IAI Investment Funds, VIII, Inc.
File No. 2-84589
SUPPLEMENT DATED FEBRUARY 2, 1999
TO THE JOINT PROSPECTUS DATED AUGUST 1, 1998
OF
IAI VALUE FUND
CLOSING OF THE FUND
Value Fund (the "Fund") generally closed to new investors on May 12, 1998.
Shareholders of the Fund as of such closing date may continue to add to an
account through the reinvestment of dividends and cash distributions on any Fund
shares owned, through an existing systematic purchase or exchange plan, or
through an existing retirement plan allocation. No changes in these plans or
allocations having the effect of increasing current purchases of Fund shares
will be permitted while the Fund is closed.
FUND INVESTMENT IN PATHNET, INC.
The Fund invests from time to time directly in privately held, early-stage
developing companies. One such company, Pathnet, Inc. ("Pathnet"), filed a
registration statement in May 1998 with the SEC for the purposes of offering its
securities for public sale, also known as an initial public offering or "IPO".
Pathnet indefinitely postponed the IPO on August 14, 1998 and canceled it on
December 30, 1998. The Fund's Board of Directors, working in conjunction with
IAI, the Fund's investment manager, has monitored this investment on a daily
basis and adjusted the investment's price when required using a fair value
methodology consistent with the Fund's pricing procedures. The Fund's investment
in Pathnet continues to present increased risks, as discussed elsewhere. CERTAIN
OF THESE RISKS RESULT FROM THE LARGE PERCENTAGE OF THE VALUE FUND'S NET ASSETS
INVESTED IN PATHNET (APPROXIMATELY 28% AS OF FEBRUARY 2, 1999).
Pathnet intends to become a leading provider of high quality, low cost, long
haul telecommunications capacity to second and third tier markets throughout the
United States primarily by upgrading existing wireless infrastructure to develop
a state-of-the-art, digital SONET network.
The Fund's investment in Pathnet is subject to the significant risks of
investing in small and early-stage developing companies described in the
sections "Venture Capital" and "Special Risk Factors Associated with Investing
in Small Companies". The following additional risk information concerning
Pathnet is based solely on information contained in Pathnet's 1998 Prospectus
for its IPO, and has not been independently verified by the Fund. The investment
in Pathnet is also subject to other significant risk factors including: (1) its
limited history of operations, operating losses and negative cash flow; (2) its
significant capital requirements and uncertainty of obtaining additional
financing; (3) its substantial use of leverage, and its ability to service its
current and substantial additional indebtedness; (4) its ability to timely and
cost-effectively complete its digital network, and sell a substantial amount of
its capacity; (5) its ability to maintain and add additional long-term
contractual relationships with various entities to enable it to deploy its
network; (6) its
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ability to manage its future anticipated growth; (7) its dependence on key
personnel; (8) its ability to successfully compete in the highly competitive
telecommunications industry, where price competition has generally been intense
and is expected to increase; (9) its substantial reliance on a single supplier
of telecommunications equipment; (10) the existence of various technical
limitations on its network; (11) the risk of rapid technological changes in the
telecommunications industry; (12) the existence of substantial regulation by
federal, state and local governmental agencies of its digital network; (13) the
possibility that wireless equipment may pose health risks to humans due to radio
frequency emissions; and (14) the fact that Pathnet does not expect to pay cash
dividends for the foreseeable future.
Further information concerning Pathnet may be found in its various filings with
the Securities and Exchange Commission. To the extent applicable, such filings
may be inspected without charge at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, Room 1034, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and its public reference facilities in New York, New York, and
Chicago, Illinois, at prescribed rates. In addition, the Commission maintains a
World Wide Web site that contains reports, proxy and information statements that
are filed electronically with the Commission. The address of the site is
http://www.sec.gov.
FUND INVESTMENT IN TUT SYSTEMS, INC.
On January 29, 1999, another one of the Fund's privately-held early-stage,
developing companies, Tut Systems, Inc. ("Tut"), offered its securities for
public sale (an "initial public offering" or "IPO"). Following the IPO there was
a substantial increase in the market price of Tut's securities and therefore a
substantial increase in the Fund's net asset value. The IPO also resulted in
increased risks associated with investing in the Fund. CERTAIN OF THESE RISKS
RESULT FROM THE PERCENTAGE OF THE FUND'S NET ASSETS INVESTED IN TUT
(APPROXIMATELY 33% AS OF FEBRUARY 2, 1999). The Fund's ownership of Tut is
subject to substantial restrictions on sale, because the underwriters of the IPO
requested, and the Fund agreed, that the Fund not sell or otherwise transfer
Tut's stock during the 180-day period following the effective date of the IPO
without the underwriters' consent. Because Tut's securities are not readily
marketable at the present time, these securities are valued in good faith using
a fair value methodology. BASED ON THE FUND'S HOLDINGS OF TUT, PATHNET, AND
OTHER PRIVATE EQUITY SECURITIES, AS OF FEBRUARY 2, 1999, APPROXIMATELY 65% OF
THE FUND'S ASSETS WERE ILLIQUID. The Fund and IAI are actively working to reduce
the level of illiquidity consistent with the best interests of Fund
shareholders.
INFORMATION ABOUT TUT SYSTEMS, INC.
SET FORTH IN ITS PROSPECTUS DATED JANUARY 29, 1999
The following information, insofar as it pertains to Tut, is based solely on
information contained in Tut's Prospectus dated January 29, 1999, for its IPO,
and has not been independently verified by the Fund. Tut is required to file
periodic and special reports with the Securities and Exchange Commission which
may contain more current information than that contained in the Prospectus. The
Prospectus, the Registration Statement of which it is a part, and such periodic
and special reports may be obtained as described below under "Additional
Available Information on Tut."
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Tut designs, develops, and markets advanced communications products which enable
high-speed data access over the copper infrastructure of telephone companies, as
well as the copper telephone wires in homes, businesses and other buildings.
Tut's objective is to be the leading provider of advanced communications
products for high-speed data access that exploit the large existing
infrastructure of copper telephone wires which lead into and reside within
homes, businesses and other buildings.
The Fund's investment in Tut is subject to the significant risks of investing in
small and early-stage developing companies described in the "Venture Capital"
and "Special Risk Factors Associated with Investing in Small Companies" sections
at pages 29 and 33 of the Fund's Prospectus dated August 1, 1998.
The investment in Tut is also subject to other significant risk factors
specifically related to Tut, including:
(1) its history of net losses, a substantial accumulated deficit and
uncertainty of its future results;
(2) its past (and possible future) fluctuation of revenues and
operating results as a result of several factors, some of which are
outside Tut's control;
(3) the unproven commercial acceptance of certain of Tut's products;
(4) the existence of competing technologies and Tut's dependence on
its core technology;
(5) the uncertainty of demand for high-speed data access services
using the Internet;
(6) its ability to
(a) develop, introduce and market enhancements to its existing
products,
(b) introduce new products in a timely manner to meet customer
requirements, and
(c) comply with evolving industry standards;
(7) its ability to compete in markets which are intensely
competitive, continually evolving and subject to rapid technological
change. Tut and its products face such competitive factors as price,
product features and enhancements, breadth of product lines, product
ease of development, conformance to industry standards, sales and
distribution capability and technical support and service;
(8) its dependence on strategic relationships;
(9) its dependence on independent distributors, two of which
accounted for approximately 25% of Tut's revenues in 1997 and the
first nine months of 1998;
(10) its dependance on contract manufacturers, as Tut does not
manufacture any of its products;
(11) its dependence on sole source suppliers;
(12) its ability to successfully manage its anticipated growth;
(13) the risks of doing business in international markets;
(14) its dependence on proprietary technology and its ability to
protect its intellectual property rights;
(15) the risk that Tut or its customers will be adversely affected
by regulation of the Federal Communications Commission or other
regulatory bodies;
(16) its ability to provide customer support;
(17) its dependence on key personnel;
(18) the risk that Tut or other enterprises with which it interacts
will be adversely affected by "Year 2000" problems;
(19) the fact that until Tut's IPO, there was no public trading
market for its securities; and
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(20) the fact that equity markets, particularly for high-technology
companies, have experienced significant price and volume
fluctuations that are unrelated to the operating performance of
individual companies.
Following the January 29, 1999 IPO at $18.00 per share, the stock of Tut has
traded as high as $86.25, and its market price at the close of business on
February 2, 1999 was $76.125. The market price of Tut common stock is likely to
continue to be highly volatile. Factors such as fluctuations in Tut's operating
results, announcements of technological innovations, new products or new
services by Tut or by its partners, competitors or customers or its competitors'
developments with respect to patents or proprietary rights, announcement of
litigation by or against Tut, changes in stock market analyst recommendations
regarding Tut or its competitors, and general market conditions may have a
significant effect on the market price of Tut's common stock.
ADDITIONAL AVAILABLE INFORMATION ON TUT
Tut has filed with the Securities and Exchange Commission a Registration
Statement and Prospectus dated January 29, 1999, referred to above. The
Registration Statemen
t, including exhibits filed therewith, and the Prospectus
may be inspected without charge at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, Room 1034, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and its public reference facilities in New York, New York, and
Chicago, Illinois, at prescribed rates. In addition, the Commission maintains a
World Wide Web site that contains reports, proxy and information statements that
are filed electronically with the Commission. The address of the site is
http://www.sec.gov.
Tut's offices are located at 2495 Estand Way, Pleasant Hill, California 94523,
and its telephone number is (925) 682-6510. Tut's Nasdaq National Market Symbol
is TUTS.
RISKS OF THE TECHNOLOGY SECTOR
Approximately 65% of the Fund is invested in the "electric technology" sector.
This includes the equity securities of companies which the Fund's adviser
believes have, or will develop, products, processes or services that will
provide or benefit significantly from technological advances and improvements.
Technology is an extremely competitive industry where rapid new developments
could have dramatic impact on a company's earnings growth potential. In
addition, many technology companies are sensitive to global and domestic
economic conditions and, for some companies, earnings growth may be tied to
product cycles within their specific industries. If technology continues to
advance at an accelerated rate and the number of companies and product offerings
continues to expand, these companies could become increasingly sensitive to
short product cycles and aggressive pricing.
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MANAGEMENT OF FUND INVESTMENTS IN RESTRICTED SECURITIES
The following replaces the disclosure on pages 36 and 37 of the Fund's current
Prospectus, and the Prospectus Supplement dated September 30, 1998, concerning
the management of Fund investments in restricted securities:
Curt McLeod is responsible for Fund investments in restricted securities,
including equity and limited partnership interests in privately-held companies
and investment partnerships. Mr. McLeod is an IAI Vice President and equity
portfolio manager. Prior to joining IAI in 1997, Mr. McLeod had been a portfolio
manager with Piper Jaffray, Inc. since 1986.
