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Filed Pursuant to Rule 424(b)(3)
Registration No. 33-65493
PROSPECTUS SUPPLEMENT
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(TO PROSPECTUS DATED JANUARY 22, 1996)
Tele-Communications, Inc.
Tele-Communications, Inc. Series A TCI Group Common Stock
($1.00 Par Value)
Tele-Communications, Inc. Series A Liberty Media Group Common Stock
($1.00 Par Value)
RECENT LEGISLATIVE DEVELOPMENT
THE TELECOMMUNICATIONS ACT OF 1996
On February 1, 1996 the Congress passed S. 652, "The Telecommunications Act
of 1996" ("Act"). On February 8, 1996, the President signed the Act into law.
This new law will alter federal, state and local laws and regulations regarding
telecommunications providers and services, including the Company and the cable
television and other telecommunications services provided by the Company. The
following is a summary of certain provisions of the Act which could materially
affect the growth and operation of the cable television industry and the cable
and telecommunications services provided by the Company. As noted below, there
are numerous rulemakings to be undertaken by the Federal Communications
Commission ("FCC") which will interpret and implement the provisions discussed
below. It is not possible at this time to predict the outcome of such
rulemakings.
CABLE RATE REGULATION
Rate regulation of the Company's cable television services is divided
between the FCC and local units of government such as states, counties or
municipalities. The FCC's jurisdiction extends to the cable programming service
tier ("CPST"), which consists largely of satellite-delivered programming
(excluding basic tier programming and programming offered on a per channel or
per program basis). Local units of governments (commonly referred to as local
franchising authorities or "LFAs") are primarily responsible for regulating
rates for the basic tier of cable service ("BST"), which will typically contain
at least the local broadcast stations and Public Access, Educational and
Government ("PEG") channels. Equipment rates are also regulated by LFAs. The
FCC retains appeal jurisdiction form LFA decisions. Cable services offered on a
per channel or per program only basis remain unregulated.
The Act eliminates CPST rate regulation for the Company as of March 31,
1999. In the interim, CPST rate regulation can be triggered only by an LFA
complaint to the FCC. An LFA complaint must be based upon more than one
subscriber complaint. Prior to the Act, an FCC review of CPST rates could be
occasioned by a single subscriber
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus Supplement is February 28, 1996.
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complaint to the FCC. The Act does not disturb existing or pending CPST rate
settlements between the Company and the FCC. The Company's BST rates remain
subject to LFA regulation under the Act.
Existing law precludes rate regulation wherever a cable operator faces
"effective competition." The Act expands the definition of effective
competition to include any franchise area where a local exchange carrier (or
affiliate) provides video programming services to subscribers by any means other
than through direct broadcast satellite (DBS). There is no penetration minimum
for the local exchange carrier to qualify as an effective competitor, but it
must provide "comparable" programming services (12 channels including one
broadcast) in the franchise area.
Under the Act, the Company will be allowed to aggregate, on a franchise,
system, regional or company level, its equipment costs into broad categories,
such as converter boxes, regardless of the varying levels of functionality of
the equipment within each such broad category. The Act will allow the Company
to average together costs of different types of converters (including non-
addressable, addressable, and digital). The statutory changes will also
facilitate the rationalizing of equipment rates across jurisdictional
boundaries. These favorable cost-aggregation rules do not apply to the limited
equipment used by "BST-only" subscribers.
Cable Uniform Rate Requirements. The Act immediately relaxes the "uniform
rate" requirements by specifying such requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about "predatory" pricing may be
made to the FCC. Upon a prima facie showing that there are reasonable grounds
to believe that the discounted price is predatory, the cable system operator
will have the burden of proving otherwise.
System Sales. The Act eliminates the existing three-year holding
requirement with respect to the sale of cable television systems.
Cable System Definition. The Act changes the definition of a "cable
system" so that competitive providers of video services will only be regulated
and franchised as a cable system if they use public rights-of-way.
CABLE POLE ATTACHMENTS
Under the Act, investor-owned utilities must make poles and conduits
available to cable systems under delineated terms. Electric utilities are given
the right to deny access to particular poles on a nondiscriminatory basis for
lack of capacity, safety, reliability, and generally accepted engineering
purposes. The current method for determining rates charged by telephone and
utility companies for cable delivery of cable and non-cable services will
continue for five years. However, the FCC will establish a new formula for
poles used by cable operators for telecommunications services which will result
in higher pole rental rates for cable operators. Any increases pursuant to this
formula may not begin for 5 years and will be phased in equal increments over
years 5 through 10. This new FCC formula does not apply in states which certify
they regulate pole rents. Pole owners must impute pole rentals to themselves if
they offer telecommunications or cable services. Cable operators need not pay
future "makeready" on poles currently contacted if the makeready is required to
accommodate the attachments of another user, including the pole owner.
CABLE ENTRY INTO TELECOMMUNICATIONS
The Act declares that no state or local laws or regulations may prohibit or
have the effect of prohibiting the ability of any entity to provide any
interstate or intrastate telecommunications service. States are authorized to
impose "competitively neutral" requirements regarding universal service, public
safety and welfare, service quality, and consumer protection. The Act further
provides that cable operators and affiliates providing telecommunications
services are not required to obtain a separate franchise from LFAs for such
services. The Act prohibits LFAs from requiring cable operators to provide
telecommunications service or facilities as a condition of a grant of a
franchise, franchise renewal, or franchise transfer, except that LFAs can seek
"institutional networks" as part of such franchise negotiations.
The act clarifies that traditional cable franchise fees may only be based
on revenues related to the provision of cable television services. However,
when cable operators provide telecommunications services, LFAs may require
reasonable, competitively neutral compensation for management of the public
rights-of-way.
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Interconnection and Other Telecommunications Carrier Obligations. To
facilitate the entry of new telecommunications providers (including cable
operators), the Act imposes interconnection obligations on all
telecommunications carriers. All carriers must interconnect their networks with
other carriers and may not deploy network features and functions that interfere
with interoperability. Existing local exchange carriers ("LECs") also have the
following obligations: (1) good faith negotiation with those seeking
interconnection; (2) unbundling, equal access and non-discrimination
requirements; (3) resale of services, including "resale at wholesale rates"
(with an exception for certain low-priced residence services to business
customers); (4) notice of changes in the network that would affect
interconnection and interoperability; and (5) physical collocation unless shown
that practical technical reasons, or space limitations, make physical
collocation impractical. The FCC has six months to "complete all actions
necessary to establish regulations" needed to effectuate this section. The Act
also directs the FCC, within one year of enactment, to adopt regulations for
existing LECs to share infrastructure with "qualifying" carriers.
Under the Act, individual interconnection rates must be just and
reasonable, based on cost, and may include a reasonable profit. Cost of
interconnection will not be determined in a rate of return proceeding. Traffic
termination charges shall be "mutual and reciprocal." The Act contemplates that
interconnection agreements will be negotiated by the parties and submitted to a
state public service commission ("PSC") for approval. A PSC may become
involved, at the request of either party, if negotiations fail. If the state
regulator refuses to act, the FCC may determine the matter. If the PSC acts, an
aggrieved party's remedy is to file a case in federal district court.
The Act requires that all telecommunications providers (including cable
operators that provide telecommunications services) must contribute equitably to
a Universal Service Fund ("USF"), although the FCC may exempt an interstate
carrier or class of carriers if their contribution would be minimal under the
USF formula. The Act allows states to determine which intrastate
telecommunications providers contribute to the USF.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The Act allows telephone companies to compete directly with cable operators
by repealing the telephone company-cable cross-ownership ban and the FCC's video
dialtone regulations. This will allow LECs, including the Bell Operating
Companies, to compete with cable both inside and outside their telephone service
areas. If a LEC provides video via radio waves, it is subject to Title III
broadcast jurisdiction. If a LEC provides common carrier channel service it is
subject to Title II common carrier jurisdiction. A LEC providing video
programming to subscribers is otherwise regulated as a cable operator (including
franchising, leased access, and customer service requirements), unless the LEC
elects to provide its programming via an "open video system." LEC owned
programming services will also be fully subject to program access requirements.
The Act replaces the FCC's video dialtone rules with an "open video system"
("OVS") plan by which LECs can provide cable service in their telephone service
area. LECs complying FCC OVS regulations will receive relaxed oversight. The
Act requires the FCC to act on any such OVS certification within ten days of its
filing. Only the program access, negative option billing prohibition,
subscriber privacy, EEO, PEG, must-carry and retransmission consent provisions
of the Communications Act of 1934 will apply to LEC provided OVS. Franchising,
rate regulation, consumer service provisions, leased access and equipment
compatibility will not apply. Cable copyright provisions will apply to
programmers using OVS. LFAs may require OVS operators to pay "franchise fees"
only to the extent that the OVS provider or its affiliates provide cable
services over the OVS. OVS operators will be subject to LFA general right-of-way
management regulations. Such fees may not exceed the franchise fees charged to
cable operators in the area, and the OVS provider may pass through the fees as a
separate subscriber bill item.
The Act requires the FCC to adopt, within six months, regulations
prohibiting an OVS operator from discriminating among programmers, and ensuring
that OVS rates, terms, and conditions for service are reasonable and
nondiscriminatory. Further, the FCC is to adopt regulations prohibiting a LEC-
OVS operator, or its affiliates, from occupying more than one-third of the
system's activated channels when demand for channels exceeds supply, although
there are no numeric limits. The Act also mandates OVS regulations governing
channel sharing; extending the FCC's sports exclusivity, network nonduplication,
and syndex regulations; and controlling the positioning of programmers on menus
and program guides. The Act does not require LECs to use separate subsidiaries
to provide incidental interLATA video or audio programming services to
subscribers or for their own programming ventures.
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Buyouts. While there remains a general prohibition on LEC buyouts of cable
systems (any ownership interest exceeding 10 percent), cable operator buyouts of
LEC systems, and joint ventures between cable operators and LECs in the same
market, the Act provides exceptions. A rural exemption permits buyouts where
the purchased system serves an area with fewer than 35,000 inhabitants outside
an urban area. Where a LEC purchases a cable system, that system plus any other
system in which the LEC has an interest may not serve 10% or more of the LEC's
telephone service area. Additional exceptions are also provided for such
buyouts. The Act also provides the FCC with the power to grant waivers of the
buyout provisions in cases where (1) the cable operator or LEC would be subject
to undue economic distress; (2) the system or facilities would not be
economically viable; or (3) the anticompetitive effects of the proposed
transaction are clearly outweighed by the effect of the transaction in meeting
community needs. The LFA must approve any such waiver.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS
The Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services (including cable) notwithstanding the
Public Utilities Holding Company Act. Electric utilities must establish
separate subsidiaries, known as "exempt telecommunications companies" and must
apply to the FCC for operating authority. It is anticipated that large utility
holding companies will become significant competitors to both cable television
and other telecommunications providers.
MISCELLANEOUS REFORMS
Cross-Ownership; Must Carry. The Act eliminates broadcast/cable cross-
ownership restrictions, but leaves in place FCC regulations prohibiting local
cross-ownership between television stations and cable systems. The FCC is
empowered by the Act to adopt rules to ensure carriage, channel positioning and
non-discriminatory treatment of non-affiliated broadcast stations by cable
systems affiliated with a broadcast network. The satellite master antenna
television and multichannel multipoint distribution system cable cross-ownership
restrictions have been eliminated for cable operators subject to effective
competition.
The Act preserves must carry rights for local television broadcasters, and
establishes new audience standards based on commercial publications which
delineate television markets based on viewing patterns. The FCC is directed to
grant or deny must carry requests within 120 days of a complaint being filed
with the FCC.
Cable Equipment Compatibility; Scrambling Requirements. The Act directs an
FCC equipment compatibility rulemaking emphasing that (1) narrow technical
standards, mandating a minimum degree of common design among televisions, VCRs,
and cable systems, and relying heavily on the open marketplace, should be
pursued; (2) competition for all converter features unrelated to security
descrambling should be maximized; and (3) adopted standards should not affect
unrelated telephone and computer features. The Act directs the FCC to adopt
regulations which assure the competitive availability of converters ("navigation
devices") from vendors other than cable operators. The Act provides that the
FCC's rules may not impinge upon signal security concerns or theft of service
protections. Waivers will be possible where the cable operator shows the waiver
is necessary for the introduction of new services. Once the equipment market
becomes competitive, FCC regulations in this areas will be terminated.
The Act requires cable operators, upon subscriber request, to fully
scramble or block at no charge the audio and video portion of any channel not
specifically subscribed to by a household. Further, the Act provides that
sexually explicit programming must be fully scrambled or blocked. If the cable
operator cannot fully scramble or block its signal, it must restrict
transmission to those hours of the day when children are unlikely to view the
programming.
Cable Provision of Internet Services. Transmitting indecent material via
the Internet is made criminal by the Act. However, on-line access providers are
exempted from criminal liability for simply providing interconnection service;
they are also granted an affirmative defense from criminal or other action where
in good "good faith" they restrict access to indecent materials. The Act
further exempts on-line access providers from civil liability for actions taken
in good faith to restrict access to obscene, excessively violent or otherwise
objectionable material.
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The following Selling Stockholders sold shares of the Company's Tele-
Communications, Inc. Series A TCI Group Common Stock ("TCOMA") and Tele-
Communications, Inc. Series A Liberty Media Group Common Stock ("LBTYA") on the
dates, in the amounts and at the prices set forth in the table below. The
discussion following the table provides the number and the percentage (if one
percent or more) of the outstanding shares of each of TCOMA and LBTYA owned
beneficially by such Selling Stockholders immediately following the sales
described in the table.
<TABLE>
<CAPTION>
Shares Price Per Shares Price Per
Selling Sold Share Sold Share
Stockholder Date of Sale (TCOMA) (TCOMA) (LBTYA) (LBTYA)
----------- ------------ ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Michael S. Naify 2/23/96 5,000 $22 1,250 $28.25
Marshall Naify 2/23/96 20,000 $22 5,000 $28.25
Christina C. Dierker 2/23/96 1,600 $22 400 $28.25
as Trustee of the
Christina C. Dierker
Trust
</TABLE>
All 26,660 shares of TCOMA and 6,650 shares of LBTYA were sold by the
Selling Stockholders named above to Montgomery Securities, as principal. No
commission or other compensation was paid to Montgomery Securities in connection
with such sales.
Following the sales described in the table above, (i) Michael S. Naify
beneficially owns 158,585 shares of TCOMA and 39,646 shares of LBTYA which are
issuable upon the conversion of certain Notes, (ii) Marshall Naify beneficially
owns 12,412,214 shares of TCOMA and 3,101,781 shares of LBTYA which are issuable
upon the conversion of certain Notes (and which number of shares does not
include (a) 229,996 shares of TCOMA and 57,499 shares of LBTYA issuable upon
conversion of Notes owned of record by Marshall Naify as sole trustee under the
Michael S. Naify 1963 Trust, which Marshall Naify may be deemed to beneficially
own and (b) 103,587 shares of TCOMA and 27,169 shares of LBTYA held in the
United Artists, Inc. Employee Stock Ownership Plan for the benefit of Marshall
Naify as of December 31, 1995), and (iii) Christina C. Dierker as Trustee of the
Christina C. Dierker Trust beneficially owns 21,884 shares of TCOMA and 5,471
shares of LBTYA which are issuable upon the conversion of certain Notes. The
Selling Stockholders in the table above beneficially own less than one percent
of the outstanding shares of each of TCOMA and LBTYA, except for Marshall Naify
who, as of the date hereof, beneficially owns approximately 2.17% of the
outstanding shares of TCOMA and 2.17% of the outstanding shares of LBTYA.
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