<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
September 11, 1996
Dear Shareholder:
The Municipal Advantage Fund had an excellent fiscal third quarter ended
July 31, 1996, outperforming the municipal bond market indexes and delivering
one of the highest returns in its fund category.
The Fund provided a total return of 3.6% based on its net asset value (NAV)
per common share and assuming reinvestment of dividends, exceeding both the 2.0%
return of the Lehman Brothers Municipal Bond Index and the 2.6% average total
return of the leveraged closed-end municipal bonds funds monitored by Lipper
Analytical Services, Inc. The Fund's performance was fifth best among the 65
funds in this Lipper universe. We are very pleased with these results.
The Fund invests in a diversified portfolio of quality municipal
securities. Its goal is to provide a high level of income exempt from regular
federal income tax. The Fund uses leverage from its preferred shares to generate
additional income, thereby increasing the yield on its common shares. Besides
adding to income, the use of leverage tends to magnify capital appreciation in a
rising bond market and magnify capital losses in a declining market.
MARKET CONDITIONS AND INVESTMENT PERFORMANCE
The bond market rallied during the Fund's third fiscal quarter as inflation
remained under control, economic growth was moderate and the Federal Reserve did
not raise short-term interest rates. The Fund benefited by being fully invested
in a rising market. In addition, the Fund was overweighted in high-quality
discount securities, one of the municipal bond market's strongest sectors in the
period.
The Fund performed well not only in the quarter, but also over longer
periods. For the first nine fiscal months ended July 31, 1996, the Fund's total
return on NAV was 3.7%, surpassing the 3.1% return of the Lehman index. For the
12 months ended July 31, 1996, the Fund provided a total return on NAV of 9.5%,
handily beating both the 6.6% return of the Lehman index and the 7.7% average
total return of the leveraged closed-end municipal bonds funds monitored by
Lipper. The Fund's performance ranked ninth best among the 64 funds in this
Lipper universe for the 12-month period.
The price of the Fund's common shares on the New York Stock Exchange
increased more than the NAV in the third quarter. This resulted in a total
return of 5.1% based on change in market price and assuming reinvestment of
dividends. For the nine months and 12 months ended July 31, 1996, the Fund's
total return at market was 4.0% and 10.5%, respectively. Returns at market
exceeded the Lehman index by a wide margin for each of these periods.
The Fund's discount (the amount the market price is below NAV) narrowed
from 17.0% at April 30, 1996 to 16.0% as of July 31, 1996. Most closed-end
municipal bond funds trade at discounts to NAV. One way for owners of the Fund's
common shares to capitalize on the discount and acquire quality securities at a
price well below NAV is by reinvesting dividends, as many of our shareholders
do.
DIVIDEND PAYMENTS
The Fund paid monthly dividends of 6.5 cents per common share during the
first three fiscal quarters, totaling 58.5 cents per common share for the
nine-month period.
The yield on the Fund's common shares was 6.8% as of July 31, 1996, based
on the $11.50 per share closing price on the New York Stock Exchange and the
annualized monthly dividend rate during the third fiscal quarter. For an
investor in the top federal tax bracket of 39.6%, this yield was equivalent to
11.3% on a taxable basis.
<PAGE>
DIVIDEND INCREASE
On September 9th, the Board of Directors of the Fund approved an increase
in the monthly dividend from 6.50 cents to 6.65 cents per common share. The new
rate takes effect with the dividend payable November 4th to common shareholders
of record on October 21st.
PREFERRED STOCK COSTS
The Fund is leveraged by its outstanding issue of auction rate preferred
stock. Dividend costs on the preferred stock averaged 3.71% annually during the
third fiscal quarter. At the latest auction on August 26, 1996, the Fund sold
91-day auction rate preferred stock at an annual rate of 3.80%, up from 3.689%
on the previous 91-day issue. Proceeds from the preferred stock are invested in
municipal bonds that yield more than the cost of the preferred, with the Fund's
common shares realizing the difference.
PORTFOLIO PROFILE
As of July 31, 1996, 98.4% of the portfolio was invested in long-term
securities, with the remainder in cash and cash equivalents. Of the long-term
securities, 82.2% of these assets were rated A or better by Standard & Poor's or
Moody's.
The five largest market sectors in the portfolio as of July 31, 1996 were:
health and hospital, 20.6%; housing, 17.8%; general obligation, 14.6%; water and
sewer, 9.6%; and airline and airport, 9.6%. This reflected a moderate increase
in the Fund's holdings of general obligation securities during the quarter. We
believe well-chosen general obligation bonds represent attractive value at a
time when the budgetary conditions of many state and local governments are
improving. The five largest portfolio positions by state were: New York, 16.0%;
Illinois, 8.4%; California, 6.6%; Texas, 6.6%; and Nevada, 6.6%. The average
maturity of the portfolio at July 31, 1996 was 21 years.
TOLL-FREE UPDATE
A recorded periodic update, reviewing the municipal bond markets and
containing specific information regarding the Fund and its portfolio, including
largest 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, remain dedicated to providing a high level of
income exempt from regular federal income tax through a diversified, leveraged
portfolio of quality municipal securities. Thank you for investing with us.
Sincerely,
/s/ Mark C. Biderman
Mark C. Biderman
President
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
JULY 31, 1996
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--98.4%
ALABAMA--2.7%
$1,000,000 Alabama State Docks Department Facility Revenue,
6.15%, 10/1/14.................................. Aaa/AAA $ 1,024,880
1,200,000 Birmingham General Obligation Bonds,
5.625%, 4/1/13.................................. A1/AA 1,184,580
2,000,000 DCH Health Care Authority, Health Care Facilities
Revenue, 5.70%, 6/1/15.......................... A1/A+ 1,906,660
------------
4,116,120
------------
CALIFORNIA--6.6%
1,000,000 Burbank Redevelopment Agency, 6.00%, 12/1/13...... Baa1/A- 997,770
2,500,000 California Health Facilities Financing Authority
Revenue,
6.25%, 3/1/21................................... Aa3/AA 2,528,000
1,000,000 California State Public Works Board, Lease
Revenue,
6.30%, 10/1/10.................................. A/A- 1,042,580
1,000,000 Lafayette Elementary School District,
5.90%, 5/15/17.................................. Aaa/AAA 999,900
1,000,000 Los Angeles Regional Airports Revenue,
6.70%, 1/1/22................................... NR/A- 1,044,990
1,000,000 Madera County Certificates of Participation (MBIA
insured),
6.125%, 3/15/23................................. Aaa/AAA 1,021,450
1,000,000 San Francisco City & County Certificates of
Participation (CGIC insured),
5.60%, 4/1/16................................... Aaa/AAA 981,230
1,500,000 Student Education Loan Marketing Corporation,
Student Loan Revenue,
7.00%, 7/1/10................................... NR/A 1,557,870
------------
10,173,790
------------
COLORADO--5.8%
3,085,000 Colorado Health Facilities Authority Revenue (MBIA
insured),
5.95%, 5/15/12.................................. Aaa/AAA 3,140,407
Denver City & County Airport Revenue (MBIA
insured),
1,500,000 5.60%, 11/15/25................................. Aaa/AAA 1,421,505
4,500,000 5.75%, 11/15/17................................. Aaa/AAA 4,407,615
------------
8,969,527
------------
FLORIDA--1.1%
2,000,000 Florida State Board of Education,
5.00%, 6/1/20................................... Aa/AA 1,773,400
------------
GEORGIA--1.5%
1,000,000 Savannah Hospital Authority Revenue,
6.125%, 7/1/12.................................. A/NR 1,021,620
</TABLE>
3
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JULY 31, 1996
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
GEORGIA (CONT'D)
$1,260,000 Toombs County Hospital Authority Revenue,
7.00%, 12/1/17.................................. NR/BBB $ 1,266,136
------------
2,287,756
------------
ILLINOIS--8.4%
2,500,000 Arlington Heights General Obligation Bonds,
5.65%, 12/1/14.................................. Aa/NR 2,458,900
3,500,000 Du Page Water Commission, Water Revenue,
5.25%, 5/1/14................................... Aa/AA 3,273,340
Illinois Health Facilities Authority Revenue,
1,000,000 6.00%, 2/15/19.................................. A/A 971,130
2,855,000 9.00%, 11/15/15................................. Baa1/BBB 3,207,021
2,985,000 Illinois Housing Development Authority Revenue,
6.70%, 8/1/25................................... Aa/AA 3,059,267
------------
12,969,658
------------
KENTUCKY--.7%
1,000,000 Louisville & Jefferson Counties Metropolitan Sewer
District (AMBAC insured),
6.50%, 5/15/24.................................. Aaa/AAA 1,062,320
------------
LOUISIANA--1.0%
1,500,000 New Orleans General Obligation Bonds (AMBAC
insured),
6.125%, 10/1/16................................. Aaa/AAA 1,533,435
------------
MAINE--1.8%
1,700,000 Maine Municipal Bond Bank,
5.80%, 11/1/20.................................. Aa/A+ 1,673,735
1,000,000 Maine State Housing Authority, Mortgage Purchase,
7.55%, 11/15/22................................. A1/AA- 1,050,330
------------
2,724,065
------------
MARYLAND--1.4%
2,000,000 Maryland State Community Development
Administration (FHA insured),
7.60%, 4/1/23................................... Aa/NR 2,093,060
------------
MASSACHUSETTS--3.5%
2,250,000 Massachusetts State Health & Education Facilities
Authority Revenue,
6.25%, 12/1/22.................................. A1/A 2,266,110
1,175,000 Massachusetts State Water Pollution Abatement
Trust,
6.375%, 2/1/15.................................. Aa/AA- 1,239,613
2,000,000 Massachusetts State Water Resource Authority,
5.25%, 3/1/13................................... A/A 1,889,820
------------
5,395,543
------------
</TABLE>
4
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JULY 31, 1996
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
MICHIGAN--6.0%
$1,700,000 Dearborn School District,
6.00%, 5/1/14................................... Aa/AA $ 1,722,916
1,000,000 Ferndale School District (FGIC insured),
5.375%, 5/1/21.................................. Aaa/AAA 945,680
1,000,000 Grand Rapids Water Supply Systems Revenue (FGIC
insured),
6.50%, 1/1/15................................... Aaa/AAA 1,058,460
Michigan State Hospital Finance Authority Revenue,
2,490,000 5.375%, 10/15/13................................ A1/NR 2,291,597
2,000,000 8.125%, 10/1/21................................. Baa/BBB 2,177,020
1,000,000 Michigan State Pollution Control Revenue,
6.20%, 9/1/20................................... A3/A- 1,003,670
------------
9,199,343
------------
MINNESOTA--4.6%
Minnesota State Housing Finance Agency,
1,650,000 6.00%, 2/1/14................................... Aa/AA 1,652,277
2,950,000 6.10%, 8/1/22................................... Aa/AA 2,946,194
2,500,000 6.25%, 8/1/22................................... Aa/AA 2,517,900
------------
7,116,371
------------
NEVADA--6.6%
2,000,000 Clark County General Obligation Bonds (MBIA
insured),
6.00%, 6/1/13................................... Aaa/AAA 2,045,180
Clark County Passenger Facility Charge Revenue
(MBIA insured),
2,000,000 5.75%, 7/1/23................................... Aaa/AAA 1,954,400
4,000,000 6.00%, 7/1/17................................... Aaa/AAA 3,999,760
1,000,000 Las Vegas General Obligation Bonds,
6.60%, 10/1/12.................................. Aaa/AAA 1,078,210
1,055,000 Nevada Housing Divisions Revenue,
6.20%, 4/1/17................................... Aaa/NR 1,062,733
------------
10,140,283
------------
NEW HAMPSHIRE--1.9%
1,000,000 New Hampshire Higher Educational & Health
Facilities Authority Revenue,
6.125%, 10/1/13................................. Baa/NR 952,510
</TABLE>
5
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JULY 31, 1996
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
NEW HAMPSHIRE (CONT'D)
New Hampshire State Housing Finance Authority,
$ 995,000 6.50%, 7/1/14................................... Aa/NR $ 1,013,616
1,000,000 6.90%, 7/1/19................................... Aa/NR 1,034,000
------------
3,000,126
------------
NEW JERSEY--.6%
1,000,000 New Jersey Economic Development Authority,
Heating and Cooling Revenue,
6.20%, 12/1/07.................................. NR/BBB- 1,003,200
------------
NEW YORK--16.0%
2,000,000 Metropolitan Transportation Authority,
Transportation Facilities Revenue,
6.00%, 7/1/14................................... Baa/BBB+ 1,986,860
New York City General Obligation Bonds,
300,000 5.75%, 2/1/12................................... Baa1/BBB+ 286,677
1,300,000 6.00%, 8/1/09................................... Baa1/BBB+ 1,288,443
2,000,000 6.00%, 5/15/10.................................. Baa1/BBB+ 1,972,160
1,000,000 6.00%, 2/1/11................................... Baa1/BBB+ 981,050
1,000,000 6.95%, 8/15/12 (MBIA insured)................... Aaa/AAA 1,100,990
2,270,000 7.00%, 10/1/09.................................. Baa1/BBB+ 2,422,272
2,000,000 New York City Industrial Development Agency,
Special Facilities Revenue,
6.125%, 1/1/24.................................. A/A 1,969,840
3,550,000 New York City Municipal Water Finance Authority,
Water & Sewer Systems Revenue,
6.00%, 6/15/25.................................. A/A- 3,552,520
New York State Dormitory Authority Revenues,
1,500,000 5.75%, 5/15/24.................................. Baa1/BBB+ 1,410,915
500,000 6.25%, 7/1/25................................... Baa1/BBB- 502,320
1,500,000 6.75%, 7/1/24 (MBIA insured).................... Aaa/AAA 1,630,395
1,000,000 7.65%, 8/1/30 (FHA insured)..................... NR/AAA 1,093,120
1,500,000 New York State Local Government Assistance
Corporation,
6.50%, 4/1/20................................... A/A 1,563,105
1,000,000 New York State Medical Care Facilities, Finance
Agency Revenue,
6.50%, 8/15/24.................................. Baa1/BBB+ 1,023,640
1,000,000 New York State Thruway Authority, Service Contract
Revenue,
5.875%, 4/1/14.................................. Baa1/BBB 965,310
New York State Urban Development Corporation,
Correctional Capital Facility,
500,000 5.375%, 1/1/25.................................. Baa1/BBB 447,005
565,000 5.625%, 1/1/07.................................. Baa1/BBB 558,621
------------
24,755,243
------------
</TABLE>
6
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JULY 31, 1996
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
NORTH CAROLINA--.6%
$1,000,000 North Carolina Municipal Power Agency, No. 1
Catawba Electric Revenue (MBIA insured),
5.00%, 1/1/18................................... Aaa/AAA $ 911,690
------------
OHIO--1.5%
2,500,000 Lucas County Hospital Revenue (MBIA insured),
5.45%, 8/15/14.................................. Aaa/AAA 2,406,100
------------
PENNSYLVANIA--3.0%
4,600,000 Philadelphia Hospital & Higher Education
Facilities Authority, Hospital Revenue,
6.60%, 7/1/10................................... NR/BBB 4,583,118
------------
SOUTH CAROLINA--1.5%
1,000,000 Greenville County Public Facilities Corporation
(AMBAC insured),
5.70%, 4/1/17................................... Aaa/AAA 989,140
1,450,000 York County Industrial Revenue,
5.70%, 1/1/24................................... A2/A+ 1,374,977
------------
2,364,117
------------
TENNESSEE--3.5%
2,020,000 Shelby County General Obligation Notes,
5.80%, 4/1/19................................... Aa/AA+ 2,030,363
3,410,000 Tennessee Housing Development Agency, Mortgage
Finance,
5.90%, 7/1/18................................... A1/A+ 3,372,626
------------
5,402,989
------------
TEXAS--6.6%
1,000,000 Austin Hotel Occupancy Tax Revenue (AMBAC
insured),
5.125%, 11/15/19................................ Aaa/AAA 900,130
1,500,000 Brownsville Utility System Revenue (AMBAC
insured),
5.25%, 9/1/15................................... Aaa/AAA 1,415,355
1,500,000 Harris County Port Authority General Obligation
Bonds,
5.75%, 10/1/17.................................. Aa/AA 1,469,310
1,000,000 Harris County Toll Road Subordinated Lien,
6.50%, 8/15/15.................................. Aa/AA- 1,058,910
Houston Water Conveyance System, Contract
Certificates of Participation (AMBAC insured),
1,000,000 6.25%, 12/15/14................................. Aaa/AAA 1,081,120
1,400,000 7.50%, 12/15/15................................. Aaa/AAA 1,709,092
2,500,000 San Antonio Electric & Gas Revenue,
6.00%, 2/1/14................................... Aa1/AA 2,524,425
------------
10,158,342
------------
</TABLE>
7
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JULY 31, 1996
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS (CONT'D)
UTAH--3.0%
$3,500,000 Intermountain Power Agency, Power Supply Revenue,
5.00%, 7/1/21................................... Aa/AA- $ 3,066,560
Utah Housing Finance Agency (FHA insured),
1,130,000 6.35%, 7/1/11................................... Aa/NR 1,150,713
460,000 6.55%, 7/1/26................................... Aa/NR 472,793
------------
4,690,066
------------
VERMONT--1.1%
1,690,000 Vermont Housing Finance Agency (FHA insured),
7.85%, 12/1/29.................................. A1/A- 1,767,825
------------
VIRGINIA--2.8%
4,200,000 Virginia Housing Development Authority,
6.50%, 1/1/13................................... Aa1/AA+ 4,288,872
------------
WASHINGTON--1.5%
1,000,000 King County School District No. 415,
6.45%, 12/1/12.................................. A1/AA- 1,071,540
1,160,000 Seattle Museum Development Authority,
6.30%, 7/1/13................................... Aa1/AA+ 1,206,029
------------
2,277,569
------------
WISCONSIN--1.3%
2,000,000 Janesville Pollution Control Revenue,
5.55%, 4/1/09................................... A3/A- 1,953,660
------------
PUERTO RICO--1.8%
1,565,000 Puerto Rico Commonwealth Highway & Transportation
Authority, Highway Revenue,
5.75%, 7/1/18................................... Baa1/A 1,515,703
1,250,000 Puerto Rico Electric Power Authority, Power
Revenue,
6.00%, 7/1/15................................... Baa1/A- 1,252,900
------------
2,768,603
------------
Total Long-Term Investments (cost - $150,198,236). $151,886,191
------------
</TABLE>
8
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JULY 31, 1996
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value (A)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--.6%
ALABAMA--.6%
$900,000 Phenix County Industrial Development Revenue,
VRDN*,
3.70%, 8/1/96 (cost - $900,000)............... VMIG1/NR $ 900,000
------------
Total Investments (cost - $151,098,236)........... 99.0% $152,786,191
Other Assets in Excess of Other Liabilities....... 1.0 1,527,975
------ ------------
Total Net Assets.................................. 100.0% $154,314,166
------ ------------
------ ------------
</TABLE>
- --------------------------------------------------------------------------------
(A) Investment debt securities are valued each week by an independent pricing
service as approved by the Board of Directors.
* 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 date shown is date of next rate
change.
9
<PAGE>
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<PAGE>
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<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
QUARTERLY REPORT
July 31, 1996
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.
