<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
September 1, 1995
Dear Shareholder:
The Municipal Advantage Fund continued to perform well in the third fiscal
quarter ended July 31, 1995. The total return on the Fund's common shares was
3.4% in the quarter and 17.6% in the first nine months, based on the net asset
value (NAV) per share and assuming reinvestment of dividends.
This performance compared with a total return of 3.3% in the quarter and
11.1% in the nine months for the Lehman Brothers Municipal Bond Index, a widely
followed benchmark. The Fund's performance in the quarter slightly exceeded the
average total return on NAV of 3.3% for the 66 leveraged closed-end municipal
bond funds monitored by Lipper Analytical Services, Inc. The Fund's return on
NAV in the quarter was 34th among the funds in this Lipper universe.
For the second consecutive quarter, the market price of the Fund's common
shares on the New York Stock Exchange lagged the increase in the Fund's NAV.
Consequently, at market the common shares provided a total return of 1.7% in the
third quarter, assuming reinvestment of dividends. For the nine months, the
total return at market was 20.4%. The Fund's discount (the amount the market
price is below NAV) widened to 16.0% as of July 31, 1995. Nearly all closed-end
municipal bond funds trade at discounts to NAV. One simple way for owners of the
Fund's common shares to take advantage of the discount is by reinvesting
dividends.
Even in the face of the past year's steep decline in bond market yields, we
have been able to maintain the Fund's dividend rate. The Fund continued to pay
monthly dividends of 6 1/2 cents per common share in the third quarter, or a
total of 19 1/2 cents per share for the period. To protect the dividend, we have
sought to bolster the Fund's income by increasing its investments in sectors,
such as high-quality health and hospital bonds and alternative minimum tax
bonds, which offer attractive relative value. In addition, during the past six
months we have lengthened somewhat the average maturity of the Fund's portfolio
to capture the higher yields available on longer-term securities.
Our ability to sustain the Fund's net income has been aided, as well, by
recent declines in the cost of the Fund's auction rate preferred stock. As you
know, the Fund is leveraged by its outstanding issue of such stock. At the
latest auction on August 21, 1995, the Fund sold 28-day auction rate preferred
stock at an annual rate of 3.85%, down from 3.875% on July 24 and 4.1% on June
26 on expiring issues of 28-day auction rate preferred. 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 reaps 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.
While leverage increases risk, we seek to moderate that risk by investing
conservatively. As of July 31, 1995, 84.4% 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 continued the Fund's broad investment
diversification by state and market sector. The five largest portfolio positions
by state as of April 30, 1995 were: Illinois, 15.7%; New York, 12.6%; Texas,
6.6%; Minnesota, 5.3%; and Massachusetts, 5.2%. The five largest sectors
represented in the Fund were: health and hospital, 23.2%; housing, 19.1%;
general obligation, 13.7%; power and utility, 10.3%; and water and sewer, 6.6%.
The average maturity of the Fund's portfolio was 21 years.
<PAGE>
We remain optimistic about investments in quality municipal securities,
which offer attractive yields at this time. Based on the $11.125 per share
closing price on the New York Stock Exchange as of July 31, 1995, and on the
annualized monthly dividend rate as of that date, the tax-exempt yield on the
Fund's common shares is 7.0%. This yield is equivalent to 11.6% on a taxable
basis for investors in the top federal tax bracket of 39.6%.
Because many investors fear that radical tax proposals, such as a flat tax,
would not bode well for municipal securities, demand for municipals has
diminished somewhat, causing their yields to increase relative to taxable
investments. Tax-exempt 30-year AAA municipals are currently trading at an
historically high 90% of the yield of taxable 30-year Treasuries, offering
opportunity for those willing to ride out the storm. While no one can predict
future investment prices with certainty, we believe that investor concerns about
the impact of tax proposals have been overdone. Today's municipal yields, in our
view, account for the risk that these proposals might be adopted at some future
date.
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.
We at the Fund, along with the Fund's manager, Advantage Advisers, Inc.,
and its adviser, Quest for Value Advisors, thank you for entrusting your money
to the Municipal Advantage Fund. We seek to continue to justify that trust by
generating high current income, exempt from regular federal income taxes, from
quality municipal securities.
Sincerely,
/s/ Mark C. Biderman
Mark C. Biderman
President
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (unaudited)
July 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
-----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS--98.5%
Alabama--2.1%
Birmingham General Obligation Notes,
$ 175,000 5.625%, 4/1/12....................................................... A1/AA $ 172,475
1,200,000 5.625%, 4/1/13....................................................... A1/AA 1,175,568
2,000,000 DCH Health Care Authority, Health Care Facilities Revenue,
5.70%, 6/1/15........................................................ A1/A+ 1,849,020
-----------
3,197,063
-----------
Arizona--0.3%
450,000 Tucson Airport Authority Inc. Revenue (MBIA insured),
5.70%, 6/1/13........................................................ Aaa/AAA 440,595
-----------
California--4.2%
1,000,000 Burbank Redevelopment Agency,
6.00%, 12/1/13....................................................... Baa1/A- 936,620
2,500,000 California Health Facilities Financing Authority Revenue,
6.25%, 3/1/21........................................................ Aa3/AA 2,452,925
1,000,000 California State Public Works Board, Lease Revenue,
6.30%, 10/1/10....................................................... A/A- 996,020
1,000,000 Madera County Certificates of Participation
(MBIA insured),
6.125%, 3/15/23...................................................... Aaa/AAA 990,050
1,000,000 San Francisco City & County Certificates of Participation
(CGIC insured),
5.60%, 4/1/16........................................................ Aaa/AAA 946,100
-----------
6,321,715
-----------
Colorado--3.3%
3,085,000 Colorado Health Facilities Authority Revenue (MBIA insured),
5.95%, 5/15/12....................................................... Aaa/AAA 3,118,873
2,000,000 Denver City & County Airport Revenue (MBIA insured),
5.75%, 11/15/17...................................................... Aaa/AAA 1,864,460
-----------
4,983,333
-----------
Delaware--0.9%
1,500,000 University of Delaware, Housing & Dining Systems Revenue,
5.50%, 11/1/15....................................................... NR/AA+ 1,399,275
-----------
Florida--0.6%
850,000 Boca Raton Community Redevelopment Agency, Tax Increment
Revenue (FGIC insured),
5.875%, 3/1/13....................................................... Aaa/AAA 857,063
-----------
</TABLE>
3
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
July 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
-----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS (cont'd)
Georgia--1.5%
$1,000,000 Savannah Hospital Authority Revenue,
6.125%, 7/1/12....................................................... A/NR $ 994,210
1,260,000 Toombs County Hospital Authority Revenue,
7.00%, 12/1/17....................................................... NR/BBB 1,233,401
-----------
2,227,611
-----------
Illinois--15.7%
2,500,000 Arlington Heights General Obligation Notes,
5.65%, 12/1/14....................................................... Aa/NR 2,389,425
Chicago General Obligation Notes (FGIC insured),
4,000,000 5.625%, 1/1/23....................................................... Aaa/AAA 3,728,120
2,500,000 5.80%, 1/1/13........................................................ Aaa/AAA 2,448,900
3,500,000 Du Page Water Commission, Water Revenue,
5.25%, 5/1/14........................................................ Aa/AA 3,221,295
Illinois Health Facilities Authority Revenue,
1,000,000 6.00%, 2/15/19....................................................... A/A 925,390
2,905,000 9.00%, 11/15/15...................................................... Baa1/BBB 3,308,592
3,000,000 Illinois Housing Development Authority Revenue,
6.70%, 8/1/25........................................................ Aa/AA 3,039,570
1,195,000 Illinois Municipal Electric Agency, Power Supply Systems Revenue
(AMBAC insured),
5.75%, 2/1/21........................................................ Aaa/AAA 1,135,310
3,735,000 Metropolitan Fair & Exposition Authority, Dedicated State
Tax Revenue,
6.00%, 6/1/14........................................................ A/A+ 3,592,136
-----------
23,788,738
-----------
Indiana--1.8%
2,750,000 Indianapolis Local Public Improvement Bond Bank,
5.90%, 1/10/14....................................................... Aaa/AA+ 2,707,403
-----------
Kentucky--0.7%
1,000,000 Louisville & Jefferson Counties Metropolitan Sewer District
(AMBAC insured),
6.50%, 5/15/24....................................................... Aaa/AAA 1,059,830
-----------
Maine--1.8%
1,700,000 Maine Municipal Bond Bank,
5.80%, 11/1/20....................................................... Aa/A+ 1,636,658
1,000,000 Maine State Housing Authority Mortgage Purchase,
7.55%, 11/15/22...................................................... A1/AA- 1,053,880
-----------
2,690,538
-----------
</TABLE>
4
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
July 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
-----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS (cont'd)
Maryland--1.4%
$2,000,000 Maryland State Community Development Administration (FHA insured),
7.60%, 4/1/23........................................................ Aa/NR $ 2,127,200
-----------
Massachusetts--5.1%
4,000,000 Boston General Obligation Notes (FHA insured),
5.75%, 2/15/23....................................................... Aa/AA- 3,713,920
2,250,000 Massachusetts State Health and Education Facilities
Authority Revenue,
6.25%, 12/1/22....................................................... A1/A 2,153,363
2,000,000 Massachusetts State Water Resource Authority,
5.25%, 3/1/13........................................................ A/A 1,826,100
-----------
7,693,383
-----------
Michigan--4.7%
1,700,000 Dearborn School District,
6.00%, 5/1/14........................................................ NR/AA 1,710,149
1,000,000 Grand Rapids Water Supply Systems Revenue (FGIC insured),
6.50%, 1/1/15........................................................ Aaa/AAA 1,031,920
Michigan State Hospital Finance Authority Revenue,
2,490,000 5.375%, 10/15/13..................................................... A1/NR 2,242,295
2,000,000 8.125%, 10/1/21...................................................... Baa/BBB 2,132,860
-----------
7,117,224
-----------
Minnesota--5.3%
Minnesota State Housing Finance Agency,
1,650,000 6.00%, 2/1/14........................................................ NR/A+ 1,635,430
3,950,000 6.10%, 8/1/22........................................................ NR/A+ 3,863,100
2,500,000 6.25%, 8/1/22........................................................ Aa/A+ 2,500,000
-----------
7,998,530
-----------
Nevada--4.9%
2,000,000 Clark County General Obligation Notes (MBIA insured),
6.00%, 6/1/13........................................................ Aaa/AAA 2,024,960
4,000,000 Clark County Passenger Facility Charge Revenue (MBIA insured),
6.00%, 7/1/17........................................................ Aaa/AAA 3,865,000
1,580,000 Nevada Housing Division,
5.85%, 10/1/15....................................................... Aa/ NR 1,511,428
-----------
7,401,388
-----------
New Hampshire--1.3%
New Hampshire State Housing Finance Authority,
1,000,000 6.50%, 7/1/14........................................................ Aa/NR 1,004,040
1,000,000 6.90%, 7/1/19........................................................ Aa/NR 1,032,420
-----------
2,036,460
-----------
</TABLE>
5
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
July 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
-----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS (cont'd)
New York--12.6%
$2,000,000 Metropolitan Transportation Authority, Transportation
Facilities Revenue,
6.00%, 7/1/14........................................................ Baa/BBB+ $ 1,925,520
New York City General Obligation Notes,
1,300,000 6.00%, 8/1/09........................................................ Baa1/BBB+ 1,254,708
2,000,000 6.00%, 5/15/10....................................................... Baa1/BBB+ 1,920,280
1,000,000 6.95%, 8/15/12 (MBIA insured)........................................ Aaa/AAA 1,088,150
2,270,000 7.00%, 10/1/09....................................................... Baa1/BBB+ 2,371,038
2,000,000 New York City Industrial Development Agency,
Special Facilities Revenue,
6.125%, 1/1/24....................................................... A/A 1,910,660
65,000 New York City Municipal Water Finance Authority,
Water & Sewer Systems Revenue,
5.70%, 6/15/07....................................................... A/A- 66,048
New York State Dormitory Authority Revenues,
1,500,000 6.75%, 7/1/24 (MBIA insured)......................................... Aaa/AAA 1,603,935
1,000,000 7.65%, 8/1/30 (FHA insured).......................................... NR/AAA 1,107,200
New York State Local Government Assistance Corporation,
1,000,000 5.50%, 4/1/18........................................................ A/A 919,830
1,500,000 6.50%, 4/1/20........................................................ A/A 1,555,620
1,000,000 New York State Medical Care Facilities, Finance Agency Revenue,
6.50%, 8/15/24....................................................... Baa1/BBB+ 1,003,860
2,365,000 New York State Urban Development Corporation, Correctional
Capital Facility,
5.625%, 1/1/07....................................................... Baa1/BBB 2,298,000
-----------
19,024,849
-----------
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 3,569,871
-----------
Ohio--1.5%
2,500,000 Lucas County Hospital Revenue (MBIA insured),
5.19%, 8/15/14(B).................................................... Aaa/AAA 2,293,750
-----------
Pennsylvania--3.7%
5,600,000 Philadelphia Hospital & Higher Education Facilities Authority,
Hospital Revenue,
6.60%, 7/1/10........................................................ NR/BBB 5,521,320
-----------
</TABLE>
6
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
July 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
-----------------------------------------------------------------------------------------------------------------------------
<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+ $ 1,974,065
3,410,000 Tennessee Housing Development Agency, Mortgage Finance,
5.90%, 7/1/18........................................................ A1/A+ 3,301,630
-----------
5,275,695
-----------
Texas--6.6%
2,750,000 Austin Utilities System Revenue,
5.75%, 11/15/13...................................................... A/A 2,662,110
1,000,000 Harris County Toll Road Subordinated Lien,
6.50%, 8/15/15....................................................... Aa/AA 1,048,670
Houston Water Conveyance System, Contract Certificates of
Participation (AMBAC insured),
1,000,000 6.25%, 12/15/14...................................................... Aaa/AAA 1,054,260
1,400,000 7.50%, 12/15/15...................................................... Aaa/AAA 1,674,624
3,500,000 San Antonio Electric & Gas Revenue,
6.00%, 2/1/14........................................................ Aa1/AA 3,484,495
-----------
9,924,159
-----------
Utah--1.1%
Utah Housing Finance Agency (FHA insured),
1,175,000 6.35%, 7/1/11........................................................ Aa/NR 1,195,269
500,000 6.55%, 7/1/26........................................................ Aaa/NR 509,325
-----------
1,704,594
-----------
Vermont--1.2%
1,690,000 Vermont Housing Finance Agency (FHA insured),
7.85%, 12/1/29....................................................... A1/NR 1,790,758
-----------
Virginia--2.9%
4,200,000 Virginia Housing Development Authority,
6.50%, 1/1/13........................................................ Aa/AA+ 4,315,542
-----------
Washington--4.6%
1,000,000 King County School District No. 415,
6.45%, 12/1/12....................................................... A1/AA- 1,053,600
1,160,000 Seattle Museum Development Authority,
6.30%, 7/1/13........................................................ Aa1/AA+ 1,190,125
5,000,000 Washington State Public Power Supply Systems, Nuclear Project
No. 1 Revenue (MBIA insured),
5.60%, 7/1/15........................................................ Aaa/A1+ 4,691,750
-----------
6,935,475
-----------
</TABLE>
7
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
July 31, 1995
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
-----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS (cont'd)
Wisconsin--1.2%
$2,000,000 Janesville Pollution Control Revenue,
5.55%, 4/1/09........................................................ A3/BBB+ $ 1,881,140
------------
Puerto Rico--1.6%
2,565,000 Puerto Rico Commonwealth Highway & Transportation Authority,
Highway Revenue,
5.75%, 7/1/18........................................................ Baa1/A 2,439,597
------------
Total Long-Term Investments (cost - $150,333,881)...................... $148,724,099
------------
SHORT-TERM INVESTMENTS--0.1%
Massachusetts--0.1%
$ 200,000 Massachusetts State General Obligation Notes, VRDN*,
2.65%, 8/1/95
(cost - $200,000).................................................... VMIG1/A1+ $ 200,000
------------
Total Investments (cost - $150,533,881)................................ 98.6% $148,924,099
Other Assets in Excess of Other Liabilities............................ 1.4 2,126,857
----- ------------
Total Net Assets....................................................... 100.0% $151,050,956
===== ============
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Investment debt securities are valued each week by an independent pricing
service as approved by the Board of Directors.
(B) Security has 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 index.
* Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specified date (such as a coupon date or interest payment date)
and/or whose interest rates vary with changes in a designated base rate
(such as the prime interest rate). Maturity shown is date of next rate
change.
8
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<PAGE>
Municipal Advantage Fund Inc.
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
Quest for Value Advisors
One World Financial Center
New York, NY 10281
Custodian, Transfer Agent, Dividend Paying Agent and
Registrar
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
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.
Quarterly Report
July 31, 1995
Municipal Advantage Fund Inc.
