<PAGE>
NUVEEN
Money Market
Funds
June 10, 1997
Prospectus
Dependable, tax-free income
to help you keep more of
what you earn.
[PHOTO OF COUPLE APPEARS HERE]
California
<PAGE>
NUVEEN CALIFORNIA TAX-FREE FUND, INC.
Nuveen California Tax-Free Money Market Fund
JUNE 10, 1997
PROSPECTUS
Nuveen California Tax-Free Fund, Inc. is an open-end,
diversified management investment company presently
offering shares in one investment portfolio, the
Nuveen California Tax-Free Money Market Fund (the
"Fund" or the "Money Market Fund").
The Money Market Fund has the objective of providing,
through investment in a professionally managed port-
folio of California Municipal Obligations, as high a
level of current interest income exempt from both
federal and California income taxes as is consistent
with its investment policies and with preservation of
capital.
The Money Market Fund invests primarily in high qual-
ity short-term California tax-exempt money market
instruments. The Fund seeks to maintain its net asset
value at $1.00 per share. The Fund has adopted plans
applicable to shares of the Fund sold through banks
or securities dealers whereby certain of the costs of
administration and/or distribution with respect to
such shares will be borne by the Fund and allocated
to the shares that are subject to those plans.
This Prospectus, which should be retained for future
reference, sets forth concisely the information about
the Fund that a prospective investor should know
before investing in the Fund. A "Statement of Addi-
tional Information" dated June 10, 1997, containing
additional information about the Fund has been filed
with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus. A
copy of this Statement may be obtained without charge
by writing to Nuveen California Tax-Free Fund, Inc.
or by calling John Nuveen & Co. Incorporated at the
toll-free number provided below.
An investment in the Fund is neither insured nor
guaranteed by the U.S. Government and there can be no
assurance that the Fund will be able to maintain a
stable net asset value of $1.00 per share.
Shares of the Fund are not deposits or obligations
of, or guaranteed or endorsed by, any bank and are
not federally insured by the Federal Deposit Insur-
ance Corporation, the Federal Reserve Board, or any
other agency.
The Fund may invest a significant percentage of its
assets in the securities of a single issuer, and,
therefore, an investment in the Fund may be riskier
than an investment in other types of money market
funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAP-
PROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
John Nuveen & Co. Incorporated
For information, call toll-free (800) 621-7227
---
1
<PAGE>
Contents
<TABLE>
<C> <S>
2 Fund Expenses
3 Highlights
4 Financial Highlights
5 Yield
5 The Fund and Its Investment
Objective and Policies
8 Management of the Fund
8 Dividends and Taxes
10 Net Asset Value
10 How to Buy Fund Shares
13 How to Redeem Fund Shares
14 General Information
16 Taxable Equivalent Yield Tables
</TABLE>
Fund Expenses
The following tables illustrate all expenses and fees that a shareholder of a
series of the Fund will incur. The expenses and fees shown are for the fiscal
year ended February 28, 1997.
<TABLE>
<CAPTION>
INSTITUTIONAL DISTRIBUTION SERVICE
SHAREHOLDER TRANSACTION EXPENSES SERIES PLAN SERIES PLAN SERIES
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Sales charges imposed on purchases None None None
Sales charges imposed on reinvested
dividends None None None
Redemption fees None None None
Exchange fees None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF INSTITUTIONAL DISTRIBUTION SERVICE
AVERAGE DAILY NET ASSETS) SERIES PLAN SERIES PLAN SERIES
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Management fees .40% .40% .40%
12b-1 Fees (or service fees) None .10% .12%
Other operating expenses, after expense
reimbursements .06% .05% .03%
- -------------------------------------------------------------------------------
Total expenses, after expense
reimbursements .46% .55% .55%
- -------------------------------------------------------------------------------
</TABLE>
The following example illustrates the expenses that you would pay on a $1,000
investment over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted in the table above,
the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional series $ 5 $15 $26 $58
Distribution Plan series $ 6 $18 $31 $69
Service Plan series $ 6 $18 $31 $69
- ---------------------------------------------------------
</TABLE>
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or less than those
shown. This example assumes that the percentage amounts listed under Annual
Operating Expenses remain the same in each of the periods.
The purpose of the foregoing tables is to help you understand all expenses and
fees that you would bear directly or indirectly as an investor in the Fund.
As discussed under "Management of the Fund" and reflected in the tables above,
the management fee is reduced or Nuveen Advisory assumes certain expenses in
amounts necessary to prevent the total expenses of each series of the Fund in
any fiscal year from exceeding .55 of 1% of the average daily net asset value
of the series. Without expense reimbursements, for the fiscal year ended Febru-
ary 28, 1997, other operating expenses would have been .06, .11 and .07 of 1%,
and total expenses would have been .46, .61 and .59 of 1% of the average daily
net assets of the Institutional series, the Distribution Plan series and the
Service Plan series, respectively, of the Fund. See "Management of the Fund."
---
2
<PAGE>
Highlights
Nuveen California Tax-Free Fund, Inc. is an open-end, diversified management
investment company that currently offers shares in one investment portfolio,
the Nuveen California Tax-Free Money Market Fund (the "Fund").
The Fund has the objective of providing, through investment in a professionally
managed portfolio of California Municipal Obligations, as high a level of cur-
rent interest income exempt both from federal and California income taxes as is
consistent with its investment policies and with preservation of capital. The
Fund invests primarily in high quality short-term California tax-exempt instru-
ments and seeks to maintain a net asset value of $1.00 per share. There is no
guarantee that this value will be maintained or that the objective of the Fund
will be realized. See "Net Asset Value" on page 10, "The Fund and its Invest-
ment Objective and Policies" on page 5.
The Fund intends to qualify, as it has in prior years, for tax treatment as a
regulated investment company and to satisfy conditions that will enable inter-
est income that is exempt from federal and California income taxes in the hands
of the Fund to retain such tax-exempt status when distributed to the sharehold-
ers. See "Dividends and Taxes--Tax Matters" on page 9.
HOW TO BUY FUND SHARES
Shares of the Fund may be purchased on days on which the Federal Reserve Bank
of Boston is normally open for business ("business days") at the net asset
value next determined after an order is received together with payment in fed-
eral funds. The minimum initial investment for purchases of shares of the Fund
is $5,000 and subsequent purchases must be in amounts of $100 or more. See "How
to Buy Fund Shares"on page 10. For further information about the Fund, please
call Nuveen toll-free at (800) 621-7227.
HOW TO REDEEM FUND SHARES
Shareholders may redeem shares at the net asset value next computed after
receipt of a redemption request in proper form on any business day. Sharehold-
ers may make redemption requests in writing or, for shareholders of the Distri-
bution Plan series, by check. Shareholders who have completed and filed the
necessary authorization form may make redemption requests by telephone with
proceeds to be transferred by wire to a predesignated bank account or by check
to the address of record. A fee may be charged for wire redemption. See "How to
Redeem Fund Shares" on page 13.
DIVIDENDS AND REINVESTMENT
All of the net income of the Fund is declared daily as a dividend on shares
entitled to such dividend. The Fund will distribute its dividends monthly. Dis-
tributions will be made in the form of additional shares of the Fund or, at the
option of the shareholder, in cash. See "Dividends and Taxes" on page 8.
INVESTMENT ADVISER AND PRINCIPAL UNDERWRITER
John Nuveen & Co. Incorporated ("Nuveen") will act as principal underwriter of
the Fund's shares. The Fund has adopted Distribution and Service Plans under
which qualifying organizations may be paid a fee for servicing shareholder
accounts. A portion of the fees paid under these Plans is charged to the Dis-
tribution Plan and Service Plan series of shares of the Fund. See "How to Buy
Fund Shares--Distribution and Service Plan" on page 12. Nuveen Advisory Corp.
("Nuveen Advisory"), a wholly-owned subsidiary of Nuveen, is the Fund's invest-
ment adviser and receives annual fees based upon the average daily net assets
of the Fund. See "Management of the Fund" on page 8.
INVESTMENTS
The Fund will invest primarily in California Municipal Obligations having rat-
ings or other credit and risk characteristics as described on pages 5-8, the
income on which is exempt from federal and California income taxes. In addi-
tion, as described below, the Fund may purchase, but to date has not purchased
and has no present intention to purchase, taxable "temporary investments," lim-
ited to obligations issued or guaranteed by the full faith and credit of the
United States, or certificates of deposit issued by U.S. banks with assets of
at least $1 billion, or "high grade" commercial paper or corporate notes, bonds
or debentures, with a remaining maturity of 397 days or less, or repurchase
agreements in respect of any of the foregoing with selected dealers, U.S. banks
or other recognized financial institutions, subject to the specific limitations
stated below. The Fund may from time to time invest a portion of its assets in
debt obligations which are not rated, and in variable rate or floating rate
obligations. Investors are urged to read the descriptions of these investments
and practices set forth in this Prospectus. See "The Fund and its Investment
Objective and Policies" on page 5.
The information set forth above should be read in conjunction with the detailed
information set forth elsewhere in this Prospectus.
---
3
<PAGE>
Financial Highlights
The following financial information has been derived from Nuveen California
Tax-Free Fund, Inc.'s financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
appearing in the Fund's Annual Report, and should be read in conjunction with
the financial statements and related notes appearing in the Annual Report.
Selected data for a common share outstanding throughout each period is as fol-
lows:
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
----------------------- ------------------------
NET
REALIZED AND DIVIDENDS NET TOTAL
NET ASSET UNREALIZED FROM TAX- ASSET RETURN
VALUE NET GAIN (LOSS) EXEMPT DISTRIBUTIONS VALUE ON NET
BEGINNING INVESTMENT FROM INVESTMENT FROM CAPITAL END OF ASSET
OF PERIOD INCOME* INVESTMENTS INCOME GAINS PERIOD VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CA**
- ----------------------------------------------------------------------------------------------------
YEAR ENDED 2/28/97
Service Plan series $1.000 $.029 $ - $(.029) $ - $1.000 2.94%
Distribution Plan series 1.000 .029 - (.029) - 1.000 2.94
Institutional series 1.000 .030 - (.030) - 1.000 3.02
YEAR ENDED 2/29/96
Service Plan series 1.000 .033 - (.033) - 1.000 3.32
Distribution Plan series 1.000 .033 - (.033) - 1.000 3.31
Institutional series 1.000 .034 - (.034) - 1.000 3.40
YEAR ENDED 2/28/95
Service Plan series 1.000 .026 - (.026) - 1.000 2.59
Distribution Plan series 1.000 .026 - (.026) - 1.000 2.60
Institutional series 1.000 .027 - (.027) - 1.000 2.69
YEAR ENDED 2/28/94
Service Plan series 1.000 .019 - (.019) - 1.000 1.94
Distribution Plan series 1.000 .019 - (.019) - 1.000 1.92
Institutional series 1.000 .021 - (.021) - 1.000 2.07
YEAR ENDED 2/28/93
Service Plan series 1.000 .023 - (.023) - 1.000 2.28
Distribution Plan series 1.000 .023 - (.023) - 1.000 2.29
Institutional series 1.000 .024 - (.024) - 1.000 2.36
8 MONTHS ENDED 2/29/92
Service Plan series 1.000 .024 - (.024) - 1.000 2.39
Distribution Plan series 1.000 .024 - (.024) - 1.000 2.39
Institutional series 1.000 .025 - (.025) - 1.000 2.45
YEAR ENDED 6/30/91
Service Plan series 1.000 .047 - (.047) - 1.000 4.70
Distribution Plan series 1.000 .047 - (.047) - 1.000 4.70
Institutional series 1.000 .048 - (.048) - 1.000 4.80
YEAR ENDED
6/30/90++ 1.000 .054 - (.054) - 1.000 5.37
6/30/89++ 1.000 .056 - (.056) - 1.000 5.62
6/30/88++ 1.000 .043 - (.043) - 1.000 4.28
- ----------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT RATIO OF INVESTMENT
NET ASSETS EXPENSES TO INCOME TO EXPENSES TO INCOME TO
END OF AVERAGE NET AVERAGE NET AVERAGE NET AVERAGE NET
PERIOD (IN ASSETS BEFORE ASSETS BEFORE ASSETS AFTER ASSETS AFTER
THOUSANDS) REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT* REIMBURSEMENT*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CA**
- ----------------------------------------------------------------------------------------------------
YEAR ENDED 2/28/97
Service Plan series $ 95,306 .59% 2.89% .55% 2.93%
Distribution Plan series 57,490 .61 2.87 .55 2.93
Institutional series 32,843 .46 3.01 .46 3.01
YEAR ENDED 2/29/96
Service Plan series 70,722 .56 3.28 .54 3.30
Distribution Plan series 73,020 .62 3.23 .55 3.30
Institutional series 34,392 .46 3.39 .46 3.39
YEAR ENDED 2/28/95
Service Plan series 41,772 .59 2.15 .55 2.19
Distribution Plan series 67,157 .64 2.47 .55 2.56
Institutional series 50,772 .47 2.74 .47 2.74
YEAR ENDED 2/28/94
Service Plan series 415,238 .53 1.94 .53 1.94
Distribution Plan series 72,380 .73 1.74 .55 1.92
Institutional series 32,299 .41 2.06 .41 2.06
YEAR ENDED 2/28/93
Service Plan series 469,812 .57 2.24 .55 2.26
Distribution Plan series 80,652 .62 2.19 .55 2.26
Institutional series 24,156 .47 2.33 .47 2.33
8 MONTHS ENDED 2/29/92
Service Plan series 478,886 .56+ 3.53+ .55+ 3.54+
Distribution Plan series 91,670 .61+ 3.48+ .55+ 3.54+
Institutional series 18,334 .45+ 3.64+ .45+ 3.64+
YEAR ENDED 6/30/91
Service Plan series 431,590 .57 4.65 .55 4.67
Distribution Plan series 90,031 .61 4.61 .55 4.67
Institutional series 22,342 .45 4.77 .45 4.77
YEAR ENDED
6/30/90++ 452,465 .59 5.34 .55 5.38
6/30/89++ 362,927 .57 5.68 .55 5.70
6/30/88++ 207,897 .59 4.27 .55 4.31
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Reflects the waiver of certain management fees and reimbursement of certain
other expenses by the Adviser, if applicable (see Notes to Financial State-
ments in the Annual Report).
** Effective for fiscal year ended June 30, 1991, and thereafter, the Fund has
presented the per share data by series.
+ Annualized.
++ Represents combined per share data and ratios for the Service Plan, Distri-
bution Plan and Institutional series.
---
4
<PAGE>
Yield
From time to time, Nuveen California Tax-Free Fund, Inc. may advertise the
"yield," "effective yield" and "taxable equivalent yield" of the various series
of its Fund. The "yield" of a series refers to the rate of income generated by
an investment in the series over a specified seven-day period, expressed as an
annualized figure. "Effective yield" is calculated similarly except that, when
annualized, the income earned by the investment is assumed to be reinvested.
Due to this compounding effect, the effective yield will be slightly higher
than the yield. "Taxable equivalent yield" is the yield that a taxable invest-
ment would need to generate in order to equal the series' yield on an after-tax
basis for an investor in a stated tax bracket (often the bracket with the high-
est marginal tax rate). A taxable equivalent yield quotation for a given series
will be higher than the yield or the effective yield quotations for the series.
The yield figures for the various series of the Fund will fluctuate over time.
Based on the seven-day period ended February 28, 1997, the yield, effective
yield and taxable equivalent yield (using a combined federal and California
income tax rate of 45.0%) for the Fund were as follows:
<TABLE>
<CAPTION>
TAXABLE
CURRENT EFFECTIVE EQUIVALENT
YIELD YIELD YIELD
- --------------------------------------------------
<S> <C> <C> <C>
Distribution and
Service Plan series 2.85% 2.89% 5.18%
Institutional series 2.95% 2.99% 5.36%
- --------------------------------------------------
</TABLE>
This Prospectus may be in use for a full year and it can be expected that dur-
ing this period there will be material fluctuations in yield from that quoted
above. For information as to current yields, please call Nuveen at (800) 621-
7227.
A comparison of tax-exempt and taxable equivalent yields is one element to con-
sider in making an investment decision. Nuveen California Tax-Free Fund, Inc.
may from time to time in its advertising and sales materials compare the then
current yield as of the most recent quarter of the Fund with the yield on tax-
able investments such as corporate or U.S. Government bonds, bank CDs and money
market accounts or money market funds, each of which has investment character-
istics that may differ from those of the Fund. U.S. Government bonds, for exam-
ple, are backed by the full faith and credit of the U.S. Government, and bank
CDs and money market accounts are insured by an agency of the federal govern-
ment. Bank money market accounts and money market funds provide stability of
principal, but pay interest at rates that vary with the condition of the short-
term taxable debt market. The investment characteristics of the Fund are
described more fully elsewhere in this Prospectus.
Any given performance quotation or performance comparison for the Fund is based
on historical earnings and should not be considered as representative of the
performance of the Fund for any future period. Additional information concern-
ing the Fund's performance appears in the Statement of Additional Information.
The Fund and Its Investment Objective and Policies
INVESTMENT OBJECTIVE
Nuveen California Tax-Free Fund, Inc. is an open-end, diversified management
investment company that currently offers shares in one investment portfolio,
the Nuveen California Tax-Free Money Market Fund. The Fund has the objective of
providing, through investment in a professionally managed portfolio of Califor-
nia Municipal Obligations (described below), as high a level of current inter-
est income exempt from both federal and California income taxes as is
consistent with its investment policies and with preservation of capital. The
Fund's investment objective is a fundamental policy of the Fund and may not be
changed without the approval of the holders of a majority of the shares of the
Fund. The Fund values its portfolio securities at amortized cost and seeks to
maintain a constant net asset value of $1.00 per share. There is risk in all
investments and, therefore, there can be no assurance that the objective of the
Fund will be achieved.
INVESTMENT POLICIES
The Fund will, as a fundamental policy, pursue its investment objective by
investing at least 80% of its investment assets in California Municipal Obliga-
tions except during temporary defensive periods. The Fund intends to remain as
fully invested in California Municipal Obligations as is prudent or practical
under the circumstances.
The Fund's investment assets will consist primarily of short-term California
Municipal Obligations which at the time of purchase are eligible for purchase
by money market funds under applicable guidelines of the Securities and
Exchange Commission ("SEC"), and are: (1) rated within the two highest long-
term grades by Moody's Investors Service, Inc. ("Moody's")--Aaa or Aa, or by
Standard & Poor's Corporation ("S&P")--AAA or AA, or, in the case of municipal
notes, rated MIG-1, MIG-2, VMIG-1 or VMIG-2 by Moody's or SP-1 or SP-2 by S&P,
or, in the case of municipal commercial paper, rated Prime-1 or Prime-2 by
Moody's or A-1 or A-2 by S&P; or (2) unrated but which, in the opinion of
Nuveen Advisory, have credit characteristics equivalent to the foregoing and
are deemed to be of "high quality" by Nuveen Advisory. To the extent that
unrated Municipal Obligations may be less liquid, there may be somewhat greater
risk in purchasing unrated Municipal Obligations than in purchasing comparable
but rated Municipal Obligations. The investment portfolio of the Fund will be
limited to obligations maturing within 397 days from the date of acquisition or
which have variable or floating rates of interest, and the Fund will maintain a
dollar-weighted average
---
5
<PAGE>
portfolio maturity of not more than 90 days. During the fiscal year ended Feb-
ruary 28, 1997, the average maturity of the Fund's portfolio ranged from 15 to
30 days. The Fund generally intends to hold securities to maturity rather than
to engage in portfolio trading. However, reflecting the short-term maturities
of the investments of the Fund, the annual portfolio turnover rate will be rel-
atively high.
The types of short-term California Municipal Obligations in which the Fund may
invest include bond anticipation notes, tax anticipation notes, revenue antici-
pation notes, construction loan notes and bank notes issued by governmental
authorities to commercial banks as evidence of borrowings. Since these short-
term securities frequently serve as interim financing pending receipt of antic-
ipated funds from the issuance of long-term bonds, tax collections, or other
anticipated future revenues, a weakness in an issuer's ability to obtain such
funds as anticipated could adversely affect the issuer's ability to meet its
obligations on these short-term securities.
The Fund may also invest in variable and floating rate instruments even if they
carry stated maturities in excess of 397 days, upon certain conditions con-
tained in rules and regulations issued by the SEC under the Investment Company
Act of 1940, but will do so only if they carry demand features that meet the
conditions of applicable SEC rules and permit the Fund to redeem upon specified
notice at par. The Fund's right to obtain payment at par on a demand instrument
upon demand could be affected by events occurring between the date the Fund
elects to redeem the instrument and the date redemption proceeds are due which
affect the ability of the issuer to pay the instrument at par value.
Because the Fund invests in securities backed by banks and other financial
institutions, changes in the credit quality of these institutions could cause
losses to the Fund and affect its share price.
To help protect against such losses, the Fund has obtained from MBIA Insurance
Corp. a commitment to issue, subject to certain conditions and at the Fund's
request, insurance policies to cover certain Municipal Obligations held by the
Fund that are backed by a credit agreement from one of a number of banks previ-
ously approved by MBIA. If the bank were to deteriorate financially (under
standards set forth in MBIA's commitment), the Fund could elect to purchase
insurance on the underlying Municipal Obligation from MBIA, which would insure
payment of regularly scheduled principal of and interest on the Municipal Obli-
gation. Although this insurance would not guarantee the market value of the
Municipal Obligations or the value of Fund shares, the Fund believes that its
ability to obtain such insurance will enable the Fund to hold or sell these
securities at a price at or near their par value.
The Fund may purchase but to date has not purchased and has no present inten-
tion to purchase "temporary investments," the income from which is subject to
California income tax or to both federal and California income taxes. Under
ordinary circumstances, the Fund may not invest more than 20% of its investment
assets in such temporary investments. However, during extraordinary circum-
stances the Fund may, for defensive purposes, invest more than 20% of its net
assets in such temporary investments. The Fund may only invest in temporary
investments with remaining maturities of 397 days or less which, in the opinion
of Nuveen Advisory, are of "high grade" quality.
MUNICIPAL OBLIGATIONS
Municipal Obligations include debt obligations issued by states, cities and
local authorities to obtain funds for various public purposes, such as air-
ports, highways, housing, hospitals, mass transportation, water and sewer
works, and include industrial development bonds and pollution control bonds.
The two principal classifications of Municipal Obligations are "general obliga-
tion" and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Industrial development
and pollution control bonds are in most cases revenue bonds and do not gener-
ally constitute the pledge of the credit or taxing power of the issuer of such
bonds. There are, of course, variations in the security of Municipal Obliga-
tions, both within a particular classification and between classifications,
depending on numerous factors.
Notes are short-term instruments with a maturity of two years or less. Most
notes are general obligations of the issuer and are sold in anticipation of a
bond sale, collection of taxes or receipt of other revenues. Payment of these
notes is primarily dependent upon the issuer's receipt of the anticipated reve-
nues. Other notes include construction loan notes issued to provide construc-
tion financing for specific projects and bank notes issued by local
governmental bodies and agencies to commercial banks as evidence of borrowings.
Municipal Obligations also include very short-term unsecured, negotiable prom-
issory notes, issued by states, municipalities, and their agencies which are
known as "tax-exempt commercial paper" or "municipal commercial paper." Payment
of principal and interest on issues of municipal commercial paper may be made
from various sources, to the extent the funds are available therefrom. There is
a limited secondary market for issues of municipal commercial paper.
While these various types of notes as a group represent the major portion of
the tax-exempt note market, other types of notes are occasionally available in
the marketplace and the Fund may invest in such other types of notes to the
extent permitted under its investment policies and limitations. Such notes may
be issued for different purposes and with different security than those men-
tioned above.
---
6
<PAGE>
The yields on Municipal Obligations are dependent on a variety of factors,
including the condition of the general money market and the Municipal Obliga-
tion market, the size of a particular offering, the maturity of the obligation
and the rating of the issue. The ratings of Moody's and S&P represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, Municipal Obligations with the
same maturity, coupon and rating may have different yields while obligations of
the same maturity and coupon with different ratings may have the same yield.
The market value of outstanding Municipal Obligations will vary with changes in
prevailing interest rate levels and as a result of changing evaluations of the
ability of their issuers to meet interest and principal payments.
CALIFORNIA MUNICIPAL OBLIGATIONS
The following information is a brief summary of special factors that affect the
risk of investing in California Municipal Obligations issued within that state.
This information was obtained from official statements of issuers located in
California as well as from other publicly available official documents and
statements and is not intended to be a complete description. The Fund has not
independently verified any of the information contained in these statements and
documents. Additional considerations relating to these risks are contained in
the Statement of Additional Information.
California Municipal Obligations are issued by the State of California and cit-
ies and local authorities in the State of California, and bear interest that,
in the opinion of bond counsel to the issuer, is exempt from federal and Cali-
fornia income taxes, although such interest may be subject to the Federal
alternative minimum tax. The Fund will invest primarily in California Municipal
Obligations that are issued by the State of California and cities and local
authorities in the State of California, except that the Fund may invest not
more than 10% of its net assets in Municipal Obligations issued by United
States possessions or territories, which also bear interest that is exempt from
regular Federal as well as California individual income taxes and are therefore
considered to be California Municipal Obligations for purposes of this Prospec-
tus.
Because the Fund will concentrate its investment in California Municipal Obli-
gations, it may be affected by political, economic or regulatory factors that
may impair the ability of California issuers to pay interest on or to repay the
principal of their debt obligations. As a result of "Proposition 13" and other
amendments to the California Constitution and the adoption of other statutes,
the authority of California governmental entities to raise taxes, fees and
other charges has been limited. In recent years California experienced substan-
tial financial difficulties related to the severe recession from 1990-93, which
hit particularly hard in Southern California. The recession caused substantial,
broad-based revenue shortfalls which affected both the state and local govern-
ments. California's economy has been in a steady recovery since the start of
1994, and the State projects that its accumulated budget deficit will be almost
totally repaid by June 30, 1997. Local governments in California continue to
face difficult financial conditions.
California Municipal Obligations may be subject to greater price volatility
than Municipal Obligations in general as a result of the effect of supply and
demand for these securities, which in turn could cause greater volatility in
the value of the shares of the Fund. Additional considerations relating to the
risks of investing in California Municipal Obligations are presented in the
Statement of Additional Information.
Obligations of issuers of Municipal Obligations are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the
future by Congress or the California legislature or by referenda extending the
time for payment of principal and/or interest, or imposing other constraints
upon enforcement of such obligations or upon municipalities to levy taxes.
There is also the possibility that, as a result of legislation or other condi-
tions, the power or ability of any issuer to pay, when due, the principal of
and interest on its Municipal Obligations may be materially affected.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase and sell Municipal Obligations on a when-issued or
delayed delivery basis. When-issued and delayed delivery transactions arise
when securities are purchased or sold with payment and delivery beyond the reg-
ular settlement date. (When-issued transactions normally settle within 15-45
days.) On such transactions the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment to purchase. The commit-
ment to purchase securities on a when-issued or delayed delivery basis may
involve an element of risk because the value of the securities is subject to
market fluctuation, no interest accrues to the purchaser prior to settlement of
the transaction, and at the time of delivery the market value may be less than
cost.
CERTAIN FUNDAMENTAL INVESTMENT POLICIES
The Fund, as a fundamental policy, may not, without the approval of the holders
of a majority of the outstanding shares of the Fund, (1) invest more than 5% of
its total assets in securities of any one issuer, excluding the United States
government, its agencies and instrumentalities or to the investment of 25% of
the Fund's assets; (2) invest more than 5% of its total assets in securities of
unseasoned issuers which, together with their predecessors, have been in opera-
tion for less than three years; (3) invest more than 10% of its assets in
repurchase agreements maturing in more than seven days, "illiquid" securities
(such as non-negotiable CDs) and securities without readily available market
quotations; or (4) invest more than 25% of its total assets in securities of
issuers in any one industry, provided,
---
7
<PAGE>
however, that such limitation shall not be applicable to municipal bonds issued
by governments or political subdivisions of governments, and obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. For
purposes of the foregoing sentence, the "issuer" of a security shall be deemed
to be the entity whose assets and revenues are committed to the payment of
principal and interest on such security, provided that the guarantee of an
instrument will be considered a separate security (subject to certain exclu-
sions allowed under the Investment Company Act of 1940). It is a fundamental
policy of the Fund, which cannot be changed without the approval of the holders
of a majority of shares of the Fund, that the Fund will not hold securities of
a single bank, including securities backed by a letter of credit of such bank,
if such holdings would exceed 10% of the total assets of the Fund.
For a more complete description of the investment restrictions summarized above
and the other investment restrictions applicable to the Fund, see the Statement
of Additional Information.
The investment policies of the Fund specifically identified as fundamental,
together with its investment objective, cannot be changed without approval by
holders of a "majority of the Fund's outstanding voting shares." As defined by
the Investment Company Act of 1940, this means the vote of (i) 67% or more of
the shares present at a meeting, if the holders of more than 50% of the shares
are present or represented by proxy or (ii) more than 50% of the shares, which-
ever is less.
Management of the Fund
The management of Nuveen California Tax-Free Fund, Inc., including general
supervision of the duties performed for the Money Market Fund by the investment
adviser under the Investment Management Agreement, is the responsibility of its
Board of Directors.
Nuveen Advisory, 333 West Wacker Drive, Chicago, Illinois 60606, acts as the
investment adviser for and manages the investment and reinvestment of the
assets of the Fund. Nuveen Advisory also administers Nuveen California Tax-Free
Fund, Inc.'s business affairs, provides office facilities and equipment and
certain clerical, bookkeeping and administrative services, and permits any of
its officers or employees to serve without compensation as directors or offi-
cers of Nuveen California Tax-Free Fund, Inc. if elected to such positions.
For the services and facilities furnished by Nuveen Advisory, the Fund has
agreed to pay an annual management fee as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET
VALUE MANAGEMENT FEE
- ------------------------------------------
<S> <C>
For the first $500 million .400 of 1%
For the next $500 million .375 of 1%
For assets over $1 billion .350 of 1%
- ------------------------------------------
</TABLE>
All fees and expenses are accrued daily and deducted before payment of divi-
dends to investors. In addition to the management fee of Nuveen Advisory, the
Fund pays all other costs and expenses of its operations and Nuveen California
Tax-Free Fund, Inc.'s general administrative expenses. Included in the expenses
paid by the Fund and allocated to the Distribution Plan series and Service Plan
series are the payments made under the Distribution and Service Plans with
respect to those series (see "How to Buy Fund Shares--Distribution and Service
Plan").
The management fees will be reduced or Nuveen Advisory will assume certain
expenses of each series of the Fund in amounts necessary to prevent the total
expenses (including Nuveen Advisory's management fees and share of payments of
each of the Distribution Plan series and Service Plan series under the Distri-
bution and Service Plans, but excluding interest, taxes, fees incurred in
acquiring and disposing of portfolio securities and, to the extent permitted,
extraordinary expenses) of each series in any fiscal year from exceeding .55 of
1% of the series' average daily net assets. For the fiscal year ended February
28, 1997, management fees amounted to .40 of 1% of the average daily net assets
of the Fund. For the fiscal year ended February 28, 1997, net of applicable
expense reimbursements, total expenses amounted to .46, .55 and .55 of 1% of
the average daily net assets of the Institutional series, the Distribution Plan
series and the Service Plan series, respectively. Without expense reimburse-
ments, total expenses for the fiscal year ended February 28, 1997, would have
been .46, .61 and .59 of 1% of the average daily net assets of the Institu-
tional series, the Distribution Plan series and the Service Plan series,
respectively.
Nuveen Advisory currently serves as investment adviser to 42 open-end funds
(the "Nuveen Mutual Funds") and 52 exchange-traded municipal securities funds
(the "Nuveen Exchange-Traded Funds"). As of the date of this Prospectus, Nuveen
Advisory manages approximately $34 billion in assets held by the Nuveen Mutual
Funds and the Nuveen Exchange-Traded Funds.
Nuveen Advisory is a wholly-owned subsidiary of John Nuveen & Co. Incorporated
("Nuveen"), 333 West Wacker Drive, Chicago, Illinois 60606. Over 1,000,000
individuals have invested to date in Nuveen's funds and unit trusts. Founded in
1898, Nuveen is a subsidiary of The John Nuveen Company which, in turn, is
approximately 78% owned by The St. Paul Companies, Inc. ("St. Paul"). St. Paul
is located in St. Paul, Minnesota, and is principally engaged in providing
property-liability insurance through subsidiaries.
Dividends and Taxes
DIVIDENDS
All of the net income attributable to the respective series of the Fund is
declared on each calendar day as a dividend on shares entitled to such divi-
dend. Net income of each series consists of all interest income accrued and
discount earned on portfolio assets (adjusted for amortization of premium on
securities when required for federal income
---
8
<PAGE>
tax purposes), plus or minus any realized short-term gains or losses on portfo-
lio instruments since the previous dividend declaration, less estimated
expenses incurred subsequent to the previous declaration. For the Distribution
Plan series and Service Plan series of the Fund, expenses will include, among
other things, payments to banks or other organizations and securities dealers
pursuant to Distribution Agreements and Service Agreements with Nuveen. See
"How to Buy Fund Shares--Distribution and Service Plan" on page 12 above for
additional information on these expenses. It is not expected that realized or
unrealized gains or losses on portfolio instruments will be a meaningful factor
in the computation of the net income of the Fund. Dividends are paid monthly
and are reinvested in additional shares of the series of the Fund on which the
dividends are declared at net asset value or, at the shareholder's option, paid
in cash. Net realized long-term capital gains, if any, will be paid not less
frequently than annually within 30 days of the end of the fiscal year of Nuveen
California Tax-Free Fund, Inc. and reinvested in additional shares of the
series of the Fund on which such gains are paid at net asset value unless the
shareholder has elected to receive capital gains in cash. The Fund does not
anticipate realizing any significant long-term capital gains or losses.
TAX MATTERS
The Fund intends to qualify, as it has in prior years, under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), for tax treatment
as a regulated investment company. In order to qualify for treatment as a regu-
lated investment company, the Fund must satisfy certain requirements relating
to the sources of its income, diversification of its assets and distribution of
its income to shareholders. As a regulated investment company, the Fund will
not be subject to federal income tax on the portion of its net investment
income and net realized capital gains that is currently distributed to share-
holders. The Fund also intends to satisfy conditions which will enable interest
from Municipal Obligations that is exempt from federal income tax in the hands
of the Fund, to retain such tax-exempt status when distributed to the share-
holders of the Fund. The Fund also intends to qualify as a diversified manage-
ment company under the California Revenue and Taxation Code, and intends to
satisfy conditions which will enable it to pay dividends that are exempt from
California personal income taxes ("California exempt-interest dividends"), but
not from California franchise tax or California corporate income tax. The total
amount of California exempt-interest dividends paid by the Fund with respect to
any taxable year cannot exceed the amount of interest received by the Fund dur-
ing such year on obligations, interest on which is exempt from California per-
sonal income tax. The Fund will not be subject to California franchise or
corporate income tax. Individual shareholders of the portfolios of Nuveen Cali-
fornia Tax-Free Fund, Inc. will therefore not incur any federal or California
personal income taxes on interest income derived from California Municipal
Obligations, whether such dividends are taken in cash or reinvested in addi-
tional shares of a portfolio.
Distributions by the Fund of net income received, if any, from taxable tempo-
rary investments and net short-term capital gains, if any, realized by the Fund
will be taxable to shareholders as ordinary income. As long as the Fund quali-
fies as a regulated investment company under the Code, distributions to share-
holders will not qualify for the dividends received deduction for corporations.
If in any year the Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its taxable income for that year, and the
entire amount of distributions to shareholders would be taxable to shareholders
as ordinary income.
The Code provides that interest on indebtedness incurred or continued to pur-
chase or carry tax-free investments, such as shares of the Fund, is not deduct-
ible. Under rules used by the Internal Revenue Service for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase of shares may be considered to have been made
with borrowed funds even though such funds are not directly traceable to the
purchase of shares. Similarly, under California law interest on indebtedness
incurred or continued by a shareholder in connection with the purchase of
shares of the Fund will not be deductible for California personal income tax
purposes.
Tax-exempt income is taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal income
tax.
Because the Fund may invest in private activity bonds, the interest on which is
not federally tax-exempt to persons who are "substantial users" of the facili-
ties financed by such bonds or "related persons" of such "substantial users,"
the Fund may not be an appropriate investment for shareholders who are consid-
ered either a "substantial user" or a "related person" thereof. Such persons
should consult their tax advisers before investing in the Fund.
Although the Fund to date has not done so and has no present intention of doing
so, the Fund may also invest in private activity bonds the interest on which is
a specific item of tax preference for purposes of computing the alternative
minimum tax on corporations and individuals. This type of private activity bond
includes most industrial and housing revenue bonds. Shareholders whose tax lia-
bility is determined under the alternative minimum tax will be taxed on their
share of the Fund's exempt-interest dividends that were paid from income earned
on these bonds.
In addition, the alternative minimum taxable income for corporations is
increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be alter-
native minimum taxable income. Interest on all Municipal Obligations, and
therefore all distributions by the Fund that would otherwise be tax exempt, is
included in calculating a corporation's adjusted current earnings.
The Fund is required in certain circumstances to withhold 31% of taxable divi-
dends and certain other payments paid
---
9
<PAGE>
to non-corporate holders of shares who have not furnished to the Fund their
correct taxpayer identification number (in the case of individuals, their
social security number) and certain certificates, or who are otherwise subject
to back-up withholding.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations and California income tax provisions presently in
effect as they directly govern the taxation of the Fund or its shareholders.
These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive with respect to Fund transactions.
Shareholders are advised to consult their own tax advisers for more detailed
information concerning the taxation of the Fund and the federal, California and
local tax consequences to its shareholders.
Net Asset Value
Net asset value of the Fund's shares will be determined by The Chase Manhattan
Bank, the custodian of Nuveen California Tax-Free Fund, Inc., as of 12:00 noon
Eastern Time on each day on which the Federal Reserve Bank of Boston is nor-
mally open for business (a "business day") and as of 12:00 noon Eastern Time on
any other day during which there is a sufficient degree of trading in the port-
folio securities held by the Fund such that the current net asset value of the
Fund's shares might be materially affected by changes in the value of the secu-
rities held by the Fund. The net asset value per share of the Fund will be com-
puted by dividing the sum of the value of the portfolio securities held by the
Fund, plus cash or other assets, less liabilities, by the total number of
shares of the Fund outstanding at such time.
The Fund will seek to maintain a net asset value of $1.00 per share. In this
connection, the Fund values its portfolio securities on the basis of their
amortized cost. This method values a security at its cost on the date of pur-
chase and thereafter assumes a constant amortization to maturity of any dis-
count or premium, regardless of the impact of fluctuating interest rates on the
market value of the security. For a more complete description of the amortized
cost valuation method and its effect on existing and prospective shareholders
of the Fund, see the Statement of Additional Information. There can be no
assurance that the Fund will be able at all times to maintain a net asset value
of $1.00 per share.
How to Buy Fund Shares
IN GENERAL
Shares of the Fund may be purchased by residents of California on days on which
the Federal Reserve Bank of Boston is normally open for business at the net
asset value which is next computed after receipt of an order in proper form and
receipt of payment in federal funds.
Shares of the Fund are issued in three series: (i) the "Distribution Plan"
series intended for purchase by or through securities dealers that have entered
into Distribution Agreements with Nuveen with respect to the distribution of
shares of the Fund pursuant to a Distribution Plan adopted by the Fund, (ii)
the "Service Plan" series intended for purchase by or through banks and other
organizations ("service organizations") that have agreed to perform services
for
their customers who are shareholders of this series of the Fund pursuant to a
Service Plan adopted by the Fund and (iii) the "Institutional" series intended
for purchase by trustees, bank trust departments, corporations and investment
bankers or advisers. The Distribution Plan was adopted by the Fund in accor-
dance with Rule 12b-1 under the 1940 Act which permits an investment company to
bear distribution expenses (as that term is construed by the Securities and
Exchange Commission) in connection with certain services provided by securities
dealers. The Service Plan, although not a Rule 12b-1 plan, is a comparable
agreement entered into with service organizations who provide certain adminis-
trative services. There are no sales charges on purchases of shares of any of
the three series of the Fund. Under the Distribution Plan and the Service Plan,
the Distribution Plan series and the Service Plan series of shares of the Fund
and Nuveen pay fees to securities dealers and service organizations for serv-
ices rendered in the distribution of shares of the Fund or the servicing of
shareholder accounts. Payment of these fees by the Service Plan series and the
Distribution Plan series will ordinarily result in a lower yield on shares of
these series as compared with shares of the Institutional series. These fees
are described below under the caption "Distribution and Service Plan" and in
the Statement of Additional Information. Nuveen may, in its discretion and from
its own resources, pay to organizations that satisfy certain criteria an addi-
tional amount not to exceed .05 of 1% per year based on average assets of
accounts serviced by such organizations. Shares of the Service Plan series and
the Distribution Plan series enjoy certain exclusive voting rights on matters
related to the payment of fees by these two series. Except for the payment of
these fees and the special voting rights related thereto, shares of each of the
three series of the Fund are identical.
Purchases of shares of the Fund by Federal Reserve wire are recommended. Howev-
er, purchases may also be made by bank wire, Federal Reserve draft or check.
The minimum initial investment in the Fund is $5,000, and subsequent invest-
ments must be in amounts of $100 or more. The Fund reserves the right to reject
purchase orders and
to waive or increase the minimum investment requirements.
In order to maximize the earnings on its assets, the Fund strives to be
invested as completely as practicable. The Fund is normally required to make
settlement in federal funds for securities purchased. Accordingly, orders for
shares of the Fund may be made and become effective on days on which the Fed-
eral Reserve Bank of Boston is normally open for business, as follows:
---
10
<PAGE>
PURCHASE BY TELEPHONE
To open an account, call Nuveen toll-free at (800) 858-4084 to obtain an
account number, control number and instructions. Information needed to estab-
lish the account will be taken over the telephone. Federal funds should be
wired to:
United Missouri Bank of Kansas City, N.A.
ABA # 101000695
Nuveen California Tax-Free Money Market Fund
Shareholder Account No. (see above)
Shareholder Account Name:
An Application Form should be completed promptly and mailed to Nuveen Califor-
nia Tax-Free Fund, Inc. Subsequent investments may be made by following the
same telephone order and wire transfer procedure.
If an order is received by Nuveen by 12:00 noon Eastern Time, and federal funds
are received by United Missouri Bank of Kansas City, N.A. on the same day by
3:00 p.m. Eastern Time, the order is effective that day. If both the order and
the federal funds are not received by the times specified above, the order will
become effective the following business day.
PURCHASE BY MAIL
To open an account, complete the Application Form and mail it with a check or
Federal Reserve draft to Nuveen California Tax-Free Money Market Fund, P.O. Box
5330, Denver, Colorado 80217-5330. Subsequent investments may be made by mail-
ing a check with the investor's account number to the above address. The order
becomes effective as soon as the check or draft is converted to federal funds.
This usually occurs one business day after receipt, but may take longer.
FUND DIRECT--ELECTRONIC FUNDS TRANSFER
You can use Fund Direct to link your Fund account to your account at your bank
or other financial institution to enable you to send money electronically
between those accounts to perform a variety of account transactions. These
include purchases of shares by telephone, investments under a Systematic
Investment Plan, and sending dividends and distributions, redemption payments
or Systematic Withdrawal Plan payments directly to your bank account. To acti-
vate Fund Direct privileges, just complete the appropriate section of the
Account Application, or an Account Update Form. To obtain an Account Update
Form, call Nuveen at (800) 621-7227. Fund Direct privileges will
apply to each shareholder listed in the registration on your account as well as
to your Authorized Dealer representative of record unless you indicate other-
wise in writing. After you establish Fund Direct privileges for your account,
any change of bank account information must be made by signature-guaranteed
instructions to SSI as described in "How to Redeem Fund Shares."
Purchases may be made by telephone only after your account has been estab-
lished. To purchase shares in amounts up to $250,000 through a telephone repre-
sentative, call SSI at (800) 621-7227. The purchase payment will be debited
from your bank account.
PURCHASE THROUGH A SECURITIES DEALER OR SERVICE ORGANIZATION
To open an account through a bank or a securities broker or dealer ("service
organization"), investors should send money to that organization for transmis-
sion to Nuveen California Tax-Free Fund, Inc. and furnish it with the informa-
tion required in the Application Form. The Fund has Distribution and Service
Plans pursuant to which payments are made, in the case of the Distribution Plan
series to dealers who provide assistance in distributing shares of such series
of the Fund, and in the case of the Service Plan series to service organiza-
tions who provide assistance in servicing shareholder accounts of such series.
See "Distribution and Service Plan."
PURCHASE BY REINVESTMENT OF NUVEEN UNIT TRUST DISTRIBUTIONS
California resident unitholders of Nuveen Unit Trusts may purchase shares of
the Fund by automatically reinvesting distributions from their Nuveen Unit
Trust. To obtain information on share purchases through investment of Nuveen
Unit Trust distributions, check the applicable box on the enclosed Application
Form or call Nuveen toll-free at (800) 237-0910.
COMMENCEMENT OF DIVIDENDS
Shares of the Fund are deemed to have been purchased when an order becomes
effective and are entitled to income commencing on the day the order becomes
effective.
THE FUND OFFERS TWO DIFFERENT TYPES OF SYSTEMATIC INVESTMENT PROGRAMS
SYSTEMATIC INVESTMENT PLAN
Once you have established a Fund account, you may make regular investments in
an amount of $50 or more each month by authorizing Shareholder Services, Inc.
("SSI") to draw preauthorized checks on your bank account. There is no obliga-
tion to continue payments and you may terminate your participation at any time
at your discretion. No charge is made in connection with this Plan, and there
is no cost to the Fund. To obtain an Account Update Form which you can use to
initiate a Systematic Investment Plan, call Nuveen toll-free at (800) 621-7227.
PAYROLL DIRECT DEPOSIT PLAN
Once you have established a Fund account, you may, with your employer's con-
sent, make regular investments in Fund shares of $50 or more per month by
authorizing your employer to deduct such amount automatically from your pay-
check. There is no obligation to continue payments and you may terminate your
participation at any time at your discretion. No charge is made for this serv-
ice and there is no cost to the Fund. To obtain an application form for the
Payroll Direct Deposit Plan, check the applicable box on the enclosed Applica-
tion Form or call Nuveen toll-free at (800) 621-7227.
---
11
<PAGE>
OTHER SHAREHOLDER PROGRAMS
EXCHANGE PRIVILEGES
You may exchange shares of the Fund for the appropriate class of shares of any
other Nuveen open-end fund with reciprocal exchange privileges, (the "Nuveen
Funds"), provided that the Nuveen Fund into which shares are to be exchanged is
offered in your state of residence and that the shares to be exchanged have
been held by you for a period of at least 15 days. You may exchange Fund shares
by calling (800) 621-7227 or by mailing your written request to SSI. Shares of
Nuveen Funds purchased subject to a front-end sales charge may be exchanged for
shares of the Fund or any other Nuveen Fund at the next determined net asset
value without any front-end sales charge. No CDSC otherwise applicable will be
assessed on an exchange, and the holding period of your investment will be car-
ried over to the new fund for purposes of determining any future CDSC. You may
not exchange B shares for shares of a Nuveen money market fund. Shares of any
Nuveen Fund purchased through dividend reinvestment or through reinvestment of
Nuveen Unit Trust distributions (and any dividends thereon) may be exchanged
for Class A shares of any other Nuveen Fund without a front-end sales charge.
Exchanges of shares with respect to which no front-end sales charge has been
paid will be made at the public offering price, which may include a front-end
sales charge, unless a front-end sales charge has previously been paid on the
investment represented by the exchanged shares (i.e., the shares to be
exchanged were originally issued in exchange for shares on which a front-end
sales charge was paid), in which case the exchange will be made at net asset
value. Because certain other Nuveen Funds may determine net asset value and
therefore honor purchase or redemption requests on days when the Fund does not
(generally, Martin Luther King's Birthday, Columbus Day and Veterans Day),
exchanges of shares of one of those funds for shares of the Fund may not be
effected on such days.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Nuveen Fund into which they are being exchanged.
Exchanges are made based on the relative dollar values of the shares involved
in the exchange, and will be effected by redemption of shares of the Nuveen
Fund held and purchase of the shares of the other Nuveen Fund. For federal
income tax purposes, any such exchange constitutes a sale and purchase of
shares and may result in capital gain or loss. Before exercising any exchange,
you should obtain the Prospectus for the Nuveen Fund into which shares are to
be exchanged and read it carefully. If the registration of the account for the
Fund you are purchasing is not exactly the same as that of the fund account
from which the exchange is made, written instructions from all holders of the
account from which the exchange is being made must be received, with signatures
guaranteed by a member of an approved Medallion Guarantee Program or in such
other manner as may be acceptable to the Fund. The exchange privilege may be
modified or discontinued at any time. If you do not wish to have telephone
exchange privileges, you must indicate this in the "Telephone Services" section
of your Account Application or otherwise notify the Fund in writing of your
desire.
ADDITIONAL INFORMATION
An account will be maintained for each shareholder of record in the Fund by
SSI, the Fund's transfer agent. Share certificates will be issued only upon
written request of the shareholder to SSI. No certificates are issued for frac-
tional shares. The Fund reserves the right to reject any purchase order and to
waive or increase minimum investment requirements.
A change in registration or transfer of shares held in the name of a
broker/dealer can only be effected by an order in good form from the
broker/dealer acting on behalf of the investor. Broker/dealers are encouraged
to open single master accounts. However, some broker/dealers may wish to use
the shareholder service agent's sub-accounting system to minimize their inter-
nal recordkeeping requirements. A broker/dealer or other investor requesting
shareholder servicing or accounting other than the master account or sub-
accounting service offered by the Fund will be required to enter into a sepa-
rate agreement with the agent for these services for a fee to be determined in
accordance with the level of services to be furnished.
Subject to the rules and regulations of the SEC, the Fund reserves the right to
suspend the continuous offering of its shares at any time, but such suspension
shall not affect the
shareholder's right of redemption as described in "How to Redeem Fund Shares"
below.
DISTRIBUTION AND SERVICE PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act and a Service Plan (collectively, the "Plan"), pursuant to which the Dis-
tribution Plan series and the Service Plan series of the Fund and Nuveen pay
fees in equal amounts to securities dealers and Service Organizations for serv-
ices rendered in the distribution of shares of the Fund or the servicing of
shareholder accounts. These services may include, among other things, estab-
lishing and maintaining shareholder accounts, processing purchase and redemp-
tion transactions, arranging for bank wires, performing sub-accounting,
answering shareholder inquiries and such other services as Nuveen may request.
Nuveen will enter into Distribution or Service Agreements with organizations
who render such services. Service payments to such organizations in amounts of
up to .25 of 1% per year of average assets of serviced accounts will be paid
one-half by the respective series of the Fund and one-half by Nuveen.
The Plan continues in effect from year to year as long as its continuance is
approved at least annually by a vote of the Board of Directors and a vote of
the non-interested directors of Nuveen California Tax-Free Fund, Inc. The Plan
may not be amended to increase materially the cost which the Distribution Plan
series or the Service Plan series
---
12
<PAGE>
of the Fund may bear for distribution and services, respectively, without the
approval of the non-interested directors and the shareholders of the affected
series of that Fund. Any other material amendments of the Plan must be approved
by the non-interested directors. Beneficial owners of shares of the Distribu-
tion Plan series and the Service Plan series should read this Prospectus in
light of the terms governing their accounts with securities dealers and service
organizations, respectively.
How to Redeem Fund Shares
IN GENERAL
Upon receipt of a proper redemption request on a business day, the Fund will
redeem its shares at their next determined net asset value. You may use the
telephone redemption, check redemption, or the regular redemption procedures
discussed hereafter. The purchase and redemption methods employed will deter-
mine when funds will be available to you. Where the shares to be redeemed have
been purchased by check or through Fund Direct within 15 days prior to the date
the redemption request is received, the Fund will not send the redemption pro-
ceeds until the check or Fund Direct transfer for the purchase has cleared,
which may take up to 15 days. There is no delay when the shares being redeemed
were purchased by wiring federal funds.
CHECK REDEMPTION
Shareholders of the Distribution Plan series of the Fund may request that the
Fund provide them with drafts ("Redemption Checks") drawn on the Fund's
account. These Redemption Checks may be made payable to the order of any person
in an amount of $500 or more, and dividends are earned until the Redemption
Check clears. Redemption Checks clear through the United Missouri Bank of Kan-
sas City, N.A. (the "Bank") and are subject to the same rules and regulations
that the Bank applies to checking accounts.
When a Redemption Check is presented, a sufficient number of full and frac-
tional shares in the shareholder's account will be redeemed to cover the amount
of the Redemption Check. Shares for which stock certificates have been issued
will not be available for redemption by the use of Redemption Checks. There
must be sufficient shares in the shareholder's account to cover the amount of
each Redemption Check written or the check will be returned. Checks should not
be used to close an account. Shareholders wishing to use Redemption Checks must
complete the appropriate section of the Application Form and submit the
enclosed signature card.
This check redemption privilege may be modified or terminated at any time by
the Fund or the Bank. The check redemption feature does not constitute a bank
checking account.
BY WRITTEN REQUEST
You may redeem shares by sending a written request for redemption directly to
the Nuveen California Tax-Free Money Market Fund, c/o Shareholder Services,
Inc., P.O. Box 5330, Denver, CO 80217-5330, accompanied by duly endorsed cer-
tificates, if issued. Requests for redemption and share certificates, if
issued, must be signed by each shareholder and, if the redemption proceeds
exceed $50,000 or are payable other than to the shareholder of record at the
address of record (which address may not have been changed in the preceding 30
days), the signature must be guaranteed by a member of an approved Medallion
Guarantee Program or in such other manner as may be acceptable to the Fund.
Under normal circumstances payment will be made by check and mailed within one
business day (and in no event more than seven days) after receipt of a redemp-
tion request in proper form.
TELEPHONE REDEMPTION BY CHECK
Unless you have declined telephone privileges, you may sell Fund shares by
calling (800) 621-7227. Your telephone redemption must not exceed $50,000 and
you may not redeem by telephone shares held in certificate form. While you or
anyone authorized by you may make telephone redemption requests, redemption
checks will be issued only in the name of the shareholder of record and will be
mailed to the address of record. If your telephone request is received prior to
4:00 p.m. Eastern Time, the shares to be redeemed earn income on the day the
request is made, and the redemption will be effected and the redemption check
will be mailed on the following business day. For requests received after 4:00
p.m. Eastern Time, the shares to be redeemed earn income through the following
business day, and the redemption is effected and the redemption check will be
mailed on the second business day.
Nuveen, the Transfer Agent or the Fund will be liable for losses resulting from
unauthorized telephone redemptions only if they do not follow reasonable proce-
dures designed to verify the identity of the caller. You should immediately
verify your trade confirmations when you receive them. Telephone redemptions
will not be honored for 30 days after the address on your account has changed.
TELEPHONE REDEMPTION VIA FUND DIRECT
To redeem shares held in non-certificate form by telephone with the redemption
proceeds paid via Fund Direct-Electronic Funds Transfer, you must complete the
Telephone Services section of the enclosed Application Form and return it to
Nuveen or SSI. If you did not authorize Telephone Redemption via Fund Direct
when you opened your account, you may do so by sending a written request to the
Fund signed by each account owner with signatures guaranteed by a member of an
approved Medallion Guarantee Program or in such other manner as may be accept-
able to the Fund. Proceeds of share redemptions made by Fund Direct will be
transferred only to the commercial bank account specified by the shareholder.
Redemption proceeds may be delayed one additional business day if the Federal
Reserve Bank of Boston or the Fed -
---
13
<PAGE>
eral Reserve Bank of New York is closed on the day the redemption proceeds
would ordinarily be wired.
If you have authorized Telephone Redemption via F und Direct, you can take
advantage of two methods of tele-
|[d
phone redemption: regular telephone redemption and expedited telephone redemp-
tion. You may make regular Fund Direct redemption requests by calling Nuveen at
(800) 621-7227. If a regular telephone redemption request is received prior to
4:00 p.m. Eastern Time, the shares to be redeemed earn income on the day the
request is made, and the redemption is effected on the following business day.
For regular redemption requests received after 4:00 p.m. Eastern Time, the
shares to be redeemed earn income through the following business day, and the
redemption is effected on the second business day following the request. For
all regular redemptions, you will typically receive your funds within three
business days after your redemption is effected. You may make expedited tele-
phone redemption requests to redeem shares that are worth at least $1,000 by
calling Nuveen at (800) 858-4084. If an expedited redemption request is
received by 12:00 noon Eastern Time, the shares to be redeemed do not earn
income on that day, but the redemption is effected, and you will normally
receive your funds, on that day. If an expedited redemption request is received
after 12:00 noon Eastern Time, the shares to be redeemed earn income on the day
the request is received. The redemption is effected, and you will normally
receive your funds, on the next business day following the request. The Fund
reserves the right to charge a fee for expedited redemption requests.
HOW TO CHANGE AUTHORIZED REDEMPTION INSTRUCTIONS
In order to establish multiple accounts, or to change the account or accounts
designated to receive redemption proceeds, a written request specifying the
change must be sent to Nuveen. This request must be signed by each account
owner with signatures guaranteed by a member of an approved Medallion Guarantee
Program or in such other manner as may be acceptable to the Fund. Further docu-
mentation may be required from corporations, executors, trustees or personal
representatives.
The Fund reserves the right to refuse telephone redemptions and, at its option,
may limit the timing, amount or frequency of these redemptions. Telephone
redemption procedures may be modified or terminated at any time, on 30 days'
notice, by the Fund. The Fund, SSI and Nuveen will not be liable for following
telephone instructions reasonably believed to be genuine.
REDEMPTION THROUGH SERVICE ORGANIZATIONS
Fund shareholders may also redeem shares through their accounts with service
organizations in accordance with procedures established by each such service
organization. The Fund has no redemption charge, but service organizations may
impose transaction fees or other charges relating to the redemption of Fund
shares. Individual shareholders should determine from their service organiza-
tions the procedures and charges, if any, that govern redemptions.
SYSTEMATIC WITHDRAWAL PLAN
If you own Fund shares currently worth at least $10,000, you may establish a
Systematic Withdrawal Plan by completing an application form for the Plan. You
may obtain an application form by checking the applicable box on the enclosed
Application Form or by calling Nuveen toll-free at (800) 621-6227. The Plan
permits you to request periodic withdrawals on a monthly, quarterly, semi-
annual or annual basis in an amount of $50 or more. All shares of the Fund you
own will be accumulated in the Plan, with a sufficient number of shares being
redeemed periodically to meet the requested withdrawal payments. Depending upon
the size of the payments requested under the Plan, redemptions for the purpose
of making such payments may reduce or even exhaust your account. Withdrawals
under this Plan should not, therefore, be considered a yield on investment. A
Systematic Withdrawal Plan may be terminated at any time by you or the Fund. To
obtain an Account Update Form, which you can use to initiate a Systematic With-
drawal Plan, call Nuveen toll-free at (800) 621-6227.
REDEMPTION IN KIND
The Fund has committed to pay in cash all redemption requests made by each
shareholder of the Fund during any 90 day period of up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of such
period. This commitment is irrevocable without the prior approval of the SEC
and is a fundamental policy of the Fund that may not be changed without share-
holder approval. In the case of redemption requests by shareholders of the Fund
in excess of such amounts, the Board of Directors reserves the right to have
the Fund make payment in whole or in part in securities or other assets of the
Fund in case of an emergency or any time a cash distribution would impair the
liquidity of the Fund to the detriment of the existing shareholders. In this
event, the securities would be valued in the same manner as the securities of
the Fund are valued. If the recipient were to sell such securities, he or she
would incur brokerage charges.
OTHER PRACTICES
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange is closed (other
than customary weekend and holiday closings), (b) when trading in the markets
the Fund normally utilizes is restricted, or an emergency exists as determined
by the SEC so that disposal of the Fund's investments or determination of its
net asset value is not reasonably practicable, or (c) for such other periods as
the SEC by order may permit for protection of the shareholders of the Fund.
General Information
INVESTOR INQUIRIES
Investor inquiries may be made directly of the Fund in writing or by calling
John Nuveen & Co. Incorporated, the Fund's distributor, toll-free at (800) 621-
7227.
---
14
<PAGE>
CUSTODIAN, SHAREHOLDER SERVICES AGENT AND TRANSFER AGENT
The custodian of the assets of the Fund is The Chase Manhattan Bank, 4 New York
Plaza, New York, New York 10004. The custodian performs custodial fund account-
ing and portfolio accounting services. Shareholder Services, Inc., P.O. Box
5330, Denver, Colorado 80217-5330, is the transfer, shareholder services and
dividend paying agent for the Fund and performs bookkeeping, data processing
and administrative services incident to the maintenance of shareholder
accounts.
CAPITAL STOCK
Nuveen California Tax-Free Fund, Inc. was incorporated in Maryland on October
3, 1985. It is authorized to issue 2,350,000,000 shares of Common Stock, $.01
par value, of the Nuveen California Tax-Free Money Market Fund. Shares of the
Nuveen California Tax-Free Money Market Fund consist of three series as fol-
lows: 400,000,000 shares of the Institutional series, 1,100,000,000 shares of
the Service Plan series and 850,000,000 shares of the Distribution Plan series.
The shares of each such series are identical in all respects except with
respect to the allocation of a portion of the fees paid under the Distribution
and Service Plans and voting rights with respect thereto. See "How to Buy Fund
Shares--Distribution and Service Plan." Shares of each portfolio class have
equal non-cumulative voting rights and equal rights with respect to dividends
declared by such portfolio class and the assets of such portfolio class upon
liquidation, except for the special voting rights of holders of those series of
Nuveen California Tax-Free Money Market Fund that are subject to Distribution
or Service Plans. In addition, only shares of a particular portfolio class are
entitled to vote on matters concerning solely that portfolio class. Shares are
fully paid and nonassessable when issued and have no pre-emptive, conversion or
exchange rights.
-15--
<PAGE>
Taxable Equivalent
Yield Tables
TAXABLE EQUIVALENT YIELD TABLES AND THE EFFECT OF TAXES AND INTEREST RATES ON
INVESTMENTS
The following tables show the combined effects for individuals of federal and
state income taxes on:
. what you would have to earn on a taxable investment to equal a given tax-free
yield; and
. the amount that those subject to a given combined tax rate would have to put
into a tax-free investment in order to generate the same after-tax income as
a taxable investment.
These tables are for illustrative purposes only and are not intended to predict
the actual return you might earn on a Fund investment. The Funds occasionally
may advertise their performance in similar tables using other current combined
tax rates than those shown here. The combined tax rates used in these tables
have been rounded to the nearest one-half of one percent. They are based upon
published 1997 marginal federal tax rates and marginal state tax rates cur-
rently available and scheduled to be in effect, and do not take into account
changes in tax rates that are proposed from time to time. A taxpayer's marginal
tax rate is affected by both his taxable income and his adjusted gross income.
The table assumes that federal taxable income is equal to state income subject
to tax, and for cases in which more than one state rate falls within a federal
bracket, the highest state rate corresponding to the highest income within that
federal bracket is used. The tables assume taxpayers are not subject to any
alternative minimum taxes and deduct any state income taxes paid on their fed-
eral income tax returns. Unless noted otherwise, the tables do not reflect any
local taxes or any taxes other than personal income taxes. They also reflect
the effect of the current federal tax limitations on itemized deductions and
personal exemptions, which were designed to phase out certain benefits of these
deductions for higher income taxpayers. These limitations are subject to cer-
tain maximums, which depend on the number of exemptions claimed and the total
amount of the taxpayer's itemized deductions. For example, the limitation on
itemized deductions will not cause a taxpayer to lose more than 80% of his
allowable itemized deductions, with certain exceptions. The combined tax rates
shown here may be higher or lower than your actual combined tax rate. A higher
combined tax rate would tend to make the dollar amounts in the third table low-
er, while a lower combined tax rate would make the amounts higher. You should
consult your tax adviser to determine your actual combined tax rate.
Combined marginal tax rates for joint taxpayers with four personal exemptions.
<TABLE>
<CAPTION>
FEDERAL
FEDERAL ADJUSTED COMBINED TAX-FREE YIELD
TAXABLE GROSS STATE AND 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50%
INCOME INCOME FEDERAL ---- ---- ---- ---- ---- ---- ----- -----
(1,000'S) (1,000'S) TAX RATE** TAXABLE EQUIVALENT YIELD
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 41.2 $ 0 - 121.2 20.0% 2.50 3.13 3.75 4.38 5.00 5.63 6.25 6.88
41.2 - 99.6 0 - 121.2 34.5 3.05 3.82 4.58 5.34 6.11 6.87 7.63 8.40
121.2 - 181.8 35.5 3.10 3.88 4.65 5.43 6.20 6.98 7.75 8.53
99.6 - 151.8 0 - 121.2 37.5 3.20 4.00 4.80 5.60 6.40 7.20 8.00 8.80
121.2 - 181.8 38.5 3.25 4.07 4.88 5.69 6.50 7.32 8.13 8.94
181.8 - 223.4 40.5 3.36 4.20 5.04 5.88 6.72 7.56 8.40 9.24
223.4 - 250.9 41.5 3.42 4.27 5.13 5.98 6.84 7.69 8.55 9.40
250.9 - 304.3 41.0 3.39 4.24 5.08 5.93 6.78 7.63 8.47 9.32
151.8 - 271.1 121.2 - 181.8 43.0 3.51 4.39 5.26 6.14 7.02 7.89 8.77 9.65
181.8 - 223.4 45.5 3.67 4.59 5.50 6.42 7.34 8.26 9.17 10.09
223.4 - 250.9 46.5 3.74 4.67 5.61 6.54 7.48 8.41 9.35 10.28
250.9 - 304.3 46.0 3.70 4.63 5.56 6.48 7.41 8.33 9.26 10.19
Over 304.3 43.5 3.54 4.42 5.31 6.19 7.08 7.96 8.85 9.73
Over 271.1 181.8 - 223.4 49.5 3.96 4.95 5.94 6.93 7.92 8.91 9.90 10.89
223.4 - 250.9 50.0 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00
250.9 - 304.3 49.5 3.96 4.95 5.94 6.93 7.92 8.91 9.90 10.89
Over 304.3 46.5 3.74 4.67 5.61 6.54 7.48 8.41 9.35 10.28
- -------------------------------------------------------------------------------------------
</TABLE>
---
16
<PAGE>
Combined marginal tax rates for single taxpayers with one personal exemption.
<TABLE>
<CAPTION>
FEDERAL
FEDERAL ADJUSTED COMBINED TAX-FREE YIELD
TAXABLE GROSS STATE AND 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50%
INCOME INCOME FEDERAL ---- ---- ---- ---- ---- ---- ---- -----
(1,000'S) (1,000'S) TAX RATE** TAXABLE EQUIVALENT YIELD
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.7 $ 0 - 111.7 20.0% 2.50 3.13 3.75 4.38 5.00 5.63 6.25 6.88
24.7 - 59.8 0 - 111.7 34.5 3.05 3.82 4.58 5.34 6.11 6.87 7.63 8.40
59.8 - 124.7 0 - 111.7 37.5 3.20 4.00 4.80 5.60 6.40 7.20 8.00 8.80
111.7 - 121.2 38.0 3.23 4.03 4.84 5.65 6.45 7.26 8.06 8.87
121.2 - 139.2 39.5 3.31 4.13 4.96 5.79 6.61 7.44 8.26 9.09
139.2 - 243.7 39.0 3.28 4.10 4.92 5.74 6.56 7.38 8.20 9.02
124.7 - 271.1 121.2 - 139.2 44.0 3.57 4.46 5.36 6.25 7.14 8.04 8.93 9.82
139.2 - 243.7 44.0 3.57 4.46 5.36 6.25 7.14 8.04 8.93 9.82
Over 243.7 43.5 3.54 4.42 5.31 6.19 7.08 7.96 8.85 9.73
Over 271.1 Over 243.7 46.5 3.74 4.67 5.61 6.54 7.48 8.41 9.35 10.28
- ------------------------------------------------------------------------------------------
</TABLE>
For an equal after-tax return, your tax-free investment may be less.*
<TABLE>
<CAPTION>
FOR AN AFTER-TAX RETURN YOUR TAX-FREE INVESTMENT MAY BE LESS*
EQUAL TO THAT PROVIDED BY A 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$50,000 in a 4% taxable investment $ 62,500 $ 50,000 $41,667 $35,714 $31,250 $27,778 $25,000
$50,000 in a 5% taxable investment 78,125 62,500 52,083 44,643 39,063 34,722 31,250
$50,000 in a 6% taxable investment 93,750 75,000 62,500 53,571 46,875 41,667 37,500
$50,000 in a 7% taxable investment 109,375 87,500 72,917 62,500 54,688 48,611 43,750
$50,000 in a 8% taxable investment 125,000 100,000 83,333 71,429 62,500 55,556 50,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Dollar amounts in the table reflect a 37.5% combined federal and state tax
rate.
** The State tax brackets are those for 1996. The 1997 brackets will be
adjusted to take into account changes in the California Consumer Price Index.
These adjustments have not yet been released.
For example, $50,000 in a 6% taxable investment earns the same after-tax return
as $37,500 in a 5% tax-free Nuveen investment.
---
17
<PAGE>
Principal Underwriter
John Nuveen & Co. Incorporated
Investment Bankers
333 West Wacker Drive
Chicago, Illinois 60606
(312) 917-7700
Investment Adviser
Nuveen Advisory Corp.
Subsidiary of John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, Illinois 60606
Custodian
The Chase Manhattan Bank
4 New York Plaza
New York, New York 10004
Transfer and Shareholder Services Agent
Shareholder Services, Inc.
P.O. Box 5330
Denver, Colorado 80217
<PAGE>
Serving Investors
for Generations
[PHOTO OF JOHN NUVEEN, SR. APPEARS HERE]
Since our founding in 1898, John Nuveen & Co. has been synonymous with
investments that withstand the test of time. Today, we offer a broad range of
investments designed for mature investors whose portfolios are the principal
source of their ongoing financial security. More than 1.3 million investors have
entrusted Nuveen to help them maintain the lifestyle they currently enjoy.
A value investing approach - purchasing securities of strong companies and
communities that represent good long-term value - is the cornerstone of Nuveen's
investment philosophy. It is a careful, long-term strategy that offers the
potential for attractive returns with moderated risk. Successful value investing
begins with in-depth research and a discerning eye for marketplace opportunity.
Nuveen's team of investment professionals is backed by the discipline, resources
and expertise of almost a century of investment experience, including one of the
most recognized research departments in the industry.
To meet the unique circumstances and financial planning needs of mature
investors, Nuveen offers a wide array of taxable and tax-free investment
products - including equity and fixed-income mutual funds, unit trusts,
exchange-traded funds, individual managed account services, and cash management
products.
To find out more about how Nuveen investment products and services can help you
preserve your financial security, talk with your financial adviser, or call us
at (800) 621-7227 for more information, including a prospectus where applicable.
Please read that information carefully before you invest.
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227
www.nuveen.com MPR-3-2.97
<PAGE>
NUVEEN
Money Market Fund Account Application
. This application must be preceded or accompanied by a current fund
prospectus, and may not be used to open Nuveen unit trust reinvestment
accounts. If you wish to open this type of account, please call Nuveen to
request the appropriate application.
. If you need additional copies of this application, or would like assistance
completing it, please call Nuveen at (800) 621-7227.
. Mail this application to:
Nuveen Money Market Funds
P.O. Box 5330
Denver, CO 80217-5330.
1 Account Registration
Please select an account type and complete all applicable information.
Joint registration will be as joint tenants with rights of survivorship unless
you specify tenants in common.
[_] Individual [_] Joint Tenant
First Name, Middle Initial, Last Name
- --------------------------------------------------------------------------------
Taxpayer ID Number
- --------------------------------------------------------------------------------
[_] Uniform Gift/Transfer to Minor
Name of Custodian Minor's State of Residence
- --------------------------------------------------------------------------------
Minor's Name (only one minor may be named) Minor's Taxpayer ID Number
- --------------------------------------------------------------------------------
[_] Corporation or Partnership
Name of Corporation or Partnership Taxpayer ID Number
- --------------------------------------------------------------------------------
[_] Trust
Names of All Trustees
- --------------------------------------------------------------------------------
Trust Name
- --------------------------------------------------------------------------------
Trust Agreement Date (mandatory) Month Day Year Trust Taxpayer ID Number
- --------------------------------------------------------------------------------
2 Mailing Address
Street Address
- --------------------------------------------------------------------------------
City State Zip Code
- --------------------------------------------------------------------------------
3 Fund Selection
Please write in the amount(s) you wish to invest.
Enclose a separate check made payable to each fund you are purchasing.
[_] Enclosed is my check in the amount payable to the Fund(s) indicated below.
[_] Funds in the amount listed below were wired to United Missouri Bank of
Kansas City.
Note: Please call Nuveen at (800) 858-4084 to obtain an account number for
wiring funds.
Nuveen Money Market Funds
$________________ Tax-Free Reserves (Minimum initial investment $1,000.)
$________________ California Tax-Free Money Market Fund (Minimum initial
investment $5,000.)
$________________ Massachusetts Tax-Free Money Market Fund (Minimum initial
investment $5,000.)
$________________ New York Tax-Free Money Market Fund (Minimum initial
investment $5,000.)
If you use this application to purchase more than one fund, any optional
features you select, except for the Systematic Investment or Systematic
Withdrawal Plans, will apply to all funds.
State funds may not be registered in all states.
Please complete the next page of this form.
<PAGE>
4 Dividend Options
Please indicate how you would like to receive your dividends.
If no box is checked, dividends will be reinvested into additional shares of the
paying fund.
Some state funds may not be available in all states.
(check one)
[_] Reinvest dividends into additional shares of the paying fund.
[_] Reinvest dividends into an existing, identically registered Nuveen mutual
fund account.
Fund Name
- --------------------------------------------------------------------------------
Account Number (if known)
- ---------------------------------------
[_] Send dividends by check. (Complete Section 5.)
[_] Deposit dividends into my bank account via Fund Direct. (Complete
Section 7.)
5 Check Instructions
Please complete this section only if you requested to receive dividends by
check.
[_] Make checks payable to the registered holder.
[_] Make checks payable to the registered holder at the address listed below.
[_] Make checks payable to the following third party, at the address listed
below.
Third Party Name (if applicable)
- --------------------------------------------------------------------------------
Attention
- --------------------------------------------------------------------------------
Street Address
- --------------------------------------------------------------------------------
City State Zip Code Daytime Telephone Number
- -
- --------------------------------------------------------------------------------
6 Telephone Services
Telephone Exchange and Telephone Redemptions by Check
You and your financial adviser will automatically receive telephone exchange and
redemption privileges, unless you request otherwise below.
[_] I do not wish to have telephone privileges.
Telephone Redemptions via Fund Direct
[_] I would like to be able to redeem shares by phone and have the proceeds
deposited directly into my bank account, and authorize Nuveen to honor
requests for such redemptions. (Complete Section 7.)
Telephone Purchases via Fund Direct
[_] I would like to be able to purchase additional shares of my current fund by
phone using funds from my bank account, and authorize Nuveen to execute
such transactions. (Complete Section 7.)
If the names on your bank account do not exactly match your money market fund
account registration, please have all bank account holders sign below.
Signature of Depositor Month Day Year
- --------------------------------------------------------------------------------
Signature of Joint Depositor Month Day Year
- --------------------------------------------------------------------------------
[_] I wish to have telephone privileges for myself, but not my financial
adviser.
Please complete the next page of this form.
<PAGE>
7 Bank Information
Please complete this section if you wish to transfer funds electronically to or
from your bank account via Fund Direct.
If you do not have a check or a personalized deposit slip, please call Nuveen at
(800) 621-7227.
Bank Name
- --------------------------------------------------------------------------------
Street Address
- --------------------------------------------------------------------------------
City State Zip Code Telephone Number
- --------------------------------------------------------------------------------
Bank Account Number
- --------------------------------------------------------------------------------
Account Type (check one)
[_] Checking account (Please attach a voided check.)
[_] Savings account (Please attach a personalized deposit slip.)
8 Check Redemption Authorization
Read the instructions and explanation carefully before completing this section
and return the completed signature card with this application form.
[_] I authorize Nuveen to honor drafts drawn on the Fund and to redeem a
sufficient number of Fund shares to pay such drafts.
Joint Accounts
You must complete this section to elect this option.
[_] Either owner of the fund(s) may sign redemption checks.
[_] All owners of the fund(s) are required to sign redemption checks.
A. Checks must be on forms provided by the Fund and for a minimum of $500 or
they will not be honored. Checks are authorizations to redeem Fund shares and
are payable through the United Missouri Bank of Kansas City, N.A. (the
"Bank").
B. Check forms will not be issued until a completed signature card is received
by the Fund.
C. Checks requiring redemption of shares held for 15 days or less that were not
purchased by "wire transfer" of federal funds or for which there are
insufficient shares to cover payment will not be honored.
D. Unless one signer is authorized on the account application form and signature
card, each check must be signed by all account owners or it will not be
honored. If SSI receives written notice by either owner of a revocation of
the authorization to sign individually, all account owners will be required
to sign redemption checks. Checks must be signed exactly as registered.
E. The privilege is subject to the Fund's and the Bank's rules and regulations,
and applicable governmental regulations, as amended from time to time.
F. The Fund may refuse to honor checks and may refuse to effect redemptions to
pay checks whenever the right of redemption has been suspended or postponed,
or whenever the account is otherwise impaired.
G. The account owner agrees to examine confirmations and cancelled checks and to
notify SSI of any unauthorized or missing signature or endorsement or
alteration on the check or error on the confirmation within 30 days after
mailing to owner. Failure to do so shall preclude any claim against the Fund,
the Bank, SSI, or their representatives and agents by reason of any
unauthorized or missing signature or endorsement, alteration, error, or
forgery of any kind.
- --------------------------------------------------------------------------------
Checkwriting Signature Card
Please indicate the Nuveen fund(s) to the right for which this signature card
applies.
In order to process this card you must write your account number in the space
provided.
Please print the names of the registered owners or legal representatives and
sign in the space provided at right.
Customer Account Number
- --------------------------------------------------------------------------------
[_] Nuveen Tax-Free Reserves
[_] Nuveen California Tax-Free Money Market Fund
[_] Nuveen Massachusetts Tax-Free Money Market Fund
[_] Nuveen New York Tax-Free Money Market Fund
Joint Accounts
[_] Check here if more than one signature will be required on checks.
Authorized Account Signer
- --------------------------------------------------------------------------------
Authorized Account Signature
- --------------------------------------------------------------------------------
Authorized Account Signer
- --------------------------------------------------------------------------------
Authorized Account Signature
- --------------------------------------------------------------------------------
<PAGE>
9 Financial Adviser Information
Please complete this section so your financial adviser can service your account
and receive copies of your statements.
Financial Adviser's Name Rep. Number
- --------------------------------------------------------------------------------
Firm Name
- --------------------------------------------------------------------------------
Branch Address Branch Number
- --------------------------------------------------------------------------------
City State Zip Code Telephone Number
- --------------------------------------------------------------------------------
10 Certification and Substitute Form W-9
I/we have received and read a copy of the prospectus for the fund(s) I am/we are
purchasing and agree to be bound by its terms, as amended. Under penalty of
perjury, I/we certify that (1) I/we have the power and authority to establish
this account; (2) the information provided on this application is accurate and
complete; and (3) the IRS has not notified me/us that I am/we are subject to
backup withholding. (Line out clause (3) if you are subject to backup
withholding.) I/we release the fund(s), Nuveen, and their agents and
representatives from all liability and agree to indemnify them from any and all
losses, damages or costs for acting in good faith in accordance with
instructions, including telephone instructions, believed to be genuine. I/we
agree to notify Nuveen promptly in writing if any information contained in this
application changes.
Signature Month Day Year Daytime Telephone Number
- --------------------------------------------------------------------------------
Signature of Joint Tenant (if any) Month Day Year Daytime Telephone Number
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Mail this completed application to:
Nuveen Money Market Funds
P.O. Box 5330
Denver, CO 80217-5330
<PAGE>
[NUVEEN LOGO]
Statement of Additional Information
June 10, 1997
Nuveen California Tax-Free Fund, Inc.
333 West Wacker Drive
Chicago, Illinois 60606
NUVEEN CALIFORNIA TAX-FREE MONEY MARKET FUND
This Statement of Additional Information relates to the sole portfolio of
Nuveen California Tax-Free Fund, Inc., the Nuveen California Tax-Free Money
Market Fund (the "Fund"). This Statement of Additional Information is not a
prospectus. A prospectus relating to the Fund may be obtained from certain se-
curities representatives, banks and other financial institutions that have en-
tered into sales agreements with John Nuveen & Co. Incorporated, or from the
Funds, c/o John Nuveen & Co. Incorporated, 333 West Wacker Drive, Chicago, Il-
linois 60606. This Statement of Additional Information relates to, and should
be read in conjunction with, the prospectus referred to above, which is dated
June 10, 1997.
<TABLE>
<S> <C>
Table of Contents Page
- --------------------------------------------------------------------------
Fundamental Policies and Investment Portfolio 2
- --------------------------------------------------------------------------
Management 21
- --------------------------------------------------------------------------
Investment Adviser and Investment Management Agreement 25
- --------------------------------------------------------------------------
Portfolio Transactions 27
- --------------------------------------------------------------------------
Net Asset Value 28
- --------------------------------------------------------------------------
Tax Matters 29
- --------------------------------------------------------------------------
Yield Information 35
- --------------------------------------------------------------------------
Additional Information on the Purchase and Redemption of Fund Shares 37
- --------------------------------------------------------------------------
Distribution and Service Plan 37
- --------------------------------------------------------------------------
Independent Public Accountants and Custodian 39
- --------------------------------------------------------------------------
</TABLE>
The audited financial statements for the fiscal year ended February 28, 1997,
appearing in the Annual Report of Nuveen California Tax-Free Fund, Inc. are in-
corporated herein by reference. The Annual Report accompanies this Statement of
Additional Information.
<PAGE>
FUNDAMENTAL POLICIES AND INVESTMENT PORTFOLIO
FUNDAMENTAL POLICIES
The investment objective and certain fundamental investment policies of the
Fund is described in the Prospectus. The Fund, as a fundamental policy, may
not, without the approval of the holders of a majority of the shares of the
Fund:
(1) Invest in securities other than Municipal Obligations and temporary invest-
ments, as those terms are defined in the Prospectuses, and in standby commit-
ments with respect to Municipal Obligations;
(2) Invest more than 5% of its total assets in securities of any one issuer,
except that this limitation shall not apply to securities of the United States
government, its agencies and instrumentalities or to the investment of 25% of
such Fund's assets;
(3) Borrow money, except from banks for temporary or emergency purposes and not
for investment purposes and then only in an amount not exceeding (a) 10% of the
value of its total assets at the time of borrowing or (b) one-third of the
value of the Fund's total assets including the amount borrowed, in order to
meet redemption requests which might otherwise require the untimely disposition
of securities. While any such borrowings exceed 5% of such Fund's total assets,
no additional purchases of investment securities will be made by such Fund. If
due to market fluctuations or other reasons, the value of the Fund's assets
falls below 300% of its borrowings, the Fund will reduce its borrowings within
3 business days. To do this, the Fund may have to sell a portion of its invest-
ments at a time when it may be disadvantageous to do so;
(4) Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (3) above, it may pledge securities having
a market value at the time of pledge not exceeding 10% of the value of the
Fund's total assets;
(5) Issue senior securities as defined in the Investment Company Act of 1940,
except to the extent such issuance might be involved with respect to borrowings
described under item (3) above.
(6) Underwrite any issue of securities, except to the extent that the purchase
of Municipal Obligations in accordance with its investment objective, policies
and limitations, may be deemed to be an underwriting;
(7) Purchase or sell real estate, but this shall not prevent any Fund from in-
vesting in Municipal Obligations secured by real estate or interests therein or
foreclosing upon and selling such security;
(8) Purchase or sell commodities or commodities contracts or oil, gas or other
mineral exploration or development programs.
(9) Make loans, other than by entering into repurchase agreements and through
the purchase of Municipal Obligations or temporary investments in accordance
with its investment objective, policies and limitations;
(10) Make short sales of securities or purchase any securities on margin, ex-
cept for such short-term credits as are necessary for the clearance of transac-
tions;
(11) Write or purchase put or call options, except to the extent that the pur-
chase of a stand-by commitment may be considered the purchase of a put.
2
<PAGE>
(12) Invest more than 5% of its total assets in securities of unseasoned is-
suers which, together with their predecessors, have been in operation for less
than three years;
(13) Invest more than 25% of its total assets in securities of issuers in any
one industry; provided, however, that such limitations shall not be applicable
to Municipal Obligations issued by governments or political subdivisions of
governments, and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities;
(14) Invest more than 10% of its total assets in repurchase agreements maturing
in more than seven days, "illiquid" securities (such as non-negotiable CDs) and
securities without readily available market quotations;
(15) Purchase or retain the securities of any issuer other than the securities
of the Fund if, to the Fund's knowledge, those directors of Nuveen California
Tax-Free Fund, Inc., or those officers and directors of Nuveen Advisory Corp.
("Nuveen Advisory") who individually own beneficially more than 1/2 of 1% of
the outstanding securities of such issuer, together own beneficially more than
5% of such outstanding securities.
For the purpose of applying the limitations set forth in paragraphs (2) and
(12) above, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its secu-
rities are backed only by its assets and revenues. Similarly, in the case of a
non-governmental user, such as an industrial corporation or a privately owned
or operated hospital, if the security is backed only by the assets and revenues
of the non-governmental user, then such non-governmental user would be deemed
to be the sole issuer. Where a security is also backed by the enforceable obli-
gation of a superior or unrelated governmental entity or other entity (other
than a bond insurer), it shall also be included in the computation of securi-
ties owned that are issued by such governmental or other entity.
Where a security is guaranteed by a governmental entity or some other facility,
such as a bank guarantee or letter of credit, such a guarantee or letter of
credit would be considered a separate security and would be treated as an issue
of such government, other entity or bank. Where a security is insured by bond
insurance, it shall not be considered a security issued or guaranteed by the
insurer; instead the issuer of such security will be determined in accordance
with the principles set forth above. The foregoing restrictions do not limit
the percentage of the Fund's assets that may be invested in securities insured
by any single insurer. It is a fundamental policy of the Fund, which cannot be
changed without the approval of the holders of a majority of shares of such
Fund, that the Fund will not hold securities of a single bank, including secu-
rities backed by a letter of credit of such bank, if such holdings would exceed
10% of the total assets of the Fund.
3
<PAGE>
The foregoing restrictions and limitations, as well as the Fund's policies as
to ratings of fund investments, will apply only at the time of purchase of se-
curities, and the percentage limitations will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of
an acquisition of securities, unless otherwise indicated.
The foregoing fundamental investment policies, together with the investment ob-
jective of the Fund, cannot be changed without approval by holders of a "major-
ity of the Fund's outstanding voting shares." As defined in the Investment Com-
pany Act of 1940, this means the vote of (i) 67% or more of the Fund's shares
present at a meeting, if the holders of more than 50% of the Fund's shares are
present or represented by proxy, or (ii) more than 50% of the Fund's shares,
whichever is less.
Nuveen California Tax-Free Fund, Inc. is a series company under SEC Rule 18f-2
and each Fund is a separate series issuing its own shares. Certain matters un-
der the Investment Company Act of 1940 which must be submitted to a vote of the
holders of the outstanding voting securities of a series company shall not be
deemed to have been effectively acted upon unless approved by the holders of a
majority of the outstanding voting securities of each series affected by such
matter.
PORTFOLIO SECURITIES
As described in the Prospectus, the Fund invests primarily in a diversified
fund of California Municipal Obligations, except that the Fund may not invest
more than 10% of its net assets in California Municipal Obligations issued
within certain U.S. possessions or territories. In general, Municipal Obliga-
tions include debt obligations issued by states, cities and local authorities
to obtain funds for various public purposes, including construction of a wide
range of public facilities such as airports, bridges, highways, hospitals,
housing, mass transportation, schools, streets and water and sewer works. In-
dustrial development bonds and pollution control bonds that are issued by or on
behalf of public authorities to finance various privately-rated facilities are
included within the term Municipal Obligations if the interest paid thereon is
exempt from federal income tax. California Municipal Obligations in which the
Fund will primarily invest are issued by the State of California and cities and
local authorities in that state, and bear interest that, in the opinion of bond
counsel to the issuer, is exempt from federal and California personal income
taxes.
Obligations of issuers of Municipal Obligations are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the fu-
ture by Congress, state legislatures or referenda extending the time for pay-
ment of principal and/or interest, or imposing other constraints upon enforce-
ment of such obligations or upon municipalities to levy taxes. There is also
the possibility that, as a result of legislation or other conditions, the power
or ability of any issuer to pay, when due, the principal of and interest on its
Municipal Obligations may be materially affected.
4
<PAGE>
The following is a more complete description of certain California Municipal
Obligations in which the Fund may invest.
The various securities in which the Fund intends to invest are described in the
Prospectus. The following is a more complete description of certain short-term
California Municipal Obligations in which the Fund may invest:
Bond Anticipation Notes (BANs) are usually general obligations of state and lo-
cal governmental issuers which are sold to obtain interim financing for pro-
jects that will eventually be funded through the sale of long-term debt obliga-
tions or bonds. The ability of an issuer to meet its obligations on its BANs is
primarily dependent on the issuer's access to the long-term municipal bond mar-
ket and the likelihood that the proceeds of such bond sales will be used to pay
the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to fi-
nance the current operations of such governments. Repayment is generally to be
derived from specific future tax revenues. TANs are usually general obligations
of the issuer. A weakness in an issuer's capacity to raise taxes due to, among
other things, a decline in its tax base or a rise in delinquencies, could ad-
versely affect the issuer's ability to meet its obligations on outstanding
TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental
bodies with the expectation that future revenues from a designated source will
be used to repay the notes. In general, they also constitute general obliga-
tions of the issuer. A decline in the receipt of projected revenues, such as
anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and in-
terest on RANs.
Construction Loan Notes are issued to provide construction financing for spe-
cific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.
Bank Notes are notes issued by local governmental bodies and agencies such as
those described above to commercial banks as evidence of borrowings. The pur-
poses for which the notes are issued are varied but they are frequently issued
to meet short-term working-capital or capital-project needs. These notes may
have risks similar to the risks associated with TANs and RANs.
Variable and Floating Rate Instruments-Certain Municipal Obligations, certain
instruments issued, guaranteed or sponsored by the U.S. Government or its agen-
cies, and certain debt instruments issued by domestic banks or corporations,
may carry variable or floating rates of interest. Such instruments bear inter-
est at rates which are not fixed, but which vary with changes in specified mar-
ket rates or indices, such as a bank prime rate or a tax-exempt money market
index. Variable rate notes are adjusted to current interest rate levels at cer-
tain specified times, such as every 30 days, as set forth in the instrument. A
floating rate note adjusts automatically whenever there is a change in its base
interest rate adjustor, e.g., a change in the prime lending rate on specified
interest rate indices. Typically such
5
<PAGE>
instruments carry demand features permitting the Money Market Fund to redeem at
par upon specified notice.
The Money Market Fund's right to obtain payment at par on a demand instrument
upon demand could be affected by events occurring between the date the Money
Market Fund elects to redeem the instrument and the date redemption proceeds
are due which affect the ability of the issuer to pay the instrument at par
value. The Adviser will monitor on an ongoing basis the pricing, quality and
liquidity of such instruments and will similarly monitor the ability of an is-
suer of a demand instrument, including those supported by bank letters of
credit or guarantees, to pay principal and interest on demand. Although the ul-
timate maturity of such variable rate obligations may exceed 397 days, the
Money Market Fund will treat the maturity of each variable rate demand obliga-
tion, for purposes of computing its dollar weighted average fund maturity, as
the longer of (i) the notice period required before the Money Market Fund is
entitled to payment of the principal amount through demand, or (ii) the period
remaining until the next interest rate adjustment.
The Money Market Fund may also obtain standby commitments with respect to Mu-
nicipal Obligations. Under a standby commitment (often referred to as a put),
the party issuing the commitment agrees to purchase at the Money Market Fund's
option the Municipal Obligation at an agreed-upon price on certain dates or
within a specific period. Since the value of a standby commitment depends in
part upon the ability of the issuing party to meet its purchase obligations
thereunder, the Money Market Fund will enter into standby commitments only with
parties which have been evaluated by Nuveen Advisory and, in the opinion of
Nuveen Advisory, present minimal credit risks.
The amount payable to the Money Market Fund upon its exercise of a standby com-
mitment would be (1) the acquisition cost of the Municipal Obligations (exclud-
ing any accrued interest that the Money Market Fund paid on acquisition), less
any amortized market premium or plus any amortized market or original issue
discount during the period the Money Market Fund owned the security, plus (2)
all interest accrued on the security since the last interest payment date dur-
ing the period the security was owned by the Money Market Fund. The Money Mar-
ket Fund's right to exercise standby commitments held by it will be uncondi-
tional and unqualified. The acquisition of a standby commitment will not affect
the valuation of the underlying security, which will continue to be valued in
accordance with the amortized cost method. The standby commitment itself will
be valued at zero in determining net asset value. The Money Market Fund may
purchase standby commitments for cash or pay a higher price for fund securities
which are acquired subject to such a commitment (thus reducing the yield to ma-
turity otherwise available for the same securities). The maturity of a Munici-
pal Obligation purchased by the Money Market Fund will not be considered short-
ened by any standby commitment to which such security is subject. Although the
Money Market Fund's rights under a standby commitment would not be transfer-
able, the Money Market Fund could sell Municipal Obligations which were subject
to a standby commitment to a third party at any time.
6
<PAGE>
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS
As described above, except to the extent the Fund invests in temporary invest-
ments, the Fund will invest substantially all of its assets in California Mu-
nicipal Obligations. The Fund is therefore susceptible to political, economic
or regulatory factors affecting issuers of California Municipal Obligations.
These include the possible adverse effects of certain California constitutional
amendments, legislative measures, voter initiatives and other matters that are
described below. The following information provides only a brief summary of the
complex factors affecting the financial situation in California (the "State")
and is derived from sources that are generally available to investors and is
believed to be accurate. No independent verification has been made of the accu-
racy or completeness of any of the following information. It is based in part
on information obtained from various State and local agencies in California or
contained in Official Statements for various California Municipal Obligations.
During the early 1990's, California experienced significant financial difficul-
ties, which reduced its credit standing, but the state's finances have improved
since 1994. The ratings of certain related debt of other issuers for which Cal-
ifornia has an outstanding lease purchase, guarantee or other contractual obli-
gation (such as for state-insured hospital bonds) are generally linked directly
to California's rating. Should the financial condition of California deterio-
rate again, its credit ratings could be further reduced, and the market value
and marketability of all outstanding notes and bonds issued by California, its
public authorities or local governments could be adversely affected.
Economic Overview
California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of more than 32 million represents over
12% of the total United States population and grew by 27% in the 1980s. Total
personal income in the State, at an estimated $760 billion in 1995, accounts
for almost 13% of all personal income in the nation. Total employment is over
14 million, the majority of which is in the service, trade and manufacturing
sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst eco-
nomic, fiscal and budget conditions since the 1930s. Construction, manufactur-
ing (especially aerospace), and financial services, among others, were all se-
verely affected, particularly in Southern California. Job losses were the worst
of any post-war recession. Employment levels stabilized by late 1993 and steady
job growth has occurred since early 1994. Pre-recession job levels were reached
in 1996. Unemployment, while remaining higher than the national average, has
come down substantially from its 10% recession peak. Economic indicators show a
steady and strong recovery underway in California since the start of 1994, par-
ticularly in export-related industries, services, electronics, entertainment
and tourism, although the residential housing sector has been weaker than in
prior recoveries. Any delay or reversal of the recovery may create new
shortfalls in State revenues.
Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California Municipal Obligations may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing powers of Cali-
fornia local governments and districts are limited by Article XIIIA of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Brief-
7
<PAGE>
ly, Article XIIIA limits to 1% of full cash value the rate of ad valorem prop-
erty taxes on real property and generally restricts the reassessment of prop-
erty to 2% per year, except upon new construction or change of ownership (sub-
ject to a number of exemptions). Taxing entities may, however, raise ad valo-
rem taxes above the 1% limit to pay debt service on voter-approved bonded
indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This sys-
tem has resulted in widely varying amounts of tax on similarly situated prop-
erties. Several lawsuits have been filed challenging the acquisition-based as-
sessment system of Proposition 13, but it was upheld by the U.S. Supreme Court
in 1992.
Article XIIIA prohibits local governments from raising revenues through ad va-
lorem property taxes above the 1% limit; it also requires voters of any gov-
ernmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed a non-voter approved levy of "general taxes" which
were not dedicated to a specific use.
Limitation on Other Taxes, Fees and Charges. On November 5, 1996, the voters
of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitu-
tion, which contain a number of provisions affecting the ability of local
agencies to levy and collect both existing and future taxes, assessments, fees
and charges.
Article XIIIC requires that all new or increased local taxes be submitted to
the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a
two-thirds vote. Further, any general purpose tax which was imposed, extended
or increased without voter approval after December 31, 1994 must be approved
by a majority vote within two years.
Article XIIID contains several new provisions making it generally more dif-
ficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions af-
fecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, im-
posed by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which gener-
ate revenues exceeding the funds required to provide the property related
service or are used for unrelated purposes. There are new notice, hearing and
protest procedures for levying or increasing property related fees and
charges, and, except for fees or charges for sewer, water and refuse collec-
tion services (or fees for electrical and gas service, which are not treated
as "property related" for purposes of Article XIIID), no property related fee
or charge may be imposed or increased without majority approval by the prop-
erty owners subject to the fee or charge or, at the option of the local agen-
cy, two-thirds voter approval by the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes limita-
tions on the initiative power in matters of local taxes, assessments, fees and
charges. Consequently, local voters could, by future initiative, repeal, re-
duce or prohibit the future imposition or increase of any local tax, assess-
ment, fee or
8
<PAGE>
charge. It is unclear how this right of local initiative may be used in cases
where taxes or charges have been or will be specifically pledged to secure
debt issues.
The interpretation and application of Proposition 218 will ultimately be de-
termined by the courts with respect to a number of matters, and it is not pos-
sible at this time to predict with certainty the outcome of such determina-
tions. Proposition 218 is generally viewed as restricting the fiscal flexibil-
ity of local governments, and for this reason, some ratings of California cit-
ies and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to an
annual "appropriations limit" imposed by Article XIIIB of the California Con-
stitution, enacted by the voters in 1979 and significantly amended by Proposi-
tions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits the
State or any covered local government from spending "appropriations subject to
limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from regu-
latory licenses, user charges or other fees, to the extent that such proceeds
exceed the cost of providing the product or service, but "proceeds of taxes"
exclude most State subventions to local governments. No limit is imposed on
appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond pro-
ceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January
1, 1979, or subsequently authorized by the voters, (2) appropriations arising
from certain emergencies declared by the Governor, (3) appropriations for cer-
tain capital outlay projects, (4) appropriations by the State of post-1989 in-
creases in gasoline taxes and vehicle weight fees, and (5) appropriations made
in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect changes
in cost of living and population, and any transfers of service responsibili-
ties between government units. The definitions for such adjustments were lib-
eralized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments must
return any excess to taxpayers by rate reductions. The State must refund 50%
of any excess, with the other 50% paid to schools and community colleges. With
more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes ex-
ceeded its appropriations limit by $1.1 billion, which was returned to taxpay-
ers. Since that year, appropriations subject to limitation have been under the
State limit. State appropriations were $7.0 billion under the limit for fiscal
year 1996-97.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of the
California Constitution, the ambiguities and possible inconsistencies in their
terms, and the impossibility of predicting future appropriations or changes in
population and cost of living, and the probability of continuing legal chal-
lenges, it is not currently possible to determine fully the impact of these
Articles on California
9
<PAGE>
Municipal Obligations or on the ability of the State or local governments to
pay debt service on such California Municipal Obligations. It is not possible,
at the present time, to predict the outcome of any pending litigation with re-
spect to the ultimate scope, impact or constitutionality of these Articles, or
the impact of any such determinations upon State agencies or local govern-
ments, or upon their ability to pay debt service on their obligations. Future
initiatives or legislative changes in laws or the California Constitution may
also affect the ability of the State or local issuers to repay their obliga-
tions.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general obliga-
tion bonds is the second charge to the General Fund after support of the pub-
lic school system and public institutions of higher education. As of March 1,
1997, the State had outstanding approximately $17.7 billion of long-term gen-
eral obligation bonds, plus $368 million of general obligation commercial pa-
per which will be refunded by long-term bonds in the future, and $6.1 billion
of lease-purchase debt supported by the State General Fund. The State also had
about $9.4 billion of authorized and unissued general obligation bonds and
lease-purchase debt. In FY 1995-96, debt service on general obligation bonds
and lease purchase debt was approximately 5.2% of General Fund revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1995-1996 were the Califor-
nia personal income tax (45% of total revenues), the sales tax (34%), bank and
corporation taxes (13%), and the gross premium tax on insurance (2%). The
State maintains a Special Fund for Economic Uncertainties (the "SFEU"), de-
rived from General Fund revenues, as a reserve to meet cash needs of the Gen-
eral Fund, but which is required to be replenished as soon as sufficient reve-
nues are available. Year-end balances in the Economic Uncertainties Fund are
included for financial reporting purposes in the General Fund balance. Because
of the recession, no reserve was budgeted in the SFEU from 1992-93, to 1995-96
because revenues had been reduced by the recession and an accumulated budget
deficit had to be repaid.
General. Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by Prop-
osition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Since the start of the 1990-91 fiscal year, the State has faced adverse eco-
nomic, fiscal, and budget conditions. The economic recession seriously af-
fected State tax revenues. It also caused increased expenditures for health
and welfare programs. The State is also facing a structural imbalance in its
budget with the largest programs supported by the General Fund (education,
health, welfare and corrections) growing at rates significantly higher than
the growth rates for the principal revenue sources of the General Fund. These
structural concerns will be exacerbated in coming years by the expected need
to substantially increase capital and operating funds for corrections as a re-
sult of a "Three Strikes" law enacted in 1994.
10
<PAGE>
Recent Budgets. As a result of these factors, among others, from the late
1980's until 1992-93, the State had a period of nearly chronic budget imbal-
ance, with expenditures exceeding revenues in four out of six years, and the
State accumulated and sustained a budget deficit in the budget reserve, the
SFEU approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legisla-
tive and Governor eventually agreed on a number of different steps to produce
Budget Acts in the Years 1991-92 to 1995-96 (although not all of these actions
were taken in each year):
. significant cuts in health and welfare program expenditures;
. transfers of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on lo-
cal government;
. transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;
. reduction in growth of support for higher education programs, coupled with
increases in student fees;
. revenue increases (particularly in the 1992-92 Fiscal Year budget), most of
which were for a short duration;
. increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal
aid than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to large unan-
ticipated deficits in the SFEU, as compared to projected positive balances. By
the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue an-
ticipation warrants to carry a portion of the deficit over the end of the fis-
cal year. When the economy failed to recover sufficiently in 1993-94, a second
two-year plan was implemented in 1994-95, to carry the final retirement of the
deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results in FY 1993-94,
1994-95, and 1995-96 which have reduced the accumulated budget deficit to
about $70 million as of June 30, 1996.
A consequence of the accumulated budget deficits in the early 1990's, together
with other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual budget,
was to significantly reduce the State's cash resources available to pay its
ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93
11
<PAGE>
Fiscal Year by July 1, 1992, which would have allowed the State to carry out
its normal annual cash flow borrowing to replenish its cash reserves, the State
Controller was forced to issue approximately $3.8 billion of registered war-
rants ("IOUs") over a 2-month period to pay a variety of obligations represent-
ing prior years' or continuing appropriations, and mandates from court orders.
The State's cash condition became so serious that from late spring 1992 until
1995, the State had to rely on issuance of short term notes which matured in a
subsequent fiscal year to finance its ongoing deficit, and pay current obliga-
tions. With the repayment of the last of these deficit notes in April, 1996,
the State does not plan to rely further on external borrowing across fiscal
years, but will continue its normal cash flow borrowings during a fiscal year.
The 1996-97 Budget Act was signed by the Governor on July 15, 1996, along with
various implementing bills. The Legislature rejected the Governor's proposed
15% cut in personal income taxes (to be phased in over three years), but did
approve a 5% cut in bank and corporation taxes, to be effective for income
years starting on January 1, 1997. As a result, revenues for the Fiscal Year
are estimated to total $47.643 billion, a 3.3 percent increase over the final
estimated 1995-96 revenues. The Budget Act contains General Fund appropriations
totaling $47.251 billion, a 4.0 percent increase over the final estimated 1995-
96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts increased by $1.65 bil-
lion total above revised 1995-96 levels. Almost half of this money was budgeted
to fund class-size reductions in kindergarten and grades 1-3. Also, for the
second year in a row, the full cost of living allowance (3.2 percent) was fund-
ed. The funding increases have brought K-12 expenditures to almost $4,800 per
pupil, an almost 15% increase over the level prevailing during the recession
years.
2. Proposed cuts in health and welfare totaling $660 million. All of these cuts
required federal law changes (including welfare reform, which was enacted),
federal waivers, or federal budget appropriations in order to be achieved. Ul-
timate federal actions after enactment of the Budget Act will allow the State
to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of California and the
California State University system, with no increases in student fees for the
second consecutive year.
4. The Budget Act assumed the federal government would provide approximately
$700 million in new aid for incarceration and health care costs of illegal im-
migrants. These funds reduce appropriations in these categories that would oth-
erwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The General Fund fund
balance on that date however, will reflect $1.45 billion of "loans" which the
General Fund made to local schools in the recession years, representing cash
outlays above the mandatory minimum funding
12
<PAGE>
level. Settlement of litigation over these transactions in July 1996 calls for
repayment of these loans over the period ending in 2001-02, about equally split
between outlays from the General Fund and from schools' entitlements. The 1996-
97 Budget Act contained a $150 million appropriation from the General Fund to-
ward this settlement.
The Department of Finance projected, when the Budget Act was passed, that, on
June 30, 1997, the State's available internal borrowable (cash) resources will
be $2.9 billion, after payment of all obligations due by that date, so that no
external cross-fiscal year borrowing will be needed. The State will continue to
rely on internal borrowing and intra-year external note borrowing to meet its
cash flow requirements.
The Department of Finance has reported that, based on stronger than expected
revenues during the first six months of the 1996-97 fiscal year, reflecting the
continued strength of the State's economic recovery, General Fund revenues for
the full 1996-97 fiscal year will be almost $800 million above projections, at
about $48.4 billion. This is expected to be offset by required increased pay-
ments to schools, and lower than expected savings resulting from federal wel-
fare reform actions and federal aid for illegal immigrants. As a result, the
expected balance of the SFEU at June 30, 1997 has been slightly reduced to
about $197 million, still the first positive balance in the decade of the 90's.
The State has not yet given any prediction of how the federal welfare reform
law will impact the State's finances, or those of its local agencies; the State
is in the midst of making many decisions concerning implementation of the new
welfare law.
Proposed 1997-98 Budget. On January 9, 1997, the Governor released his proposed
budget for FY 1997-98. Assuming continuing strength in the economy, the Gover-
nor projects General Fund revenues of $50.7 billion, and proposes expenditures
of $50.3 billion, to leave a budget reserve in the SFEU of $550 million at June
30, 1998. The Governor proposed further programs to reduce class size in lower
primary grades, using excess revenues from FY 1996-97. He also proposed a fur-
ther cut in corporate taxes, and sweeping changes in public assistance programs
to respond to the new federal welfare reform law.
Although the State's strong economy is producing record revenues to the State
government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a grow-
ing population with many immigrants. These factors which limit State spending
growth also put pressure on local governments. There can be no assurances that,
if economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
Bond Rating
The ratings on California's long-term general obligation bonds were reduced in
the early 1990's from "AAA" levels which had existed prior to the recession. In
1996, Fitch and Standard & Poor's raised their ratings of California's general
obligation bonds, which as of April 1997 were assigned ratings of "A+" from
Standard & Poor's, "A1" from Moody's and "A+" from Fitch.
There can be no assurance that such ratings will be maintained in the future.
It should be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to the creditworthiness of obligations is-
sued by the State of California, and that there is no obligation on the part of
the State to make payment on such local obligations in the event of default.
13
<PAGE>
Legal Proceedings
The State is involved in certain legal proceedings (described in the State's
recent financial statements) that, if decided against the State, may require
the State to make significant future expenditures or may substantially impair
revenues. Trial courts have recently entered tentative decisions or injunctions
which would overturn several parts of the state's recent budget compromises.
The matters covered by these lawsuits include a deferral of payments by Cali-
fornia to the Public Employees Retirement System, reductions in welfare pay-
ments and the use of certain cigarette tax funds for health costs. All of these
cases are subject to further proceedings and appeals, and if California eventu-
ally loses, the final remedies may not have to be implemented in one year.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations
There are a number of state agencies, instrumentalities and political subdivi-
sions of the State that issue Municipal Obligations, some of which may be con-
duit revenue obligations payable from payments from private borrowers. These
entities are subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary considerably from the
credit quality of obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments declined
more than 50% following passage of Proposition 13. Subsequently, the California
Legislature enacted measures to provide for the redistribution of the State's
General Fund surplus to local agencies, the reallocation of certain State reve-
nues to local agencies and the assumption of certain governmental functions by
the State to assist municipal issuers to raise revenues. Total local assistance
from the State's General Fund was budgeted at approximately 75% of General Fund
expenditures in recent years, including the effect of implementing reductions
in certain aid programs. To reduce State General Fund support for school dis-
tricts, the 1992-93 and 1993-94 Budget Acts caused local governments to trans-
fer $3.9 billion of property tax revenues to school districts, representing
loss of the post-Proposition 13 "bailout" aid. Local governments have in return
received greater revenues and greater flexibility to operate health and welfare
programs. To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State as-
sistance to local governments may continue to be reduced. Any such reductions
in State aid
could compound the serious fiscal constraints already experienced by many local
governments, particularly counties. At least one rural county (Butte) publicly
announced that it might enter bankruptcy proceedings in August 1990, although
such plans were put off after the Governor approved legislation to provide ad-
ditional funds for the county. Other counties have also indicated that their
budgetary condition is extremely grave. Los Angeles County, the largest in the
State, was forced to make significant cuts in services and personnel, particu-
larly in the health care system, in order to balance its budget in 1995-96 and
1996-97. Los Angeles County's debt was downgraded by Moody's and S&P in the
summer of 1995. Orange County, which emerged from Federal Bankruptcy Court pro-
tection in June 1996, has significantly reduced county services and personnel,
and faces strict financial conditions following large investment fund losses in
1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of changes
in welfare and public assistance programs, which will have to be enacted by
June, 1997 in order to comply with the federal
14
<PAGE>
welfare reform law. It is not yet known how the State's legislation will turn
out and what its overall impact will be on local government finances.
Assessment Bonds. California Municipal Obligations which are assessment bonds
may be adversely affected by a general decline in real estate values or a slow-
down in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but anticipated to be devel-
oped within a few years after issuance. In the event of such reduction or slow-
down, such development may not occur or may be delayed, thereby increasing the
risk of a default on the bonds. Because the special assessments or taxes secur-
ing these bonds are not the personal liability of the owners of the property
assessed, the lien on the property is the only security for the bonds. More-
over, in most cases the issuer of these bonds is not required to make payments
on the bonds in the event of delinquency in the payment of assessments or tax-
es, except from amounts, if any, in a reserve fund established for the bonds.
California Long Term Lease Obligations. Based on a series of court decisions,
certain long-term lease obligations, though typically payable from the general
fund of the State or a municipality, are not considered "indebtedness" requir-
ing voter approval. Such leases, however, are subject to "abatement" in the
event the facility being leased is unavailable for beneficial use and occupancy
by the municipality during the term of the lease. Abatement is not a default,
and there may be no remedies available to the holders of the certificates evi-
dencing the lease obligation in the event abatement occurs. The most common
cases of abatement are failure to complete construction of the facility before
the end of the period during which lease payments have been capitalized and un-
insured casualty losses to the facility (e.g., due to earthquake). In the event
abatement occurs with respect to a lease obligation, lease payments may be in-
terrupted (if all available insurance proceeds and reserves are exhausted) and
the certificates may not be paid when due. Litigation is brought from time to
time which challenges the constitutionality of such lease arrangements.
Other Considerations
The repayment of industrial development securities secured by real property may
be affected by California laws limiting foreclosure rights of creditors. Secu-
rities backed by healthcare and hospital revenues may be affected by changes in
State regulations governing cost reimbursements to health care providers under
Medi-Cal (the State's Medicaid program), including risks related to the policy
of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax alloca-
tion" bonds issued by California redevelopment agencies. Such bonds are secured
solely by the increase in assessed valuation of a redevelopment project area
after the start of redevelopment activity. In the event that assessed values in
the redevelopment project decline (e.g., because of a major natural disaster
such as an earthquake), the tax increment revenue may be insufficient to make
principal and interest payments on these bonds. Both Moody's and S&P suspended
ratings on California tax allocation bonds after the enactment of Articles
XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all reve-
nues produced by a tax rate increase go directly to the taxing entity which in-
creased such tax rate to repay that entity's general
15
<PAGE>
obligation indebtedness. As a result, redevelopment agencies (which, typically,
are the issuers of tax allocation securities) no longer receive an increase in
tax increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon the abil-
ity of California municipal securities issuers to pay interest and principal on
their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such legisla-
tion will be enacted. Nor is it possible, at present, to determine the impact
of any such legislation on California Municipal Obligations in which the Fund
may invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject to
major seismic activity. Northern California in 1989 and Southern California in
1994 experienced major earthquakes causing billions of dollars in damages. The
federal government provided more than $13 billion in aid for both earthquakes,
and neither event is expected to have any long-term negative economic impact.
Any California Municipal Obligation in the Fund could be affected by an inter-
ruption of revenues because of damaged facilities, or, consequently, income tax
deductions for casualty losses or property tax assessment reductions. Compensa-
tory financial assistance could be constrained by the inability of (i) an is-
suer to have obtained earthquake insurance coverage at reasonable rates; (ii)
an insurer to perform on its contracts of insurance in the event of widespread
losses; or (iii) the federal or State government to appropriate sufficient
funds within their respective budget limitations.
TEMPORARY INVESTMENTS
The Prospectus discusses briefly the ability of the Fund to invest a portion of
its assets in federally tax-exempt or taxable "temporary investments." Tempo-
rary investments will not exceed 20% of the Fund's assets except when made for
defensive purposes. The Fund will invest only in temporary investments with re-
maining maturities of 397 days or less which, in the opinion of Nuveen Adviso-
ry, are of "high grade" quality.
Subject to the foregoing limitations, the Fund may invest in the following fed-
erally tax-exempt temporary investments:
Bond Anticipation Notes (BANs) are usually general obligations of state and lo-
cal governmental issuers which are sold to obtain interim financing for pro-
jects that will eventually be funded through the sale of long-term debt obliga-
tions or bonds. The ability of an issuer to meet its obligations on its BANs is
primarily dependent on the issuer's access to the long-term municipal bond mar-
ket and the likelihood that the proceeds of such bond sales will be used to pay
the principal and interest on the BANs.
16
<PAGE>
Tax Anticipation Notes (TANs) are issued by state and local governments to fi-
nance the current operations of such governments. Repayment is generally to be
derived from specific future tax revenues. Tax anticipation notes are usually
general obligations of the issuer. A weakness in an issuer's capacity to raise
taxes due to, among other things, a decline in its tax base or a rise in delin-
quencies, could adversely affect the issuer's ability to meet its obligations
on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental
bodies with the expectation that future revenues from a designated source will
be used to repay the notes. In general, they also
constitute general obligations of the issuer. A decline in the receipt of pro-
jected revenues, such as anticipated revenues from another level of government,
could adversely affect an issuer's ability to meet its obligations on outstand-
ing RANs. In addition, the possibility that the revenues would, when received,
be used to meet other obligations could affect the ability of the issuer to pay
the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for spe-
cific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies as those
described above to commercial banks as evidence of borrowings. The purposes for
which the notes are issued are varied but they are frequently issued to meet
short-term working capital or capital-project needs. These notes may have risks
similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (Municipal Paper) represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available there-
from. Maturities of municipal paper generally will be shorter than the maturi-
ties of TANs, BANs or RANs. There is a limited secondary market for issues of
municipal paper.
While these various types of notes as a group represent the major portion of
the tax-exempt note market, other types of notes are occasionally available in
the marketplace and the Fund may invest in such other types of notes to the ex-
tent permitted under its investment objective, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
The Fund may also invest in the following taxable temporary investments:
U.S. Government Direct Obligations are issued by the United States Treasury and
include bills, notes and bonds.
- -- Treasury bills are issued with maturities of up to one year. They are issued
in bearer form, are sold on a discount basis and are payable at par value at
maturity.
- -- Treasury notes are longer-term interest bearing obligations with original
maturities of one to seven years.
17
<PAGE>
- -- Treasury bonds are longer-term interest-bearing obligations with original
maturities from five to thirty years.
U.S. Government Agencies Securities--Certain federal agencies have been estab-
lished as instrumentalities of the United States Government to supervise and
finance certain types of activities. These agencies include, but are not lim-
ited to, the Bank for Cooperatives, Federal Land Banks, Federal Intermediate
Credit Banks, Federal Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Export-Import Bank of the United
States, and Tennessee Valley Authority. Issues of these agencies, while not di-
rect obligations of the United States Government, are either backed by
the full faith and credit of the United States or are guaranteed by the Trea-
sury or supported by the issuing agencies' right to borrow from the Treasury.
There can be no assurance that the United States Government itself will pay in-
terest and principal on securities as to which it is not legally so obligated.
Certificates of Deposit (CDs)--A certificate of deposit is a negotiable inter-
est bearing instrument with a specific maturity. CDs are issued by banks in ex-
change for the deposit of funds and normally can be traded in the secondary
market, prior to maturity. The Fund will only invest in U.S. dollar denominated
CDs issued by U.S. banks with assets of $1 billion or more.
Commercial Paper--Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations. Maturities on these issues
vary from a few days to nine months. Commercial paper may be purchased from
U.S. corporations.
Other Corporate Obligations--The Fund may purchase notes, bonds and debentures
issued by corporations if at the time of purchase there is less than 397 days
remaining until maturity or if they carry a variable or floating rate of inter-
est.
Repurchase Agreements--A repurchase agreement is a contractual agreement
whereby the seller of securities (U.S. Government or municipal obligations)
agrees to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed upon repurchase price determines the
yield during the Fund's holding period. Repurchase agreements are considered to
be loans collateralized by the underlying security that is the subject of the
repurchase contract. The Fund will only enter into repurchase agreements with
dealers, domestic banks or recognized financial institutions that in the opin-
ion of Nuveen Advisory present minimal credit risk. The risk to the Fund is
limited to the ability of the issuer to pay the agreed-upon repurchase price on
the delivery date; however, although the value of the underlying collateral at
the time the transaction is entered into always equals or exceeds the agreed-
upon repurchase price, if the value of the collateral declines there is a risk
of loss of both principal and interest. In the event of default, the collateral
may be sold but the Fund might incur a loss if the value of the collateral de-
clines, and might incur disposition costs or experience delays in connection
with liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon the col-
lateral by the Fund may be delayed or limited. Nuveen Advisory will monitor the
value of collateral at the time the transaction is entered into and at all
times subsequent during the term of the repurchase agreement in an effort to
determine that the value always equals or exceeds the agreed upon price. In the
event the value of the collateral declined below the repurchase price, Nuveen
Advisory will demand additional collateral from the issuer to increase the
18
<PAGE>
value of the collateral to at least that of the repurchase price. The Fund
will not invest more than 10% of its assets in repurchase agreements maturing
in more than seven days.
Variable and Floating Rate Investments--See description on page 5.
RATINGS OF INVESTMENTS
The four highest ratings of Moody's for Municipal Obligations are Aaa, Aa, A
and Baa. Municipal Obligations rated Aaa are judged to be of the "best quali-
ty." The rating of Aa is assigned to Municipal Obligations which are of "high
quality by all standards," but as to which margins of protection or other ele-
ments make long-term risks appear somewhat larger than in Aaa rated Municipal
Obligations. The Aaa and Aa rated Municipal Obligations comprise what are gen-
erally known as "high grade bonds." Municipal Obligations that are rated A by
Moody's possess many favorable investment attributes and are considered upper
medium grade obligations. Factors giving security to principal and interest of
A rated Municipal Obligations are considered adequate, but elements may be
present, which suggest a susceptibility to impairment sometime in the future.
Municipal Obligations rated Baa by Moody's are considered medium grade obliga-
tions (i.e., they are neither highly protected nor poorly secured). Such bonds
lack outstanding investment characteristics and in fact have speculative char-
acteristics as well. Moody's bond rating symbols may contain numerical modifi-
ers of a generic rating classification. The modifier 1 indicates that the bond
ranks at the high end of its category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its general rating category.
The four highest ratings of S&P for Municipal Obligations are AAA, AA, A and
BBB. Municipal Obligations rated AAA have an extremely strong capacity to pay
principal and interest. The rating of AA indicates that capacity to pay prin-
cipal and interest is very strong and such bonds differ from AAA issues only
in small degree. The category of A describes bonds which have a strong capac-
ity to pay principal and interest, although such bonds are somewhat more sus-
ceptible to the adverse effects of changes in circumstances and economic con-
ditions. The BBB rating is the lowest "investment grade" security rating by
S&P. Municipal Obligations rated BBB are regarded as having an adequate capac-
ity to pay principal and interest. Whereas such bonds normally exhibit ade-
quate protection parameters, adverse economic conditions are more likely to
lead to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
The "Other Corporate Obligations" category of temporary investments are corpo-
rate (as opposed to municipal) debt obligations rated AAA by S&P or Aaa by
Moody's. Corporate debt obligations rated AAA by S&P have an extremely strong
capacity to pay principal and interest. The Moody's corporate debt rating of
Aaa is comparable to that set forth above for Municipal Obligations.
The two highest ratings of Moody's and S&P for federally tax-exempt short-term
loans and notes are MIG-1 and MIG-2, or VMIG-1 or VMIG-2 in the case of vari-
able rate instruments, and SP-1 and SP-2, respectively. Obligations designated
MIG-1 or VMIG-1 are the best quality, enjoying strong protection from estab-
lished cash flows of funds for their servicing or from established and broad-
based access to the market for refinancing, or both. Obligations designated as
MIG-2 or VMIG-2 are high quality obligations with ample margins of protection.
The designation SP-1 indicates a very strong or strong capacity
19
<PAGE>
to pay principal and interest while the designation SP-2 denotes a satisfactory
capacity to pay principal and interest.
The Fund's ability to purchase commercial paper of tax-exempt and corporate is-
suers is limited to commercial paper rated Prime-1 or Prime-2 by Moody's or A-1
or A-2 by S&P. The rating Prime-1
(P-1) is the highest commercial paper rating assigned by Moody's. Issuers rated
P-1 have a superior capacity for repayment of short-term obligations normally
evidenced by the following characteristics: leading market positions in well-
established industries; high rates or return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset pro-
tection; broad margins in earnings coverage of fixed financial charges and high
internal cash generation; well-established access to a range of financial mar-
kets and assured sources of alternative liquidity. Issuers rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. The desig-
nation A-1 indicates that the degree of safety regarding timely payment is very
strong, while the designation A-2 denotes a strong capacity for timely repay-
ment.
Subsequent to its purchase by the Fund, an issue may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund. Nei-
ther event requires the elimination of such obligation from the Fund's portfo-
lio, but Nuveen Advisory will consider such an event in its determination of
whether the Fund should continue to hold such obligation.
20
<PAGE>
MANAGEMENT
The management of Nuveen California Tax-Free Fund, Inc., including general su-
pervision of the duties performed for the Fund under the Investment Management
Agreement, is the responsibility of its directors. Nuveen California Tax-Free
Fund, Inc. currently has eight directors, two of whom are "interested persons"
(as the term "interested persons" is defined in the Investment Company Act of
1940) and six of whom are "disinterested persons." The names and business ad-
dresses of the directors and officers of Nuveen California Tax-Free Fund, Inc.
and their principal occupations and other affiliations during the past five
years are set forth below, with those directors who are "interested persons"
indicated by an asterisk.
<TABLE>
- ----------------------------------------------------------------------------------------------
<CAPTION>
POSITIONS AND
OFFICES WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE FUNDS DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Timothy R. 48 Chairman of the Chairman since July 1, 1996 of The John
Schwertfeger Board and Di- Nuveen Company, John Nuveen & Co. Incorpo-
333 West Wacker rector rated, Nuveen Advisory Corp. and Nuveen In-
Drive stitutional Advisory Corp.; prior thereto
Chicago, IL 60606 Executive Vice President and Director of
The John Nuveen Company (since March 1992),
John Nuveen & Co. Incorporated, Nuveen Ad-
visory Corp. (since October 1992) and
Nuveen Institutional Advisory Corp. (since
October 1992).
- ----------------------------------------------------------------------------------------------
Anthony T. Dean 52 President and President since July 1, 1996 of The John
333 West Wacker Director Nuveen Company, John Nuveen & Co. Incorpo-
Drive rated, Nuveen Advisory Corp. and Nuveen In-
Chicago, IL 60606 stitutional Advisory Corp.; prior thereto,
Executive Vice President and Director of
The John Nuveen Company (since March 1992),
John Nuveen & Co. Incorporated, Nuveen Ad-
visory Corp. (since October 1992) and
Nuveen Institutional Advisory Corp. (since
October 1992).
- ----------------------------------------------------------------------------------------------
Robert P. Bremner 56 Director Private Investor and Management Consultant.
3725 Huntington Street, N.W.
Washington, D.C.
20015
- ----------------------------------------------------------------------------------------------
Lawrence H. Brown 62 Director Retired (August 1989) as Senior Vice Presi-
201 Michigan Avenue dent of The Northern Trust Company.
Highwood, IL 60040
- ----------------------------------------------------------------------------------------------
Anne E. Impellizzeri 64 Director President and Chief Executive Officer of
3 West 29th Street Blanton-Peale, Institutes of Religion and
New York, NY 10001 Health.
- ----------------------------------------------------------------------------------------------
Margaret K. Rosen- 70 Director Helen Ross Professor of Social Welfare Pol-
heim icy, School of Social Service Administra-
969 East 60th Street tion, University of Chicago.
Chicago, IL 60637
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE FUNDS DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Peter R. Sawers 64 Director Adjunct Professor of Business and Econom-
22 The Landmark ics, University of Dubuque, Iowa; Adjunct
Northfield, IL 60093 Professor, Lake Forest Graduate School of
Management, Lake Forest, Illinois; Chart-
ered Financial Analyst; Certified Manage-
ment Consultant.
- --------------------------------------------------------------------------------------
William J. Schneider 52 Trustee Senior Partner, Miller-Valentine Partners,
400 Miller-Valentine Vice President, Miller-Valentine Realty,
Ct. Inc.
P.O. Box 744
Dayton, OH 45401
- --------------------------------------------------------------------------------------
Bruce P. Bedford 57 Executive Vice Executive Vice President of John Nuveen &
333 West Wacker President Co. Incorporated, Nuveen Advisory Corp. and
Drive Nuveen Institutional Advisory Corp. (since
Chicago, IL 60606 January 1997), prior thereto, Chairman and
CEO of Flagship Resources Inc. and Flagship
Financial Inc. and the Flagship funds
(since January 1985).
- --------------------------------------------------------------------------------------
Michael S. Davern 39 Vice President Vice President of Nuveen Advisory Corp.
One South Main (since January 1997); prior thereto, Vice
Street President and Portfolio Manager (since Sep-
Dayton, OH 45402 tember 1991) of Flagship Financial.
- --------------------------------------------------------------------------------------
William M. Fitzger- 33 Vice President Vice President of Nuveen Advisory Corp.
ald (since December 1995); Assistant Vice Pres-
33 West Wacker Drive ident of Nuveen Advisory Corp. (from Sep-
Chicago, Illinois tember 1992 to December 1995), prior
60606 thereto Assistant Portfolio Manager of
Nuveen Advisory Corp. (from June 1988 to
September 1992).
- --------------------------------------------------------------------------------------
Kathleen M. Flanagan 50 Vice President Vice President of John Nuveen & Co. Incor-
333 West Wacker porated; Vice President of Nuveen Advisory
Drive Corp. and Nuveen Institutional Advisory
Chicago, IL 60606 Corp. (since June 1996).
- --------------------------------------------------------------------------------------
J. Thomas Futrell 41 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker
Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------------
Richard A. Huber 34 Vice President Vice President of Nuveen Advisory Corp.
One South Main (since January 1997); prior thereto, Vice
Street President and Portfolio Manager (since Au-
Dayton, OH 45402 gust 1985) of Flagship Financial.
- --------------------------------------------------------------------------------------
Steven J. Krupa 39 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker
Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------------
Anna R. Kucinskis 51 Vice President Vice President of John Nuveen & Co. Incor-
333 West Wacker porated.
Drive
Chicago, IL 60606
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE FUNDS DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Larry W. Martin 45 Vice President Vice President (since September 1992), As-
333 West Wacker and Assistant sistant Secretary and Assistant General
Drive Secretary Counsel of John Nuveen & Co. Incorporated;
Chicago, IL 60606 Vice President (since May 1993) and Assis-
tant Secretary of Nuveen Advisory Corp;
Vice President (since May 1993) and Assis-
tant Secretary of Nuveen Institutional Ad-
visory Corp.; Assistant Secretary of The
John Nuveen Company (since February 1993).
- --------------------------------------------------------------------------------------
Edward F. Neild, IV 31 Vice President Vice President (since September 1996), pre-
One South Main viously Assistant Vice President (since De-
Street cember 1993) of Nuveen Advisory Corp.,
Dayton, OH 45402 Portfolio Manager prior thereto; Vice Pres-
ident (since September 1996), previously
Assistant Vice President (since May 1995)
of Nuveen Institutional Advisory Corp.,
Portfolio Manager prior thereto.
- --------------------------------------------------------------------------------------
Walter K. Parker 48 Vice President Vice President of Nuveen Advisory Corp.
One South Main (since January 1997); prior thereto, Vice
Street President and Portfolio Manager (since July
Dayton, OH 45402 1994) of Flagship Financial; Portfolio Man-
ager and CIO Trust Investor (since 1983)
for PNC Bank.
- --------------------------------------------------------------------------------------
O. Walter Renfftlen 57 Vice President Vice President and Controller of The John
333 West Wacker and Controller Nuveen Company, John Nuveen & Co. Incorpo-
Drive rated, Nuveen Advisory Corp. and Nuveen In-
Chicago, IL 60606 stitutional Advisory Corp.
- --------------------------------------------------------------------------------------
Thomas C. Spalding, 45 Vice President Vice President of Nuveen Advisory Corp. and
Jr. Nuveen Institutional Advisory Corp.; Chart-
333 West Wacker ered Financial Analyst.
Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------------
H. William Stabenow 62 Vice President Vice President and Treasurer of The John
333 West Wacker and Nuveen Company, John Nuveen & Co. Incorpo-
Drive Treasurer rated, Nuveen Advisory Corp. and Nuveen In-
Chicago, IL 60606 stitutional Advisory Corp.
- --------------------------------------------------------------------------------------
Jan E. Terbrueggen 41 Vice President Vice President of Nuveen Advisory Corp.
One South Main (since January 1997); Vice President and
Street Portfolio Manager of Flagship
Dayton, OH 45402 Financial.
- --------------------------------------------------------------------------------------
Gifford R. Zimmerman 40 Vice President Vice President (since September 1992), As-
333 West Wacker and sistant Secretary and Assistant General
Drive Assistant Sec- Counsel of John Nuveen & Co. Incorporated;
Chicago, IL 60606 retary Vice President (since May 1993) and Assis-
tant Secretary of Nuveen Advisory Corp.;
Vice President (since May 1993) and Assis-
tant Secretary of Nuveen Institutional Ad-
visory Corp.
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE>
Anthony T. Dean, Timothy R. Schwertfeger and Margaret K. Rosenheim serve as
members of the Executive Committee of the Board of Directors. The Executive
Committee, which meets between regular meetings of the Board of Directors, is
authorized to exercise all of the powers of the Board of Directors.
The directors of Nuveen California Tax-Free Fund, Inc. are also directors or
trustees, as the case may be, of 42 Nuveen open-end fund portfolios and of 52
Nuveen closed-end funds.
The following table sets forth compensation paid by the Nuveen California Tax-
Free Fund, Inc. during the fiscal year ended February 28, 1997 to each of the
directors. The Nuveen California Tax-Free Fund, Inc. has no retirement or pen-
sion plans. The officers and directors affiliated with Nuveen serve without any
compensation from the Nuveen California Tax-Free Fund, Inc.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM THE FUND
COMPENSATION AND FUND COMPLEX
NAME OF DIRECTOR FROM THE FUND PAID TO DIRECTORS
- --------------------------------------------------------------------------------
<S> <C> <C>
Anthony T. Dean................................ $ 0 $ 0
Richard J. Franke*............................. 0 0
Timothy R. Schwertfeger........................ 0 0
Robert P. Bremner.............................. 0 0(1)
Lawrence H. Brown.............................. 500 59,000
Anne E. Impellizzeri........................... 500 59,000
Margaret K. Rosenheim.......................... 646(2) 66,815(3)
Peter R. Sawers................................ 500 59,000
William J. Schneider........................... 0 0(1)
</TABLE>
- --------
* Mr. Franke retired as of June 30, 1996.
(1) First payment was in April 1997.
(2) Includes $66 in interest earned on deferred compensation from prior years.
(3) Includes $1,565 in interest earned on deferred compensation from prior
years.
Each director who is not affiliated with Nuveen or Nuveen Advisory receives a
$27,500 annual retainer for serving as a director or trustee of all open-end
funds for which Nuveen Advisory serves as investment adviser, and a $1,000 fee
per day plus expenses for attendance at all meetings held on a day on which a
regularly scheduled Board meeting is held, a $1,000 fee per day plus expenses
for attendance in person or a $500 fee per day plus expenses for attendance by
telephone at a meeting held on a day on which no regular Board meeting is held
and a $250 fee per day plus expenses for attendance in person or by telephone
at a meeting of the Executive Committee held solely to declare dividends. The
annual retainer, fees and expenses are allocated among the open-end funds for
which Nuveen Advisory serves as investment adviser on the basis of relative net
asset sizes. Nuveen California Tax-Free Fund, Inc. requires no employees other
than its officers, all of whom are compensated by Nuveen.
On May 28, 1997, the officers and directors of Nuveen California Tax-Free Fund,
Inc. as a group owned less than 1% of the outstanding shares of each Fund. The
following table sets forth the percentage ownership of each person who, as of
May 28, 1997, owned of record or was known by Nuveen California Tax-Free Fund,
Inc. to own of record or beneficially 5% or more of any class of shares of a
Fund.
24
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OWNERSHIP
- -------------------------------------------------------------------------------
<S> <C> <C>
California Money Market Fund
Institutional Series................. Wells Fargo Bank NA 85.02%
FBO Westcore
Attn.: Fund Acct. Cash
Mngt. Desk
C/O Trust & Investment
Services
P.O. Box 9800
Calabasas, CA 91372-0800
U.S. Nat'l Bank of Oregon 11.02%
Cash Management Desk HO5
Trust Operations
321 SW 6th
P.O. Box 3168
Portland, OR 97208-3168
California Money Market Fund
Service Plan Series.................. Republic Bank California 78.00%
N.A.
Attn.: Patsy Haynes
445 N. Bedford Dr.
Beverly Hills, CA 90210-
4302
Cudd & Company 5.79%
Attn Mutual Funds
Department
c/o Chase Manhattan
101 California St. Ste
4125
San Francisco, CA 94011-
6132
California Money Market Fund
Distribution Plan Series............. Eileen B. Geller & 6.97%
Andrew O. Geller TR
UA Sep. 02 87
Geller Family Trust
3297 Woodbine St.
Los Angeles, CA 90064-
4836
John L. Sell 6.44%
Dorothy J. Sell JT Ten
2023 Bella Vista Ave.
Arcadia, CA 91007-8104
</TABLE>
INVESTMENT ADVISER AND INVESTMENT MANAGEMENT AGREEMENT
Nuveen Advisory Corp. acts as investment adviser for and manages the investment
and reinvestment of the assets of the Fund. Nuveen Advisory also administers
Nuveen California Tax-Free Fund Inc.'s business affairs, provides office facil-
ities and equipment and certain clerical, bookkeeping and administrative serv-
ices, and permits any of its officers or employees to serve without compensa-
tion as trustees or officers of the Fund if elected to such positions. See
"Management of the Fund" in the Prospectus.
Pursuant to an investment management agreement between Nuveen Advisory and
Nuveen California Tax-Free Fund, Inc., the Fund has agreed to pay annual man-
agement fees at the rates set forth below:
25
<PAGE>
California Money Market Fund:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET
VALUE MANAGEMENT FEES
- -------------------------------------------
<S> <C>
For the first $500 million .400 of 1%
For the next $500 million .375 of 1%
For assets over $1 billion .350 of 1%
</TABLE>
Nuveen Advisory will waive all or a portion of its management fee or reimburse
certain expenses of the Fund in order to prevent total operating expenses of
(including Nuveen Advisory's management fee, but excluding interest, taxes,
fees incurred in acquiring and disposing of portfolio securities, any asset-
based distribution or service fees and, to the extent permitted, extraordinary
expenses) in any fiscal year from exceeding .55 of 1% of the average daily net
asset value of the Fund. Nuveen Advisory may also voluntarily agree to reim-
burse additional expenses from time to time, which voluntary reimbursements may
be terminated at any time in its discretion. For the last three fiscal years,
the Fund paid net management fees to Nuveen Advisory as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEES NET OF
EXPENSE
REIMBURSEMENT PAID TO FEE WAIVERS AND EXPENSE
NUVEEN ADVISORY FOR THE REIMBURSEMENTS FOR THE
YEAR ENDED YEAR ENDED
----------------------- -----------------------
2/28/95 2/29/96 2/28/97 2/28/95 2/29/96 2/28/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund............... 836,730 600,017 665,655 122,246 59,354 70,133
</TABLE>
As discussed in the Prospectus, in addition to the management fees of Nuveen
Advisory, the Fund pays all other costs and expenses of its operations and the
general administrative expenses of Nuveen California Tax-Free Fund, Inc.
Nuveen Advisory is a wholly owned subsidiary of John Nuveen & Co. Incorporated
("Nuveen"), the Fund's principal underwriter. In 1961, Nuveen began sponsoring
the Nuveen Tax-Exempt Unit Trust and since that time has issued more than $36
billion in tax-exempt unit trusts, including over $12 billion in tax-exempt in-
sured unit trusts. In addition, Nuveen open-end and closed-end funds held ap-
proximately $36 billion in securities under management as of the date of this
Statement. Over 1,000,000 individuals have invested to date in Nuveen's funds
and trusts. Founded in 1898, Nuveen is a subsidiary of The John Nuveen Company
which, in turn, is approximately 78% owned by The St. Paul Companies, Inc.
("St. Paul"). St. Paul is located in St. Paul, Minnesota, and is principally
engaged in providing property-liability insurance through subsidiaries.
Nuveen Advisory's portfolio managers call upon the resources of Nuveen's Re-
search Department. The Nuveen Research Department reviews more than $100 bil-
lion in municipal bonds every year.
26
<PAGE>
The Fund, the other Nuveen funds, Nuveen Advisory, and other related entities
have adopted a code of ethics which essentially prohibits all Nuveen fund man-
agement personnel, including Nuveen fund portfolio managers, from engaging in
personal investments which compete or interfere with, or attempt to take advan-
tage of, a Fund's anticipated or actual portfolio transactions, and is designed
to assure that the interest of Fund shareholders are placed before the interest
of Nuveen personnel in connection with personal investment transactions.
PORTFOLIO TRANSACTIONS
Nuveen Advisory, in effecting purchases and sales of portfolio securities for
the account of the Fund, will place orders in such manner as, in the opinion of
management, will offer the best price and market for the execution of each
transaction. Portfolio securities will normally be purchased directly from an
underwriter or in the over-the-counter market from the principal dealers in
such securities, unless it appears that a better price or execution may be ob-
tained elsewhere. Portfolio securities will not be purchased from Nuveen or its
affiliates except in compliance with the Investment Company Act of 1940.
The Fund expects that all portfolio transactions will be effected on a princi-
pal (as opposed to an agency) basis and, accordingly, do not expect to pay any
brokerage commissions. Purchases from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include the spread between the bid and asked price. Given the best price
and execution obtainable, it will be the practice of the Fund to select dealers
which, in addition, furnish research information (primarily credit analyses of
issuers and general economic reports) and statistical and other services to
Nuveen Advisory. It is not possible to place a dollar value on information and
statistical and other services received from dealers. Since it is only supple-
mentary to Nuveen Advisory's own research efforts, the receipt of research in-
formation is not expected to reduce significantly Nuveen Advisory's expenses.
While Nuveen Advisory will be primarily responsible for the placement of the
business of the Fund, the policies and practices of Nuveen Advisory in this re-
gard must be consistent with the foregoing and will, at all times, be subject
to review by the Board of Directors.
Nuveen Advisory reserves the right to, and does, manage other investment ac-
counts and investment companies for other clients, which may have investment
objectives similar to the Fund. Subject to applicable laws and regulations,
Nuveen Advisory will attempt to allocate equitably portfolio transactions among
the Fund and the portfolios of its other clients purchasing or selling securi-
ties whenever decisions are made to purchase or sell securities by the Fund and
one or more of such other clients simultaneously. In making such allocations
the main factors to be considered will be the respective investment objectives
of the Fund and such other clients, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment by
the Fund and such other
clients, the size of investment commitments generally held by the Fund and such
other clients and
opinions of the persons responsible for recommending investments to the Fund
and such other clients. While this procedure could have a detrimental effect on
the price or amount of the securities available to the Fund from time to time,
it is the opinion of the Board of Directors that the benefits available from
Nuveen Advisory's organization will outweigh any disadvantage that may arise
from exposure to simultaneous transactions.
27
<PAGE>
Under the Investment Company Act of 1940, the Fund may not purchase portfolio
securities from any underwriting syndicate of which Nuveen is a member except
under certain limited conditions set forth in Rule 10f-3. The Rule sets forth
requirements relating to, among other things, the terms of an issue of Munici-
pal Obligations purchased by the Fund, the amount of Municipal Obligations
which may be purchased in any one issue and the assets of the Fund which may be
invested in a particular issue. In addition, purchases of securities made pur-
suant to the terms of the Rule must be approved at least quarterly by the Board
of Directors, including a majority of the directors who are not interested per-
sons of the Fund.
NET ASSET VALUE
As stated in the Prospectus, the net asset value of the shares of the Fund will
be determined separately for each class of shares by The Chase Manhattan Bank,
the Fund's Custodian. Net asset value will be determined as of 12:00 noon East-
ern Time (9:00 a.m. Pacific time) on each day on which the Federal Reserve Bank
of Boston is normally open for business and on any other day during which there
is a sufficient degree of trading in the portfolio securities held by the Fund
that the current net asset value of the Fund's shares might be materially af-
fected by changes in the value of the securities held by the Fund. The Exchange
is not open for trading on New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Federal Reserve Bank of Boston is also not open for business on these days
(except for Good Friday) as well as Martin Luther King's Birthday, Columbus Day
and Veterans Day. The net asset value per share of a class of shares of the
Fund will be computed by dividing the value of the portfolio securities held by
the Fund plus cash or other assets, less liabilities, by the number of shares
of the class outstanding.
The Fund seeks to maintain a net asset value of $1.00 per share. In this con-
nection, the Fund values its portfolio securities at their amortized cost, as
permitted under the rules and regulations of the Securities and Exchange Com-
mission under the Investment Company Act of 1940. This method does not take
into account unrealized securities gains or losses. It involves valuing an in-
strument at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of any discount or premium. While this method provides
certainty in valuation, it may result in periods during which the value of an
investment, as determined by amortized cost, is higher or lower than the price
the Fund would receive if it sold the instrument. During periods of declining
interest rates, the daily yield on shares held by the Fund may tend to be
higher than a like computation made by a fund with identical investments util-
izing a method of valuation based upon market prices and estimates of market
prices for all of its fund instruments. Thus, if the use of the amortized cost
method by the Fund resulted in a lower aggregate portfolio value on a particu-
lar day, a prospective investor in the Fund would be able to obtain a somewhat
higher yield than would result from an investment in a fund utilizing solely
market values, and existing investors in the Fund would receive less investment
income. The converse would apply in a period of rising interest rates.
The Fund, as a condition to the use of amortized cost and the maintenance of
its per share net asset value of $1.00, must maintain a dollar-weighted average
portfolio maturity of 90 days or less, only purchase instruments having remain-
ing maturities of 397 days or less, and invest only in securities
28
<PAGE>
determined to be of high quality with minimal credit risks. The Money Market
Fund may invest in variable and floating rate instruments even if they carry
stated maturities in excess of 397 days, upon certain conditions contained in
rules and regulations issued by the Securities and Exchange Commission under
the Investment Company Act of 1940, but will do so only if there is a secondary
market for such instruments or if they carry demand features, permissible under
rules of the Securities and Exchange Commission for money market funds, to re-
deem upon specified notice at par, or both.
The Board of Directors, pursuant to the requirements of the rule permitting am-
ortized cost valuation, has established procedures designed to stabilize, to
the extent reasonably possible, the Money Market Fund's price per share as com-
puted for the purpose of sales and redemptions at $1.00. Such procedures will
include review of the holdings of the Money Market Fund by the Board of Direc-
tors, at such intervals as it may deem appropriate, to determine whether the
net asset value calculated by using available market quotations or market
equivalents deviates from $1.00 per share based on amortized cost. Market quo-
tations and market equivalents used in such review may be obtained from a pric-
ing agent approved by the Board of Directors. The Board has selected Nuveen Ad-
visory to act as pricing agent, but in the future may select an independent
pricing service to perform this function. In serving as pricing agent, Nuveen
Advisory will follow guidelines adopted by the Board, and the Board will moni-
tor Nuveen Advisory to see that the guidelines are followed. The pricing agent
will value the investments in the Fund based on methods which include consider-
ation of: yield or prices of municipal obligations of comparable quality, cou-
pon, maturity and type; indications as to value from dealers; and general mar-
ket conditions. The pricing agent may employ electronic data processing tech-
niques and/or a matrix system to determine valuations. The extent of any devia-
tion between the Money Market Fund's net asset value based on the pricing
agent's market valuation and $1.00 per share based on amortized cost will be
examined by the Board of Directors. If such deviation were to exceed 1/2 of 1%,
the Board of Directors would promptly consider what action, if any, would be
initiated. In the event the Board of Directors determines that a deviation ex-
ists which may result in material dilution or other unfair results to investors
or existing shareholders, it has agreed to take such corrective action as it
regards as necessary and appropriate, including the sale of portfolio instru-
ments prior to maturity to realize capital gains or losses or to shorten aver-
age portfolio maturity; withholding dividends or payment of distributions from
capital or capital gains; redemption of shares in kind; or establishing a net
asset value per share by using available market quotations.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon the advice
of Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C., counsel to the
Fund.
As described in the Prospectus, the Fund intends to qualify, as it has in prior
years, under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") for tax treatment as a regulated invest -
29
<PAGE>
ment company. In order to qualify as a regulated investment company, the Fund
must satisfy certain requirements relating to the source of its income, diver-
sification of its assets, and distributions of its income to shareholders.
First, the Fund must derive at least 90% of its annual gross income (including
tax-exempt interest) from dividends, interest, payments with respect to securi-
ties loans, gains from the sale or other disposition of stock or securities,
foreign currencies or other income (including but not limited to gains from op-
tions and futures) derived with respect to its business of investing in such
stock or securities (the "90% gross income test"). Second, the Fund must derive
less than 30% of its annual gross income from the sale or other disposition of
any of the following which was held for less then three months: (i) stock or
securities and (ii) certain options, futures, or forward contracts (the "short-
short test"). Third, the Fund must diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the value of its total
assets is comprised of cash, cash items, United States Government securities,
securities of other regulated investment companies and other securities limited
in respect of any one issuer to an amount not greater in value than 5% of the
value of the Fund's total assets and to not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of
its total assets is invested in the securities of any one issuer (other than
United States Government securities and securities of other regulated invest-
ment companies) or two or more issuers controlled by the Fund and engaged in
the same, similar or related trades or businesses.
As a regulated investment company, the Fund will not be subject to federal in-
come tax in any taxable year for which it distributes at least 90% of the sum
of (i) its "investment company taxable income" (which includes dividends, tax-
able interest, taxable original issue discount and market discount income, in-
come from securities lending, net short-term capital gain in excess of long-
term capital loss, and any other taxable income other than "net capital gain"
(as defined below) and is reduced by deductible expenses) and (ii) its "net
tax-exempt interest" (the excess of its gross tax-exempt interest income over
certain disallowed deductions). The Fund may retain for investment its net cap-
ital gain (which consists of the excess of its net long-term capital gain over
its short-term capital loss). However, if the Fund retains any net capital gain
or any investment company taxable income, it will be subject to tax at regular
corporate rates on the amount retained. If the Fund retains any capital gain,
the Fund may designate the retained amount as undistributed capital gains in a
notice to its shareholders who, if subject to federal income tax on long-term
capital gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund against their federal income tax liabilities, if any, and to claim
refunds to the extent the credit exceeds such liabilities. For federal income
tax purposes, the tax basis of shares owned by a shareholder of the Fund will
be increased by an amount equal under current law to 65% of the amount of un-
distributed capital gains included in the shareholder's gross income. The Fund
intends to distribute at least annually to its shareholders all or substan-
tially all of its net tax-exempt interest and any investment company taxable
income and net capital gain.
The Fund also intends to satisfy conditions (including requirements as to the
proportion of its assets invested in Municipal Obligations) that will enable it
to designate distributions from the interest income generated by investments in
Municipal Obligations, which is exempt from regular federal income tax when re-
ceived by the Fund, as exempt-interest dividends. Shareholders receiving ex-
empt-interest
30
<PAGE>
dividends will not be subject to regular federal income tax on the amount of
such dividends. Insurance proceeds received by the Fund under any insurance
policies in respect of scheduled interest payments on defaulted Municipal Obli-
gations will be excludable from federal gross income under Section 103(a) of
the Code. In the case of non-appropriation by a political subdivision, however,
there can be no assurance that payments made by the insurer representing inter-
est on "non-appropriation" lease obligations will be excludable from gross in-
come for federal income tax purposes. See "Fundamental Policies and Investment
Portfolio--Portfolio Securities."
Distributions by the Fund of net interest received from certain taxable tempo-
rary investments (such as certificates of deposit, commercial paper and obliga-
tions of the United States Government, its agencies and instrumentalities) and
net short-term capital gains realized by the Fund, if any, will be taxable to
shareholders as ordinary income whether received in cash or additional
shares./1/ If the Fund purchases a
Municipal Obligation at a market discount, any gain realized by the Fund upon
sale or redemption of the Municipal Obligation will be treated as a taxable in-
terest income to the extent such gain does not exceed the market discount, and
any gain realized in excess of the market discount will be treated as capital
gains. Any net long-term capital gains realized by the Fund and distributed to
shareholders in cash or in additional shares will be taxable to shareholders as
long-term capital gains regardless of the length of time investors have owned
shares of the Fund. Distributions by the Fund that do not constitute ordinary
income dividends, exempt-interest dividends, or capital gain dividends will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in his or her shares. Any excess will be treated as
gain from the sale of his or her shares, as discussed below.
If the Fund engages in hedging transactions involving financial futures and op-
tions, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to the Fund, defer the Fund's losses, cause
adjustments in the holding periods of the Fund's securities, convert long-term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders.
Because the taxable portion of the Fund's investment income consists primarily
of interest, none of its dividends, whether or not treated as exempt-interest
dividends, is expected to qualify under the Internal Revenue Code for the divi-
dends received deductions for corporations.
Prior to purchasing shares in the Fund, the impact of dividends or distribu-
tions which are expected to be or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase of shares prior to the record date will have the effect of reducing
the per share net asset value by the per share amount of the dividend or dis-
tribution.
- --------
/1/If the Fund has both tax-exempt and taxable income, it will use the "average
annual" method for determining the designated percentage that is taxable in-
come and designate the use of such method within 60 days after the end of
the Fund's taxable year. Under this method, one designated percentage is ap-
plied uniformly to all distributions made during the Fund's taxable year.
The percentage of income designated as tax-exempt for any particular distri-
bution may be substantially different from the percentage of the Fund's in-
come that was tax-exempt during the period covered by the distribution.
31
<PAGE>
Although dividends generally will be treated as distributed when paid, divi-
dends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by the Fund (and received
by the shareholders) on December 31.
The redemption or exchange of the shares of the Fund normally will result in
capital gain or loss to the shareholders. Generally, a shareholder's gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. Present law taxes both long- and short-term capital gains of corpora-
tions at the rates applicable to ordinary income. For non-corporate taxpayers,
however, net capital gains (i.e., the excess of net long-term capital gain over
net short-term capital loss) will be taxed at a maximum marginal rate of 28%,
while short-term capital gains and other ordinary income will be taxed at a
maximum marginal rate of 39.6%. Because of the limitations on itemized deduc-
tions and the deduction for personal exemptions applicable to higher income
taxpayers, the effective rate of tax may be higher in certain circumstances.
All or a portion of a sales load paid in purchasing shares of the Fund cannot
be taken into account for purposes of determining gain or loss on the redemp-
tion or exchange of such shares within 90 days after their purchase to the ex-
tent shares of the Fund or another fund are subsequently acquired without pay-
ment of a sales load pursuant to the reinvestment or exchange privilege. Any
disregarded portion of such load will result in an increase in the sharehold-
er's tax basis in the shares subsequently acquired, moreover, losses recognized
by a shareholder on the redemption or exchange of shares of the Fund held for
six months or less are disallowed to the extent of any distribution of exempt-
interest dividends received with respect to such shares and, if not disallowed,
such losses are treated as long-term capital losses to the extent of any dis-
tributions of long-term capital gain made with respect to such shares. In addi-
tion, no loss will be allowed on the redemption or exchange of shares of the
Fund if the shareholder purchases other shares of the Fund (whether through re-
investment of distributions or otherwise) or the shareholder acquires or enters
into a contract or option to acquire securities that are substantially identi-
cal to shares of the Fund within a period of 61 days beginning 30 days before
and ending 30 days after such redemption or exchange. If disallowed, the loss
will be reflected in an adjustment to the basis of the shares acquired.
It may not be advantageous from a tax perspective for shareholders to redeem or
exchange shares after tax-exempt income has accrued but before the record date
for the exempt-interest dividend representing the distribution of such income.
Because such accrued tax-exempt income is included in the net asset value per
share (which equals the redemption or exchange value), such a redemption could
result in treatment of the portion of the sales or redemption proceeds equal to
the accrued tax-exempt interest as taxable gain (to the extent the redemption
or exchange price exceeds the shareholder's tax basis in the shares disposed
of) rather then tax-exempt interest.
In order to avoid a 4% federal excise tax, the Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any taxable ordinary income and the excess of realized capital gains over real-
ized capital losses for the period year that was
32
<PAGE>
not distributed during such year and on which the Fund paid no federal income
tax. For purposes of the excise tax, a regulated investment company may reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year in determining the amount of or-
dinary taxable income for the current calendar year (and, instead, include such
gains and losses in determining ordinary taxable income for the succeeding cal-
endar year). The Fund intends to make timely distributions in compliance with
these requirements and consequently it is anticipated that it generally will
not be required to pay the excise tax.
If in any year the Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year (other than interest
income from Municipal Obligations) and distributions to its shareholders would
be taxable to shareholders as ordinary dividend income for federal income tax
purposes to the extent of the Fund's available earnings and profits.
Because the Fund may invest in private activity bonds, the interest on which is
not federally tax-exempt to persons who are "substantial users" of the facili-
ties financed by such bonds or "related persons" of such "substantial users,"
the Fund may not be an appropriate investment for shareholders who are consid-
ered either a "substantial user" or a "related person" within the meaning of
the Code. For additional information, investors should consult their tax advis-
ers before investing in the Fund.
Federal tax law imposes an alternative minimum tax with respect to both corpo-
rations and individuals. Interest on certain Municipal Obligations, such as
bonds issued to make loans for housing purposes or to private entities (but not
for certain tax-exempt organizations such as universities and non-profit hospi-
tals), is included as an item of tax preference in determining the amount of a
taxpayer's alternative minimum taxable income. To the extent that the Fund re-
ceives income from Municipal Obligations subject to the alternative minimum
tax, a portion of the dividends paid by it, although otherwise exempt from fed-
eral income tax, will be taxable to shareholders to the extent that their tax
liability is determined under the alternative minimum tax regime. The Fund will
annually supply shareholders with a report indicating the percentage of the
Fund income attributable to Municipal Obligations subject to the federal alter-
native minimum tax.
In addition, the alternative minimum taxable income for corporations is in-
creased by 75% of the difference between an alternative measure of income ("ad-
justed current earnings") and the amount otherwise determined to be the alter-
native minimum taxable income. Interest on all Municipal Obligations, and
therefore all distributions by the Fund that would otherwise be tax exempt, is
included in calculating a corporation's adjusted current earnings.
Tax-exempt income, including exempt-interest dividends paid by the Fund, will
be added to the taxable income of individuals receiving social security or
railroad retirement benefits in determining whether a portion of that benefit
will be subject to federal income tax.
The Code provides that interest on indebtedness incurred or continued to pur-
chase or carry shares of any Fund is not deductible. Under rules used by the
IRS for determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares of the Fund
33
<PAGE>
may be considered to have been made with borrowed funds even though such funds
are not directly traceable to the purchase of shares.
The Fund is required in certain circumstances to withhold 31% of taxable divi-
dends and certain other payments paid to non-corporate holders of shares who
have not furnished to the Fund their correct taxpayer identification number (in
the case of individuals, their social security number) and certain certifica-
tions, or who are otherwise subject to back-up withholding.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Fund and their shareholders. For complete provisions, reference
should be made to the pertinent Code sections and Treasury Regulations. The
Code and Treasury Regulations are subject to change by legislative or adminis-
trative action, and any such change may be retroactive with respect to Fund
transactions. Shareholders are advised to consult their own tax advisers for
more detailed information concerning the federal taxation of the Fund and the
income tax consequences to their shareholders.
CALIFORNIA STATE AND LOCAL TAX MATTERS
The following is based upon the advice of Orrick, Herrington & Sutcliffe, spe-
cial California counsel to the Fund, and assumes that the Fund will be quali-
fied as a regulated investment company under Subchapter M of the Code and will
be qualified thereunder to pay exempt interest dividends.
Individual shareholders of the Fund who are subject to California personal in-
come taxation will not be required to include in their California gross income
that portion of their federally tax-exempt dividends which the Fund clearly and
accurately identifies as directly attributable to interest earned on obliga-
tions, the interest on which is exempt from California personal income tax,
provided that at least 50 percent of the value of the Fund's total assets con-
sists of obligations the interest on which is exempt from California personal
income taxation. Distributions to individual shareholders derived from interest
on Municipal Obligations issued by governmental authorities in states other
than California, short-term capital gains and other taxable income will be
taxed as dividends for purposes of California personal income taxation. The
Fund's long-term capital gains for federal income tax purposes will be taxed as
long-term capital gains to individual shareholders of the Fund for purposes of
California personal income taxation. Gain or loss, if any, resulting from an
exchange or redemption of shares will be recognized in the year of the exchange
or redemption. Present California law taxes both long-term and short-term capi-
tal gains at the rates applicable to ordinary income. Interest on indebtedness
incurred or continued by a shareholder in connection with the purchase of
shares of the Fund will not be deductible for California personal income tax
purposes. California has an alternative minimum tax similar to the federal al-
ternative minimum tax described above. However, the California alternative min-
imum tax does not include interest from private activity bonds as an item of
tax preference.
Generally corporate shareholders of the Fund subject to the California fran-
chise tax will be required to include any gain on an exchange or redemption of
shares and all distributions of exempt-interest, capital gains and other tax-
able income, if any, as income subject to such tax.
34
<PAGE>
The Fund will not be subject to California franchise or corporate income tax on
interest income or net capital gain distributed to the shareholders.
Shares of the Fund will be exempt from local property taxes in California.
The foregoing is a general, abbreviated summary of certain of the provisions of
the California Revenue and Taxation Code presently in effect as it directly
governs the taxation of shareholders of the Fund. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to Fund transactions. Shareholders are advised to con-
sult with their own tax advisers for more detailed information concerning Cali-
fornia tax matters.
YIELD INFORMATION
As explained in the Money Market Fund Prospectus, the historical performance of
a series of the Money Market Fund may be expressed in terms of "yield," "effec-
tive yield" or "taxable equivalent yield." Each series' yield is computed in
accordance with a standard method prescribed by rules of the Securities and Ex-
change Commission. Under that method, current yield is based on a seven-day pe-
riod and is computed as follows: the series' net investment income per share
for the period is divided by the price per share (expected to remain constant
at $1.00) at the beginning of the period, the result (the "base period return")
is divided by seven and multiplied by 365, and the resulting figure is carried
to the nearest hundredth of one percent. For the purpose of this calculation,
the series' net investment income per share includes its accrued interest in-
come plus or minus amortized purchase discount or premium less accrued ex-
penses, but does not include realized capital gains or losses or unrealized ap-
preciation or depreciation of investments.
A series' effective yield is calculated by taking the base period return (com-
puted as described above) and calculating the effect of assumed compounding.
The formula for effective yield is: (base period return +1) 365/7 -1. Based on
the seven-day period ended February 28, 1997, the yield and effective yield for
the Service and Distribution Plan series of the Money Market Fund were 2.85%
and 2.89%, respectively, and for the Institutional series were 2.95% and 2.99%,
respectively.
A series' taxable equivalent yield is computed by dividing that portion of the
series' yield which is tax-exempt by 1 minus the stated combined federal and
state income tax rate and adding the result to that portion, if any, of the
yield of the series that is not tax-exempt. Based upon (1) a combined 1996 fed-
eral and California income tax of 45.0%, and (2) the yield for the Money Market
Fund as described above for the seven-day period ended February 28, 1997, the
taxable equivalent yield for the Service and Distribution Plan series of the
Money Market Fund for that period was 5.18% and for the Institutional series
the taxable equivalent yield was 5.35%.
Each series' yield will fluctuate, and the publication of annualized yield quo-
tations is not a representation of what an investment in the series will actu-
ally yield for any given future period. Actual yields will depend not only on
changes in interest rates on money market instruments during the period in
question, but also on such matters as the expenses attributable to the series.
35
<PAGE>
The following table shows the effects for individuals of federal income taxes
on the amount that those subject to a given tax rate would have to put into a
tax-free investment in order to generate the same after-tax income as a taxable
investment.*
Read down to find the amount of a tax-free investment at the specified rate
that would provide the same after-tax income as a $50,000 taxable invest-
ment at the stated taxable rate.
<TABLE>
<CAPTION>
3.00% 3.50 % 4.00% 4.50% 5.00% 5.50 % 6.00% 6.50%
1.50% 2.00% 2.50% TAX- TAX- TAX- TAX- TAX- TAX- TAX- TAX-
TAXABLE TAX-FREE TAX-FREE TAX-FREE FREE FREE FREE FREE FREE FREE FREE FREE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2.00% $ 46,000 $ 34,500 $ 27,600 $23,000 $19,714 $17,250 $15,333 $13,800 $12,545 $11,500 $10,615
- ------------------------------------------------------------------------------------------------------
2.50% $ 57,500 $ 43,125 $ 34,500 $28,750 $24,643 $21,563 $19,167 $17,250 $15,682 $14,375 $13,269
- ------------------------------------------------------------------------------------------------------
3.00% $ 69,000 $ 51,750 $ 41,400 $34,500 $29,571 $25,875 $23,000 $20,700 $18,818 $17,250 $15,923
- ------------------------------------------------------------------------------------------------------
3.50% $ 80,500 $ 60,375 $ 48,300 $40,250 $34,500 $30,188 $26,833 $24,150 $21,955 $20,125 $18,262
- ------------------------------------------------------------------------------------------------------
4.00% $ 92,000 $ 69,000 $ 55,200 $46,000 $39,429 $34,500 $30,667 $27,600 $25,091 $23,000 $21,231
- ------------------------------------------------------------------------------------------------------
4.50% $103,500 $ 77,625 $ 62,100 $51,750 $44,357 $38,813 $34,500 $31,050 $28,227 $25,875 $23,884
- ------------------------------------------------------------------------------------------------------
5.00% $115,000 $ 86,250 $ 69,000 $57,500 $49,286 $43,125 $38,333 $34,500 $31,364 $28,750 $26,538
- ------------------------------------------------------------------------------------------------------
5.50% $126,500 $ 94,875 $ 75,900 $63,250 $54,214 $47,437 $42,167 $37,950 $34,500 $31,625 $29,192
- ------------------------------------------------------------------------------------------------------
6.00% $138,000 $103,500 $ 82,800 $69,000 $59,143 $51,750 $46,000 $41,400 $37,636 $34,500 $31,846
- ------------------------------------------------------------------------------------------------------
6.50% $149,500 $112,125 $ 89,700 $74,750 $64,071 $56,062 $49,833 $44,850 $40,773 $37,375 $34,500
- ------------------------------------------------------------------------------------------------------
7.00% $161,000 $120,750 $ 96,600 $80,500 $69,000 $60,375 $53,667 $48,300 $43,909 $40,250 $37,154
- ------------------------------------------------------------------------------------------------------
7.50% $172,500 $129,375 $103,500 $86,250 $73,929 $64,688 $57,500 $51,750 $47,045 $43,125 $39,808
- ------------------------------------------------------------------------------------------------------
8.00% $184,000 $138,000 $110,400 $92,000 $78,857 $69,000 $61,333 $55,200 $50,182 $46,000 $42,462
- ------------------------------------------------------------------------------------------------------
</TABLE>
*The dollar amounts in the table reflect a 31% federal income tax rate.
This table is for illustrative purposes only and is not intended to predict the
actual return you might earn on your investment. The Money Market Fund occa-
sionally may advertise its performance in similar tables using a different cur-
rent tax rate than that shown here. The tax rate shown here may be higher or
lower than your actual tax rate; a higher tax rate would tend to make the dol-
lar amounts in the table lower, while a lower tax rate would make the amounts
higher. You should consult your tax adviser to determine your actual tax rate.
36
<PAGE>
ADDITIONAL INFORMATION ON THE PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at the net asset value which is next com-
puted after receipt of an order and receipt of payment in federal funds. Shares
of the Fund are issued in three series: (i) the Service Plan series, (ii) the
Distribution Plan series, and (iii) the Institutional series. There is no sales
charge on purchases of shares of any series of the Fund.
Shares of the Nuveen Money Market Funds may be purchased on days on which the
Federal Reserve Bank of Boston is normally open for business. The Nuveen Money
Market Funds observe and will not make fund shares available for purchase on
the following holidays: New Year's Day, Martin Luther King's Birthday, Washing-
ton's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day.
DISTRIBUTION AND SERVICE PLAN
As discussed in the Prospectus under "How to Purchase Fund Shares--Distribution
and Service Plan," the Fund has adopted Distribution and Service Plans (the
"Plan") with respect to the shares of the Distribution Plan series and the
Service Plan series. The Distribution Plan was adopted pursuant to Rule 12b-1
of the 1940 Act while the Service Plan, although containing comparable terms,
is not a Rule 12b-1 plan. The Plans were adopted by a vote of the Board of Di-
rectors, including a majority of the directors who are not interested persons
and who have no direct or indirect financial interest in the operation of the
Plan. Under the Plan, the Distribution Plan series and the Service Plan series
of the Fund and Nuveen pay fees (i) in the case of the Service Plan series, to
banks and other organizations described in the Prospectus for the servicing of
accounts of shareholders of such series and (ii) in the case of the Distribu-
tion Plan series, to securities dealers for services rendered in the distribu-
tion of the shares of such series. In each case, such services may include,
among other things, establishing and maintaining shareholder accounts, process-
ing purchase and redemption transactions, arranging for bank wires, performing
sub-accounting, answering shareholder inquiries and such other services as
Nuveen may request. Payments to such securities dealers and banks or other or-
ganizations will be at the rate of .25 of 1% per year of the daily average as-
sets of serviced accounts. Such amounts will be paid one-half by the Service
Plan series and the Distribution Plan series of the Fund and one-half by
Nuveen. In addition, Nuveen may, in its discretion and from its own resources,
pay to organizations that satisfy certain criteria an additional amount not to
exceed .05 of 1% per year based on average assets of accounts serviced by such
organizations. For the fiscal year ended February 28, 1997, the Fund paid fees
to banks and other organizations under the Service Plan in the amount of
$86,592 and paid fees to securities dealers under the Distribution Plan in the
amount of $61,766.
Under the Plan, the Controller of Nuveen California Tax-Free Fund, Inc. will
report quarterly to the Board of Directors for its review of amounts expended
for services rendered under the Plan. The Plan may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the directors
who are not "interested persons" and who have no direct or indirect financial
interest in the Plan or by vote of a majority of the outstanding voting securi-
ties of the applicable series of the Fund. The Plan may be renewed from year to
year if approved by a vote of the Board of Directors and a vote of
the non-interested directors who have no direct or indirect financial interest
in the Plan cast in person at
37
<PAGE>
a meeting called for the purpose of voting on the Plan. The Plan may be con-
tinued only if the directors who vote to approve such continuance conclude, in
the exercise of reasonable business judgment and in light of their fiduciary
duties under applicable law, that there is a reasonable likelihood that the
Plan will benefit such series of the Fund and its shareholders. The Plan may
not be amended to increase materially the cost which the Distribution Plan or
the Service Plan series of the Fund may bear without the approval of the
shareholders of the affected series of that Fund. Any other material amend-
ments of the Plans must be approved by the non-interested directors by a vote
cast in person at a meeting called for the purpose of considering such amend-
ments. During the continuance of the Plan, as required by the Rule, the selec-
tion and nomination of the non-interested directors will be committed to the
discretion of the non-interested directors then in office.
Neither any director nor any "interested" person of Nuveen California Tax-Free
Fund, Inc., has any direct or indirect financial interest in the Plan.
Shareholders should note that when a Fund dividend check has been returned to
the sender by the post office after repeated mailings, the shareholder account
will thereafter be registered for automatic reinvestment of dividends and thus
the dividend check and future dividend checks will be reinvested in additional
Fund shares. Shareholders are reminded that they need to advise the Fund
promptly in writing of any change in address.
The Glass-Steagall Act and other applicable laws, among other things, may
limit banks from engaging in the business of underwriting, selling or distrib-
uting securities. Since the only functions of banks who may be engaged as
Service Organizations is to perform administrative shareholder servicing func-
tions, Nuveen California Tax-Free Fund, Inc. believes that such laws should
not preclude a bank from acting as a Service Organization. However, future
changes in either federal or state statutes or regulations relating to the
permissible activities of banks and their subsidiaries or affiliates, as well
as judicial or administrative decisions or interpretations of statutes or reg-
ulations, could prevent a bank from continuing to perform all or a part of its
shareholder servicing activities. If a bank were prohibited from so acting,
its shareholder customers would be permitted to remain shareholders of the
Fund and alternative means for continuing the servicing of such shareholders
would be sought.
Nuveen serves as the principal underwriter of the shares of the Fund pursuant
to a "best efforts" arrangement as provided by a distribution agreement with
the Nuveen California Tax-Free Fund, Inc., dated January 2, 1990 and last re-
newed on July 26, 1996 ("Distribution Agreement"). Pursuant to the Distribu-
tion Agreement, the Nuveen California Tax-Free Fund, Inc. appointed Nuveen to
be its agent for the distribution of the Fund's shares on a continuous offer-
ing basis. Nuveen sells shares to or through brokers, dealers, banks or other
qualified financial intermediaries (collectively referred to as "Dealers"), or
others, in a manner consistent with the then effective registration statement
of the Nuveen California Tax-Free Fund, Inc. Pursuant to the Distribution
Agreement, Nuveen, at its own expense, finances certain activities incident to
the sale and distribution of the Fund's shares, including printing and dis-
tributing of prospectuses and statements of additional information to other
than existing shareholders, the printing and distributing of sales literature,
advertising and payment of compensation and giving of concessions to dealers.
Nuveen receives for its services the excess, if any, of the sales price of the
Fund's shares less the net asset value of those shares, and reallows a major-
ity or all of such amounts to the Dealers who sold the shares; Nuveen may act
as such a Dealer.
38
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS AND CUSTODIAN
Arthur Andersen LLP, independent public accountants, 33 W. Monroe Street, Chi-
cago, Illinois 60603 have been selected as auditors for the Fund. In addition
to audit services, Arthur Andersen LLP will provide consultation and assistance
on accounting, internal control, tax and related matters. The financial state-
ments incorporated by reference elsewhere in this Statement of Additional In-
formation and the information set forth under "Financial Highlights" in the
Prospectus have been audited by Arthur Andersen LLP as indicated in their re-
port with respect thereto, and are included in reliance upon the authority of
said firm as experts in given said report.
The custodian of the assets of the Fund is The Chase Manhattan Bank, 4 New York
Plaza, New York, NY 10004. The Custodian performs custodial, fund accounting
and portfolio accounting services.
39
