<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
November 22, 1995
Dear Shareholder:
The Municipal Advantage Fund achieved excellent results in the fiscal year
ended October 31, 1995, meeting its objective of delivering a high level of
income exempt from regular federal income tax. The Fund paid monthly dividends
of 6 1/2 cents per common share, or a total of 78 cents per share for the year.
The Fund delivered a total return (dividends plus price appreciation) of
24.1% in the fiscal year, based on the net asset value (NAV) per common share
and assuming reinvestment of dividends. This performance was well above the
total return of 14.8% for the Lehman Brothers Municipal Bond Index, a widely
followed benchmark. The Fund's performance also exceeded the average total
return on NAV of 19.0% for the leveraged closed-end municipal bond funds
monitored by Lipper Analytical Services, Inc. The Fund's return on NAV ranked
ninth best among the 63 funds in this Lipper universe. The Fund's total return
on NAV was 5.5% in the fourth fiscal quarter, surpassing the 3.4% return of the
Lehman index for that period.
The Fund's returns were even higher based on the market price of its shares
on the New York Stock Exchange. At market, the Fund provided a total return of
27.9% in the fiscal year and 6.3% in the fourth quarter, assuming reinvestment
of dividends. Because the market price rose more sharply than the NAV, the
Fund's discount (the amount the market price is below NAV) narrowed to 15.6% as
of October 31, 1995. Nearly all closed-end municipal bond funds continue to
trade at significant discounts to NAV. One way for owners of the Fund's common
shares to take advantage of the discount is by reinvesting dividends.
The Fund's strong performance in the year and the quarter reflected the
benefits of leverage in a rising bond market. In addition, in managing the Fund,
we continuously rebalanced the portfolio, selling bonds as they reached or
exceeded par value and reinvesting the proceeds in bonds selling at a discount
to par. In this way, we remained heavily invested in quality discount securities
throughout the year. Our strategy worked well, since high-quality discount bonds
were among the market's top performers.
We also extended somewhat the maturity of the Fund's portfolio to capture
the higher yields available on longer-term securities. As of October 31, 1995,
the average maturity of the portfolio was 22 years, up from 20 years on
October 31, 1994.
Preferred Stock Costs
- ---------------------
As you know, the Fund is leveraged by its outstanding issue of auction rate
preferred stock. Dividend costs on the preferred stock have come down
significantly from their peak early in the fiscal year, benefiting the Fund's
performance. At the latest auction on November 13, 1995, the Fund sold 28-day
auction rate preferred stock at an annual rate of 3.85%, virtually unchanged
from the prior issue and down from an earlier high of 4.26%.
Our primary purpose in using leverage is to increase the Fund's yield:
proceeds from the preferred stock are invested in municipal bonds that yield
more than the cost of the preferred, and the Fund realizes the difference. In
addition, the use of leverage offers common shareholders the prospect of
accelerated capital appreciation in a rising bond market. Leverage can, however,
add to losses in a declining market.
<PAGE>
Portfolio Profile
- -----------------
While leverage increases risk, we seek to moderate that risk by investing
conservatively. As of October 31, 1995, 84.6% of the Fund's assets were invested
in securities rated A or better by Standard & Poor's or Moody's. In addition to
emphasizing investment quality, we stress investment diversification by state
and market sector. The five largest portfolio positions by state as of
October 31, 1995 were: New York, 15.6%; Illinois, 11.8%; California, 7.1%;
Nevada, 5.8%; and Minnesota, 5.2%. The five largest sectors represented in the
Fund were: health and hospital, 22.6%; housing, 18.8%; general obligation,
12.8%; power and utility, 9.4%; and water and sewer, 8.9%.
Yield at Fiscal Year End
- ------------------------
The tax-exempt yield on the Fund's common shares was 6.7% as of October 31,
1995, based on the $11.625 per share October 31 closing price on the New York
Stock Exchange and the annualized monthly dividend rate as of that date. This
yield was equivalent to 11.1% on a taxable basis for investors in the top
federal tax bracket of 39.6% and was well above the inflation rate, providing a
positive real return for shareholders.
A recorded periodic update, reviewing the municipal bond markets and
containing specific information regarding the Fund and its portfolio, is
available by calling (800) 421-4777.
Summary
- -------
The Fund performed well in the past year, benefiting from rising bond
prices and an investment strategy that produced attractive rates of return. Our
goal is to continue to generate high current income, exempt from regular federal
income taxes, from a diversified portfolio of quality municipal securities.
We at the Fund, along with the Fund's manager, Advantage Advisers, Inc.,
and its adviser, OpCap Advisors, thank you for investing with the Municipal
Advantage Fund.
Sincerely,
/s/ Mark C. Biderman
Mark C. Biderman
President
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS
October 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating*
Amount (Moody's/S&P) Value
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS--98.4%
ALABAMA--2.0%
$1,200,000 Birmingham General Obligation Notes,
5.625%, 4/1/13...................................................... A1/AA $ 1,205,124
2,000,000 DCH Health Care Authority, Health Care Facilities Revenue,
5.70%, 6/1/15....................................................... A1/A+ 1,906,960
------------
3,112,084
------------
CALIFORNIA--7.1%
1,000,000 Burbank Redevelopment Agency,
6.00%, 12/1/13...................................................... Baa1/A- 966,780
2,500,000 California Health Facilities Financing Authority Revenue,
6.25%, 3/1/21....................................................... Aa3/AA 2,527,525
1,330,000 California State General Obligation Notes (FGIC insured),
5.50%, 4/1/15....................................................... Aaa/AAA 1,306,592
California State Public Works Board, Lease Revenue,
1,690,000 5.625%, 5/1/20...................................................... Aaa/AAA 1,653,733
1,000,000 6.30%, 10/1/10...................................................... A/A- 1,026,940
1,000,000 Madera County Certificates of Participation
(MBIA insured),
6.125%, 3/15/23..................................................... Aaa/AAA 1,023,360
1,000,000 San Francisco City & County Certificates of Participation
(CGIC insured),
5.60%, 4/1/16....................................................... Aaa/AAA 984,420
1,500,000 Student Education Loan Marketing Corporation,
Student Loan Revenue,
7.00%, 7/1/10....................................................... NR/A 1,549,335
------------
11,038,685
------------
COLORADO--3.3%
3,085,000 Colorado Health Facilities Authority Revenue (MBIA insured),
5.95%, 5/15/12...................................................... Aaa/AAA 3,177,643
2,000,000 Denver City & County Airport Revenue (MBIA insured),
5.75%, 11/15/17..................................................... Aaa/AAA 1,946,400
------------
5,124,043
------------
Delaware--.9%
1,500,000 University of Delaware, Housing & Dining Systems Revenue,
5.50%, 11/1/15...................................................... NR/AA+ 1,450,590
------------
GEORGIA--1.5%
1,000,000 Savannah Hospital Authority Revenue,
6.125%, 7/1/12...................................................... A/NR 1,019,990
1,260,000 Toombs County Hospital Authority Revenue,
7.00%, 12/1/17...................................................... NR/BBB 1,264,927
------------
2,284,917
------------
</TABLE>
3
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (continued)
October 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating*
Amount (Moody's/S&P) Value
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
ILLINOIS--11.8%
$2,500,000 Arlington Heights General Obligation Notes,
5.65%, 12/1/14...................................................... Aa/NR $ 2,470,550
4,000,000 Chicago General Obligation Notes (FGIC insured),
5.625%, 1/1/23...................................................... Aaa/AAA 3,925,920
3,500,000 Du Page Water Commission, Water Revenue,
5.25%, 5/1/14....................................................... Aa/AA 3,356,115
Illinois Health Facilities Authority Revenue,
1,000,000 6.00%, 2/15/19...................................................... A/A 961,140
2,905,000 9.00%, 11/15/15..................................................... Baa1/BBB 3,345,485
2,985,000 Illinois Housing Development Authority Revenue,
6.70%, 8/1/25....................................................... Aa/AA 3,055,774
1,195,000 Illinois Municipal Electric Agency, Power Supply Systems Revenue
(AMBAC insured),
5.75%, 2/1/21....................................................... Aaa/AAA 1,179,214
------------
18,294,198
------------
KENTUCKY--.7%
1,000,000 Louisville & Jefferson Counties Metropolitan Sewer District
(AMBAC insured),
6.50%, 5/15/24...................................................... Aaa/AAA 1,081,040
------------
MAINE--1.8%
1,700,000 Maine Municipal Bond Bank,
5.80%, 11/1/20...................................................... Aa/A+ 1,691,109
1,000,000 Maine State Housing Authority, Mortgage Purchase,
7.55%, 11/15/22..................................................... A1/AA- 1,061,150
------------
2,752,259
------------
MARYLAND--1.4%
2,000,000 Maryland State Community Development Administration
(FHA insured),
7.60%, 4/1/23....................................................... Aa/NR 2,128,180
------------
MASSACHUSETTS--5.2%
4,000,000 Boston General Obligation Notes (FHA insured),
5.75%, 2/15/23...................................................... Aa/AA- 3,845,400
2,250,000 Massachusetts State Health & Education Facilities
Authority Revenue,
6.25%, 12/1/22...................................................... A1/A 2,265,030
2,000,000 Massachusetts State Water Resource Authority,
5.25%, 3/1/13....................................................... A/A 1,910,020
------------
8,020,450
------------
</TABLE>
4
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (continued)
October 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating*
Amount (Moody's/S&P) Value
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
MICHIGAN--4.7%
$1,700,000 Dearborn School District,
6.00%, 5/1/14....................................................... Aa/AA $ 1,740,885
1,000,000 Grand Rapids Water Supply Systems Revenue (FGIC insured),
6.50%, 1/1/15....................................................... Aaa/AAA 1,054,850
Michigan State Hospital Finance Authority Revenue,
2,490,000 5.375%, 10/15/13.................................................... A1/NR 2,312,538
2,000,000 8.125%, 10/1/21..................................................... Baa/BBB 2,172,900
------------
7,281,173
------------
MINNESOTA--5.2%
Minnesota State Housing Finance Agency,
1,650,000 6.00%, 2/1/14....................................................... NR/AA 1,659,487
3,950,000 6.10%, 8/1/22....................................................... NR/AA 3,934,042
2,500,000 6.25%, 8/1/22....................................................... NR/AA 2,503,375
------------
8,096,904
------------
NEVADA--5.8%
2,000,000 Clark County General Obligation Notes (MBIA insured),
6.00%, 6/1/13....................................................... Aaa/AAA 2,087,240
Clark County Passenger Facility Charge Revenue (MBIA insured),
1,500,000 5.75%, 7/1/23....................................................... Aaa/AAA 1,439,775
4,000,000 6.00%, 7/1/17....................................................... Aaa/AAA 4,016,280
1,555,000 Nevada Housing Division,
5.85%, 10/1/15...................................................... Aa/NR 1,512,175
------------
9,055,470
------------
NEW HAMPSHIRE--1.3%
New Hampshire State Housing Finance Authority,
1,000,000 6.50%, 7/1/14....................................................... Aa/NR 1,016,240
1,000,000 6.90%, 7/1/19....................................................... Aa/NR 1,041,240
------------
2,057,480
------------
NEW YORK--15.6%
2,000,000 Metropolitan Transportation Authority, Transportation
Facilities Revenue,
6.00%, 7/1/14....................................................... Baa/BBB+ 1,973,320
New York City General Obligation Notes,
1,300,000 6.00%, 8/1/09....................................................... Baa1/BBB+ 1,285,492
2,000,000 6.00%, 5/15/10...................................................... Baa1/BBB+ 1,973,260
1,000,000 6.95%, 8/15/12 (MBIA insured)....................................... Aaa/AAA 1,111,260
2,270,000 7.00%, 10/1/09...................................................... Baa1/BBB+ 2,427,424
2,000,000 New York City Industrial Development Agency,
Special Facilities Revenue,
6.125%, 1/1/24...................................................... A/A 1,974,680
</TABLE>
5
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (continued)
October 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating*
Amount (Moody's/S&P) Value
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
NEW YORK (CONT'D)
$3,550,000 New York City Municipal Water Finance Authority,
Water & Sewer Systems Revenue,
6.00%, 6/15/25...................................................... A/A- $ 3,552,946
New York State Dormitory Authority Revenues,
1,500,000 5.75%, 5/15/24...................................................... Baa1/BBB+ 1,437,180
500,000 6.25%, 7/1/25....................................................... Baa1/BBB- 503,490
1,500,000 6.75%, 7/1/24 (MBIA insured)........................................ Aaa/AAA 1,649,760
1,000,000 7.65%, 8/1/30 (FHA insured)......................................... NR/AAA 1,119,300
New York State Local Government Assistance Corporation,
1,000,000 5.50%, 4/1/18....................................................... A/A 961,370
1,500,000 6.50%, 4/1/20....................................................... A/A 1,579,080
1,000,000 New York State Medical Care Facilities, Finance Agency Revenue,
6.50%, 8/15/24...................................................... Baa1/BBB+ 1,024,810
1,000,000 New York State Thruway Authority, Service Contract Revenue,
5.875%, 4/1/14...................................................... Baa1/BBB 978,490
565,000 New York State Urban Development Corporation, Correctional
Capital Facility,
5.625%, 1/1/07...................................................... Baa1/BBB 558,276
------------
24,110,138
------------
NORTH CAROLINA--2.4%
3,700,000 North Carolina Municipal Power Agency, No. 1 Catawba
Electric Revenue (MBIA insured),
5.75%, 1/1/15....................................................... Aaa/AAA 3,678,429
------------
OHIO--1.6%
2,500,000 Lucas County Hospital Revenue (MBIA insured),
5.39%, 8/15/14 (A).................................................. Aaa/AAA 2,422,750
------------
PENNSYLVANIA--2.9%
4,600,000 Philadelphia Hospital & Higher Education Facilities Authority,
Hospital Revenue,
6.60%, 7/1/10....................................................... NR/BBB 4,556,898
------------
SOUTH CAROLINA--1.5%
1,000,000 Greenville County Public Facilities Corporation (AMBAC insured),
5.70%, 4/1/17....................................................... Aaa/AAA 976,990
1,450,000 York County Industrial Revenue,
5.70%, 1/1/24....................................................... A2/A+ 1,370,424
------------
2,347,414
------------
</TABLE>
6
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (continued)
October 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating*
Amount (Moody's/S&P) Value
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
TENNESSEE--3.5%
$2,020,000 Shelby County General Obligation Notes,
5.80%, 4/1/19....................................................... Aa/AA+ $ 2,056,421
3,410,000 Tennessee Housing Development Agency, Mortgage Finance,
5.90%, 7/1/18....................................................... A1/A+ 3,330,581
------------
5,387,002
------------
TEXAS--4.8%
1,000,000 Harris County Toll Road Subordinated Lien,
6.50%, 8/15/15...................................................... Aa/AA 1,068,130
Houston Water Conveyance System, Contract Certificates of
Participation (AMBAC insured),
1,000,000 6.25%, 12/15/14..................................................... Aaa/AAA 1,069,520
1,400,000 7.50%, 12/15/15..................................................... Aaa/AAA 1,693,566
3,500,000 San Antonio Electric & Gas Revenue,
6.00%, 2/1/14....................................................... Aa1/AA 3,530,415
------------
7,361,631
------------
UTAH--1.1%
Utah Housing Finance Agency (FHA insured),
1,175,000 6.35%, 7/1/11....................................................... Aa/NR 1,207,865
500,000 6.55%, 7/1/26....................................................... Aa/NR 514,635
------------
1,722,500
------------
VERMONT--1.2%
1,690,000 Vermont Housing Finance Agency (FHA insured),
7.85%, 12/1/29...................................................... A1/A- 1,802,030
------------
VIRGINIA--2.8%
4,200,000 Virginia Housing Development Authority,
6.50%, 1/1/13....................................................... Aa1/AA+ 4,320,456
------------
WASHINGTON--4.6%
1,000,000 King County School District No. 415,
6.45%, 12/1/12...................................................... A1/AA- 1,078,470
1,160,000 Seattle Museum Development Authority,
6.30%, 7/1/13....................................................... Aa1/AA+ 1,211,806
5,000,000 Washington State Public Power Supply Systems, Nuclear Project
No. 1 Revenue (MBIA insured),
5.60%, 7/1/15....................................................... Aaa/AAA 4,883,150
------------
7,173,426
------------
WISCONSIN--1.3%
2,000,000 Janesville Pollution Control Revenue,
5.55%, 4/1/09....................................................... A3/A- 1,948,260
------------
</TABLE>
7
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (continued)
October 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating*
Amount (Moody's/S&P) Value
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
PUERTO RICO--2.4%
$2,565,000 Puerto Rico Commonwealth Highway & Transportation Authority,
Highway Revenue,
5.75%, 7/1/18....................................................... Baa1/A $ 2,517,009
1,250,000 Puerto Rico Electric Power Authority, Power Revenue,
6.00%, 7/1/15....................................................... Baa1/A- 1,264,525
------------
3,781,534
------------
Total Long-Term Investments (cost - $150,009,910)...................... $152,389,941
------------
Total Investments (B) (cost - $150,009,910)............................ 98.4% $152,389,941
Other Assets in Excess of Other Liabilities............................ 1.6 2,518,444
----- ------------
Total Net Assets....................................................... 100.0% $154,908,385
===== ============
</TABLE>
- --------------------------------------------------------------------------------
* Unaudited.
(A) Security has an embedded interest rate cap which creates a variable coupon.
The coupon rate (which cannot exceed 8.00% nor decline below 5.09%) is
linked to changes in the PSA (Public Securities Association) index.
(B) Aggregate unrealized appreciation for securities in which there is an excess
of value over tax cost is $3,145,138, aggregate gross unrealized
depreciation for securities in which there is an excess of tax cost over
value is $1,074,457 and net unrealized appreciation for Federal income tax
purposes is $2,070,681. The cost basis of portfolio securities for Federal
income tax basis is $150,319,260.
See accompanying notes to financial statements.
8
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $150,009,910).......................................................... $152,389,941
Cash................................................................................................. 81,982
Interest receivable.................................................................................. 2,751,317
Deferred organization expenses....................................................................... 43,954
Prepaid expenses..................................................................................... 19,938
------------
Total Assets...................................................................................... 155,287,132
------------
LIABILITIES
Investment management fee payable.................................................................... 78,582
Dividends payable attributable to preferred shares................................................... 88,204
Dividends payable attributable to common shares...................................................... 128,420
Other payables and accrued expenses.................................................................. 83,541
------------
Total Liabilities................................................................................. 378,747
------------
NET ASSETS
Preferred stock ($.001 par value and $50,000 liquidation value per share
applicable to 1,100 shares issued)................................................................ 55,000,000
------------
Common stock:
Par value ($.001 per share, applicable to 7,257,093 shares issued)................................ 7,257
Paid-in-surplus................................................................................... 100,618,353
Undistributed net investment income.................................................................. 204,027
Accumulated net realized loss on investments......................................................... (3,301,283)
Net unrealized appreciation on investments........................................................... 2,380,031
------------
Net assets applicable to common shareholders...................................................... 99,908,385
------------
Total Net Assets............................................................................... $154,908,385
============
Net asset value per common share............................................................... $13.77
======
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
STATEMENT OF OPERATIONS
For the year ended October 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest............................................................................................. $ 9,208,831
-----------
OPERATING EXPENSES
Investment management fee (note 2)................................................................... 889,036
Auction fees and commissions......................................................................... 149,952
Auditing, consulting and tax return preparation fees................................................. 67,572
Legal fees........................................................................................... 47,068
Reports and notices to shareholders.................................................................. 42,832
Custodian fees....................................................................................... 39,461
Directors' fees and expenses......................................................................... 25,168
Transfer and dividend disbursing agent fees.......................................................... 22,873
Stock exchange listing fee........................................................................... 17,794
Amortization of deferred organization expenses....................................................... 17,582
Miscellaneous........................................................................................ 22,916
-----------
Total operating expenses.......................................................................... 1,342,254
-----------
Net investment income.......................................................................... 7,866,577
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET
Net realized loss on investments..................................................................... (2,041,826)
Net change in unrealized appreciation (depreciation) on investments.................................. 16,416,958
-----------
Net realized loss and change in unrealized appreciation (depreciation) on investments............. 14,375,132
-----------
Net increase in net assets resulting from operations................................................. $22,241,709
===========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended Year ended
October 31, 1995 October 31, 1994
---------------- ----------------
<S> <C> <C>
OPERATIONS
Net investment income.......................................................... $ 7,866,577 $ 7,657,130
Net realized loss on investments............................................... (2,041,826) (1,259,457)
Net change in unrealized appreciation (depreciation) on investments............ 16,416,958 (19,774,914)
------------ ------------
Net increase (decrease) in net assets resulting from operations............. 22,241,709 (13,377,241)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to preferred shareholders from net investment income................. (2,223,538) (1,562,237)
Dividends to common shareholders from net investment income.................... (5,660,535) (6,241,095)
Distributions to preferred shareholders from net realized gains................ -- (58,300)
Distributions to common shareholders from net realized gains................... -- (267,787)
------------ ------------
Total dividends and distributions to shareholders........................... (7,884,073) (8,129,419)
------------ ------------
Total increase (decrease) in net assets.................................. 14,357,636 (21,506,660)
NET ASSETS
Beginning of year.............................................................. 140,550,749 162,057,409
------------ ------------
End of year (including undistributed net investment income
of $204,027 and $221,523, respectively)..................................... $154,908,385 $140,550,749
============ ============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Municipal Advantage Fund Inc. (the "Fund") was incorporated in Maryland on
February 23, 1993 and is registered as a diversified, closed-end management
investment company under the Investment Company Act of 1940.
The Fund has entered into a management agreement with Advantage Advisers,
Inc. (the "Investment Manager"), a subsidiary of Oppenheimer & Co., Inc.,
pursuant to which the Investment Manager will, among other things, supervise the
Fund's investment program and monitor the performance of the Fund's service
providers.
The Investment Manager entered into an advisory contract with OpCap
Advisors (formerly called Quest for Value Advisors) (the "Investment Adviser"),
pursuant to which the Investment Adviser provides investment advisory and
administrative services to the Fund. The Investment Adviser is responsible for
the management of the Fund's portfolio in accordance with the Fund's investment
objective and policies, for making decisions to buy, sell, or hold particular
securities and is responsible for the day-to-day administration of the Fund.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements:
(A) VALUATION OF INVESTMENTS
Investment debt securities (other than short-term obligations) are valued
each week by an independent pricing service approved by the Board of Directors.
Short-term debt securities having a remaining maturity of sixty days or less are
valued at amortized cost or amortized value, which approximates market value.
Any security or other asset for which market quotations are not readily
available is valued at its fair value as determined in good faith by or under
procedures established by the Board of Directors.
(B) FEDERAL 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 and non-taxable income to its shareholders;
accordingly, no Federal income tax provision is required.
(C) ORGANIZATION AND OFFERING COSTS
Costs incurred by the Fund in connection with its organization and offering
of its common shares were $87,909 and $433,917, respectively; offering costs
were charged to capital. Organization costs have been deferred and are being
amortized to expense on a straight line basis over sixty months from
commencement of operations. Offering costs and underwriting discounts in
connection with the preferred share issuance were $303,393 and $962,500,
respectively and were charged to capital attributable to common shares at the
time of issuance of such shares.
(D) SECURITY TRANSACTIONS AND OTHER INCOME
Security transactions are accounted for on the trade date. In determining
the gain or loss from the sale of securities, the cost of securities sold is
determined on the basis of identified cost. Interest income is accrued daily.
Discounts or premiums on debt securities purchased are accreted or amortized to
interest income over the lives of the respective securities.
12
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(E) DIVIDENDS AND DISTRIBUTIONS--COMMON STOCK
The Fund intends to declare dividends from net investment income monthly to
holders of common stock. Distributions of net capital gains, if any, will be
paid at least annually. The Fund records dividends and distributions to common
shareholders on the ex-dividend date.
2. INVESTMENT MANAGEMENT FEE
The investment management fee is payable monthly to the Investment Manager,
and is computed as a percentage of the Fund's average weekly net assets at the
annual rate of .60%. The Investment Manager pays the Investment Adviser a
monthly fee at an annual rate of .36% of the Fund's average weekly net assets
for its services. Investment management fees earned for the year ended
October 31, 1995 were $889,036.
3. PURCHASES AND SALES OF SECURITIES
For the year ended October 31, 1995, purchases and sales of investment
securities other than short-term securities, aggregated $52,685,226 and
$52,647,498, respectively.
4. CAPITAL
There are 100 million shares of $.001 par value common stock authorized.
The Fund's charter provides that the Board of Directors may classify or
reclassify any unissued shares of capital stock into one or more additional
classes or series, with rights determined by the Board of Directors. The Fund's
Board of Directors has authorized the reclassification of 1,100 shares of common
stock to Auction Rate Preferred Stock ("Preferred Stock").
5. AUCTION RATE PREFERRED STOCK
The Fund has issued 1,100 shares of Preferred Stock with a liquidation
value of $50,000 per share plus any accumulated but unpaid dividends.
Dividends are cumulative at a rate set through auction procedures and are
typically reset and paid every twenty-eight days. The dividend rate ranged from
3.399% to 4.26% during the year ended October 31, 1995 and was 3.849% at
October 31, 1995. Distributions of capital gains, if any, will be paid at least
annually.
The Fund is subject to certain restrictions relating to the Preferred
Stock. Failure to comply with these restrictions could preclude the Fund from
declaring any distributions to common shareholders or repurchasing common shares
and/or could trigger the mandatory redemption of Preferred Stock at liquidation
value.
The Preferred Stock, which is entitled to one vote per share, generally
votes with the common stock but votes separately as a class to elect two
Directors and on any matters affecting the rights of the Preferred Stock.
13
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1995
6. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Realized and Unrealized
Net Gain (Loss) on
Investment Income Investment Income Investments--Net
--------------------- --------------------- ------------------------
Per Per Per
Common Common Common
QUARTER ENDED Total Share Total Share Total Share
- ------------- ---------- ----- ---------- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
January 31, 1995........ $2,283,921 $0.31 $1,967,434 $0.27 $ 4,208,926 $ 0.58
April 30, 1995.......... 2,302,750 0.32 1,965,276 0.27 4,526,988 0.62
July 31, 1995........... 2,297,040 0.32 1,953,419 0.27 1,803,701 0.25
October 31, 1995........ 2,325,120 0.32 1,980,448 0.27 3,835,517 0.53
---------- ----- ---------- ----- ------------ ------
$9,208,831 $1.27 $7,866,577 $1.08 $14,375,132 $ 1.98
========== ===== ========== ===== ============ ======
January 31, 1994........ $2,254,819 $0.31 $1,905,740 $0.26 $ 1,113,638 $ 0.15
April 30, 1994.......... 2,242,578 0.31 1,899,573 0.26 (14,609,755) (2.01)
July 31, 1994........... 2,242,693 0.31 1,905,095 0.26 2,066,196 0.29
October 31, 1994........ 2,272,030 0.31 1,946,722 0.27 (9,604,450) (1.32)
---------- ----- ---------- ----- ------------ ------
$9,012,120 $1.24 $7,657,130 $1.05 $(21,034,371) $(2.89)
========== ===== ========== ===== ============ ======
</TABLE>
7. CAPITAL LOSS CARRYFORWARD
At October 31, 1995, accumulated net realized capital losses available as a
reduction against future net realized capital gains were $2,291,933 of which
$1,259,457 will expire in 2002 and $1,732,476 will expire in 2003.
8. SUBSEQUENT EVENTS
On November 1, 1995, a dividend of $.065 per share was declared to
common shareholders payable November 30, 1995 to shareholders of record on
November 13, 1995.
On December 1, 1995, a dividend of $.065 per share was declared to
common shareholders payable December 29, 1995 to shareholders of record on
December 15, 1995.
14
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
FINANCIAL HIGHLIGHTS
For a common share outstanding throughout each period:
<TABLE>
<CAPTION>
Year ended Year ended April 30, 1993 (1)
October 31, 1995 October 31, 1994 to October 31, 1993
---------------- ---------------- -------------------
<S> <C> <C> <C>
Net asset value, beginning of period........................... $ 11.79 $ 14.75 $ 14.10
Income from investment operations:
Net investment income.......................................... 1.08 1.05 0.43
Net realized and unrealized gain (loss) on investments......... 1.98 (2.89) 0.84
------------ ------------ ------------
Total from investment operations......................... 3.06 (1.84) 1.27
------------ ------------ ------------
Dividends and distributions to shareholders:
Dividends to preferred shareholders from
net investment income....................................... (0.30) (0.21) (0.07)
Dividends to common shareholders from
net investment income....................................... (0.78) (0.86) (0.31)
Distributions to preferred shareholders from
net realized gains.......................................... -- (0.01) --
Distributions to common shareholders from
net realized gains.......................................... -- (0.04) --
------------ ------------ ------------
Total dividends and distributions to shareholders........ (1.08) (1.12) (0.38)
------------ ------------ ------------
Capital charge in respect of issuance of
preferred shares............................................ -- -- (0.18)
Capital charge in respect of issuance of common shares......... -- -- (0.06)
------------ ------------ ------------
Total capital charges.................................... -- -- (0.24)
------------ ------------ ------------
Net asset value, end of period................................. $ 13.77 $ 11.79 $ 14.75
============ ============ ============
Market value, end of period.................................... $ 11.625 $ 9.75 $ 14.125
============ ============ ============
Total investment return........................................ 27.9%(2) (25.7%)(2) 2.4%(2,3)
============ ============ ============
Net assets, end of period...................................... $154,908,385(4) $140,550,749(4) $162,057,409(4)
------------ ------------ ------------
Ratio of operating expenses to average net assets.............. 1.44%(6) 1.39%(6) 1.17%(5,6)
------------ ------------ ------------
Ratio of net investment income to average net assets........... 8.44%(6) 7.85%(6) 6.07%(5,6)
------------ ------------ ------------
Portfolio turnover............................................. 36% 22% 9%
------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Commencement of operations.
(2) Change in market price assuming reinvestment of dividends on payable date
(at market).
(3) Return does not reflect underwriters' discount.
(4) 1940 Act Preferred Shares asset coverage was 281%, 255% and 295%,
respectively.
(5) Annualized.
(6) Ratios calculated on the basis of income and expenses applicable to both the
common and preferred shares relative to the average net assets of common
shareholders. Average net assets of common shareholders for the year were
$93,172,629, $97,502,978 and $102,609,821, respectively.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Municipal Advantage Fund Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Municipal Advantage Fund Inc. (the
"Fund") at October 31, 1995, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the two years in the period
then ended and for the period April 30, 1993 (commencement of operations) to
October 31, 1993, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1995 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 15, 1995
16
<PAGE>
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (October 31,
1995) as to the Federal tax status of dividends and distributions received by
shareholders during such fiscal year. Accordingly, we are advising you that
substantially all dividends paid from net investment income during the fiscal
year ended October 31, 1995 were Federally exempt interest dividends, although
the Fund did invest in securities which paid interest subject to the Federal
alternative minimum tax during the fiscal year. Dividends paid from net
investment income subject to such tax amounted to 8.9%. Per share dividends and
distributions for the fiscal year ended October 31, 1995 were as follows:
<TABLE>
<S> <C>
Net Investment Income................... $0.78
</TABLE>
Since the Fund's fiscal year is not the calendar year, another notification will
be sent with respect to calendar year 1995. In January 1996, you will be advised
on IRS Form 1099 DIV as to the Federal tax status of the dividends received by
you in calendar 1995. The amount that will be reported, will be the amount to
use on your 1995 Federal income tax return and may differ from the amount which
we must report for the Fund's fiscal year ended October 31, 1995. Shareholders
are advised to consult with their own tax advisers as to the Federal, state and
local tax status of the Fund's income received. A breakdown of interest by state
will also be provided which may be of value in reducing a shareholder's state or
local tax liability, if any.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Municipal Advantage Fund Inc. has a Dividend Reinvestment and Cash Purchase
Plan (the "Plan"). Under the Plan, all dividends and distributions on the Fund's
Common Stock automatically are reinvested in additional shares of Common Stock
purchased in the open market unless a shareholder elects to receive cash.
Dividends and distributions with respect to Common Stock registered in the name
of a bank, broker-dealer or other nominee are reinvested under the Plan unless
the service is not provided by the bank, broker-dealer or other nominee or the
shareholder elects to receive dividends and distributions in cash. Investors
that own shares registered in the name of a bank, broker-dealer or other nominee
should consult with such nominee as to their participation in the Plan and may
be required to have their shares registered in their own names in order to
participate in the Plan if they transfer their shares into the name of another
nominee.
BostonEquiServe L.P., (the "Plan Agent") serves as agent for the holders of
Common Stock in administering the Plan. After the Fund declares a dividend on
the Common Stock or determines to make a capital gain distribution, the Plan
Agent, as agent for the participants, receives the cash payment and uses it to
buy the Common Stock in the open market, on the New York Stock Exchange or
elsewhere, for the participants' accounts. The Fund does not issue any new
shares of Common Stock in connection with the Plan.
Participants also have the option of making additional cash payments to the Plan
Agent, monthly, in a minimum amount of $250, for investment in Common Stock. The
Plan Agent uses all such funds received from participants to purchase shares of
Common Stock in the open market on or about the first business day of each
month. To avoid unnecessary cash accumulations, and also to allow ample time for
receipt and processing by the Plan Agent, it is suggested that participants send
in voluntary cash payments to be received by the Plan Agent at least ten days
before an applicable purchase date. A participant may withdraw a voluntary cash
payment by written notice, if the notice is received by the Plan Agent not less
than 48 hours before such payment is to be invested.
The Plan agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including tax forms
required for personal and tax filing. Shares of Common Stock in
17
<PAGE>
the account of each Plan participant will be held by the Plan in the name of the
participant, and each shareholder's proxy will include those shares purchased
pursuant to the Plan. In the case of holders of Common Stock, such as banks,
broker-dealers or other nominees, that hold shares for others who are beneficial
owners, the Plan Agent will administer the Plan on the basis of the number of
Common Shares certified from time to time by the holders as representing the
total amount registered in such holders' names and held for the account
registered in such holders' names and held for the account of beneficial owners
that have not elected to receive distributions in cash.
There is no charge to participants for reinvesting dividends or capital gains
distributions or voluntary cash payments. The Plan Agent's fees for the
reinvestment of dividends and capital gains distributions and voluntary cash
payments are paid for by the Fund. However, each participant pays a pro rata
share of the brokerage commission incurred with respect to the Plan Agent's open
market purchases in connection with the reinvestment of income dividends,
capital gain distributions and voluntary cash payments made by the participant.
Brokerage charges for purchasing small amounts of stock for individual accounts
through the Plan are less than the usual brokerage charges for such transactions
because the Plan Agent purchases stock for all participants in blocks and
prorates the lower commission thus attainable.
The receipt of dividends and distributions under the Plan does not relieve
participants of any income tax which may be payable on such dividends or
distributions.
Participation in the Plan may be terminated at any time by written notice from
the participant received by the Plan Agent up to 10 days prior to the next
dividend record date. Upon termination, the Plan Agent will send the participant
a certificate for the full shares in his/her account and a check in an amount
equal to the then current market price of any fractional share, or upon written
instructions from the participant, will sell the full shares as soon as
practicable following termination and send the participant a check representing
the proceeds, less a service charge of $2.50, brokerage commissions and
applicable taxes, if any.
The Fund and the Plan Agent reserve the right to terminate the Plan as applied
to any voluntary cash payments made and any dividend or distribution paid
subsequent to notice of the termination sent to participants in the Plan at
least 30 days before the record date for such dividend or distribution. The Plan
also may be amended by the Fund or the Plan Agent, but only by at least 30 days
written notice to participants in the Plan (except when necessary or appropriate
to comply with applicable laws, rules or policies of a regulatory authority).
All correspondence concerning the Plan including requests for additional
information or requests to be included or excluded from the Plan should be
addressed to the applicable bank, broker-dealer or other nominee or in the case
of shareholders whose shares are registered in their own name to BostonEquiServe
L.P., Post Office Box 8200, Boston, Massachusetts 02266.
18
<PAGE>
Annual Shareholders Meeting
The Fund held its annual shareholders meeting on February 24, 1995. At the
meeting, preferred shareholders elected the nominee proposed for election to the
Fund's Board of Directors and common and preferred shareholders voting together
as a single class ratified the selection of Price Waterhouse LLP as the
independent accountants of the Fund. The following table provides information
concerning the matters voted on at the meeting:
1. Election of Director (preferred stock voting only)
Nominee Votes For Votes Against Withheld Authority
---------------- --------- ------------- ------------------
Robert L. Rosen 722 0 0
2. Ratification of Price Waterhouse LLP as the Independent Accountants of
the Fund
Votes For Votes Against Withheld Authority
---------------- ----------------- ------------------
6,081,842 153,649 108,949
The following table provides information concerning the directors of the Fund:
Director Term Expiration
------------------- -------------------
Mark C. Biderman* 1996 Annual Meeting
Raymond D. Horton 1996 Annual Meeting
Robert I. Kleinberg 1997 Annual Meeting
Jeswald W. Salacuse 1997 Annual Meeting
Robert L. Rosen* 1998 Annual Meeting
* Preferred stock director
19
<PAGE>
Annual Report
Municipal Advantage Fund Inc. October 31, 1995
DIRECTORS AND PRINCIPAL OFFICERS
Mark C. Biderman
Director, Chairman of the Board and President
Raymond D. Horton
Director
Robert L. Rosen
Director
Jeswald W. Salacuse
Director
Robert I. Kleinberg
Director and Secretary
Robert A. Blum
Assistant Secretary
INVESTMENT MANAGER
Advantage Advisers, Inc.
One World Financial Center
New York, NY 10281
INVESTMENT ADVISER
OpCap Advisors
One World Financial Center
New York, NY 10281
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
BostonEquiServe L.P.
Post Office Box 8200
Boston, MA 02266
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
This report, including the financial information herein, is transmitted to the
shareholders of Municipal Advantage Fund Inc. for their information. It is not a
prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in this report.
Municipal Advantage Fund Inc.
