** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

 

**FORM 10-QSB**

** **

**(Mark One)**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THESECURITIES EXCHANGE ACT OF 1934.**

 

**For the quarterly period ended September 30, 2001**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934.**

 

**For thetransition period from ____ to ____**

 

 

**CommissionFile Number 0-31193**

 

**USIP.COM, INC.******(Exact name of smallbusiness issuer as specified in its charter)

 

| **Utah**                                                         |   | **16-1583162**                      |
|------------------------------------------------------------------|--------|-------------------------------------|
| (State or other jurisdiction of   incorporation or organization) |   | (I.R.S. EmployerIdentification No.) |

 

**7325 Oswego Road**

**Liverpool,New York 13090**

(Address of principal executive offices)

 

**(315) 451-7515**

(Issuer's telephone number)

 

(Former name, former address and former fiscal year

if changed since last report)

 

Checkwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes   ý                                                  No   o

 

Statethe number of shares outstanding of each of the issuer's classes of commonequity, as of the latest practicable date: 17,619,388 shares of Common Stock,$.01 par value, were outstanding as of November 8, 2001.

 

TransitionalSmall Business Disclosure Forms (check one):

 

Yes   o                                                  No   ý

 

 

 

USIP.COM, INC.

INDEX TO FORM 10-QSB

September 30, 2001

 

 

 
| PART I       | FINANCIAL INFORMATION                                                                       |   |
|--------------|---------------------------------------------------------------------------------------------|--------|
|         |                                                                                        |   |
| ITEM 1.      | Financial Statements                                                                        |   |
|         |                                                                                        |   |
|         | Consolidated Balance Sheets                                                                 |   |
|         | At  September 30, 2001 and December 31,2000                                                 |   |
|         |                                                                                        |   |
|         | Consolidated  Statements of Income and Retained Earnings                                    |   |
|         | For the three months and  nine months ended September 30, 2000 and September 30, 2001       |   |
|         |                                                                                        |   |
|         | Consolidated  Statements of Cash Flows                                                      |   |
|         | For  the nine months ended September 30, 2001 and the twelve months ended Decenber  31,2000 |   |
|         |                                                                                        |   |
|         | **Notes to  Consolidated Financial Statements**                                             |   |
|         |                                                                                        |   |
| **ITEM  2.** | Managements  Discussion and Analysis of Financial Condition and Results of Operation   |   |
|         |                                                                                        |   |
| PART II      | OTHER INFORMATION                                                                           |   |
|         |                                                                                        |   |
| ITEM 1.      | Legal Proceedings                                                                           |   |
|         |                                                                                        |   |
| ITEM  2.     | Changes  in Securities and Use of Proceeds                                                  |   |
|         |                                                                                        |   |
| ITEM 3.      | Defaults Upon  Senior Securities                                                            |   |
|         |                                                                                        |   |
| ITEM  4.     | Submission  of Matters to a Vote of Security Holders                                        |   |
|         |                                                                                        |   |
| ITEM 5.      | Other Information                                                                           |   |
|         |                                                                                        |   |
| ITEM 6.      | Exhibits and  Reports on Form 8-K                                                           |   |
|         |                                                                                        |   |
|         | Signatures                                                                                  |   |

 

 

PARTI.     FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

USIP.COM,INC

CONSOLIDATED BALANCE SHEET

 
|                                                             |   | **Unaudited********September 30, 2001** |          | **Audited********December  31, 2000** |     |
|------------------------------------------------------------------|--------|-----------------------------------------|---------------|---------------------------------------|---------------|
| ASSETS                                                           |   |                                    |          |                                  |          |
| CURRENT ASSETS                                                   |   |                                    |          |                                  |          |
| Cash                                                             |   | $                                       | 21,491        |                                  | 117,619       |   |
| Commissions and Sales Receivable, Net                            |   | 209,275                                 |          | 166,033                               |          |
| Inventory                                                        |   | 51,625                                  |          | 36,250                                |          |
| Prepaid Insurance                                                |   | 2,546                                   |          | -                                     |          |
| TOTAL CURRENT ASSETS                                             |   | 284,937                                 |          | 319,902                               |          |
|                                                             |   |                                    |          |                                  |          |
| FIXED ASSETS                                                     |   |                                    |          |                                  |          |
| Telephone and Office Equipment                                   |   | 1,922,836                               |          | 1,846,572                             |          |
| Vehicle                                                          |   | 74,542                                  |          | 74,542                                |          |
|                                                             |   | 1,997,378                               |          | 1,921,114                             |          |
| Less: Accumulated Depreciation                                   |   | (467,246                                | )             | (310,711                              | )             |
| Net Fixed Assets                                                 |   | 1,530,132                               |          | 1,610,403                             |          |
|                                                             |   |                                    |          |                                  |          |
| TOTAL ASSETS                                                     |   | $                                       | 1,815,069     |                                  | $             | 1,930,305 |   |
|                                                             |   |                                    |          |                                  |          |
| LIABILITIES AND STOCKHOLDERS' EQUITY                             |   |                                    |          |                                  |          |
|                                                             |   |                                    |          |                                  |          |
| Current Liabilities                                              |   |                                    |          |                                  |          |
| Accounts Payable                                                 |   | $                                       | 282,503       |                                  | 203,809       |   |
| Line of Credit                                                   |   | 215,952                                 |          | 98,886                                |          |
| Accrued Payroll and Payroll Taxes                                |   | 10,671                                  |          | 5,345                                 |          |
| Accrued State Gross Receipts Taxes                               |   | 4,348                                   |          | 20,642                                |          |
| Other Accrued Expenses                                           |   | 16,891                                  |          | 1,508                                 |          |
| Current Portion of Long-Term Debt                                |   | 4,200                                   |          | 13,990                                |          |
| TOTAL CURRENT LIABILITIES                                        |   | 534,565                                 |          | 344,180                               |          |
|                                                             |   |                                    |          |                                  |          |
| LONG-TERM LIABILITIES                                            |   |                                    |          |                                  |          |
| Long-Term Debt, Less Current Portion                             |   | 39,695                                  |          | 39,238                                |          |
| TOTAL LIABILITIES                                                |   | 574,260                                 |          | 383,418                               |          |
| STOCKHOLDERS' EQUITY                                             |   |                                    |          |                                  |          |
| Common Stock, $.01 par value   25,000,000                   |   | 176,194                                 |          | 176,194                               |          |
| Shares authorized, 17,619,388 shares issued and outstanding |   |                                    |     |                                  |     |
|                                                             |   |                                    |          |                                  |          |
| Additional Paid In Capital                                       |   | 1,378,673                               |          | 1,382,358                             |          |
|                                                             |   |                                    |          |                                  |          |
| Retained Earnings                                                |   | (314,058                                | )             | (11,665                               | )             |
| TOTAL STOCKHOLDERS' EQUITY                                       |   | 1,240,809                               |          | 1,546,887                             |          |
|                                                             |   |                                    |          |                                  |          |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       |   | $                                       | 1,815,069     |                                  | $             | 1,930,305 |   |

 

See Accountant'sReport and Notes to Financial Statement

 

USIP.COM, INCCONSOLIDATED STATEMENT OF INCOME(LOSS)Unaudited

 
|                               |   | **Three Months Ended** |    | **Nine Months Ended**  |   |
|------------------------------------|--------|------------------------|---------|------------------------|--------|
|                               |   | **September 30, 2001** |    | **September 30, 2000** |   | **September 30, 2001** |   | **September 30, 2000** |   |
| SALES                              |   |                   |    |                   |   |   |   |   |   |
| Commissions                        |   | $                      | 51,952  |                   | $      | 74,435 |   | $ | 214,367 |   | $ | 152,251 |   |
| Coin Collections                   |   | 117,956                |    | 155,330                |   | 355,144 |   | 404,864 |   |
| Dial Around                        |   | 87,355                 |    | 92,430                 |   | 178,288 |   | 270,046 |   |
| Phone Card Sales                   |   | 21,316                 |    | -                      |   | 62,799 |   | 3,070 |   |
| Equipment Sales                    |   | 985                    |    | 10,624                 |   | 15,605 |   | 69,875 |   |
| Atm Revenue                        |   | 4,286                  |    | -                      |   | 8,891 |   | - |   |
| Service and Repair Sales           |   | 28,893                 |    | 31,920                 |   | 67,413 |   | 50,214 |   |
| Total Sales                        |   | 312,743                |    | 364,739                |   | 902,507 |   | 950,320 |   |
|                               |   |                   |    |                   |   |   |   |   |   |
| COST OF SALES                      |   |                   |    |                   |   |   |   |   |   |
| Telecommunications Costs           |   | 143,631                |    | 145,914                |   | 493,628 |   | 553,489 |   |
| Commissions                        |   | 7,246                  |    | 2,507                  |   | 17,841 |   | 40,092 |   |
| Repairs and Service Supplies       |   | -                      |    | 22,591                 |   | 4,810 |   | 38,506 |   |
| Other Direct Expenses - Travel     |   | 5,488                  |    | 4,810                  |   | 14,459 |   | 24,782 |   |
| Depreciation                       |   | 53,750                 |    | 80,913                 |   | 161,250 |   | 161,076 |   |
| Subcontractors                     |   | 20,163                 |    | 13,355                 |   | 59,843 |   | 17,095 |   |
| Supplies                           |   | 1,333                  |    | 982                    |   | 1,803 |   | 1,878 |   |
| Total Cost of Sales                |   | 231,611                |    | 271,072                |   | 753,634 |   | 836,918 |   |
|                               |   |                   |    |                   |   |   |   |   |   |
| GROSS PROFIT                       |   | 81,132                 |    | 93,667                 |   | 148,873 |   | 113,402 |   |
|                               |   |                   |    |                   |   |   |   |   |   |
| OPERATING EXPENSES                 |   |                   |    |                   |   |   |   |   |   |
| Officers' Salaries                 |   | 16,770                 |    | -                      |   | 52,100 |   | - |   |
| Salaries and Wages                 |   | 42,231                 |    | 57,595                 |   | 123,947 |   | 151,338 |   |
| Payroll Taxes                      |   | 5,032                  |    | 8,691                  |   | 18,863 |   | 25,656 |   |
| Insurance                          |   | 16,036                 |    | 12,094                 |   | 48,601 |   | 32,265 |   |
| Office Expense                     |   | 15,278                 |    | 7,801                  |   | 28,489 |   | 5,483 |   |
| Telephone                          |   | 6,220                  |    | 8,476                  |   | 19,506 |   | 62,920 |   |
| Utilities                          |   | 1,523                  |    | 1,872                  |   | 7,765 |   | 5,930 |   |
| Vehicle Expenses                   |   | 3,501                  |    | 4,773                  |   | 18,818 |   | 7,880 |   |
| Rent                               |   | 18,952                 |    | 18,035                 |   | 55,633 |   | 43,540 |   |
| Professional Fees                  |   | 8,715                  |    | 5,590                  |   | 35,215 |   | 5,590 |   |
| Travel & Entertainment         |   | 2,153                  |    | -                      |   | 5,477 |   | - |   |
| Outside Services                   |   | 9,935                  |    | 6,576                  |   | 21,824 |   | 6,286 |   |
| Total Operating Expenses           |   | 146,346                |    | 131,503                |   | 436,238 |   | 346,888 |   |
|                               |   |                   |    |                   |   |   |   |   |   |
| OPERATING INCOME (LOSS)            |   | (65,214                | )       | (37,836                | )      | (287,365 | ) | (233,486 | ) |
|                               |   |                   |    |                   |   |   |   |   |   |
| OTHER INCOME (EXPENSE)             |   |                   |    |                   |   |   |   |   |   |
| Interest Expense                   |   | (7,929                 | )       | (4,357                 | )      | (15,115 | ) | (8,783 | ) |
| NY State Gross Receipts Tax        |   | (5,488                 | )       | (425                   | )      | - |   |   |   |
| Interest Income                    |   | 57                     |    | 1,624                  |   | 299 |   | 5,238 |   |
| Total Other Income                 |   | (7,872                 | )       | (8,221                 | )      | (15,241 | ) | (3,545 | ) |
|                               |   |                   |    |                   |   |   |   |   |   |
| NET INCOME (LOSS)                  |   | $                      | (73,086 | )                      | $      | (46,057 | ) | $ | (302,606 | ) | $ | (237,031 | ) |
|                               |   |                   |    |                   |   |   |   |   |   |
| Weighted Common Shares Outstanding |   | 17,619,388             |    | 17,619,388             |   | 17,619,388 |   | 17,619,388 |   |
|                               |   |                   |    |                   |   |   |   |   |   |
| Net Loss per Common Share          |   | $                      | -       |                   | $      | - |   | $ | - |   | $ | - |   |
|                               |   | x                      |    | x                      |   | x |   | x |   |

 

See Accountant'sReport and Notes to Financial Statement

 

USIP.COM, INCCONSOLIDATED STATEMENT OF CASHFLOWS

 
|                                                                                                 |   | **Nine Months********September  30, 2001** |     | **Twelve  Months********December  31, 2000** |   |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|----------|----------------------------------------------|--------|
|                                                                                                 |   | **Unaudited**                              |     | **Audited**                                  |   |
| Cash Flows From Operating Activities:                                                                |   |                                       |     |                                         |   |
| Net (Loss)                                                                                           |   | $                                          | (302,393 | )                                            | $      | (283,865 | ) |
| Adjustments to reconcile net   (loss) to net cash provided (used) by operating activities: |   |                                       |     |                                         |   |
| Depreciation Expense                                                                                 |   | 161,250                                    |     | 214,769                                      |   |
| (Increase) Decrease in Commissions and Sales Receivables                                             |   | (43,242                                    | )        | 28,167                                       |   |
| (Increase) in Inventory                                                                              |   | (15,375                                    | )        | (14,816                                      | )      |
| (Increase) Decrease in Prepaid Insurance                                                             |   | (2,546                                     | )        | 9,889                                        |   |
| Decrease in Due From Related Parties                                                                 |   |                                       |     | -                                            |   |
| Increase in Accounts Payable                                                                         |   | 78,694                                     |     | 72,402                                       |   |
| Increase (Decrease) in Accrued Expenses and Wages                                                    |   | 20,709                                     |     | (7,155                                       | )      |
| Increase (Decrease) in Accrued State Gross Receipts Taxes                                            |   | (16,294                                    | )        | 7,985                                        |   |
|                                                                                                 |   |                                       |     |                                         |   |
| Net cash provided (used) by operating activities                                                     |   | (119,197                                   | )        | 27,376                                       |   |
|                                                                                                 |   |                                       |     |                                         |   |
| Cash Flows From Investing Activities:                                                                |   |                                       |     |                                         |   |
| Acquisition of Equipment                                                                             |   | (80,979                                    | )        | (68,814                                      | )      |
| Stockholder Capital Contributions                                                                    |   | -                                          |     |                                         |   |
|                                                                                                 |   |                                       |     |                                         |   |
| Net cash provided (used) by investing activities                                                     |   | (80,979                                    | )        | (68,814                                      | )      |
|                                                                                                 |   |                                       |     |                                         |   |
| Cash Flows From Financing Activities:                                                                |   |                                       |     |                                         |   |
| Proceeds Received from Line of Credit                                                                |   | 113,381                                    |     | 70,000                                       |   |
| Principal Payments on Long-term Debt                                                                 |   | (9,333                                     | )        | (6,801                                       | )      |
| Proceeds from Issuance on Notes Payable                                                              |   | -                                          |     | 80,945                                       |   |
| Proceeds from Issuance of Stock                                                                      |   | -                                          |     | 5,500                                        |   |
|                                                                                                 |   |                                       |     |                                         |   |
| Net cash provided (used) by financing activities                                                     |   | 104,048                                    |     | 149,644                                      |   |
|                                                                                                 |   |                                       |     |                                         |   |
| Net Increase in cash                                                                                 |   | (96,128                                    | )        | 108,206                                      |   |
|                                                                                                 |   |                                       |     |                                         |   |
| Cash - Beginning of Period                                                                           |   | 117,619                                    |     | 9,413                                        |   |
|                                                                                                 |   |                                       |     |                                         |   |
| Cash - End of Period                                                                                 |   | $                                          | 21,491   |                                         | $      | 117,619 |   |
|                                                                                                 |   |                                       |     |                                         |   |
|                                                                                                 |   |                                       |     | x                                            |   |
| Supplemental Disclosures of Cash Flow Information:                                                   |   |                                       |     |                                         |   |
| Cash Paid During Period The Period For:                                                              |   |                                       |     |                                         |   |
| Interest                                                                                             |   | $                                          | 15,115   |                                         | $      | 9,755 |   |
| Income Taxes                                                                                         |   | $                                          | -        |                                         | $      | - |   |

 

See Accountant'sReport and Notes to Financial Statement

 

USIP.COM, INC.

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2001

(unaudited)

 

 

NOTE 1.     SUMMARY INFORMATION

 

The accompanying unaudited consolidated financialstatements include the accounts of USIP.Com, Inc. and our two wholly ownedsubsidiaries: Datone, Inc., and NB Payphones Ltd. All significant inter-companyamounts have been eliminated. Our unaudited consolidated financial statementspresent herein, should be read in conjunction with the audited consolidatedfinancial statements of our company as of and for the year ended December 31,2000. In the opinion of our management, the unaudited consolidated financialstatements presented herein reflect all adjustments (consisting only of normalrecurring adjustments) necessary for fair presentation. Interim results are notnecessarily indicative of results to be expected for the entire year.

We prepare our consolidated financial statements inaccordance with generally accepted accounting principles, which require thatmanagement make estimates and assumptions that affect reported amounts. Actualresults could differ from these estimates.

 

NOTE 2.     ASSET ALLOCATION

 

                As of September30, 2001, we own and operate a network of approximately 1,386 payphones inthree states. This number reflects a reduction of 244 payphones from the numberreported in June 30, 2001 due to our ongoing strategy of identifying andremoving unprofitable payphones. Once a low revenue payphone is identified, weoffer the site owner an opportunity to purchase the equipment. If the siteowner does not purchase the payphone, we remove it from the site. Our installedpayphone base generates revenue through coin calls (local and long-distance),non-coin calls (calling card, credit card, collect, and third party billedcalls using our preselected operator service).

 

NOTE 3.     NOTES PAYABLE ANDCAPITAL EXPENDITURES

 

In the third quarter of2001, we have notes payable to our banking institution of $105,952. We have anadditional, unsecured line of credit with Lilly Beter Capital Group, Ltd. inthe amount of $200,000. As of this date $110,000 has been used in part to fundthe purchase of the payphones routes. We intend to use the remaining monies forour continued expansion.

 

#  

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

FORWARD LOOKING STATEMENTS

 

The following is a discussion and analysis of theresults of operations of our company and should be read in conjunction with ourfinancial statements and related notes contained in this Form 10-QSB. This Form10-QSB contains forward-looking statements that involve risks anduncertainties. You can identify these statements by the use of forward-lookingwords such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe”“continue,” or other similar words. You should read statements that containthese words carefully because they discuss our future expectations, containprojections of our future results of operations or financial condition or stateother “forward-looking” information. We believe that it is important tocommunicate our future expectations to our investors. However, there may beevents in the future that we are unable to accurately predict or control. Thoseevents as well as any cautionary language in this registration statementprovide examples of risks, uncertainties and events that may cause our actualresults to differ materially from the expectations we describe in ourforward-looking statements. You should be aware that the occurrence of theevents described in this Form 10-QSB could have a material adverse effect onour business, operating results and financial condition. Actual results coulddiffer materially from current expectations. Among the factors that couldeffect our actual results and could cause results to differ from thosecontained in the forward-looking statements contained herein is our ability toexpand our customer base, which will be dependent on business, financial andother factors beyond our control, including, among others, seasonal aspectssuch as the winter months that tend to reduce the frequency of outdoor payphoneuse on the east coast, ability to increase our size and marketing area by purchasingpayphones and locations from independent telephone companies, and whether thepublic uses our payphones, together with all the risks inherent in theestablishment of a new enterprise and the marketing of new products.

 

PLAN OF OPERATION

 

USIP.Com, Inc., (the “Company,” “Our,” “USIP” or“We”), was incorporated under the laws of the State of Utah on April 6, 1978 asDerby Farms, Inc. On January 19, 1982, the Articles of Incorporation wereamended and the name of the company was changed to Commerce Oil of Kentucky,Inc. On February 4, 2000 the Articles of Incorporation were amended and thename of our company was changed to USIP.Com, Inc.

 

We own, operate and manage privately owned publicpayphones in New York, Pennsylvania and Massachusetts. Our revenue comes fromcommissions that we receive from long distance carrier’s operator services andtoll free calls. Revenue also comes from the coins that we collect from ourpayphones as well as from sales, service of payphones and prepaid phone cardsthat we sell at various locations throughout these states. We enter into siteleasing agreements with various business sites that are open to the public.Some of the businesses include but are not limited to retail stores,convenience stores, bars, restaurants, gas stations, colleges and hospitals.The agreements allow us to install our payphones in areas that are accessibleto the public. We provide the payphones, install them, and pay all maintenanceand operational costs for the term of each lease. We also sell payphones tosome of the site owners. We derive income from the sale as well as anycommission split that we negotiate with the buyer.

 

PLANS FOR FISCAL YEAR 2001.

 

Our plans of operation for the remainder ofour 2001 fiscal year will consist of the following activities:

 

•      continue to evaluate the acquisition ofmore payphones and new site leasing arrangements

        that will enhance our business plan;

•      expandour customer base in existing areas; and

•      developa marketing plan and infrastructure that can help us grow into the next year.

 

 

RESULTS OF OPERATIONS

 

The following discussion is based in part on ourunauditedFinancial Statements forthe three months ended September 30, 2001 and the unaudited FinancialStatements for the three months ended September 30, 2000. Our revenue isderived from the following three general sources.

 

1. Commission Income.

 

Commission income includes commissions from longdistance carrier’s operator services, and dial around compensation for tollfree calls from all payphones. The commissions for operator services are paid45 days in arrears. Dial around compensation for toll free calls is billedquarterly and received three and one half months behind the billed quarter.

 

2. Payphone sales, repairs and pre-paid phone cards.

 

We derive income from the sale and repair of apayphone. We can negotiate the sale of a payphone to a site owner when itbecomes cost prohibitive to maintain or if a customer offers to buy the phoneat a price that is favorable to our company. The new owner or lessee becomesresponsible for the maintenance and operational costs of the payphone. We sellpre-paid phone cards at some of our payphone locations. We also derive a profitfrom any commission split that is negotiated between the parties as a result ofa sale or lease of a payphone. Sales and repairs of payphones and the sale ofpre-paid phone cards are not subject to the same collection delays as the othertypes of operating income.

 

3. Coin calls.

 

Coin calls represent calls paid for by customers whodeposit coins into the payphones. Coin call revenue is recorded as the actualamount of coins collected from the payphones. Coin collections are made on a dailybasis.  The coins are counted in houseand deposited weekly.

 

THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDEDSEPTEMBER 30, 2000

 

REVENUES

 

The following discussion is based in part on our unaudited FinancialStatements for the three months ended September 30, 2001. Our overall revenuedecreased for the months ending September 30, 2001 by $51,996 or 14.24% whencompared to the three months ending September 30, 2000. This decrease wasprimarily attributable to the removal of unprofitable payphones. The number ofpayphones that we had in service went from 1554 at September 30, 2000 to 1386at September 30, 2001. We experienced lower call volumes due to increasedcompetition from the wireless communications industry, resulting in loweraverage revenue per phone.

 

Commission revenuedecreased by $22,483 while coin collection decreased by $37,374. Dial Aroundrevenue decreased by $5,075, when compared to the same period in 2000. Thedecrease is attributable to fewer phones, which results in fewer long distancecalls made per payphone. Equipment sales decreased by $9,639 over the sameperiod in 2000. Phone card sales, repairs, service, and ATM revenue added$22,575 to our revenue stream when compared to the period ending September 30,2000. This increase occurred because we experienced an increase in sales ofpre-paid phone cards as well as an increase in local service that we providedto our customers.

 

COST OF SALES

 

Our cost of sales decreased during the third quarter by $39,461 or14.55%. Telecommunication costs decreased by $2,283 because as we reduced thenumber of payphones that we own, we reduced the amount of money that we have topay to local exchange companies. Commissions payable increased by $4,739 due toan increase in phone card sales. Contractors’fees increased by $6,808. Although we have fewer payphones, our independentcontractors must travel over a larger geographic territory. Our cost of salesfor repairs, service, travel, deprecation and supplies decreased by $48,725. Webelieve that this decrease occurred because we had fewer phones to upgrade, andrepair, and because we are continuing our efforts to reduce costs overall.

 

OPERATING AND ADMINISTRATIVE EXPENSES

 

Operating expenses increasedby $14,843 over the same period in 2000. Salaries, payroll taxes, telephone,utilities and vehicle expense decreased by $6,130 when compared to the thirdquarter of 2000. Insurance, office expense, rent, professional fees, outsideservices, and travel and entertainment added $20,973 to the operating expenseswhen compared to the third quarter of 2000.

 

Operating and administrativeexpenses consist of employee costs and other operating expenses. Employee costsconsist of salaries, wages, employee benefits and payroll taxes. Otheroperating expenses consist of insurance (other than health), rent, professionalfees, property and school taxes.

 

NINE MONTHS ENDEDSEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000

#### **REVENUES**

Our overall revenue decreased for the nine monthsending September 30, 2001 by $47,813 or 5% when compared to the nine monthsending September 30, 2000. The components making up this decrease includecommission revenue, which increased by $62,116; this increase can be attributedto some of our high traffic routes from small independent phone companies aswell as our continuing efforts towards increasing payphone installation inexisting areas. Coin collection decreased by $49,720 and dial around revenuedecreased by $91,758, when compared to the same period in 2000. Equipment salesdecreased by $54,270, this decrease is due in part to a large one time sale of$52,040 to an urban hospital in the second quarter of 2000. Phone card salesadded $59,729 to our revenue stream. We believe that this increase occurredbecause we were able to get site owners to place phone card vending machines inareas of high traffic. Repairs, service, and ATM revenue added $26,090 to ourrevenue stream when compared to the period ending September 30, 2000. Thisincrease is attributable to an increase in sales of pre-paid phone cards and anincrease in local service being provided to our customers.

#### **Cost ofSales**

Our cost of sales decreased during the third quarterby $83,284 or 9.95% from $836,918 to $753,634. Telecommunication costsdecreased by $59,861, because of a decrease in payphone usage. We believe thatthis is a result of the increased use of cellular phones and pre-paid phonecards. Commissions payable decreased by $22,251 because some site owners are nolonger receiving a commission, and in most cases they are being invoicedmonthly for payphone services. Contractors’ fees increased by $42,748 becausealthough we have fewer payphones, we still have a larger geographic territorythat our independent contractors have to cover. Repairs, travel, depreciation,and supplies were reduced by $43,920 when compared to the same nine months in 2000.

 

Operating and Administrative Expenses

 

Operating expenses increased by $89,350 over the sameperiod in 2000. This is due to an increase of $17,916 in salaries and wages.Insurance, office supplies, vehicle expense, travel, entertainment and outside servicesincreased by $29,716. Rent and professional fees increased by $41,718.

 

## **ADDITIONAL CAPITAL FINANCING IN THE FUTURE**

 

We may be required to seek additional financing in thefuture to respond to increased expenses or shortfalls in anticipated revenues,accelerate product development and deployment. We may be required to respond tocompetitive pressures, develop new or enhanced products, or take advantage ofunanticipated acquisition opportunities. We cannot be certain we will be ableto find such additional financing on reasonable terms, or at all. If we areunable obtain additional financing when needed, we could be required to modifyour business plan in accordance with the extent of available financing. We alsomay not be able to accelerate the development and deployment of our products,respond to competitive pressures, develop or enhance our products or takeadvantage of unanticipated opportunities.

 

 

IF WE ARE UNABLE TO COMPETE SUCCESSFULLY IN THISHIGHLY COMPETITIVE MARKET, OUR BUSINESS WILL FAIL.

 

The market for payphones is worldwide and highlycompetitive and we expect competition to intensify in the future. There are fewsubstantial barriers to entry and additional competition from existingcompetitors and new market entrants will likely occur in the future. Anincrease in competitive pressures in our market or our failure to competeeffectively may result in pricing reductions, reduced gross margins and loss ofmarket share. Many of our current or potential competitors have longeroperating histories, greater name recognition, larger customer bases andsignificantly greater financial, technical, marketing and other resources thanwe do. In addition, our current and potential competitors may establishcooperative relationships among themselves or with third parties that mayfurther enhance their resources. As a result, they may be able to adapt morequickly to new technologies and customer needs, devote greater resources to thepromotion or sale of their products and services, initiate or withstand pricecompetition, take advantage of acquisition or other opportunities more readilyor develop and expand their product and services offerings more quickly, inaddition, our competitors may bundle products that compete with ours. If thesecompanies were to use their greater financial, technical and marketingresources in our target markets, it could adversely affect our business.

 

FEDERAL REGULATION OF LOCAL COIN ANDDIAL-AROUND CALLS

 

The Telephone Operator Consumer Services ImprovementAct of 1990 ("TOCSIA") established various requirements for companiesthat provide operator services and for call aggregators, including PSPs, whosend calls to those OSPs. The requirements of TOCSIA as implemented by the FCCincluded call branding, information posting, rate quotations, the filing ofinformational tariffs and the right of payphone users to access any OSP to makenon-coin calls. TOCSIA also required the FCC to take action to limit theexposure of payphone companies to undue risk of fraud upon providing this"open access" to carriers.

 

TOCSIA further directed theFCC to consider the need to provide compensation for IPPs for dial-aroundcalls. Accordingly, the FCC ruled in May 1992 that IPPs were entitled todial-around compensation. Because of the complexity of establishing anaccounting system for determining per call compensation for these calls, andfor other reasons, the FCC temporarily set this compensation at $6.00 perpayphone per month based on an assumed average of 15 interstate carrier accesscode dial-around calls per month and a rate of $0.40 per call. The failure bythe FCC to provide compensation for 800 "toll free" dial-around callswas challenged by the IPPs, and a federal court subsequently ruled that the FCCshould have provided compensation for these toll free calls.

 

In 1996, recognizing that IPPs had been at a severecompetitive disadvantage under the existing system of regulation and hadexperienced substantial increases in dial-around calls without a correspondingadjustment in compensation, Congress enacted Section 276 to promote bothcompetition among payphone service providers and the widespread deployment ofpayphones throughout the nation. Section 276 directed the FCC to implementrules by November 1996 that would:

 
|   | • | create a standard  regulatory scheme for all public payphone service providers;                                                                                                                                                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | establish a per call  compensation plan to ensure that all payphone service providers are fairly  compensated for each and every completed intrastate and interstate call,  except for 911 emergency and telecommunications relay service calls;                                                                                 |
|   | • | terminate subsidies for LEC  payphones from LEC regulated rate-base operations;                                                                                                                                                                                                                                                  |
|   | • | prescribe, at a minimum,  nonstructural safeguards to eliminate discrimination between LECs and IPPs  and remove the LEC payphones from the LEC's regulated asset base;                                                                                                                                                          |
|   | • | provide for the RBOCs to  have the same rights that IPPs have to negotiate with Location Owners over  the selection of interLATA carrier services, subject to the FCC's  determination that the selection right is in the public interest and subject  to existing contracts between the Location Owners and interLATA carriers; |
|   | • | provide for the right of  all PSPs to choose the local, intraLATA and interLATA carriers subject to the  requirements of, and contractual rights negotiated with, Location Owners and  other valid state regulatory requirements;                                                                                                |
|   | • | evaluate the requirement  for payphones which would not normally be installed under competitive  conditions but which might be desirable as a matter of public policy, and  establish how to provide for and maintain such payphones if it is determined  they are required; and                                                 |
|   | • | preempt any state  requirements which are inconsistent with the FCC's regulations implementing  Section 276.                                                                                                                                                                                                                     |

 

 

In September and November 1996, the FCC issued itsrulings implementing Section 276 (the "1996 Payphone Order"). In the1996 Payphone Order, the FCC determined that the best way to ensure faircompensation to independent and LEC PSPs for each and every call was toderegulate, to the maximum extent possible, the price of all calls originatingfrom payphones. For local coin calls, the FCC mandated that deregulation of thelocal coin rate would not occur until October 1997 in order to provide a periodof orderly transition from the previous system of state regulation.

 

To achieve fair compensation for dial-around callsthrough deregulation and competition, the FCC in the 1996 Payphone Orderdirected a two-phase transition from a regulated market. In the first phase,November 1996 to October 1997, the FCC prescribed flat-rate compensationpayable to the PSPs by the interexchange carriers ("IXCs") in theamount of $45.85 per month per payphone. This rate was arrived at bydetermining that the deregulated local coin rate was a valid market-basedsurrogate for dial-around calls. The FCC applied a market-based, deregulatedcoin rate of $0.35 per call to a finding from the record that there was amonthly average of 131 compensable dial-around calls per payphone. This totalincluded both carrier access code calls dialed for the purpose of reaching along distance company other than the one designated by the PSP as well as 800"toll free" calls. The monthly, per phone flat-rate compensation of$45.85 was to be assessed only against IXCs with annual toll-call revenues inexcess of $100 million and allocated among such IXCs in proportion to theirgross long-distance revenues. During the second phase of the transition toderegulation and market-based compensation (initially from October 1997 toOctober 1998, but subsequently extended in a later order by one year to October1999), the FCC directed the IXCs to pay the PSPs on a per-call basis fordial-around calls at the assumed deregulated coin rate of $0.35 per call. Atthe conclusion of the second phase, the FCC set the market-based local coinrate, determined on a payphone-by-payphone basis, as the default per-callcompensation rate in the absence of a negotiated agreement between the PSP andthe IXC. To facilitate per-call compensation, the FCC required the PSPs totransmit payphone-specific coding digits, which would identify each call asoriginating from a payphone, and required the LECs to make such codingavailable to the PSPs as a tariffed item included in the local access lineservice.

 

In July 1997, a federal court(the "Court") responded to an appeal of the 1996 Payphone Order,finding that the FCC erred in (1) setting the default per-call rate at $0.35without considering the differences in underlying costs between dial-aroundcalls and local coin calls, (2) assessing the flat-rate compensation againstonly the carriers with annual toll-call revenues in excess of $100 million, and(3) allocating the assessment of the flat-rate compensation based on grossrevenues rather than on a factor more directly related to the number ofdial-around calls processed by the carrier. The Court also assigned error toother aspects of the 1996 Payphone Order concerning inmate payphones and theaccounting treatment of payphones transferred by an RBOC to a separateaffiliate.

 

In response to the Court'sremand, the FCC issued its modified ruling implementing Section 276 (the"1997 Payphone Order") in October of 1997. The FCC determined thatdistinct and severable costs of $0.066 were attributable to coin calls that didnot apply to the costs incurred by the PSPs in providing access for dial-aroundcalls. Accordingly, the FCC adjusted the per call rate during the second phaseof interim compensation to $0.284 (which is $0.35 less $0.066). While the FCCtentatively concluded that the $0.284 default rate should be utilized indetermining compensation during the first phase and reiterated that PSPs wereentitled to compensation for each and every call during the first phase, itdeferred a decision on the precise method of allocating the initial interimperiod (November 1996 through October 1997) flat-rate payment obligation amongthe IXCs and the number of calls to be used in determining the total amount ofthe payment obligation.

 

 

On March 9, 1998, the FCC issued a Memorandum Opinionand Order, FCC 98-481, which extended and waived certain requirementsconcerning the provision by the LECs of payphone-specific coding digits thatidentify a call as originatingfrom a payphone. Without the transmission of payphone-specific coding digits,some of the IXCs have claimed they are unable to identify a call as a payphonecall eligible for dial-around compensation. With the stated purpose of ensuringthe continued payment of dial-around compensation, the FCCs Memorandum andOrder issued on April 3, 1998 left in place the requirement for payment ofper-call compensation for payphones on lines that do not transmit the requisitepayphone-specific coding digits but gave the IXCs a choice for computing theamount of compensation for payphones on LEC lines not transmitting thepayphone-specific coding digits of either accurately computing per-callcompensation from their databases or paying per-phone, flat-rate compensationcomputed by multiplying the $0.284 per call rate by the nationwide average numberof 800 subscriber and access code calls placed from RBOC payphones forcorresponding payment periods. Accurate payments made at the flat rate are notsubject to subsequent adjustment for actual call counts from the applicablepayphone.

 

On May 15, 1998, the Courtagain remanded the per-call compensation rate to the FCC for furtherexplanation without vacating the $0.284 per call rate. The Court opined thatthe FCC had failed to explain adequately its derivation of the $0.284 defaultrate. The Court stated that any resulting overpayment would be subject torefund and directed the FCC to conclude its proceedings within a six-monthperiod from the effective date of the Court's decision.

 

In response to the Court's second remand, the FCCconducted further proceedings and sought additional comment from interestedparties to address the relevant issues posed by the Court. On February 4, 1999,the FCC released the Third Report and Order and Order on Reconsideration of theSecond Report and Order (the "1999 Payphone Order"), in which the FCCabandoned its efforts to derive a "market-based" default dial-aroundcompensation rate and instead adopted a "cost-based" rate of $0.24per dial-around call. Both PSPs and IXCs petitioned the Court for review of the1999 Payphone Order's determination of the dial-around compensation rate. OnJune 16, 2000, the Court affirmed the 1999 Payphone Order setting a 24-centdial-around compensation rate. On all the issues, including those raised by theIXCs and the payphone providers, the Court applied the "arbitrary andcapricious" standard of review, and found that the FCC's rulings werelawful and sustainable under that standard. As a result of the Court's June 16,2000 decision, the 24-cent dial-around compensation rate is likely to remain inplace until at least the end of 2001, when the FCC has stated its intention tocomplete a third-year review of the rate. With respect to the Petition forReconsideration of the 1999 Payphone Order filed with the FCC by the IPPs, thisPetition is still pending and has yet to be ruled on by the FCC. In view of theCourt's affirmation of the 1999 Payphone Order, it is unlikely that the FCCwill adopt material changes to the key components of the Order pursuant to thepending Reconsideration Petition, although no assurances can be given.

 

On April 5, 2001, the FCCreleased an order that is expected to have a significant impact on theobligations of telecommunications carriers to pay dial-around compensation toPSPs. The effect of the decision is to clarify that

the first carrier to handle a dial-around calloriginating from a pay telephone has the obligation to track and paycompensation on the call, regardless of whether other carriers may subsequentlytransport or complete the call. Under the FCC ruling, implementation of thissystem modification is scheduled to occur on November 27, 2001. We believe thatthis modification to the dial-around compensation system will result in asignificant increase to the number of calls upon which we are able to collectsuch compensation. Because, however, the FCC ruling is potentially subject toadministrative reconsideration or judicial appeal and the system modificationis as yet untested, no assurances can be given as to the precise timing ormagnitude of revenue impact that will flow from the decision.

 

The new 24-cent rate became effective April 21, 1999,and will serve as the default rate through January 31, 2002. The new rate willalso be applied retroactively to the period beginning on October 7, 1997, lessa $0.002 amount to account for FLEX ANI payphone tracking costs, for a netcompensation of $0.238.The 1999 Payphone Order deferred a final ruling on the interim period (November7, 1996 to October 6, 1997) treatment to a later, as yet unreleased, order.Upon establishment of the interim period rate, the FCC has further ruled that atrue-up may be made for all payments or credits (with applicable interest) dueand owing between the IXCs and the PSPs, including USIP, for the payment periodcommencing on November 7, 1996 through the effective date of the new $0.24 percall rate. It is possible that the final implementation of the 1999 PayphoneOrder, including resolution of this retroactive adjustment and the outcome ofany related administrative or judicial review, could have a material adverseeffect on our Company.

 

COMPETITION

 

We compete for payphonelocations directly with Regional Bell Operating Companies (RBOCs), such asVerizon Communications, Local Exchange Companies (LECs) such as CitizensCommunications and Alltel Corporation, and other Independent Payphone Providers(IPPs) such as Davel Communications. We also compete, indirectly, withlong-distance companies, which can offer Location Owners commissions onlong-distance calls made from LEC-owned payphones. Most LEC long-distancecompanies and some IPPs may have substantially greater financial, marketing andother resources than our company.

 

We believe that our principal competition is fromproviders of wireless communications services for both local and long distancetraffic. Certain providers of wireless communication services have introducedrate plans that are competitively priced with certain of the products offeredby us and have negatively impacted the usage of payphones throughout thenation.

 

We believe that thecompetitive factors among payphone providers are (1) the commission payments toa Location Owner, (2) the ability to serve accounts with locations in severalLocal Access Transport Areas (LATAs) or states, (3) the quality of service andthe availability of specialized services provided to a Location Owner andpayphone users, and (4) responsiveness to customer service needs. We believethat we are currently competitive in each of these areas.

 

Additionally, a number of domestic IPPs continue toexperience financial difficulties from various competitive and regulatoryfactors impacting the pay telephone industry generally, which may impair theirability to compete prospectively. While no assurances can be given, we believethat these circumstances create an opportunity for us to obtain new locationagreements and reduced site commissions going forward.

 

We compete withlong-distance carriers that provide dial-around services that can be accessedthrough our payphones. Certain national long-distance operator serviceproviders and prepaid calling card providers have implemented extensiveadvertising promotions and distribution schemes which have increaseddial-around activity on payphones owned by LECs and IPPs, including ourCompany, thereby reducing traffic to our primary providers of long-distanceservice. While we do receive compensation for dial-around calls placed from ourpayphones, regulatory efforts are underway to improve the collection system andprovide us with the ability to collect that portion of dial-around calls thatare currently owing.

 

Weather conditions affect ourrevenue stream because we operate in the Northeastern part of the country.Revenues drop off significantly during the winter because most of our phonesare outdoors. The spring and summer periods show an increase in payphone usage.Revenue and income are generally lowest in the first quarter and highest in thethird quarter.

 

 

 

PART II OTHER INFORMATION.

 

 

Item 1.    Legal Proceedings.

                Not applicable.

 

Item 2.    Changes in Securities and Use of Proceeds.

                Not applicable.

 

Item 3     Defaults Upon Senior Securities.

                Not applicable.

 

Item. 4.   Submission of Matters to a Vote of SecurityHolders.

                Not applicable.

 

Item 5.    Other Information.

                Not applicable.

 

 

Item 6.    Exhibits and Reports on Form 8-K.

(a)           Exhibits.

 

 

The following exhibits required by Item 601 ofRegulation S-B are attached.

 

There were no Exhibits filed with this report.

 

(b)           Reportson Form 8-K.

 

None

SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   | Dated:    November 9, 2001 |             |
|--------|-------------------------------------------|------------------|
|   |                                      |             |
|   |                                      | USIP.Com, Inc.   |
|   |                                      |             |
|   |                                      | (Registrant)     |
|   |                                      |             |
|   |                                      |             |
|   |                                      | /s/ Craig Burton |
|   |                                      |             |
|   |                                      | President        |