Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________.

COMMISSION FILE NUMBER 000-29667

VOICESTREAM WIRELESS CORPORATION

(425) 378-4000

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title		Shares Outstanding as of August 1, 2002
Common Stock, par value $.000001 per share			269,738,185

     This registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

Table of Contents

VOICESTREAM WIRELESS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002

TABLE OF CONTENTS

				Page
PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001			3
		Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2002, for the period from April 1, 2001 through May 31, 2001 and the one month ended June 30, 2001, and for the five months ended May 31, 2001 and the one month ended June 30, 2001			4
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and for the five months ended May 31, 2001 and the one month ended June 30, 2001			5
		Notes to Condensed Consolidated Financial Statements			6
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Abbreviated pursuant to General Instruction H(2).)				12
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS				20
	ITEM 2. CHANGES IN SECURITIES				20
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES				20
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS				20
	ITEM 5. OTHER INFORMATION				20
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K				20
SIGNATURES					21

2

Table of Contents

VOICESTREAM WIRELESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)

				June 30,				December 31,
				2002				2001
				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	21,811			$	—
	Accounts receivable, net of allowance for doubtful accounts of $128,775 and $119,794, respectively				613,381				602,767
	Inventory				154,481				153,432
	Other current assets including FCC license deposits				204,965				308,528
		Total current assets			994,638				1,064,727
Property and equipment, net of accumulated depreciation of $770,171 and $384,372, respectively					3,753,196				3,390,103
Goodwill					16,286,755				16,265,790
Licensing costs					19,148,423				18,791,696
Other intangible assets, net of accumulated amortization of $341,819 and $184,057, respectively					537,811				695,573
Investments in and advances to unconsolidated affiliates					1,196,542				994,976
Other assets and investments					73,966				37,055
				$	41,991,331			$	41,239,920
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
	Accounts payable			$	181,505			$	198,530
	Accrued liabilities				662,255				647,590
	Deferred revenue				93,070				75,996
	Construction accounts payable				191,865				348,600
		Total current liabilities			1,128,695				1,270,716
Long-term debt					1,636,313				1,861,518
Long-term notes payable to affiliates					5,900,777				4,110,393
Deferred tax liabilities					6,852,959				3,565,286
Other long-term liabilities					2,632				24,336
		Total long-term liabilities			14,392,681				9,561,533
Minority interest in equity of consolidated subsidiaries					8,725				51,287
Voting preferred stock; $0.001 par value; 100,000,000 shares authorized; 3,906,250 shares issued and outstanding					5,000,000				5,000,000
Commitments and contingencies (see Note 6)
Shareholder’s equity:
	Common stock, $0.000001 par value, and paid-in capital; 1.0 billion shares authorized, 269,738,185 shares issued and outstanding				26,851,821				26,851,821
	Deferred stock compensation				(28,465	)			(35,891	)
	Accumulated other comprehensive income (loss)				(142	)			655
	Accumulated deficit				(5,361,984	)			(1,460,201	)
		Total shareholder’s equity			21,461,230				25,356,384
				$	41,991,331			$	41,239,920

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

VOICESTREAM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(dollars in thousands)
(unaudited)

				Three month periods														Six month periods
								June 1, 2001						April 1, 2001								June 1, 2001						January 1,
				Three months				through						through				Six months				through						2001 through
				ended June 30,				June 30,						May 31,				ended June 30,				June 30,						May 31,
				2002				2001						2001				2002				2001						2001
Revenues:
	Post pay revenues			$	849,247			$	183,224					$	368,464			$	1,578,435			$	183,224					$	868,667
	Prepaid revenues				91,991				34,763						64,984				204,208				34,763						158,893
	Roaming revenues				56,321				16,850						29,113				106,639				16,850						73,128
	Equipment sales				126,147				33,642						68,525				226,149				33,642						150,958
	Affiliate and other revenues				18,991				10,245						7,428				42,833				10,245						18,922
		Total revenues			1,142,697				278,724						538,514				2,158,264				278,724						1,270,568
Operating expenses:
	Cost of service (excludes stock-based compensation of $891, $297, $244, $1,782, $297 and $610, respectively)				215,308				70,550						122,410				431,511				70,550						286,897
	Cost of equipment sales				200,493				62,161						107,135				384,864				62,161						265,629
	General and administrative (excludes stock-based compensation of $2,079, $449, $813, $4,159, $449 and $2,298, respectively)				278,000				94,675						191,368				553,278				94,675						466,641
	Sales and marketing (excludes stock-based compensation of $743, $248, $203, $1,485, $248 and $508, respectively)				322,359				102,171						185,547				618,818				102,171						466,513
	Depreciation and amortization				263,852				225,804						228,238				528,775				225,804						559,409
	Stock-based compensation				3,713				994						1,260				7,426				994						3,416
		Total operating expenses			1,283,725				556,355						835,958				2,524,672				556,355						2,048,505
Operating loss					(141,028	)			(277,631	)					(297,444	)			(366,408	)			(277,631	)					(777,937	)
Other income (expense):
	Interest and financing expense				(60,487	)			(39,433	)					(88,826	)			(109,268	)			(39,433	)					(224,471	)
	Equity in net losses of unconsolidated affiliates				(95,209	)			(4,789	)					(20,561	)			(122,767	)			(4,789	)					(63,477	)
	Interest income and other, net				17,367				1,791						6,813				17,678				1,791						35,968
	T-Mobile merger related costs				—				(477	)					(102,271	)			—				(477	)					(118,885	)
	Accretion of preferred stock of consolidated subsidiary				—				—						—				—				—						(4,699	)
		Total other income (expense)			(138,329	)			(42,908	)					(204,845	)			(214,357	)			(42,908	)					(375,564	)
Net loss before income taxes					(279,357	)			(320,539	)					(502,289	)			(580,765	)			(320,539	)					(1,153,501	)
Income tax benefit (expense)					(16,889	)			101,256						—				(3,321,018	)			101,256						—
Net loss					(296,246	)			(219,283	)					(502,289	)			(3,901,783	)			(219,283	)					(1,153,501	)
Other comprehensive income (loss):
	Foreign currency translation adjustment				1,977				—						(4,308	)			(533	)			—						(8,013	)
	Equity in unrealized income on investment in securities held by unconsolidated affiliate				744				—						791				17				—						21,727
	Net unrealized income (loss) on available-for- sale securities				(179	)			—						(139	)			(281	)			—						15,333
		Total other comprehensive income (loss)			2,542				—						(3,656	)			(797	)			—						29,047
Comprehensive loss				$	(293,704	)		$	(219,283	)				$	(505,945	)		$	(3,902,580	)		$	(219,283	)				$	(1,124,454	)

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

VOICESTREAM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

						Six months				June 1, 2001						January 1, 2001
						ended June 30,				through June 30,						through May 31,
						2002				2001						2001
Operating activities:
	Net loss					$	(3,901,783	)		$	(219,283	)				$	(1,153,501	)
	Adjustments to reconcile net loss to net cash used in operating activities:
			Depreciation and amortization				528,775				225,804						559,409
			Income tax expense (benefit)				3,321,018				(101,256	)					—
			Amortization of debt discount and premium, net				10,045				610						22,783
			Equity in net losses of unconsolidated affiliates				122,767				4,789						63,477
			Stock-based compensation				7,426				994						3,416
			Allowance for bad debts				8,981				(2,053	)					1,776
			Other, net				(8,973	)			(1,712	)					(25,119	)
			Changes in operating assets and liabilities, net of effects of purchase accounting:
				Accounts receivable			(15,359	)			(13,869	)					(6,264	)
				Inventory			(89	)			33,659						107,957
				Other current assets			(75,791	)			(1,920	)					1,766
				Accounts payable			(31,449	)			(21,683	)					(52,429	)
				Accrued liabilities			30,804				(383	)					56,797
		Net cash used in operating activities					(3,628	)			(96,303	)					(419,932	)
Investing activities:
	Purchases of property and equipment						(839,611	)			(123,347	)					(809,983	)
	Acquisitions of wireless properties, net of cash acquired						(77,819	)			(205,079	)					(299,292	)
	Sales of short-term investments, net						—				—						1,175,636
	Investments in and advances to unconsolidated affiliates, net						(635,494	)			8,919						(37,193	)
	Refund of deposits held by FCC						166,563				—						49,589
	Other, net						(595	)			47						26,863
		Net cash provided by (used in) investing activities					(1,386,956	)			(319,460	)					105,620
Financing activities:
	Net proceeds from issuance of common and preferred stock						—				—						43,468
	Long-term debt repayments						(312,146	)			(325,000	)					(32,113	)
	Long-term debt borrowings from affiliates						1,766,840				—						—
	Other						(42,299	)			—						27,470
	Cash entitlements on conversion of preferred stock of consolidated subsidiary						—				—						(81,711	)
		Net cash provided by (used in) financing activities					1,412,395				(325,000	)					(42,886	)
Change in cash and cash equivalents							21,811				(740,763	)					(357,198	)
Cash and cash equivalents, beginning of period							—				797,698						1,154,896
Cash and cash equivalents, end of period						$	21,811			$	56,935					$	797,698

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

VOICESTREAM WIRELESS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION

     VoiceStream Wireless Corporation (“VoiceStream,” “we” or “us,” as described in Note 2 below) provides personal communications services (“PCS”) primarily in urban markets in the United States using the Global System for Mobile Communications, or GSM, technology.

     On May 31, 2001, Deutsche Telekom AG (“Deutsche Telekom”) acquired 100% of the common shares of VoiceStream. The merger qualified as a tax-free reorganization. VoiceStream shareholders received for each VoiceStream common share either 3.6693 shares of Deutsche Telekom stock and $15.7262 in cash, 3.6683 shares of Deutsche Telekom stock and $15.9062 in cash or 3.7647 shares of Deutsche Telekom stock. Deutsche Telekom transferred all of its VoiceStream common shares to T-Mobile International AG (“T-Mobile”). T-Mobile is a wholly-owned subsidiary of Deutsche Telekom and is the holding company for Deutsche Telekom’s principal GSM wireless operations in Europe and the United States.

     Upon consummation of the VoiceStream merger and the transfer by Deutsche Telekom of all of its VoiceStream common shares to T-Mobile (hereafter referred to as “the T-Mobile merger”), VoiceStream common shares were deregistered and delisted from NASDAQ and are no longer publicly traded. VoiceStream is now relying on funding from Deutsche Telekom and/or T-Mobile to meet its working capital, capital expenditure, debt service and other obligations.

     Simultaneous with the VoiceStream merger, Deutsche Telekom also acquired 100% of the common shares of Powertel, Inc. (“Powertel”), a GSM provider in the southeastern United States. Powertel provides and bills for its services under the VoiceStream brand. Powertel’s wireless network is fully integrated with ours such that, from a customer’s perspective, their services are indistinguishable from ours (see Note 7 for a description of certain cost sharing agreements).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Consolidation and basis of presentation

     The condensed consolidated financial statements of VoiceStream include the accounts of all majority and minority-owned subsidiaries controlled by VoiceStream. Affiliates that are 20 percent to 50 percent owned are generally accounted for using the equity method. Intercompany accounts and transactions have been eliminated in consolidation.

     We have prepared the condensed consolidated financial statements pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations for interim reporting. These rules and regulations allow certain information required under accounting principles generally accepted in the United States to be condensed or omitted, provided that the condensed financial statements, when read in conjunction with our annual audited financial statements included in our most recent Form 10-K, provide a fair presentation of our financial position, results of operations and cash flows. The interim financial statements presented herein are unaudited; however, we believe that the interim financial statements reflect all adjustments necessary for a fair presentation of our financial position, results of operations and cash flows. Such adjustments include those of a normal, recurring nature and those related to the T-Mobile merger as described below. The results for interim periods are not necessarily indicative of expected operating results for the full fiscal year or any future periods.

     The T-Mobile merger was accounted for as a purchase business combination and resulted in adjustment of the basis of our assets, liabilities and shareholder’s equity to reflect fair value on the closing date of the merger. As a result of this new basis, our condensed consolidated financial position, results of operations and cash flows for periods subsequent to May 31, 2001, the closing date of the merger, are not comparable to periods prior to the merger.

6

Table of Contents

     Long-lived assets

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we periodically evaluate whether there has been any indication of impairment of our long-lived assets. As of June 30, 2002 there has been no such indication of impairment.

     On January 1, 2002, we changed the useful lives of our towers and related assets from 10 years to 20 years, which we believe more accurately represents the economic lives of these assets. This change in estimate resulted in a decrease in depreciation and amortization expense of $44.1 million and $86.4 million for the three and six month periods ended June 30, 2002, respectively.

     Intangible assets

     On January 1, 2002, we adopted SFAS No. 142 “Goodwill and Other Intangible Assets”. Upon adoption, we ceased amortizing goodwill. Additionally, we ceased amortizing our spectrum licenses as we determined that these assets meet the definition of indefinite life intangible assets under SFAS No. 142. Upon adoption, that standard required that we determine the fair value of our goodwill and spectrum licenses in order to assess our carrying value of these assets for potential impairment. As of March 31, 2002, we had completed this assessment and determined that these assets were not impaired.

     We are required to assess these assets for impairment annually, or when indications of impairment exist. In assessing the existence of impairment, our considerations include the impacts of significant adverse changes in legal factors, market and economic conditions, the results of our operational performance and strategic plans; adverse actions by regulators; unanticipated competition and changes in market share; the potential for the sale or disposal of all or a significant portion of our business; and the cost and continued availability of funding from our parent company for expansion and enhancement of our wireless network and to conduct our operations. While VoiceStream’s equity securities are not publicly traded such that VoiceStream does not have a market capitalization, we consider, among other things, the market capitalization of other wireless carriers to the extent that stock market price trends are reflective of current industry conditions and expected long-term industry performance.

     The estimated fair value of our business, as determined on a discounted cash flow basis at January 1, 2002, exceeded the carrying value; however, it appears that a value based solely on the current general share price level of other publicly traded US wireless carriers would be substantially lower. Other wireless carriers’ lower market capitalizations may be indicative of impairment of our goodwill, licenses, or both, to the extent their share prices reflect lower long-term prospects for the industry rather than short-term market forces and the specific competitive and financial prospects of those companies. Our assessment is that the lower market capitalizations of US wireless carriers does not currently constitute sufficient evidence of changes in general industry circumstances that would more likely than not reduce the fair value of our business below its carrying value, thus triggering the need for an impairment test. Over time, we expect that the underlying assumptions used and the fair values determined using discounted cash flow and market price valuation methods will tend to converge as more information becomes available. It is possible that future assessments of impairment could lead us to the conclusion that an impairment charge is required.

     In connection with our adoption of SFAS No. 142, our spectrum licenses are no longer being amortized on a scheduled basis and the reversal of the deferred tax liabilities related to spectrum licenses is no longer assured within the carryforward periods of our existing net operating losses (“NOL’s”). As a result of this change, under SFAS No. 109 “Accounting for Income Taxes”, the deferred tax liabilities related to the spectrum licenses cannot be treated as a realization of income and applied against the deferred tax assets arising from our NOL’s. Accordingly, we recorded a non-cash charge to income tax expense of $3.3 billion in the first quarter of 2002 to establish a valuation allowance against our deferred tax assets. The valuation allowance does not affect our NOL’s for tax purposes and does not reflect a change in the expectations regarding the company’s ability to utilize them in the future.

     Recently issued accounting standards

     On April 30, 2002, we adopted SFAS No. 145, “Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13 and Technical Corrections.” SFAS No. 145 eliminates the requirement in SFAS No. 4 that gains and losses from the extinguishments of debt be aggregated and classified as extraordinary items, net of the related income tax. Adoption of SFAS No. 145 did not have a material impact on our financial position, results of operations or cash flows.

     Reclassifications

     Certain of the comparative figures in the prior period financial statements have been reclassified to conform to the current period presentation.

7

Table of Contents

3. GOODWILL, LICENSING COSTS AND OTHER INTANGIBLE ASSETS

     Adjusted net loss

     The following table reconciles our reported net loss to adjusted net loss, which excludes depreciation and amortization expense related to goodwill and licensing costs, assuming the adoption of SFAS No. 142 had occurred on January 1, 2001 (dollars in thousands):

     Other intangible assets

     Amortization expense

     The following table presents current and expected amortization expense for the current year and the subsequent five years (dollars in thousands):

8

Table of Contents

4. BUSINESS COMBINATIONS AND OTHER TRANSACTIONS

     During April 2002, we acquired the remaining outstanding 16.35% interest in Cook Inlet/VS GSM IV PCS Holdings, LLC (“CIVS IV”) and the remaining outstanding 50% interest in PCS One Corporation (“PCS One”). The primary assets of these entities are licensing costs. We have accounted for the acquisitions in accordance with SFAS No. 141, “Business Combinations.” The aggregate purchase price of the remaining interests in these entities consisted of $85.3 million in cash and 1,277,048 Deutsche Telekom shares with a fair market value of $18.5 million. The Deutsche Telekom shares were issued on our behalf in return for a note payable of $18.5 million to Deutsche Telekom. Additionally, we assumed $78.5 million in long-term debt in connection with the purchase of PCS One, which we repaid immediately following the acquisition. These acquisitions resulted in our recording $20.6 million in goodwill. The results of CIVS IV and PCS One are included in our results on a consolidated basis since the dates of acquisition.

     Prior to acquiring these entities, we accounted for our ownership interests in CIVS IV and PCS One using the equity method. At the time of the acquisitions, our investment balance was $306.1 million. This investment balance was principally allocated to licensing costs.

     Auction 35

     Certain licenses included in the Federal Communications Commission’s (“FCC”) Auction 35 were originally held by NextWave Communications Inc. and NextWave Power Partners Inc. (collectively “NextWave”), and Urban Comm-North Carolina, Inc. (“Urban”), all of which had previously declared bankruptcy. The FCC has not granted these licenses to the high bidders in the auction due to pending administrative and judicial challenges related to the auction process, including a decision issued by the United States Court of Appeals for the District of Columbia Circuit on June 22, 2001. That court held that the FCC had erroneously cancelled the licenses previously acquired by NextWave and Urban in earlier auctions when NextWave and Urban, upon declaring bankruptcy, failed to make installment payments for those licenses. The FCC, as well as VoiceStream, Cook Inlet/VS GSM V PCS Holdings, LLC (“CIVS V”), a consolidated affiliate in which we hold a non-controlling interest, and other Auction 35 winning bidders, filed petitions with the United States Supreme Court seeking review of the Court of Appeals’ decision. On March 4, 2002, the Supreme Court granted the petitions. Pending the outcome of the Supreme Court case, 85% of the original deposits were refunded to the winning bidders, and the FCC continues to hold the remaining 15% of the original deposits, which equals three percent of the total winning bids. On March 27, 2002, the FCC also declared that the auction winners would be required to pay the full amount of their winning bids if the FCC prevailed in the pending litigation. Separately, Verizon Wireless (“Verizon”) has filed lawsuits in the federal court of appeals and in the federal court of claims seeking to force the FCC to return 100% of the deposits that Verizon paid in connection with the re-auction of the NextWave licenses and to declare the re-auction void. VoiceStream has preserved the right to assert in the court of appeals lawsuit that their deposits should be returned and the re-auction should be voided. VoiceStream and CIVS V’s total winning bids for licenses which have not been granted as discussed above totaled $989.0 million.

     On April 29, 2002, we and CIVS V, a consolidated affiliate in which we hold a non-controlling interest, received refunds of 85% of the FCC deposits discussed above for a combined total of $166.6 million. Subsequent to receipt of the FCC deposits, we distributed $42.3 million of the refund to Cook Inlet Region Inc. (“CIRI”), a member of CIVS V, which has been included in other financing activities in our condensed consolidated statement of cash flows for the six months ended June 30, 2002. This refund caused a decrease in CIRI’s percentage ownership in CIVS V.

     Microcell

     In June 2002, we recorded a write-down of $65.1 million in our investment in Microcell Telecommunications Inc., a publicly traded Canadian GSM provider. We wrote the investment down to its current market value of $3.5 million based on our assessment that the decline in value of the investment is other than temporary. The non-cash charge is included in equity in net losses of unconsolidated affiliates.

5. LONG-TERM DEBT AND NOTES PAYABLE TO AFFILIATES

     During the six months ended June 30, 2002, we purchased on the open market and retired outstanding debt as follows: $134.5 million of our 10 3/8% Senior Notes due in 2009, together with premiums of $21.7 million; $70.0 million of our 11 7/8% Senior Notes due in 2009, together with discounts of $10.1 million; and $15.0 million of our 11 1/2% Senior Notes due in 2009, together with premiums of $2.7 million. These repayments were funded by borrowings from Deutsche Telekom, which are due in 2005, and bear interest at a fixed rate of 5.9%.

     The weighted average effective interest rate for all outstanding long-term debt and long-term notes payable to affiliates was 7.0% and 6.5% for the three and six months ended June 30, 2002, respectively, as compared with 9.2% and 9.8% for the same periods in 2001, respectively.

9

Table of Contents

6. COMMITMENTS AND CONTINGENCIES

     On May 3, 1999, Western Wireless Corporation (“Western Wireless”) distributed its entire 80.1% interest in VoiceStream’s common shares to its stockholders. Prior to this “spin-off,” Western Wireless obtained a favorable ruling from the IRS indicating that the spin-off would not result in the recognition of a gain or taxable income to Western Wireless or its stockholders. However, Western Wireless could still recognize a gain upon the spin-off, notwithstanding the favorable IRS ruling, if it is determined that the spin-off was part of a “prohibited plan,” that is, a plan or series of related transactions in which one or more persons acquire, directly or indirectly, 50% or more of VoiceStream’s stock. Acquisitions of 50% or more of VoiceStream’s stock occurring during the four-year period beginning two years before the spin-off could give rise to a rebuttable presumption that the spin-off was part of a prohibited plan. Although it is not assured, VoiceStream believes that the spin-off, subsequent mergers, including the T-Mobile merger in 2001, and certain investments by Hutchison Telecommunications PCS (USA) Limited and Sonera Corporation in 2000 were not pursuant to a “prohibited plan.”

     VoiceStream has agreed to indemnify Western Wireless on an after-tax basis for any taxes, penalties, interest and various other expenses incurred by Western Wireless if it is required to recognize such a gain. The amount of such gain that Western Wireless would recognize would be equal to the difference between the fair market value of VoiceStream common shares at the time of the spin-off and Western Wireless’ adjusted tax basis in such shares at the time. The estimated range of possible liability of VoiceStream, not including interest and penalties, if any, is from zero to $400 million.

     Should the FCC prevail in litigation related to Auction 35 (see Note 4), we could be required to purchase licenses totaling $989.0 million of which $29.7 million has been paid as a deposit to the FCC.

7. RELATED PARTY TRANSACTIONS

     VoiceStream is party to technical service, system access and reciprocal wholesale agreements with certain affiliates, controlled by CIRI through its subsidiaries. The agreements entitle each party to utilize airtime on the other’s spectrum, and/or utilize wireless system infrastructure in certain agreed upon markets. The agreements are structured such that each party re-sells airtime purchased from the other, and related fees are charged and paid between the parties. We earned revenues and incurred expenses relative to these agreements as follows (dollars in thousands):

     Following the T-Mobile merger, employees of Powertel, a wholly owned subsidiary of T-Mobile, became employees of VoiceStream. While Powertel’s results are not consolidated with ours, we directly charge Powertel for the compensation and benefit costs of our employees working on Powertel business. We also charge Powertel for certain centralized services and functions, including accounting and other administrative functions. The cost of these centralized services and functions are charged to Powertel in a manner that reflects the relative time and associated costs devoted to it. Powertel was charged $13.9 million and $28.7 million for the costs of these centralized services and functions for the three and six months ended June 30, 2002. At June 30, 2002, we have an intercompany receivable due from Powertel of $634.1 million. The receivable balance is included in investments in and advances to unconsolidated affiliates.

10

Table of Contents

8. SUBSEQUENT EVENTS

     During July 2002, we purchased on the open market and retired outstanding debt as follows: $162.7 million of our 10 3/8% Senior notes due in 2009, together with premiums of $8.5 million; $84.7 million of our 11 7/8% Senior Notes due in 2009, together with discounts of $13.8 million; and $39.7 million of our 11 1/2% Senior Notes due in 2009, together with premiums of $3.5 million. These repayments were funded by borrowings from Deutsche Telekom.

     In July 2002, we launched commercial service under the T-Mobile brand in and around the major population centers of California, including San Francisco and Los Angeles, as well as in Las Vegas, Nevada.

11

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     (Abbreviated pursuant to General Instruction H (2).)

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE LITIGATION REFORM ACT OF 1995.

     Information contained or incorporated by reference herein that is not based on historical fact, including without limitation, statements containing the words “believes,” “may,” “will,” “estimate,” “continue,” “anticipates,” “intends,” “expects” and words of similar import, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and regionally; technology changes; competition; changes in business strategy or development plans; the leverage of VoiceStream; the ability to attract and retain qualified personnel; existing governmental regulations and changes in, or the failure to comply with, governmental regulations; liability and other claims asserted against VoiceStream; and other factors referenced in VoiceStream’s filings with the Securities and Exchange Commission. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. VoiceStream disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments.

     Unless the context requires otherwise, “VoiceStream,” “we,” “our” and “us” include us and our predecessors and consolidated subsidiaries.

     The following discussion and analysis is based upon our condensed consolidated financial statements, which have been prepared pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations for interim reporting. These rules and regulations allow certain information required under accounting principles generally accepted in the United States to be condensed or omitted, provided that the condensed financial statements, when read in conjunction with the annual audited financial statements included in our most recent Form 10-K, provide a fair presentation of the financial position, results of operations and cash flows. Accordingly, this discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto and other financial information included herein and in our Form 10-K for the year ended December 31, 2001. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses, and assets and liabilities during the periods reported. Estimates are used when accounting for certain items such as unbilled revenues, allowance for doubtful accounts, sales and marketing programs and incentives, employee compensation programs, depreciation and amortization periods, taxes, inventory values, and valuations of investments and intangible assets. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates due to changing conditions or the validity of our assumptions.

     We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We recognize service revenues based upon minutes of use processed and contracted fees, net of credits and adjustments for service discounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on the aging of our accounts receivable balances and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, actual write-offs may be higher than expected. We record accruals associated with sales and marketing promotions and incentives. These accruals are based primarily on historical take-rates of similar promotions or offers. When recording depreciation expense associated with our wireless communications equipment, we use estimated useful lives. As a result of changes in technology and industry conditions, we periodically evaluate the useful lives of our wireless communications equipment. These evaluations could result in a change in useful lives in future periods. On January 1, 2002, we adopted SFAS No. 142 “Goodwill and Other Intangible Assets”, which resulted in the cessation of amortization of goodwill and spectrum licenses, and established a new impairment testing process for goodwill and intangible assets with indefinite lives on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. We hold non-controlling investments in several entities for which we apply the equity or cost method of accounting. We record impairments associated with these investments when we determine that the fair value of the investment is below our net book value and the decline is deemed to be other than temporary. Volatility in market prices of these investments, or poor operating performance of these entities could cause the market value of these investments to decline below our carrying value.

12

Table of Contents

Overview

     We provide personal communications services (“PCS”) using the Global System for Mobile Communications, or GSM, technology primarily in urban markets in the United States through the ownership and operation of our PCS licenses, through contractual relationships with entities in which we have non-controlling ownership interests and through arrangements with third parties that own and operate similar licenses. Powertel, Inc. (“Powertel”), also a subsidiary of T-Mobile, provides the same service under the VoiceStream brand in the southeastern United States. While Powertel’s results are not consolidated with ours, we directly charge Powertel for the compensation and benefit costs of our employees working on Powertel business. We also charge Powertel for certain centralized services and functions including accounting and other administrative functions. The cost of these centralized services and functions are charged to Powertel in a manner that reflects the relative time and associated costs devoted to it.

     The following discussion highlights the key events in the periods covered by these financial statements:

     On May 31, 2001, Deutsche Telekom acquired 100% of the common shares of VoiceStream in a transaction that qualified as a tax-free reorganization. Following the closing of the merger, Deutsche Telekom transferred all of its VoiceStream shares to T-Mobile (referred to herein as the “T-Mobile merger”). T-Mobile is a wholly-owned subsidiary of Deutsche Telekom and is the holding company for Deutsche Telekom’s principal GSM wireless operations in Europe and the United States.

     The T-Mobile merger was accounted for as a purchase business combination and resulted in adjustment of the basis of our assets, liabilities and shareholder’s equity to reflect fair value on the closing date of the merger. As a result of this new basis, our condensed consolidated financial position, results of operations and cash flows for periods subsequent to May 31, 2001, the closing date of the merger, are not comparable to periods prior to the merger. The following discussion and analysis refers to the results and activities for the three and six months ended June 30, 2002 as compared to the three and six months ended June 30, 2001. Where necessary, we have provided explanations to improve comparability between the pre-merger and post-merger activity.

     Operating markets

     We commenced operations in 1996 in various markets in the western United States and have expanded operations through the addition of numerous new markets in subsequent years. We have added significant operational markets through acquisitions at varying stages of maturity and have converted the acquired markets to the VoiceStream brand and otherwise integrated the operations of the acquired businesses. In July 2002, we launched service under the T-Mobile brand in and around the major population centers of California, including San Francisco and Los Angeles, as well as in Las Vegas, Nevada. All existing VoiceStream markets will be converted to the T-Mobile brand by the end of 2002. Due to these factors, revenues and expenses recognized during any period may not be comparable to other periods and may not be representative of future operations.

13

Table of Contents

Results of Operations for the Three and Six Months Ended June 30, 2002 and 2001

     The following table sets forth certain financial data as it relates to our operations (dollars in thousands):