<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
February 23, 1996
Dear Shareholder:
The Municipal Advantage Fund had a strong first fiscal quarter ended
January 31, 1996, benefiting from its use of leverage in a rising bond market.
The Fund significantly outperformed the widely followed municipal bond market
indices and continued to meet its objective of providing 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 19 1/2 cents per share in the quarter. Its total return (dividends plus price
appreciation) was 5.4% in the quarter, based on the net asset value (NAV) per
common share and assuming reinvestment of dividends. This return was well above
the total return of 3.4% for the Lehman Brothers Municipal Bond Index, a popular
benchmark.
The Fund's performance also surpassed the average total return on NAV of
4.6% for the leveraged closed-end municipal bond funds monitored by Lipper
Analytical Services, Inc. The Fund's return on NAV ranked 15th best among the 64
funds in this Lipper universe.
Based on the market price of the common shares on the New York Stock
Exchange, the Fund delivered a total return of 7.1% in the quarter, assuming
reinvestment of dividends, more than double the return of the Lehman index. The
Fund's discount (the amount the market price is below NAV) narrowed to 14.5% as
of January 31, 1996. Nearly all closed-end municipal bond funds continue to
trade at discounts to NAV. As we have said in the past, owners of the Fund's
common shares might wish to capitalize on the Fund's discount by reinvesting
dividends, as a great many of our shareholders do.
During the quarter, we continued our active program to rebalance the
portfolio as bond prices increased. The objective of this program is to sell
certain bonds as they reach or exceed par value and reinvest the proceeds in
bonds selling at a discount to par. In this way, we have maintained a position
in quality long-term discount securities, which have been among the market's top
performers in recent months.
PREFERRED STOCK COSTS
The Fund is leveraged by its outstanding issue of auction rate preferred
stock. Dividend costs on the preferred stock came down steadily during the
quarter, as a result of declining short-term interest rates, benefiting the
Fund. At the latest auction on February 5, 1996, the Fund sold 28-day auction
rate preferred stock at an annual rate of 3.48%, down from 3.80% on the previous
auction.
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. Also,
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
We seek to control risk and generate high returns by investing in a
diversified portfolio of quality tax-exempt securities. As of January 31, 1996,
82.9% of the Fund's assets were invested in securities rated A or better by
Standard & Poor's or Moody's. The five largest market sectors in the portfolio
as of January 31, 1996 were: health and hospital, 20.7%; housing, 18.5%; general
obligation, 12.7%; power and utility, 9.7%; and water and sewer, 9.0%. The five
largest portfolio positions by state were: New York, 16.7%; Illinois, 9.7%;
Texas, 6.7%; California, 6.3%; and Nevada, 5.9%. The average maturity of the
portfolio was 21 years.
YIELD AT QUARTER'S END
The Fund continues to pay an attractive tax-exempt yield on its common
shares. This yield was 6.4% as of January 31, 1996, based on the $12.25 per
share January 31 closing price on the New York Stock Exchange and the annualized
monthly dividend rate. For an investor in the top federal tax bracket of 39.6%,
this yield was equivalent to 10.6% on a taxable basis, a very positive real
return above inflation.
We wish to remind you that a recorded periodic update, reviewing the
municipal bond markets and containing specific information regarding the Fund,
including top holdings, asset allocation, NAV, performance and other
information, is available by calling (800) 421-4777.
We at the Fund, along with the Fund's manager, Advantage Advisers, Inc.,
and its adviser, OpCap Advisors, thank you for your continued confidence and
support. We remain dedicated to serving your investment needs.
Sincerely,
/s/ Mark C. Biderman
---------------------
Mark C. Biderman
President
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
JANUARY 31, 1996
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.4%
ALABAMA--2.0%
$1,200,000 Birmingham General Obligation Notes,
5.625%, 4/1/13........................ A1/AA $ 1,231,884
2,000,000 DCH Health Care Authority, Health Care
Facilities Revenue,
5.70%, 6/1/15......................... A1/A+ 1,960,820
------------
3,192,704
------------
CALIFORNIA--6.3%
1,000,000 Burbank Redevelopment Agency,
6.00%, 12/1/13........................ Baa1/A- 1,002,850
2,500,000 California Health Facilities Financing
Authority Revenue,
6.25%, 3/1/21......................... Aa3/AA 2,613,100
California State Public Works Board,
Lease Revenue,
1,690,000 5.625%, 5/1/20........................ Aaa/AAA 1,705,971
1,000,000 6.30%, 10/1/10........................ A/A- 1,072,160
1,000,000 Madera County Certificates of
Participation (MBIA insured),
6.125%, 3/15/23....................... Aaa/AAA 1,064,260
1,000,000 San Francisco City & County
Certificates of Participation
(CGIC insured),
5.60%, 4/1/16......................... Aaa/AAA 1,009,840
1,500,000 Student Education Loan Marketing
Corporation, Student Loan Revenue,
7.00%, 7/1/10......................... NR/A 1,586,970
------------
10,055,151
------------
COLORADO--4.3%
3,085,000 Colorado Health Facilities Authority
Revenue (MBIA insured),
5.95%, 5/15/12........................ Aaa/AAA 3,276,363
Denver City & County Airport Revenue
(MBIA insured),
1,500,000 5.60%, 11/15/25....................... Aaa/AAA 1,491,255
2,000,000 5.75%, 11/15/17....................... Aaa/AAA 2,022,000
------------
6,789,618
------------
DELAWARE--1.0%
1,500,000 University of Delaware, Housing &
Dining Systems Revenue,
5.50%, 11/1/15........................ NR/AA+ 1,512,255
------------
FLORIDA--.6%
1,000,000 Florida State Board of Education,
5.00%, 6/1/20......................... Aa/AA 953,920
------------
GEORGIA--1.5%
1,000,000 Savannah Hospital Authority Revenue,
6.125%, 7/1/12......................... A/NR 1,041,670
3
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JANUARY 31, 1996
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D)
GEORGIA (CONT'D)
$1,260,000 Toombs County Hospital Authority
Revenue,
7.00%, 12/1/17......................... NR/BBB $ 1,289,786
------------
2,331,456
------------
ILLINOIS--9.7%
2,500,000 Arlington Heights General Obligation
Notes,
5.65%, 12/1/14....................... Aa/NR 2,554,975
2,000,000 Chicago General Obligation Notes (FGIC
insured),
5.625%, 1/1/23....................... Aaa/AAA 2,015,920
3,500,000 Du Page Water Commission, Water
Revenue,
5.25%, 5/1/14........................ Aa/AA 3,502,240
Illinois Health Facilities Authority
Revenue,
1,000,000 6.00%, 2/15/19....................... A/A 998,730
2,855,000 9.00%, 11/15/15...................... Baa1/BBB 3,305,176
2,985,000 Illinois Housing Development Authority
Revenue,
6.70%, 8/1/25........................ Aa/AA 3,082,669
------------
15,459,710
------------
KENTUCKY--.7%
1,000,000 Louisville & Jefferson Counties
Metropolitan Sewer District
(AMBAC insured),
6.50%, 5/15/24....................... Aaa/AAA 1,117,730
------------
MAINE--1.7%
1,700,000 Maine Municipal Bond Bank,
5.80%, 11/1/20....................... Aa/A+ 1,716,915
1,000,000 Maine State Housing Authority, Mortgage
Purchase,
7.55%, 11/15/22...................... A1/AA- 1,058,560
------------
2,775,475
------------
MARYLAND--1.3%
2,000,000 Maryland State Community Development
Administration (FHA insured),
7.60%, 4/1/23........................ Aa/NR 2,108,980
------------
MASSACHUSETTS--2.7%
2,250,000 Massachusetts State Health & Education
Facilities Authority Revenue,
6.25%, 12/1/22....................... A1/A 2,321,977
2,000,000 Massachusetts State Water Resource
Authority,
5.25%, 3/1/13........................ A/A 1,975,480
------------
4,297,457
------------
4
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MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JANUARY 31, 1996
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D)
MICHIGAN--5.3%
$1,700,000 Dearborn School District,
6.00%, 5/1/14........................ Aa/AA $ 1,771,604
1,000,000 Ferndale School District (FGIC
insured),
5.375%, 5/1/21....................... Aaa/AAA 991,040
1,000,000 Grand Rapids Water Supply Systems
Revenue (FGIC insured),
6.50%, 1/1/15........................ Aaa/AAA 1,077,580
Michigan State Hospital Finance
Authority Revenue,
2,490,000 5.375%, 10/15/13..................... A1/NR 2,405,664
2,000,000 8.125%, 10/1/21...................... Baa/BBB 2,238,020
------------
8,483,908
------------
MINNESOTA--5.2%
Minnesota State Housing Finance Agency,
1,650,000 6.00%, 2/1/14........................ NR/AA+ 1,678,660
3,950,000 6.10%, 8/1/22........................ NR/AA+ 3,998,230
2,500,000 6.25%, 8/1/22........................ NR/AA+ 2,525,200
------------
8,202,090
------------
NEVADA--5.9%
2,000,000 Clark County General Obligation Notes
(MBIA insured),
6.00%, 6/1/13........................ Aaa/AAA 2,146,020
Clark County Passenger Facility Charge
Revenue (MBIA insured),
1,500,000 5.75%, 7/1/23........................ Aaa/AAA 1,516,185
4,000,000 6.00%, 7/1/17........................ Aaa/AAA 4,184,960
1,540,000 Nevada Housing Division,
5.85%, 10/1/15....................... Aa/NR 1,544,543
------------
9,391,708
------------
NEW HAMPSHIRE--1.9%
1,000,000 New Hampshire Higher Educational &
Health Facilities Authority Revenue,
6.125%, 10/1/13...................... Baa/NR 983,490
New Hampshire State Housing Finance
Authority,
1,000,000 6.50%, 7/1/14........................ Aa/NR 1,028,340
1,000,000 6.90%, 7/1/19........................ Aa/NR 1,049,930
------------
3,061,760
------------
NEW YORK--16.7%
2,000,000 Metropolitan Transportation Authority,
Transportation Facilities Revenue,
6.00%, 7/1/14........................ Baa/BBB+ 2,028,600
5
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JANUARY 31, 1996
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D)
NEW YORK (CONT'D)
New York City General Obligation Notes,
$ 300,000 5.75%, 2/1/12........................ Baa1/BBB+ $ 294,468
1,300,000 6.00%, 8/1/09........................ Baa1/BBB+ 1,300,936
2,000,000 6.00%, 5/15/10....................... Baa1/BBB+ 1,995,980
1,000,000 6.00%, 2/1/11........................ Baa1/BBB+ 1,005,950
1,000,000 6.95%, 8/15/12 (MBIA insured)........ Aaa/AAA 1,145,970
2,270,000 7.00%, 10/1/09....................... Baa1/BBB+ 2,461,520
2,000,000 New York City Industrial Development
Agency, Special Facilities Revenue,
6.125%, 1/1/24....................... A/A 2,033,300
3,550,000 New York City Municipal Water Finance
Authority, Water & Sewer Systems
Revenue,
6.00%, 6/15/25....................... A/A- 3,683,125
New York State Dormitory Authority
Revenues,
1,500,000 5.75%, 5/15/24....................... Baa1/BBB+ 1,485,375
500,000 6.25%, 7/1/25........................ Baa1/BBB- 521,110
1,500,000 6.75%, 7/1/24 (MBIA insured)......... Aaa/AAA 1,701,585
1,000,000 7.65%, 8/1/30 (FHA insured).......... NR/AAA 1,126,810
New York State Local Government
Assistance Corporation,
1,000,000 5.50%, 4/1/18........................ A/A 986,060
1,500,000 6.50%, 4/1/20........................ A/A 1,625,160
1,000,000 New York State Medical Care Facilities,
Finance Agency Revenue,
6.50%, 8/15/24....................... Baa1/BBB+ 1,055,400
1,000,000 New York State Thruway Authority,
Service Contract Revenue,
5.875%, 4/1/14....................... Baa1/BBB 1,004,840
New York State Urban Development
Corporation, Correctional Capital
Facility,
500,000 5.375%, 1/1/25....................... Baa1/BBB 476,400
565,000 5.625%, 1/1/07....................... Baa1/BBB 571,882
------------
26,504,471
------------
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 3,765,194
------------
OHIO--1.6%
2,500,000 Lucas County Hospital Revenue (MBIA
insured),
5.09%, 8/15/14 (B)................... Aaa/AAA 2,483,250
------------
PENNSYLVANIA--3.0%
4,600,000 Philadelphia Hospital & Higher
Education Facilities Authority,
Hospital Revenue,
6.60%, 7/1/10........................ NR/BBB 4,685,468
------------
6
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JANUARY 31, 1996
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D)
SOUTH CAROLINA--1.5%
$1,000,000 Greenville County Public Facilities
Corporation (AMBAC insured),
5.70%, 4/1/17........................ Aaa/AAA $ 1,021,460
1,450,000 York County Industrial Revenue,
5.70%, 1/1/24........................ A2/A+ 1,422,131
------------
2,443,591
------------
TENNESSEE--3.5%
2,020,000 Shelby County General Obligation Notes,
5.80%, 4/1/19........................ Aa/AA+ 2,119,788
3,410,000 Tennessee Housing Development Agency,
Mortgage Finance,
5.90%, 7/1/18........................ A1/A+ 3,441,679
------------
5,561,467
------------
TEXAS--6.4%
1,000,000 Austin Hotel Occupancy Tax Revenue
(AMBAC insured),
5.125%, 11/15/19..................... Aaa/AAA 969,840
1,500,000 Brownsville Utility System Revenue
(AMBAC insured),
5.25%, 9/1/15........................ Aaa/AAA 1,483,650
1,000,000 Harris County Toll Road Subordinated
Lien,
6.50%, 8/15/15....................... Aa/AA- 1,089,630
Houston Water Conveyance System,
Contract Certificates of
Participation (AMBAC insured),
1,000,000 6.25%, 12/15/14...................... Aaa/AAA 1,144,840
1,400,000 7.50%, 12/15/15...................... Aaa/AAA 1,814,442
3,500,000 San Antonio Electric & Gas Revenue,
6.00%, 2/1/14........................ Aa1/AA 3,633,735
------------
10,136,137
------------
UTAH--1.1%
Utah Housing Finance Agency (FHA
insured),
1,145,000 6.35%, 7/1/11........................ Aa/NR 1,188,212
480,000 6.55%, 7/1/26........................ Aa/NR 498,317
------------
1,686,529
------------
VERMONT--1.1%
1,690,000 Vermont Housing Finance Agency (FHA
insured),
7.85%, 12/1/29....................... A1/A- 1,787,293
------------
VIRGINIA--2.7%
4,200,000 Virginia Housing Development Authority,
6.50%, 1/1/13........................ Aa1/AA+ 4,366,152
------------
WASHINGTON--4.6%
1,000,000 King County School District No. 415,
6.45%, 12/1/12....................... A1/AA- 1,096,030
7
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JANUARY 31, 1996
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D)
WASHINGTON (CONT'D)
$1,160,000 Seattle Museum Development Authority,
6.30%, 7/1/13........................ Aa1/AA+ $ 1,244,390
5,000,000 Washington State Public Power Supply
Systems, Nuclear Project No. 1
Revenue (MBIA insured),
5.60%, 7/1/15........................ Aaa/AAA 5,007,000
------------
7,347,420
------------
WISCONSIN--1.3%
2,000,000 Janesville Pollution Control Revenue,
5.55%, 4/1/09........................ A3/A- 1,997,980
------------
PUERTO RICO--2.4%
2,565,000 Puerto Rico Commonwealth Highway &
Transportation Authority, Highway
Revenue,
5.75%, 7/1/18........................ Baa1/A 2,552,072
1,250,000 Puerto Rico Electric Power Authority,
Power Revenue,
6.00%, 7/1/15........................ Baa1/A- 1,295,963
------------
3,848,035
------------
Total Long-Term Investments (cost -
$149,948,872)........................ $156,346,909
------------
SHORT-TERM INVESTMENTS--.5%
DELAWARE--.2%
$300,000 Delaware State Economic Development
Authority Revenue, VRDN*,
3.90%, 2/1/96........................ VMIG1/A-1 $ 300,000
------------
TEXAS--.3%
500,000 Harris County Industrial Development
Corporation, Pollution Control
Revenue, VRDN*,
3.60%, 2/1/96........................ Aaa/A-1+ 500,000
------------
Total Short-Term Investments (cost -
$800,000)............................ $ 800,000
------------
Total Investments (cost -
$150,748,872)........................ 98.9% $157,146,909
Other Assets in Excess of Other
Liabilities.......................... 1.1 1,776,284
------------
Total Net Assets....................... 100.0% $158,923,193
------------
------------
- --------------------------------------------------------------------------------
(A) Investment debt securities are valued each week by an independent pricing
service as approved by the Board of Directors.
(B) 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.
* 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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Quarterly Report
January 31, 1996
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
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.
