<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
June 8, 1998
Dear Shareholder:
We are pleased to report on the performance and investment activities of
the Municipal Advantage Fund in the three months (second fiscal quarter) and six
months (first fiscal half) ended April 30, 1998. The Fund invests in a
diversified portfolio of quality municipal securities and uses leverage from its
preferred shares to generate additional income for the holders of its common
shares. Its objective is to provide a high level of income exempt from regular
federal income tax.
The Fund paid regular monthly dividends of 6.65 cents per common share
during the first fiscal half. The yield on the Fund's common shares (based on
the $13.125 per share closing market price on the New York Stock Exchange at
April 30, 1998 and the annualized current monthly dividend rate of 6.65 cents
per common share) was 6.1% at the end of April. For an investor in the top
federal tax bracket of 39.6%, the Fund's yield was equivalent to 10.1% on a
taxable basis, which we consider to be favorable relative to comparable quality
investments.
TOTAL RETURN
The second fiscal quarter was characterized by a moderate decline in
municipal bond prices as interest rates increased. Consequently, the Fund had a
negative total return on net asset value (NAV) of 1.0% in the quarter. Total
return consists of dividends plus change in NAV per share and assumes
reinvestment of dividends. This performance trailed the negative total return of
0.3% for the Lehman Brothers Municipal Bond Index (Lehman Index) and the
negative average total return of 0.8% for the leveraged closed-end general
municipal bond funds monitored by Lipper Analytical Services, Inc. The Fund's
quarterly performance was 39th among the 65 funds in this Lipper universe.
The Fund continues to deliver excellent total returns over longer periods.
It had a positive total return on NAV of 3.2% in the first fiscal half,
exceeding the 2.8% return of the Lehman Index. Lipper does not publish
comparative returns for this period.
For the 12 months ended April 30, 1998, the Fund delivered a total return
on NAV of 12.4%, surpassing both the 9.3% return of the Lehman Index and the
average total return of 10.5% for the leveraged closed-end general municipal
bond funds monitored by Lipper. The Fund's 12-month performance ranked sixth
among the 64 funds in its Lipper category.
RETURN AT MARKET
Total return at market--that is, dividends plus the price change of the
Fund's common shares on the New York Stock Exchange, assuming reinvestment of
dividends--was negative 2.2% in the second fiscal quarter, positive 2.5% in the
first fiscal half and positive 15.0% in the 12 months ended April 30, 1998.
The Fund's common shares trade at a discount to NAV, as is true of many
closed-end municipal bond funds. The discount was 10.8% on April 30, 1998. As we
have said in the past, one way for owners of the Fund's common shares to
capitalize on the discount and acquire an interest in quality securities at a
price below NAV is by reinvesting dividends, as many of the Fund's shareholders
do.
MARKET OVERVIEW AND INVESTMENT ACTIVITIES
Following a year of steadily rising prices, the bond market turned somewhat
weaker in the second fiscal quarter due to investor fears that the Federal
Reserve might raise interest rates. Municipal securities, moreover,
underperformed taxable bonds in the quarter because of a large supply of new
municipal issues.
Municipals, as their prices lagged, began offering what we consider to be
very attractive relative yields. By the end of April, yields on long-term
triple-A tax-exempt municipal securities were equal to about 86% of the yield on
long Treasuries, compared with an historical ratio of about 80%. Triple-A
municipals trade at lower yields than Treasuries because of the tax benefits of
municipal securities.
<PAGE>
In managing the Fund, we seek to generate favorable returns by purchasing
those bonds that we believe provide the best relative value--that is, the
highest yield at the lowest price with the least amount of risk. During the
second quarter, we increased the Fund's holdings of health/hospital and housing
bonds, which provide somewhat higher yields than other tax-exempt bonds of
comparable quality.
Also, because there is relatively little yield difference at this time
between higher-rated and lower-rated municipal securities, we increased the
Fund's holdings of higher-rated issues rather than reach for the slightly higher
yields of lower-rated securities. As of April 30, 1998, 90.7% of the long-term
securities owned by the Fund were rated A or better by Standard & Poor's or
Moody's, up from 84.3% three months earlier. Many triple-A insured bonds, in
particular, today offer yields only slightly less than single-A bonds, yet with
less credit risk, making us want to own insured issues. About one-third of the
Fund's portfolio was invested in insured securities at the end of April.
PORTFOLIO ANALYSIS
The Fund's portfolio is diversified both in terms of states and market
sectors, helping spread risk. The five largest portfolio positions by state as
of April 30, 1998 were: New York, representing 14.9% of the Fund's net assets;
Texas, 13.2%; California, 10.2%; Illinois, 5.7%; and Massachusetts, 5.2%. The
five largest market sectors were: health and hospital, 22.0% of the Fund's net
assets; housing, 18.3%; general obligation, 17.4%; water and sewer, 10.6%; and
airline and airport, 7.5%.
As of April 30, 1998, at market value, 99.6% of the portfolio was invested
in long-term securities and 0.4% in cash equivalents. The average maturity of
the portfolio was 21.7 years.
PREFERRED STOCK COSTS
The Fund uses leverage from its preferred shares to help generate income.
At the latest auction on May 18, 1998, the Fund sold 28-day auction rate
preferred stock at an annual dividend rate of 3.645%, down from 3.75% on the
previous 28-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. 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.
RECORDED UPDATE
For 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,
please call our toll-free number (800) 223-2413.
SUMMARY
We at the Fund, together with Value Advisors LLC, the Fund's investment
manager, and OpCap Advisors, which provides advisory and administrative services
to the Fund, appreciate your trust and support. We remain dedicated to serving
your investment needs by meeting the Fund's objective of providing a high level
of income exempt from federal income tax. Thank you for investing with us.
Sincerely,
Stephen Treadway
Chairman
2
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
APRIL 30, 1998
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--99.2%
ALABAMA--2.0%
$1,000,000 Alabama State Docks Department Facility Revenue
(MBIA insured),
6.15%, 10/1/14............................................ Aaa/AAA 1,078,130
2,000,000 DCH Health Care Authority, Health Care Facilities Revenue,
5.70%, 6/1/15............................................. A1/A+ 2,092,740
---------
3,170,870
---------
CALIFORNIA--10.2%
1,000,000 Burbank Redevelopment Agency,
6.00%, 12/1/13............................................ Baa1/A- 1,041,940
2,500,000 California Health Facilities Financing Authority Revenue,
6.25%, 3/1/21............................................. A2/A+ 2,629,700
1,000,000 California State Public Works Board, Lease Revenue,
6.30%, 10/1/10 (Pre-refunded 10/1/04) (A)................. A2/A 1,115,570
1,000,000 Lafayette Elementary School District (FSA insured),
5.90%, 5/15/17............................................ Aaa/AAA 1,064,500
4,000,000 Los Angeles Harbor Department Revenue,
5.375%, 11/1/23........................................... Aa3/AA 3,969,800
1,000,000 Los Angeles Regional Airports Revenue,
6.70%, 1/1/22............................................. NR/A- 1,066,340
1,000,000 Madera County Certificates of Participation (MBIA insured),
6.125%, 3/15/23 (Pre-refunded 3/15/05) (A)................ Aaa/AAA 1,070,890
1,000,000 Modesto Irrigation Distribution Financing Authority
(AMBAC insured),
4.75%, 9/1/22............................................. Aaa/AAA 918,810
1,000,000 Riverside County Asset Leasing Corporation, Leasehold
Revenue (MBIA insured),
5.00%, 6/1/19............................................. Aaa/AAA 956,020
1,000,000 San Mateo County JT Powers Authority (MBIA insured),
5.00%, 7/1/21............................................. Aaa/AAA 967,940
1,500,000 Student Education Loan Marketing Corporation,
Student Loan Revenue,
7.00%, 7/1/10............................................. NR/A 1,637,985
----------
16,439,495
----------
COLORADO--4.9%
3,085,000 Colorado Health Facilities Authority Revenue (MBIA insured),
5.95%, 5/15/12............................................ Aaa/AAA 3,293,854
Denver City & County Airport Revenue (MBIA insured),
1,500,000 5.60%, 11/15/25............................................. Aaa/AAA 1,523,220
3,000,000 5.75%, 11/15/17............................................. Aaa/AAA 3,097,740
----------
7,914,814
----------
CONNECTICUT--.8%
1,215,000 Connecticut General Obligation Bonds,
5.25%, 3/15/14............................................ Aa3/AA- 1,229,932
----------
3
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1998
</TABLE>
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D.)
FLORIDA--1.8%
$3,160,000 Tampa Health Systems Revenue (MBIA insured),
4.75%, 11/15/18........................................... Aaa/AAA $2,906,852
----------
GEORGIA--1.5%
1,000,000 Savannah Hospital Authority Revenue,
6.125%, 7/1/12............................................ A2/NR 1,067,990
1,260,000 Toombs County Hospital Authority Revenue,
7.00%, 12/1/17............................................ NR/BBB 1,365,412
----------
2,433,402
----------
ILLINOIS--5.7%
1,500,000 Chicago General Obligation Bonds (AMBAC insured),
5.125%, 1/1/25............................................ Aaa/AAA 1,441,935
1,000,000 Chicago Water Revenue (FGIC insured),
5.25%, 11/1/17............................................ Aaa/AAA 990,370
1,000,000 Illinois Educational Facilities Authority Revenue (MBIA
insured),
5.25%, 9/1/24............................................. NR/A- 949,380
2,740,000 Illinois Health Facilities Authority Revenue,
9.00%, 11/15/15........................................... Baa1/NR 3,114,229
2,625,000 Illinois Housing Development Authority Revenue,
6.70%, 8/1/25............................................. Aa3/AA 2,777,906
----------
9,273,820
----------
KENTUCKY--.7%
1,000,000 Louisville & Jefferson Counties Metropolitan Sewer District
(AMBAC insured),
6.50%, 5/15/24 (Pre-refunded 11/15/04) (A)................ Aaa/AAA 1,131,440
----------
LOUISIANA--1.0%
1,500,000 New Orleans General Obligation Bonds (AMBAC insured),
6.125%, 10/1/16........................................... Aaa/AAA 1,619,565
----------
MAINE--.6%
1,000,000 Maine State Housing Authority, Mortgage Purchase,
7.55%, 11/15/22........................................... Aa2/AA 1,055,180
----------
MARYLAND--1.0%
1,505,000 Maryland State Community Development Administration
(FHA insured),
7.60%, 4/1/23............................................. Aa/NR 1,574,049
----------
MASSACHUSETTS--5.2%
Massachusetts Bay Transportation Authority Revenue,
2,000,000 Ser. A, 5.00%, 3/1/27 (FGIC insured)........................ Aaa/AAA 1,900,380
3,000,000 Ser. D, 5.00%, 3/1/27....................................... A1/AA- 2,821,200
2,250,000 Massachusetts State Health & Education Facilities Authority
Revenue,
6.25%, 12/1/22............................................ A1/A 2,434,275
1,175,000 Massachusetts State Water Pollution Abatement Trust,
6.375%, 2/1/15............................................ Aa3/AA+ 1,284,228
----------
8,440,083
----------
</TABLE>
4
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1998
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D.)
MICHIGAN--3.9%
$1,700,000 Dearborn School District,
6.00%, 5/1/14 (Pre-refunded 5/1/01) (A)................... Aa2/AA+ $1,812,659
Michigan State Hospital Finance Authority Revenue,
1,000,000 5.50%, 10/1/18.............................................. Baa2/BBB 976,000
2,000,000 8.125%, 10/1/21 (Pre-refunded 10/1/05) (A).................. Baa2/BBB 2,473,080
1,000,000 Michigan State Pollution Control Revenue,
6.20%, 9/1/20............................................. A3/A 1,075,820
----------
6,337,559
----------
MINNESOTA--4.1%
Minnesota State Housing Finance Agency,
1,620,000 6.00%, 2/1/14............................................... Aa2/AA 1,683,439
2,905,000 6.10%, 8/1/22............................................... Aa2/AA 3,018,353
1,955,000 6.25%, 8/1/22............................................... Aa2/AA 1,978,226
----------
6,680,018
----------
NEVADA--4.6%
2,000,000 Clark County General Obligation Bonds (MBIA insured),
6.00%, 6/1/13 (Pre-refunded 6/1/04) (A)................... Aaa/AAA 2,178,900
1,000,000 Clark County Industrial Development Revenue,
5.60%, 10/1/30............................................ NR/BBB- 985,680
2,000,000 Clark County Passenger Facility Charge Revenue (MBIA
insured),
5.75%, 7/1/23............................................. Aaa/AAA 2,055,760
Nevada Housing Division Revenue (FHA insured),
1,055,000 6.20%, 4/1/17............................................... Aaa/NR 1,107,528
1,000,000 6.20%, 10/1/28.............................................. Aaa/NR 1,045,220
----------
7,373,088
----------
NEW HAMPSHIRE--1.9%
1,000,000 New Hampshire Higher Educational & Health Facilities
Authority Revenue,
6.125%, 10/1/13........................................... Baa2/NR 1,030,850
New Hampshire State Housing Finance Authority,
960,000 6.50%, 7/1/14............................................... Aa3/NR 1,014,163
1,000,000 6.90%, 7/1/19............................................... Aa/NR 1,057,340
----------
3,102,353
----------
NEW JERSEY--.6%
1,000,000 New Jersey Economic Development Authority,
Heating & Cooling Revenue,
6.20%, 12/1/07............................................ NR/BBB- 1,051,930
----------
</TABLE>
5
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1998
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D.)
NEW YORK--14.9%
$1,000,000 Municipal Assistance Corporation, City of Troy (MBIA
insured),
5.00%, 1/15/16............................................ Aaa/AAA $ 972,450
New York City General Obligation Bonds,
2,000,000 5.75%, 2/1/17............................................... A3/BBB+ 2,058,460
1,500,000 5.75%, 2/1/19............................................... A3/BBB+ 1,543,845
1,000,000 5.875%, 3/15/18............................................. A3/BBB+ 1,041,350
1,000,000 6.00%, 8/1/14............................................... A3/BBB+ 1,061,270
1,000,000 6.00%, 8/1/16............................................... A3/BBB+ 1,057,160
1,000,000 6.95%, 8/15/12 (MBIA insured) (Pre-refunded 8/15/01) (A).... Aaa/AAA 1,144,800
2,140,000 7.00%, 10/1/09 (Pre-refunded 10/1/02) (A)................... A3/BBB+ 2,387,192
130,000 7.00%, 10/1/09.............................................. A3/BBB+ 142,923
3,000,000 New York City Industrial Development Agency,
Special Facilities Revenue,
6.125%, 1/1/24.............................................. A3/A 3,156,000
3,550,000 New York City Municipal Water Finance Authority,
Water & Sewer Systems Revenue,
6.00%, 6/15/25 (Pre-refunded 6/15/05) (A)................... Aaa/A- 3,883,522
New York State Dormitory Authority Revenue,
500,000 5.30%, 8/15/21.............................................. Baa/BBB+ 484,615
1,500,000 5.75%, 5/15/24 (Pre-refunded 5/15/04) (A)................... A3/A- 1,596,555
1,000,000 New York State Medical Care Facilities,
Finance Agency Revenue,
6.50%, 8/15/24............................................ A3/A- 1,087,320
New York State Urban Development Corporation,
Correctional Capital Facility,
1,500,000 5.00%, 1/1/28............................................... Baa1/BBB+ 1,386,675
1,080,000 5.375%, 1/1/25.............................................. Baa1/BBB+ 1,055,236
----------
24,059,373
----------
NORTH DAKOTA--.9%
1,500,000 North Dakota State Housing Finance Agency,
5.50%, 7/1/18............................................. Aa3/A 1,490,835
----------
PENNSYLVANIA--5.2%
2,000,000 Allegheny County Hospital Development Authority
(MBIA insured),
6.00%, 7/1/23............................................. Aaa/AAA 2,184,340
1,750,000 Philadelphia Hospitals & Highered Facilities Authority
Revenue,
5.125%, 5/15/18........................................... Aaa/AAA 1,689,398
1,500,000 Philadelphia Water and Wastewater Revenue (MBIA insured),
5.25%, 6/15/23............................................ Aaa/AAA 1,475,235
3,000,000 Southeastern Pennsylvania Transit Authority Revenue
(FGIC insured),
5.375%, 3/1/22............................................ Aaa/AAA 3,005,880
----------
8,354,853
----------
</TABLE>
6
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1998
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D.)
SOUTH CAROLINA--.9%
$1,450,000 York County Industrial Revenue,
5.70%, 1/1/24............................................. A2/A+ $1,466,023
----------
SOUTH DAKOTA--.7%
1,000,000 Heartland Consumers Power District Revenue,
7.00%, 1/1/16............................................. Aaa/AAA 1,180,240
----------
TENNESSEE--1.3%
2,000,000 Tennessee Housing Development Agency,
6.375%, 7/1/22............................................ Aa2/AA 2,104,480
----------
TEXAS--12.8%
1,000,000 Alliance Airport Authority Revenue,
6.375%, 4/1/21............................................ Baa2/BBB 1,065,370
1,695,000 Arlington General Obligation Bonds,
5.00%, 8/15/16............................................ Aa3/AA 1,657,117
2,300,000 Carrollton Independent School District (PSFG insured),
5.00%, 2/15/17............................................ Aaa/AAA 2,228,976
1,000,000 Denton County General Obligation Bonds (AMBAC insured),
5.00%, 7/15/16............................................ Aaa/AAA 973,120
1,000,000 Harlandale Independent School District (PSFG insured),
4.50%, 8/15/23............................................ NR/AAA 880,330
1,500,000 Harris County Port Authority General Obligation Bonds,
5.75%, 10/1/17............................................ Aa2/AA 1,553,535
785,000 Harris County Toll Road Subordinated Lien,
6.50%, 8/15/15............................................ Aa2/AA 852,133
Houston Water Conveyance System, Certificates of
Participation
(AMBAC insured),
1,000,000 6.25%, 12/15/14............................................. Aaa/AAA 1,135,060
1,400,000 7.50%, 12/15/15............................................. Aaa/AAA 1,789,410
2,500,000 Houston Water and Sewer Systems Revenue (FGIC insured),
5.00%, 12/1/25............................................ Aaa/AAA 2,377,900
1,000,000 San Antonio Electric & Gas Revenue,
6.00%, 2/1/14............................................. Aa1/AA 1,027,900
5,500,000 Texas Turnpike Authority, Dallas North Thruway Revenue
(FGIC insured),
5.00%, 1/1/25............................................. Aaa/AAA 5,235,285
----------
20,776,136
----------
UTAH--1.0%
Utah Housing Finance Agency (FHA insured),
1,105,000 6.35%, 7/1/11............................................... Aa/NR 1,166,781
365,000 6.55%, 7/1/26............................................... Aa/NR 385,002
----------
1,551,783
----------
</TABLE>
7
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1998
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS (CONT'D.)
VERMONT--1.1%
$1,690,000 Vermont Housing Finance Agency (FHA insured),
7.85%, 12/1/29............................................ A1/A- $1,763,245
----------
VIRGINIA--3.9%
4,200,000 Virginia Housing Development Authority, Commonwealth
Mortgage,
6.50%, 1/1/13............................................. Aa1/AA+ 4,474,218
Virginia Housing Development Authority, Multi-Family
Housing,
900,000 5.20%, 11/1/13.............................................. Aa1/AA+ 890,568
1,000,000 5.20%, 11/1/15.............................................. Aa1/AA+ 988,680
----------
6,353,466
----------
WASHINGTON--1.3%
1,000,000 Seattle Museum Development Authority,
6.30%, 7/1/13............................................. Aa1/AA+ 1,076,990
1,000,000 Washington General Obligation Bonds (FGIC insured),
5.00%, 1/1/22............................................. Aaa/AAA 954,550
----------
2,031,540
----------
WEST VIRGINIA--1.3%
Braxton County Solid Waste Disposal Revenue,
1,000,000 6.125%, 4/1/26.............................................. A2/A 1,063,360
1,000,000 6.50%, 4/1/25............................................... A2/A 1,090,230
----------
2,153,590
----------
WISCONSIN--3.4%
2,000,000 Janesville Pollution Control Revenue,
5.55%, 4/1/09............................................. A3/A- 2,095,040
3,500,000 Wisconsin Health & Educational Facilities Authority Revenue
(MBIA insured),
5.25%, 8/15/27............................................ Aaa/AAA 3,382,960
----------
5,478,000
----------
Total Long-Term Investments (cost--$153,083,658)............ $160,498,014
----------
</TABLE>
8
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1998
<TABLE>
<CAPTION>
Principal Credit Rating
Amount (Moody's/S&P) Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--.4%
TEXAS--.4%
$ 200,000 Grapevine Industrial Development Revenue, VRDN,
4.25%, 5/1/98............................................. VMIG1/A1+ $ 200,000
100,000 Harris County Health Facilities Development Revenue, VRDN,
4.25%, 5/1/98............................................. VMIG1/A1+ 100,000
300,000 North Central Texas Health Facilities Development Revenue,
VRDN,
4.25%, 5/1/98............................................. VMIG1/A1+ 300,000
----------
Total Short-Term Investments (cost--$600,000)............... $ 600,000
----------
Total Investments (cost--$153,683,658*)..................... 99.6% $161,098,014
Other Assets in Excess of Liabilities....................... 0.4 663,366
------------- ----------
Total Net Assets............................................ 100.0% $161,761,380
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
VRDN--Variable rate demand notes 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 the date of next
rate change.
* Aggregate unrealized appreciation for securities in which there is an excess
of value over tax cost is $8,016,971, aggregate gross unrealized depreciation
for securities in which there is an excess of tax cost over value is $602,615
and net unrealized appreciation for Federal income tax purposes is
$7,414,356. The cost basis of portfolio securities for Federal income tax
purposes is $153,683,658.
(A) Bonds which are pre-refunded are collateralized by U.S. Government or other
eligible securities which are held in escrow and used to pay principal and
interest and retire the bonds at the earliest refunding date.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
APRIL 30, 1998
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost--$153,683,658)................ $ 161,098,014
Cash...................................................... 135,315
Interest receivable....................................... 2,656,795
Receivable from investments sold.......................... 1,520,940
Prepaid expenses.......................................... 23,851
---------------
Total Assets........................................... 165,434,915
---------------
LIABILITIES
Payable for investments purchased......................... 2,958,244
Dividends payable attributable to common shares........... 482,596
Investment management fee payable......................... 80,525
Dividends payable attributable to preferred shares........ 57,285
Other payables and accrued expenses....................... 94,885
---------------
Total Liabilities...................................... 3,673,535
---------------
Total Net Assets..................................... $ 161,761,380
---------------
---------------
COMPOSITION OF NET ASSETS
Preferred stock ($.001 par value and $50,000 net asset and
liquidation value per share applicable to 1,100 shares
issued and outstanding)................................ $ 55,000,000
---------------
Common stock:
Par value ($.001 per share, applicable to 7,257,093
shares issued and outstanding)........................ 7,257
Paid-in-capital in excess of par....................... 100,618,353
Undistributed net investment income....................... 253,340
Accumulated net realized loss on investments and futures
transactions........................................... (1,531,926)
Net unrealized appreciation on investments................ 7,414,356
---------------
Net assets applicable to common shareholders........... 106,761,380
---------------
Total Net Assets..................................... $ 161,761,380
---------------
---------------
Net asset value per common share..................... $14.71
---------------
---------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED APRIL 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest.................................................. $ 4,583,071
---------------
OPERATING EXPENSES
Investment management fee (note 2)........................ 485,167
Auction fees and commissions.............................. 72,876
Auditing and tax return preparation fees.................. 33,689
Legal fees................................................ 30,939
Custodian fees (note 1g).................................. 23,953
Directors' fees and expenses.............................. 13,290
Transfer and dividend disbursing agent fees............... 12,572
Reports and notices to shareholders....................... 12,430
Amortization of deferred organization expenses............ 8,791
Stock exchange listing fee................................ 8,019
Miscellaneous............................................. 9,864
---------------
Total operating expenses............................... 711,590
Less: Expenses offset (note 1g)...................... (759)
---------------
Net operating expenses............................... 710,831
---------------
Net investment income............................. 3,872,240
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET
Net realized gain on investments.......................... 1,265,200
Net realized loss on futures transactions (note 1f)....... (6,917)
---------------
Net realized gain on investments and futures
transactions.......................................... 1,258,283
Net change in unrealized appreciation (depreciation) on
investments............................................ (650,184)
---------------
Net realized gain and change in unrealized appreciation
(depreciation) on investments......................... 608,099
---------------
Net increase in net assets resulting from operations........ $ 4,480,339
---------------
---------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
APRIL 30, OCTOBER 31,
1998 (1) 1997
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income......................... $ 3,872,240 $ 7,838,929
Net realized gain on investments and futures
transactions............................... 1,258,283 664,126
Net change in unrealized appreciation
(depreciation) on investments.............. (650,184) 4,273,177
------------ ------------
Net increase in net assets resulting from
operations................................ 4,480,339 12,776,232
------------ ------------
DIVIDENDS AND SHAREHOLDERS
Dividends to preferred shareholders from net
investment income.......................... (1,041,899) (2,063,850)
Dividends to common shareholders from net
investment income.......................... (2,895,580) (5,791,161)
------------ ------------
Total dividends to shareholders............ (3,937,479) (7,855,011)
------------ ------------
Total increase in net assets............. 542,860 4,921,221
NET ASSETS
Beginning of period........................... 161,218,520 156,297,299
------------ ------------
End of period (including undistributed net
investment income of $253,340 and $318,579,
respectively).............................. $161,761,380 $161,218,520
------------ ------------
------------ ------------
</TABLE>
(1) Unaudited
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1998
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 Value Advisors LLC
(the 'Investment Manager') 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 (the 'Investment Adviser'), an affiliate of the Investment Manager,
pursuant to which the Investment Adviser provides investment advisory and
administrative services to the Fund. The Investment Adviser is responsible for
the mangement 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 preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies consistently followed by the Fund:
(A) VALUATION OF INVESTMENTS
Investment debt securities are valued each week by an independent pricing
service approved by the Board of Directors. Futures contracts are valued at the
last sale price on the market where the futures contracts are principally
traded. Any security or other asset for which market quotations are not readily
available is valued at fair value as determined in good faith under procedures
established by the Board of Directors. The Fund invests substantially all of its
assets in a diversified portfolio of debt obligations issued by states,
territories and possessions of the United States and by the District of Columbia
and their political subdivisions. The issuers' abilities to meet their
obligations may be affected by economic and political developments in a specific
state or region.
(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.
13
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
Original issue discounts or premiums on debt securities purchased are accreted
or amortized daily to non-taxable interest income. Market discounts, if any, are
accreted daily to taxable income.
(E) DIVIDENDS AND DISTRIBUTIONS -- COMMON STOCK
The Fund declares dividends from net investment income monthly to holders
of common stock. Distributions of net capital gains, if any, are paid at least
annually. The Fund records dividends and distributions to its
shareholders on the ex-dividend date.
(F) FUTURES ACCOUNTING POLICIES
A futures contract is an agreement between two parties to buy and sell a
financial instrument at a set price on a future date. Upon entering into such a
contract, the Fund is required to pledge to the broker an amount of cash or
securities equal to the minimum 'initial margin' requirements of the exchange.
Pursuant to the contracts, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in the value of the contracts.
Such receipts or payments are known as 'variation margin' and are recorded by
the Fund as unrealized appreciation or depreciation. When the contracts are
closed, the Fund records a realized gain or loss equal to the difference between
the value of the contracts at the time they were opened and the value at the
time they were closed. Any unrealized appreciation or depreciation recorded is
simultaneously reversed. The Fund invests in futures contracts solely for the
purpose of hedging its existing portfolio securities, or securities the Fund
intends to purchase against fluctuations in value caused by changes in
prevailing market interest rates. The use of futures transactions involves the
risk of imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. There were no futures
contracts open at April 30, 1998.
(G) EXPENSES OFFSET
The Fund benefits from an expense offset arrangement with its custodian
bank where uninvested cash balances earn credits that reduce monthly expenses.
Had these cash balances been invested in income producing securities, they would
have generated income for the Fund.
2. INVESTMENT MANAGEMENT FEE
The Fund pays the Investment Manager a monthly fee at an annual rate of
.60% of the Fund's average weekly net assets for its services, and 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. The Investment
Manager informed the Fund that it paid the Investment Adviser $291,100 for the
six months ended April 30, 1998.
14
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1998
3. PURCHASES AND SALES OF SECURITIES
For the six months ended April 30, 1998, purchases and sales of investment
securities, other than short-term securities, aggregated $37,626,928 and
$36,550,154, 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 net asset and
liquidation value of $50,000 per share plus accrued dividends.
Dividends are accumulated daily at an annual rate set through auction
procedures and recently have been reset and paid every twenty-eight days. The
annualized dividend rate ranged from 3.499% to 3.90% during the period and was
3.75% at April 30, 1998. Distributions of net realized capital gains, if any,
are paid at least annually.
The Fund is subject to certain limitations and restrictions while Preferred
Stock is outstanding. Failure to comply with these limitations and restrictions
could preclude the Fund from declaring any dividends or distributions to common
shareholders or repurchasing common shares and/or could trigger the mandatory
redemption of Preferred Stock at its 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.
6. QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Realized and
Unrealized Net Increase
Gain (Loss) on (Decrease)
Investments in Net Assets
Net and Futures Resulting from
Investment Income Investment Income Transactions-Net Operations
-------------------- -------------------- -------------------- ---------------------
Per Per Per Per
Common Common Common Common
Quarter Ended Total Share Total Share Total Share Total Share
- ----------------------- ---------- ------ ---------- ------ ---------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 31, 1998....... $2,295,587 $0.32 $1,930,460 $0.26 $3,068,626 $ 0.42 $ 4,999,086 $0.68
April 30, 1998......... 2,287,484 0.31 1,941,780 0.27 (2,460,527) (0.34) (518,747) (0.07)
---------- ------ ---------- ------ ---------- ------ ----------- ------
$4,583,071 $0.63 $3,872,240 $0.53 $ 608,099 $0.08 $ 4,480,339 $0.61
---------- ------ ---------- ------ ---------- ------ ----------- ------
---------- ------ ---------- ------ ---------- ------ ----------- ------
January 31, 1997....... $2,319,442 $0.32 $1,962,718 $0.27 $ (215,768) $(0.03) $ 1,746,950 $0.24
April 30, 1997......... 2,318,411 0.32 1,970,841 0.27 (816,728) (0.11) 1,154,113 0.16
July 31, 1997.......... 2,315,868 0.32 1,957,595 0.27 6,965,992 0.96 8,923,587 1.23
October 31, 1997....... 2,307,689 0.32 1,947,775 0.27 (996,193) (0.14) 951,582 0.13
---------- ------ ---------- ------ ---------- ------ ----------- ------
$9,261,410 $1.28 $7,838,929 $1.08 $4,937,303 $ 0.68 $12,776,232 $1.76
---------- ------ ---------- ------ ---------- ------ ----------- ------
---------- ------ ---------- ------ ---------- ------ ----------- ------
</TABLE>
15
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1998
7. SUBSEQUENT EVENTS
On May 1, 1998, a dividend of $.0665 per share was declared to common
shareholders payable June 1, 1998 to shareholders of record on May 15, 1998.
On May 18, 1998, the Fund sold 28-day auction rate preferred stock at an
annual rate of 3.645% with a pay date of June 16, 1998.
On June 1, 1998, a dividend of $.0665 per share was declared to common
shareholders payable July 1, 1998 to shareholders of record on June 16, 1998.
16
<PAGE>
MUNICIPAL ADVANTAGE FUND INC.
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
April 30,
Six Months Year ended October 31, 1993 (1) to
ended April 30, ----------------------------------------------------- October 31,
1998* 1997 1996 1995 1994 1993
--------------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................. $ 14.64 $ 13.96 $ 13.77 $ 11.79 $ 14.75 $ 14.10
--------------- -------- -------- -------- -------- -----------
Income from investment operations:
Net investment income................ 0.53 1.08 1.09 1.08 1.05 0.43
Net realized and unrealized gain
(loss) on investments.............. 0.08 0.68 0.17 1.98 (2.89) 0.84
--------------- -------- -------- -------- -------- -----------
Total income from investment
operations..................... 0.61 1.76 1.26 3.06 (1.84) 1.27
--------------- -------- -------- -------- -------- -----------
Dividends and distributions to
shareholders:
Dividends to preferred shareholders
from net investment income......... (0.14) (0.28) (0.29) (0.30) (0.21) (0.07)
Dividends to common shareholders from
net investment income.............. (0.40) (0.80) (0.78) (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 ............... (0.54) (1.08) (1.07) (1.08) (1.12) (0.38)
--------------- -------- -------- -------- -------- -----------
Capital charge with respect to
issuance of preferred shares....... -- -- -- -- -- (0.18)
Capital charge with respect to
issuance of common shares.......... -- -- -- -- -- (0.06)
--------------- -------- -------- -------- -------- -----------
Total capital charges............ -- -- -- -- -- (0.24)
--------------- -------- -------- -------- -------- -----------
Net asset value, end of period....... $ 14.71 $ 14.64 $ 13.96 $ 13.77 $ 11.79 $ 14.75
--------------- -------- -------- -------- -------- -----------
--------------- -------- -------- -------- -------- -----------
Market value, end of period.......... $ 13.125 $13.1875 $ 11.875 $ 11.625 $ 9.75 $ 14.125
--------------- -------- -------- -------- -------- -----------
--------------- -------- -------- -------- -------- -----------
Total investment return (2)...... 2.5% 18.4% 9.2% 27.9% (25.7%) 2.4%(3)
--------------- -------- -------- -------- -------- -----------
--------------- -------- -------- -------- -------- -----------
Net assets applicable to common
shareholders, end of
period (000's) (4)................. $ 106,761 $106,219 $101,297 $ 99,908 $ 85,551 $ 107,057
--------------- -------- -------- -------- -------- -----------
Ratio of operating expenses to
average weekly net assets (6)...... 1.33%(5,7) 1.39%(7) 1.40%(7) 1.44% 1.39% 1.17%(5)
--------------- -------- -------- -------- -------- -----------
Ratio of net investment income to
average weekly net assets (6)...... 7.23%(5) 7.64% 7.88% 8.44% 7.85% 6.07%(5)
--------------- -------- -------- -------- -------- -----------
Portfolio turnover rate.............. 23% 44% 27% 36% 22% 9%
--------------- -------- -------- -------- -------- -----------
</TABLE>
- --------------------------------------------------------------------------------
* Unaudited
(1) Commencement of operations.
(2) Change in market price assuming reinvestment of dividends and distributions
to common shareholders on payable date (at market).
(3) Return does not reflect underwriters' discount.
(4) Preferred Shares asset coverage per unit was $146,955, $146,251, $141,788,
$140,680, $127,619 and $147,285, 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 weekly net assets of
common shareholders. Average weekly net assets of common shareholders for
each period were $108,062,507, $102,621,213, $99,980,261, $93,172,629,
$97,502,978 and $102,609,821, respectively.
(7) Gross of expenses offset (see note 1g in Notes to Financial Statements). The
net ratios of operating expenses to average weekly net assets were 1.33% for
the six months ended April 30, 1998 and 1.39% and 1.40% for the years ended
October 31, 1997 and October 31, 1996, respectively.
17
<PAGE>
ANNUAL SHAREHOLDERS MEETING
- --------------------------------------------------------------------------------
The Fund held its annual shareholders meeting on February 20, 1998. At the
meeting, preferred shareholders voted separately on the election of the nominees
proposed for election. Common and preferred shareholders voted together and
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 DIRECTORS
<TABLE>
<CAPTION>
NOMINEE VOTES FOR WITHHELD AUTHORITY
- ------- ---------- ------------------
<S> <C> <C>
Robert L. Rosen *.......................................................... 630 0
Stephen J. Treadway *...................................................... 630 0
</TABLE>
2. RATIFICATION OF PRICE WATERHOUSE LLP AS THE INDEPENDENT ACCOUNTANTS OF THE
FUND
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED BROKER NON-VOTES
------------ ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
6,376,653 63,181 72,503 5,058
</TABLE>
The following table provides information concerning the Directors of the Fund:
<TABLE>
<CAPTION>
DIRECTOR TERM EXPIRATION
- -------- -------------------
<S> <C>
Raymond D. Horton.............................. 1999 Annual Meeting
Stephen J. Treadway *.......................... 1999 Annual Meeting
Robert I. Kleinberg............................ 2000 Annual Meeting
Jeswald W. Salacuse............................ 2000 Annual Meeting
Robert L. Rosen *.............................. 2001 Annual Meeting
</TABLE>
- ------------------
* Preferred Stock Director
18
<PAGE>
[This page intentionally left blank.]
<PAGE>
Municipal Advantage Fund Inc. Semi-Annual Report
April 30, 1998
Directors and Principal Officers
Stephen J. Treadway
Director and Chairman of the Board
Raymond D. Horton
Director
Robert L. Rosen
Director
Jeswald W. Salacuse
Director
Bernard H. Garil
President
Newton B. Schott, Jr.
Executive Vice President and Assistant Secretary
Robert J. Bluestone
Executive Vice President
Matthew Greenwald
Executive Vice President
Deborah Kaback
Secretary
Richard L. Peteka
Treasurer
Investment Manager
Value Advisors LLC
800 Newport Center Drive
Newport Beach, CA 92660
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.
