**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-KSB**

 

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| **(MARK ONE)** |   |
|----------------|--------|

 

| **ý** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

 

**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001**

 

**OR**

** **

| **o** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------|

 

**FOR THE TRANSITION PERIOD                       TO                     .**

 

**COMMISSION FILE NUMBER 0-31193**

 

**USIP.COM, INC.**

(Nameof small business issuer as specified in its charter)

 

| **UTAH**                                                                  |   | **16-1583162**                        |
|---------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization)           |   | (I.R.S.  Employer Identification No.) |
|                                                                      |   |                                  |
| **7325 Oswego Rd.**                                                       |   |                                  |
| **Liverpool, N.Y.**                                                       |   | **13090**                             |
| (Address  of principal executive offices)                                 |   | (Zip  Code)                           |
|                                                                      |   |                                  |
| Issuer’s  telephone number, including area code: **(315)  451-7515** |

 

Securities RegisteredPursuant to Section 12(b) of The Exchange Act: None

Securities RegisteredPursuant to Section 12(g) of The Exchange Act:

 

| **(Title of Class)**          |
|-------------------------------|
| Common  Stock, $.01 Par Value |

 

Check whether the issuer (1)filed all reports required to be filed by Sections 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ýNo o

 

Check if disclosure of delinquent filers inresponse to Item 405 of Regulation S-B is not contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB. o

 

State issuer’s revenues for itsmost recent fiscal year: $1,104,385.

 

As of December 31, 2001 the aggregate marketvalue of the common stock held by non-affiliates was approximately$5,901,013.56 based upon the closing price on December 31, 2001 of $1.41. As ofDecember 31, 2001, there were 17,619,388 shares of common stock outstanding.

 

Documents incorporated by reference: None

 

Transitional Small Business Disclosure Format:Yes o  No ý

 

 

**TABLE OF CONTENTS**

 
| **PART I**   |
|--------------|
|         |
| Item 1.      | Description of Business |
|         |   |
| Item 2.      | Description of Property |
|         |   |
| Item  3.     | Legal  Proceedings |
|         |   |
| Item  4.     | Submission  of Matters to a Vote of Security Holders |
|         |   |
| **PART II**  |
|         |   |
| Item 5.      | Market for Common Equity and Related  Stockholder Matters |
|         |   |
| Item  6.     | Managements  Discussion and Analysis or Plan of Operation |
|         |   |
| Item 7.      | Financial Statements |
|         |   |
| Item  8.     | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure |
|         |   |
| **PART III** |
|         |   |
| Item 9.      | Directors, Executive Officers, Promoters and  Control persons; Compliance with Section 16(a) of the Exchange Act. |
|         |   |
| Item 10.     | Executive Compensation |
|         |   |
| Item 11.     | Security ownership of Certain Beneficial Owners  and Management |
|         |   |
| Item 12.     | Certain Relationships and Related Transactions |
|         |   |
| **PART IV**  |
|         |   |
| Item 13.     | Exhibits and Reports on Form 8-K |
|         |   |
|         | Signatures |

 

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**PART I**

 

**ITEM 1.****                       ****DESCRIPTION OF****BUSINESS**

 

**GENERALOVERVIEW**

 

USIP.Com, Inc. (“USIP,” the“Company,” “we,” “our” or “us”) was incorporated under the laws of the State ofUtah on April 6, 1978 as Derby Farms, Inc. On January 19, 1982 ourArticles of Incorporation were amended and the name of our company was changedto Commerce Oil of Kentucky, Inc. On December 31, 1983 our Certificate ofIncorporation was suspended for failure to file an annual report. On December20, 1984 we filed a petition for relief under Chapter Eleven of the UnitedStates Bankruptcy Code. The case was filed in The United States BankruptcyCourt, Middle District of Tennessee. The case was converted to Chapter Seven onJuly 1, 1986. On September 1, 1992 the court signed a Final Decree, and thecase was closed. Our Certificate of Incorporation was reinstated on June 18,1992 by the Utah Department of Commerce, Division of Corporations.

 

On January 31, 2000, DatoneCommunications, Inc., (“Datone”), a New York corporation and an independentpayphone provider (“IPP”) merged into our company. All the Datone shares wereretired. Datone shareholders received 7,268,388 restricted shares of commonstock for their stock. On February 4, 2000 we amended the Articles ofIncorporation and changed our name to USIP.Com, Inc.

 

On April 29,2000 we purchased all the shares of NB Payphones, Ltd., (“NB”), the owner of466****payphones in Pennsylvania andCointel Leasing, Inc., (“Cointel”), the owner of 45 payphones in Syracuse, NewYork, from Riviera Bay Holding Trust, a Gibraltar Trust, for 8,750,000restricted shares of our common stock. NB is a USIP wholly owned subsidiary. OnApril 29, 2000 we entered into a two hundred thousand dollar ($200,000),unsecured line of credit with Lilly Beter Capital Group, Ltd., with interest atthe rate of ten percent per annum. These funds will be used to purchase andupgrade telephones that will be placed at new locations.

 

On August 30,2000 we incorporated Datone, Inc. as a Delaware company. Datone, Inc. is a USIPwholly owned subsidiary. All the revenue generating assets and related expensesthat we received from the Datone Communications Merger were subsequently movedvia an intercompany transfer from USIP into Datone, Inc. Datone, Inc., wascapitalized with $1,017. All of the Datone, Inc., shares were given to USIP. OnOctober 1, 2000 we merged Cointel into Datone, Inc. by way of an inner companytransaction. Management decided that it would not benefit our company to havetwo companies that are in the same business and location; we therefore combinedthe two in an effort to save money.

 

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On February 1, 2001 DatoneInc. purchased 91 payphones and related equipment from Chautauqua & ErieTelephone Corporation for $50,050. On June 1, 2001 Datone Inc. purchased 61payphones and related equipment of Dunkirk & Fredonia Telephone Company for$24,400.

 

As of December31, 2001 we owned and operated a network of approximately 1,386 payphones inthree states. Our installed payphone base generates revenue through coin calls(local and long-distance), non-coin calls (calling card, credit card, collect,and third-party billed calls using our pre-selected operator services providerssuch as Qwest, ESS Communications, and Pacific Telemanagement Services) anddial-around calls (utilizing a 1-800, 1010XXX or similar “toll free” dialingmethod to select a carrier other than our pre-selected carrier).

 

**INDUSTRYOVERVIEW**

 

Today’s telecommunicationsmarketplace was principally shaped by the 1984 court-approved divestiture byAT&T of its local telephone operations (the “AT&T Divestiture”) and themany regulatory changes adopted by the FCC and state regulatory authorities inresponse to and subsequent to the AT&T Divestiture, including theauthorization of the connection of competitive or independently owned payphonesto the public switched network. The “public switched network” is thetraditional domestic landline public telecommunications network used to carry,switch and connect telephone calls. The connection of independently ownedpayphones to the public switched network has resulted in the creation ofadditional business segments in the telecommunications industry. Prior to thesedevelopments, only the consolidated Bell system or independent LECs werepermitted to own and operate payphones. Following the AT&T Divestiture andsubsequent FCC and state regulatory rulings, the independent payphone sectordeveloped as a competitive alternative to the consolidated Bell system andother LECs by providing more responsive customer service, lower cost ofoperations and higher commissions to the owners or operators of the premises atwhich a payphone is located (“Location Owners”).

 

Prior to the AT&TDivestiture, the LECs could refuse to provide payphone service to a businessoperator or, if service was installed, would typically pay no or relativelysmall commissions for the right to place a payphone on the business premises.Following the AT&T Divestiture and the FCC’s authorization of payphonecompetition, IPPs began to offer Location Owners higher commissions on coincalls made from the payphones in order to obtain the contractual right toinstall the equipment on the Location Owners’ premises. Initially, coin revenuewas the only source of revenue for the payphone operators because they wereunable to participate in revenues from non-coin calls. However, the operatorservice provider (“OSP”) industry emerged and enabled the competitive payphoneoperators to compete more effectively with the regulated telephone companies bypaying commissions to payphone owners for non-coin calls. For the first time,IPPs were able to receive non-coin call revenue from their payphones. With thisincremental source of revenue from non-coin calls, IPPs were able to competemore vigorously on a financial basis with RBOCs and other LECs for sitelocation agreements, 

 

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as a complement to the improved customerservice and more efficient operations provided by the IPPs. As part of theAT&T Divestiture, the United States was divided into Local Access TransportAreas (“LATAs”). RBOCs were authorized to provide telephone service that bothoriginates and terminates within the same LATA (“intraLATA”) pursuant totariffs filed with and approved by state regulatory authorities. RBOCstypically provide payphone service primarily in their own respectiveterritories, and are now authorized to share in the payphone revenues generatedfrom telecommunications services between LATAs (“interLATA”). Long-distancecompanies, such as Sprint, AT&T, MCI Verizon of New York and Worldcom,provide interLATA services, and in some circumstances, also provide local orlong-distance service within LATAs. An interLATA long-distance telephone callgenerally begins with an originating LEC transmitting the call from theoriginating payphone to a point of connection with a long-distance carrier. Thelong-distance carrier, through its owned or leased switching and transmissionfacilities, transmits the call across its long-distance network to the RBOC orLEC servicing the local area in which the recipient of the call is located. Theterminating RBOC or LEC then delivers the call to the recipient.

 

Our objectives are tocontinue to review our overall cost structure, improve route density andservice quality, monitor and take action on our under performing telephones andplace an emphasis on expanding in economically favorable territories. We haveimplemented the following strategy to meet our objectives.

 

**SMARTPAYPHONE TECHNOLOGY**

 

Our payphonesutilize “smart” technology which provides voice synthesized callinginstructions, detects and counts coins deposited during each call, informs the caller atcertain intervals of the time remaining on each call, identifies the need forand the amount of an additional deposit in order to continue the call, andprovides other functions associated with the completion of calls. Through theuse of a non-volatile, electronically erasable, programmable memory chip, thepayphones can also be programmed and reprogrammed from our central computerfacilities to update rate information or to direct different types of calls toparticular carriers. Our payphones can also distinguish coins by size andweight, report to our central host computer the total amount of coin in thecoin box, perform self-diagnosis and automatically report problems to apre-programmed service number.

 

**MONITORINGAND MANAGEMENT INFORMATION SYSTEMS**

 

Our payphones utilizeproprietary and non-proprietary software that continuously tracks coin andnon-coin revenues from each payphone, as well as expenses relating to eachpayphone, including commissions payable to the Location Owners. Our technologyalso allows us to efficiently track and facilitate the activities of our fieldtechnicians via interactions from the pay telephone with our computer systemsand technical support personnel at our headquarters.

 

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**CUSTOMERSERVICE**

 

The technologywe use enables us to (i) respond quickly to equipment malfunctions and (ii)maintain accurate records of payphone activity, which can be verified bycustomers. We strive to minimize “downtime” on our payphones by identifyingservice problems as quickly as possible. We employ both advancedtelecommunications technology and trained field technicians as part of ourcommitment to provide superior customer service. The records generated throughour technology also allow for the more timely and accurate payment ofcommissions to Location Owners.

 

**OPERATIONS**

 

As of December 31, 2001 andDecember 31, 2000 we owned and operated approximately 1,386 and 1,578payphones, respectively.

 

**COIN CALLS**

 

Our payphones generate coinrevenues primarily from local calls. Historically, the maximum rate that LECsand IPPs could charge for local calls was generally set by state regulatoryauthorities and in most cases was $0.25 through October 6, 1997.****We charge $0.25 and $0.35 in New York andMassachusetts and $0.35 in Pennsylvania. In ensuring “fair compensation” forall calls, the FCC determined that local coin rates from payphones should begenerally deregulated by October 7, 1997, but provided for possiblemodifications or exemptions from deregulation upon a detailed demonstration byan individual state that there are market failures within the state that wouldnot allow market-based rates to develop. On July 1, 1997, a federal courtissued an order that upheld the FCC’s authority to deregulate local coin callrates. In accordance with the FCC’s ruling and the court order, certain RBOCs,LECs and IPPs, including our Company, began to increase rates for local coincalls from $0.25 to $0.35 after October 7, 1997.

 

Long distance carriers thathave contracted to provide transmission services to our payphones typicallycarry long distance coin calls. We pay a charge to the long-distance carriereach time the carrier transports a long-distance call for which we receive coinrevenue from an end user.

 

**NON-COINCALLS**

 

We also receive revenue fromnon-coin calls made from our payphones. Traditional non-coin calls includecredit card, calling card, prepaid calling card, collect and third party billedcalls where the caller dials “0” plus the number or simply dials “0” for anoperator.

 

The services needed tocomplete a non-coin call include providing an automated or live operator toanswer the call, verifying billing information, validating calling cards andcredit cards, routing and transmitting the call to its destination, monitoringthe call’s duration and determining the charge for the call, and billing andcollecting the applicable 

 

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charge. We have contracted with operatorservice providers to handle these calls and perform all associated functions,while paying us a commission on the revenues generated.

 

We realize additionalnon-coin revenue from various carriers pursuant to the 1996 Telecom Act and FCCregulations as compensation for “dial-around” non-coin calls made from ourpayphones. A dial-around call is made by dialing an access code for the purposeof reaching a long distance carrier company other than the one designated bythe payphone operator or using a traditional “toll free” number, generally bydialing a 1-800/888/877/866 number, a 950-XXXX number or a seven-digit“1010XXXX” code.

 

Through a series of ordersfrom 1996-1999 the Federal Communications Commission (“FCC”), attempts toaddress the financial loss created by 800 services, commonly known as “dialaround” or “toll free” calls. The FCC requires the sellers of long distance 800services to pay the payphone owner 24.8 cents per call. These funds areremitted quarterly through a service provided by the American PublicCommunication Council “APCC”.

 

If the FCC regulationrequiring sellers of long distance 800 services to pay payphone owners 24.8cents per call is reduced or done away with, it could have a negative effectupon our revenue stream. We have no control over what rules and regulations thestate and federal regulatory agencies require us to follow now or in thefuture. It is possible for future regulations to be so financially demandingthat they cause our revenue to decline so much that we could be forced to closeour business.

 

We select locations for ourpayphones where there is typically high demand for payphone service, such asconvenience stores, truck stops, service stations, grocery stores, colleges andhospitals. For many locations, historical information regarding an installedpayphone is available because payphone operators are often obligated pursuantto agreements to provide this information to Location Owners for theirpayphones. In locations where historical revenue information is not available,we rely on our site survey to examine geographic factors, population density,traffic patterns and other factors in determining whether to install apayphone. Our marketing staff attempts to obtain agreements to install ourpayphones (“Location Agreements”) at locations with favorable historical dataregarding payphone revenues. We recognize, however, that recent changes inpayphone traffic volumes and usage patterns being experienced on anindustry-wide basis warrant a continued assessment of the location deploymentof our payphones.

 

Our location agreements mayprovide for revenue sharing with the applicable location owners based on fixedpercentages of revenues. The agreements also provide for monthly billing ofpayphone service. We can terminate a location agreement on 30 days’ notice tothe Location Owner if the payphone does not generate sufficient revenue.

 

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#### **SERVICE AND MAINTENANCE**

 

We employfield service technicians, who collect coin boxes, and clean and maintain aroute of payphones. The technicians also respond to trouble calls made by Location Owners, by users of payphonesor by the telephone itself as part of its internal diagnostic procedures. Sometechnicians are also responsible for the installation of new payphones. Due tothe proximity of most of our payphones to our division offices, our polling andelectronic tracking and trouble reporting systems, and the ability of the fieldservice technicians to perform on-site service and maintenance functions, weare able to limit the frequency of trips to the payphones as well as the numberof employees needed to service the payphones.

 

**CUSTOMERS,SALES AND MARKETING**

 

The Location Owners with whomwe contract are a diverse group of small and medium businesses, which arefrequented by individuals needing payphone access. The majority of ourpayphones are located at convenience stores, truck stops, service stations,grocery stores, colleges and hospitals. As of December 31, 2001 our payphoneaccounts of 20 or more payphones represented approximately 15% of our installedpayphone base. Approximately 80% of our customers are a result of acquisitionsfrom (ITOC’s), Independent Telephone Operating Companies.

 

**SERVICE ANDEQUIPMENT SUPPLIERS**

 

Our primary suppliers providepayphone components, local line access, and long-distance transmission andoperator services. In order to promote acceptance by end users accustomed tousing RBOC or LEC-owned payphone equipment, we utilize payphones designed to besimilar in appearance and operation to payphones owned by LECs.

 

We purchase circuit boardsfrom various manufacturers for repair and installation of payphones. Weprimarily obtain local line access from various LECs, including Verizon,Citizens Communications and various other incumbent and competitive suppliersof local line access. New sources of local line access are expected to emergeas competition continues to develop in local service markets. Long-distanceservices are provided to our company by various long-distance and operatorservice providers, including AT&T, Qwest and others.

 

We expect the basicavailability of such products and services to continue in the future; however,the continuing availability of alternative sources cannot be assured. Althoughwe are not aware of any current circumstances that would require us to seekalternative suppliers for any material portion of the products or services usedin the operation of our business, transition from our existing suppliers, ifnecessary, could have a disruptive effect on our operations and could give riseto unforeseen delays and/or expenses.

 

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**ASSEMBLY ANDREPAIR OF PAYPHONES**

 

We assemble and repairpayphone equipment for our own use. The assembly of payphone equipment providesus with technical expertise used in the operation, service, maintenance andrepair of our payphones. We assemble, refurbish or replace payphones fromstandard payphone components either obtained from our sizable inventory orpurchased from component manufacturers. These components include a metal case,an integrated circuit board incorporating a microprocessor, a handset and cord,and a coin box and lock. On the occasion when components are not available frominventory, we can purchase the components from several suppliers. We do notbelieve that the loss of any single supplier would have a material adverseeffect on our assembly operations.

 

Our payphones comply with allmaterial regulatory requirements regarding the performance and quality ofpayphone equipment and have all of the operating characteristics required bythe applicable regulatory authorities, including free access to local emergency(911) telephone numbers, dial-around access to all available carriers, andautomatic coin return capability for incomplete calls.

 

**TECHNOLOGY**

 

The payphone equipment weinstall makes use of microprocessors to provide voice synthesized callinginstructions, detect and count coin deposits during each call, inform the callerat certain intervals of the time remaining on each call, identify the need forand the amount of an additional deposit and other functions associated withcompletion of calls. Through the use of non-volatile, electronically erasable,programmable read-only memory chips, our payphones can also be programmed andreprogrammed from our central computer facilities to update rate information orto direct different kinds of calls to particular carriers.

 

Our payphones can distinguishcoins by size and weight, report to a remote location the total coin in thecoin box, perform self-diagnosis and automatically report problems to apre-programmed service number, and immediately report attempts at vandalism ortheft. Many of our payphones operate on power available from the telephonelines, thereby avoiding the need for and reliance upon an additional powersource at the installation location.

 

We utilizeproprietary and non-proprietary software that tracks the coin and non-coinrevenues from each payphone as well as expenses relating to that payphone,including commissions payable to the Location Owners.

 

We provide all technicalsupport required to operate the payphones, such as computers and software andhardware specialists, at our headquarters in Liverpool New York. Our assemblyand repair support operations provide materials, equipment, spare parts andaccessories to the field. Each of our division offices and each of ourtechnician’s vans maintain inventories for immediate deployment in the field.

 

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**MAJORCUSTOMERS**

 

No individual customeraccounted for more than 5% of our consolidated revenues in 2001 and 2000.

 

**COMPETITION**

 

We compete for payphonelocations directly with RBOCs, LECs and other IPPs. We also compete,indirectly, with long-distance companies, which can offer Location Ownerscommissions on long-distance calls made from LEC-owned payphones. We competewith LECs and long-distance companies who may have substantially greaterfinancial, marketing and other resources.

 

We believe that our principalcompetition is from providers of wireless communications services for bothlocal and long distance traffic. Certain providers of wireless communicationservices have introduced rate plans that are competitively priced with certainof the products offered by us and have negatively impacted the usage ofpayphones throughout the nation.

 

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 severalLATAs or states, (3) the quality of service and the availability of specializedservices provided to a Location Owner and payphone users, and (4)responsiveness to customer service needs. We believe that we are currentlycompetitive in each of these areas.

 

Additionally, a number ofdomestic IPPs continue to experience financial difficulties from variouscompetitive and regulatory factors impacting the pay telephone industrygenerally, which may impair their ability to compete prospectively. While noassurances can be given, we believe that these circumstances create anopportunity for us to obtain new location agreements and reduced sitecommissions going forward. There are no guarantees that we will be able toobtain new location agreements that are advantageous to our company.

 

We competewith long-distance carriers that provide dial-around services that can beaccessed through 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 owed.

 

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**REGULATION**

 

The FCC and state regulatoryauthorities have traditionally regulated payphone and long-distance services,with regulatory jurisdiction being determined by the interstate or intrastatecharacter of the service and the degree of regulatory oversight varying amongjurisdictions. On September 20 and November 8, 1996, the FCC adopted initialrules and policies to implement Section 276 of the 1996 Telecom Act. The 1996Telecom Act substantially restructured the telecommunications industry,included specific provisions related to the payphone industry and required theFCC to develop rules necessary to implement and administer the provisions ofthe 1996 Telecom Act on both an interstate and intrastate basis. Among otherprovisions, the 1996 Telecom Act granted the FCC the power to preempt statepayphone regulations to the extent that any state requirements are inconsistentwith the FCC’s implementation of Section 276.

 

**STATE ANDLOCAL REGULATION**

 

State regulatory authoritieshave been primarily responsible for regulating the rates, terms and conditionsfor intrastate payphone services. Regulatory approval to operate payphones in astate typically involves submission of a certification application and anagreement by our company to comply with applicable rules, regulations andreporting requirements. The states and the District of Columbia have adopted avariety of state-specific regulations that govern rates charged for coin andnon-coin calls, as well as a broad range of technical and operationalrequirements. The 1996 Telecom Act contains provisions that require all statesto allow payphone competition on fair terms for both LECs and IPPs. Stateauthorities also in most cases regulate LEC tariffs for interconnection ofindependent payphones, as well as the LECs’ own payphone operations andpractices.

 

We are also affected by stateregulation of operator services. Most states have capped the rates thatconsumers can be charged for coin toll calls and non-coin local and intrastatetoll calls made from payphones. In addition, we must comply with regulationsdesigned to afford consumers notice at the payphone location of thelong-distance company or companies servicing the payphone and the ability to accessalternate carriers. We believe that we are currently in material compliancewith all such regulatory requirements.

 

In accordancewith requirements under the 1996 Telecom Act, state regulatory authorities arecurrently reviewing the rates that LECs charge IPPs for local line access and associated services.Local line access charges have been reduced in certain states, and we believethat selected states’ continuing review of local line access charges, coupledwith competition for local line access service resulting from implementation ofthe 1996 Telecom Act, may lead to more options available to us for local lineaccess at competitive rates. We cannot provide assurance, however, that suchoptions or local line access rates will become available.

 

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**OUREMPLOYEES**

 

We currently have six fulltime employees. We may, from time to time, supplement our regular work force asnecessary with temporary and contract personnel. None of our employees arerepresented by a labor union. We believe we have a good relationship with ouremployees.

 

**A NOTE ABOUTFORWARD-LOOKING STATEMENTS**

 

This report (including theforegoing “Description of Business” and the section below entitled“Management’s Discussion and Analysis of Financial Condition and Results ofOperations”) contains forward-looking statements that involve risks anduncertainties. You should exercise extreme caution with respect to allforward-looking statements contained in this report. Specifically, the followingstatements are forward-looking:

 

•             statements regarding our overall strategy forexpansion of our company, including without limitation our intended markets andfuture products;

 

•             statements regarding our research anddevelopment efforts;

 

•             statements regarding the plans and objectivesof our management for future operations, including, without limitation, plansto explore other non telecommunication business along with the size and natureof the costs we expect to incur and the people and services we may employ;

 

•             statements regarding the future of ourcompany, our competition or regulations that may affect us;

 

•             statements regarding our ability to competewith third parties;

 

•             any statements usingthe words “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similarwords; and

 

•             any statements otherthan historical fact.

 

We believe that it isimportant to communicate our future expectations to our shareholders.Forward-looking statements reflect the current view of management with respectto future events and are subject to numerous risks, uncertainties andassumptions, including, without limitation, the factors listed in “RisksAssociated with Our Business.” Although we believe that the expectationsreflected in such forward-looking statements are reasonable, we can give noassurance that such expectations will prove to be correct. Should any one ormore of these or other risks or uncertainties materialize or should anyunderlying assumptions prove incorrect, actual results are likely to varymaterially from those described in this report. There can be no assurance thatthe projected results will 

 

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occur, that these judgments or assumptionswill prove correct or that unforeseen developments will not occur.

 

Any person orentity may read and copy our reports filed with the Securities and ExchangeCommission at the SEC’s Public Reference Room at 450 Fifth Street, NW,Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room bycalling the SEC toll free at 1-800-SEC-0330. The SEC also maintains an Internetsite at HTTP://WWW.SEC.GOV where reports, proxies and informationalstatements on public companies may be viewed by the public.

 

**ITEM 2.****                       ****DESCRIPTION OF PROPERTY**

 

We leaseapproximately 5600 square feet of space in Liverpool, New York andapproximately 700 square feet of space in Gibsonia, Pennsylvania. These twolocations provide office space and facilities for assembly and repair ofpayphones.

 

**ITEM 3.****                       ****LEGAL PROCEEDINGS**

 

Not Applicable

 

**ITEM 4.****                       ****SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

Not Applicable

 

**PART II**

 

**ITEM 5.****                       ****MARKET FORCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

In the third calendar quarter of 2001, ourcommon stock was included in the NASD’s Bulletin Board system under the symbol“USPO”. The following table sets forth for the respective periods indicated theprices of the common stock in the over-the-counter market, as reported andsummarized by the OTC Bulletin Board. Such prices are based on inter-dealer bidand asked prices, without markup, markdown, commissions, or adjustments and maynot represent actual transactions.

 
| **Calendar Quarter Ended** |   | **High Bid ($)** |   | **Low Bid ($)** |   |
|----------------------------|--------|------------------|--------|-----------------|--------|
| September  30, 2001        |   | $                | 0.84   |            | $      | 0.70 |   |
| December  31, 2001         |   | $                | 1.55   |            | $      | 1.35 |   |

 

Since inception, no dividends have been paidon our common stock. We intend to retain any earnings for use in our businessactivities, so it is not expected that any dividends on our common stock willbe declared and paid in the foreseeable future. At December 31, 2001, therewere approximately 271 holders of record of our common stock.

 

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Any future dividends will beat the discretion of the board of directors, after taking into account variousfactors, including among others, operations, current and anticipated cash needsand expansion plans, the income tax laws then in effect, the requirements ofUtah law, and any restrictions that may be imposed by our future credit arrangements.

 

Since inception, we haveissued the following unregistered securities. Five Thousand Shares of commonstock were issued to David Singleton, a resident of the State of Florida, inlieu of a debt owed by our company. The shares were issued under Section 4(2)of the Securities Act of 1933, as amended. Five Hundred Shares of common stockwere issued to Paul Abert, a resident of the State of New Jersey, in lieu of adebt owed by our company. The shares were issued under Section 4(2) of theSecurities Act of 1933, as amended.

 

**ITEM 6.       MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**The following discussionand analysis should be read in conjunction with our Company’s consolidatedfinancial statements and notes.**

 

Certainstatements contained below are forward-looking statements (rather thanhistorical facts) that are subject to risks and uncertainties that could causeactual results to differ materially from those described in the forward-lookingstatements.

 

Our Company’srevenue for fiscal year 2000 and 2001 is derived from the following threegeneral sources.

 

1.  Commission Income. Commission incomeincludes commissions from operator service telecommunications companies andcommissions for toll free calls from all payphones. The commissions foroperator services are paid 45 days in arrears. Dial Around compensation isbilled quarterly and received three and one half months behind the billedquarter.

 

2.  Coin calls. Coin calls represent calls paidfor by customers who deposit coins into the payphones. Coin call revenue isrecorded as the actual amount of coins collected from the payphones. Some coincollections are made on a daily basis and others more often if the particularpayphone has significant usage. The coins are counted in house and depositedweekly.

 

3.  Payphone sales, repairs and pre-paid phonecards sales. We derive income from the sale and repair of a payphone. We cannegotiate the sale, of a payphone to a site owner when it becomes costprohibitive to maintain or if a customer offers to buy the phone at a pricethat is favorable to our company. The new owner or lessee becomes responsiblefor the maintenance and operational costs of the payphone. We sell pre-paidphone cards at some of our payphone locations. Sales and repairs of payphonesand the 

 

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sale of pre-paid phone cards are notsubject to the same collection delays as the other types of operating income.

 

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 a significant increase inpayphone usage. Revenues are generally lowest in the first quarter and highestin the third quarter.

 

**YEARENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000**

 

**Revenues**

 

Total revenuedecreased in 2001 by $184,737 or 14.33% from $1,289,122 in the year endedDecember 31, 2000 to $1,104,385 in the year ended December 31, 2001. Thisdecrease was primarily attributable to removal of unprofitable payphonelocations. We believe that lower call volumes on our payphones are the resultof the growth in wireless and cell phone usage.

 

Commissions decreasedby $36,620, or 14.02% from $261,180 in the year ended December 31, 2000 to$224,560 in the year ended December 31, 2001. The amount of $261,180 forCommissions in 2000 is a combination of $255,380 listed as Commissions and$5,800 listed as reimbursed fees. This decrease was the result of the reductionin payphones; fewer operator assisted calls, the increased use of wireless andcell phones as well as the increased use of prepaid calling cards.

 

Coin callrevenues decreased by $75,831 or 13.94% from $543,900 in 2000 to $468,069 in2001. The decrease in coin call revenue was primarily attributable to ourongoing strategy of removing unprofitable payphones. We believe that theincreased competition from wireless and other public communication servicesalso impacted our revenue.

 

Non-coin callrevenue, which is comprised primarily of dial-around revenue and operatorservice revenue decreased by $97,039 from $310,136 in 2000 to $213,097 in 2001or approximately 31.3%. This decrease was primarily attributable to the removalof unprofitable phone locations and lower call volumes on our payphones. Webelieve that lower call volumes are a result of the overall growth in cellphone and wireless communication use by the public. In addition, thedial-around decreased because of slow payment as well as underpayment ofdial-around revenues caused by deficiencies in the established payment andtracking process now under regulatory review by the FCC.

 

Service &Repair Sales increased by $18,819 from $70,436 in 2000 to $89,255 in 2001.Equipment sales decreased by $59,519, this decrease is due in part to a largeone time sale of $52,040 to an urban hospital in the second quarter of 2000.Phone card sales increased by $50,179 from $24,415 in 2000 to $74,594 in 2001. Weplaced phone card 

 

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vending machines in hightraffic areas in an effort to maximize their use. In the second quarter of 2001we first reported ATM machines as a small source of revenue. ATM’s added $15,273to our overall revenue in 2001. We operated three ATM machines at threedifferent locations. They provided revenue from transaction fees and surchargesthat we received on every transaction completed by the customer.

** **

**Cost of Sales**

** **

**Our overall cost ofsales increased for the year ending December 31, 2001 by $152,031 or 16.76%from the year ending December 31, 2000. Telecommunication costs increased by$34,885 because we provided telephone service to 1,730 payphones in 2001 ascompared to 1,578 payphones in 2000. The increased number of payphones for 2001was a result of the Chautauqua & Erie, and Dunkirk & Fredoniaacquisitions. As of December 31, 2001, we operated a network of approximately1,386 payphones in three states. We continued to remove phones that were nolonger profitable. When a low revenue payphone is identified, we offer the siteowner an opportunity to purchase the equipment. If the site owner does notpurchase the payphone, we remove it from the site. Our installed payphone basegenerates revenue through coin calls (local and long-distance), non-coin calls(calling card, credit card, collect, and third party billed calls using ourpre-selected operator service).**

** **

Commissionspayable decreased by $13,597 from $38,521 in 2000 to $24,924 in 2001. Webelieve this was due to a decrease in payphone usage. Approximately 50% of oursite owners are no longer receiving a commission. Most of them are beinginvoiced monthly for payphone services. Contractor fees increased by $40,610from $36,197 in 2000 to $76,807 in 2001. We believe that this was a result ofthe larger geographical area that our Contractors must cover in order tomaintain our phones. We had depreciation of $214,769 in 2000 and $303,887 in2001. The increase of $89,118 in depreciation is due directly to theacquisition of 152 payphones and related equipment in 2001 and a full year ofdepreciation taken on assets that we acquired in 2000. We own telephoneequipment and motor vehicles that provide a service for a number of years. Theterm of service is commonly referred to as the “useful life” of the asset.Because an asset such as telephone equipment or a motor vehicle is expected toprovide service for many years, it is recorded as an asset rather than anexpense in the year acquired. A portion of the cost of the long-lived asset isreported as an expense each year throughout the useful life of the asset.

 

Cost of salesfor repairs, service, travel and supplies decreased by $1,239. This was aresult of our management team’s ongoing efforts to reduce cost. ATM parts added$2,254 to the cost of sales for 2001. This was the cost associated with partsneeded to maintain the machines.

** **

**Operation and Administrative Expenses**

** **

**Operating expensesdecreased by $86,930 or 13.59% over the same period in 2000. This decrease is adirect result of our management working to reduce expenses. Salaries and wagesincreased in 2001 by $7,816 over the same period in 2000. Related**

** **

**16**

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** **

**payroll taxes decreased by $8,200. Insuranceexpense increased by $6,440 in 2001 when compared to 2000. We changed insurancecompanies and increased our coverage in an effort to protect our company. Rentincreased by $9,068 when compared to 2000. This increase reflects a full year ofrental payments in 2001 for office space in Pennsylvania and approximatelyseven months of rental payments for extra storage space in New York. Telephone,utilities, office, bad debt and other miscellaneous expenses together accountfor a decrease of $131,176 when compared to the same period ending December 31,2000. Professional fees increased by $19,887 over 2000. Professional feesinclude attorneys and accountants. Expenses for outside services increased by$8,138 over 2000. This expense was the result of temporary employees we hiredin 2001. Vehicle expense increased by $1,097 in 2001 when compared to 2000.This expense includes the cost of maintenance for five vehicles.**

** **

**Interest expense in theyear ended December 31, 2001 increased by $11,097 from $9,755 in the year endedDecember 31, 2000 to $20,852 in the year ended December 31, 2001. This increaseis attributable to increased borrowing levels related to our two lines ofcredit. We borrowed $114,066 more in 2001 than in 2000.**

** **

**As of December 31, 2001,we have a note payable to Key Bank in the amount of $102,952. We were able toreduce the principle balance of this note by $5,200 between June 2001 andDecember 31, 2001. We have an additional unsecured line of credit with theLilly Beter Capital Group, Ltd. in the amount of $200,000. As of December 31,2001 we have used $110,000 in part to fund the purchase of payphone routes.**

 

The increased use of thecellular telephone has substantially impacted the public’s use of payphones,and we believe that the trend will continue to increase as the cost forcellular usage declines. However, we have attempted to minimize some of theimpact from cellular use by avoiding traditional travel locations wherecellular use is high. There are no guarantees that we will be successful inminimizing the effects of increased cellular usage. We intend to increaserevenue by advertising. We do not plan to expend large sums of money toadvertise. The advertisement will be affixed to each payphone booth.

 

We plan toincrease our expansion efforts by acquiring additional phones from smallindependent local exchange companies, placing the upgraded payphones at newsites, and selling more prepaid phone cards. We intend to explore the use ofphone-to-phone Internet usage on our payphones as a means of further reducingcosts in the future. We will be exploring the use of existing services while wedevelop our own proprietary software and services for resale to other payphoneproviders. We intend to develop an infrastructure to support our futureexpansion, sales and marketing efforts.

 

We also planto expand our company by purchasing the assets of other companies or mergingother companies that are not in the telecommunications business into our mergersubsidiaries. We intend to enter into deals with individuals or companies whohave an established track record and revenue stream as well as assets that willenhance our growth. Theanalysis of potential business acquisitions or mergers will be undertaken 

 

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by or under the supervision ofour management. They will rely on their own collective business judgment inevaluating businesses that we might acquire. There is no assurance that any ofthese companies will be successful in the future

 

Theacquisition of a business opportunity may be made by purchase, merger, exchangeof stock, or otherwise, and may encompass assets or a business entity, such asa corporation, joint venture, or partnership. Because we have limited capital,we must be very selective about which entity we will do business with. Weintend to seek opportunities that demonstrate the potential of long-term growthas opposed to short-term earnings.

 

No assurance can be giventhat we will be successful in finding or acquiring a desirable businessopportunity, given the limited funds that are expected to be available foracquisitions, or that any acquisition that occurs will be on terms that arefavorable to our company or our stockholders. We do not propose to restrict oursearch for investment opportunities to any particular geographical area orindustry.

 

To a largeextent, a decision to participate in a specific business deal will be madeafter we analyze the quality of the other company’s management and personnel,the acceptability of new products or marketing concepts, the merit of theirtechnology or product, the perceived benefit the company will derive frombecoming a publicly held entity, and numerous other factors which are difficultto analyze. We anticipate that the historical operations of a specific businessmay not be indicative of the potential for future success. We may need to shiftmarketing approaches, expand significantly, change product emphasis, changemanagement, or make other changes that meet our business requirements.

 

We will consider, among other things, thefollowing factors:

 

•                  Potential for growth and profitability,indicated by new technology, anticipated market expansion, or new products;

 

•                  Our perception of how any particular businessopportunity will be received by the investment community and by ourstockholders;

 

•                  Capital requirements and anticipatedavailability of required funds, to be provided by us;

 

•                  The extent to which the business opportunitycan be advanced;

 

•                  Competitive position as compared to othercompanies of similar size and experience within the industry segment as well aswithin the industry as a whole;

 

•                  Strength and diversity of existing management,or management prospects that are scheduled for recruitment;

 

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•                  The cost of our participation as compared tothe perceived tangible and intangible values and potential; and

 

•                  The accessibility of required managementexpertise, personnel, raw materials, services, professional assistance, andother required items.

 

We may consider some or allof these factors in the selection of a business opportunity, and our managementwill attempt to analyze all factors appropriate to each opportunity and make adetermination based upon reasonable investigative measures and available data.Potentially available business opportunities may occur in many differentindustries and at various stages of development, all of which will make thetask of comparative investigation and analysis of such business opportunitiesextremely difficult and complex. Potential investors must recognize that,because of our limited capital available for investigation and management’slimited experience in business analysis, we may not discover or adequatelyevaluate adverse facts about the assets or company to be acquired.

 

We cannot predict when wemight locate target assets or companies. We anticipate that the analysis ofspecific proposals and the selection of business opportunities could take manymonths to finalize. Prior to making a decision to participate in a purchase ormerger, we will usually request written materials from the business. Thisrequest will ask for a variety of information which may include but is notlimited to a description of products and services, a company history,management resumes, financial information, relevant contracts, availableprojections with related assumptions upon which they are based, an explanationof proprietary products and services, evidence of existing patents, trademarks,or service marks, or rights thereto, present and proposed forms of compensationto management, a financial plan of operation and estimated capitalrequirements, as well as any other information deemed relevant.

 

We anticipatethat the investigation of specific business opportunities, the negotiation,drafting and execution of relevant agreements, disclosure documents and otherinstruments will require substantial time and attention by management as wellas substantial costs for accountants, attorneys, consultants and othernecessary professionals. If we abandon a merger or acquisition, the costsincurred for investigation will be lost. Because many providers of goods andservices require payment at the time, or soon after the goods or services areprovided, our inability to pay until an indeterminate future time may delay ormake it impossible to complete a merger or acquisition.

 

**RISKSASSOCIATED WITH OUR BUSINESS**

 

In addition tothe other information in this report, the following risks should be consideredcarefully in evaluating our business and prospects:

 

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**UNLESS WE CAN REVERSE OUR HISTORY OF LOSSES, WE MAY HAVE TO DISCONTINUE OPERATIONS.**

 

If we areunable to achieve or sustain profitability, or if operating losses increase inthe future, we may not be able to remain a viable company and may have todiscontinue operations. Our expenses have historically exceeded our revenuesand we have had losses in all fiscal years of operation, including those infiscal years 2000 through 2001, and the losses are projected to continue in2002. Our net losses were $11,665 and $556,310 for fiscal years ended 2000,2001 respectively. We have been concentrating on the development of ourproducts, services and business plan. Our management believes that we can beprofitable and that our business plan will be successful; however, there is noassurance that we will be successful in implementing our business plan or thatwe will be profitable now or in the future.

 

**WE MAY NOTSUCCEED OR BECOME PROFITABLE.**

 

We will need to generatesignificant revenues to achieve profitability and we may be unable to do so.Even if we do achieve profitability, we may not be able to sustain or increaseprofitability in the future. We expect that our expenses will continue toincrease and there is no guarantee that we will not experience operating lossesand negative cash flow from operations for this fiscal year or for theforeseeable future. If we do not achieve or sustain profitability, then we maybe unable to continue our operations.

 

**WE WILL NEEDADDITIONAL CAPITAL FINANCING IN THE FUTURE.**

 

We may be required to seekadditional financing in the future to respond to increased expenses orshortfalls in anticipated revenues, accelerate product development anddeployment, respond to competitive pressures, develop new or enhanced products,or take advantage of unanticipated acquisition opportunities. We cannot becertain we will be able to find such additional financing on reasonable terms,or at all. If we are unable to obtain additional financing from Lilly BeterCapital Group, Ltd. or Key Bank, when needed, we could be required to modifyour business plan in accordance with the extent of available financing.

 

**IF WE AREUNABLE TO COMPETE SUCCESSFULLY IN THIS HIGHLY COMPETITIVE MARKET, OUR BUSINESSWILL FAIL.**

 

The market for payphones isworldwide and highly competitive and we expect competition to intensify in thefuture. There are few substantial barriers to entry, and additional competitionfrom existing competitors and new market entrants will likely occur in thefuture. An increase in competitive pressures in our market or our failure tocompete effectively may result in pricing reductions, reduced gross margins andloss of market 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 

 

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to adapt more quickly to new technologies andcustomer needs, devote greater resources to the promotion or sale of theirproducts and services, initiate or withstand substantial price competition,take advantage of acquisition or other opportunities more readily or developand expand their product and service offerings more quickly. In addition, ourcompetitors may bundle products that compete with ours. If these companies wereto use their greater financial, technical and marketing resources in our targetmarkets, it could adversely affect our business.

 

**WE MAY FAILTO ENGAGE IN STRATEGIC ACQUISITIONS, WHICH COULD LIMIT OUR FUTURE GROWTH.**

 

One of our strategies forgrowth is to engage in selective strategic acquisitions of key products,technologies or companies. Our ability to conduct such acquisitions is limitedby our ability to identify potential acquisition candidates, obtain necessaryfinancing and consummate the acquisitions. In the event we are unable toidentify and take advantage of these opportunities, we may experiencedifficulties in growing our business. In addition, pursuing acquisitionopportunities could divert our management’s attention from our ongoing businessoperations and result in decreased operating performance.

 

**IF WE ENGAGEIN ACQUISITIONS, WE MAY EXPERIENCE SIGNIFICANT COSTS AND DIFFICULTYASSIMILATING THE OPERATIONS OR PERSONNEL OF THE ACQUIRED COMPANIES, WHICH COULDTHREATEN****OUR FUTURE GROWTH.**

 

If we make any acquisitions,we could have difficulty assimilating the operations, technologies and productsacquired or integrating or retaining personnel of acquired companies. Inaddition, acquisitions may involve entering markets in which we have no orlimited direct prior experience. The occurrence of any one or more of thesefactors could disrupt our ongoing business, distract our management andemployees and increase our expenses. In addition, pursuing acquisitionopportunities could divert our management’s attention from our ongoing businessoperations and result in decreased operating performance. Moreover, ourprofitability may suffer because of acquisition-related costs or amortizationof acquired goodwill and other intangible assets. Furthermore, we may have toincur debt or issue equity securities in future acquisitions. The issuance ofequity securities would dilute our existing stockholders.

 

**IF WE DO NOT INCREASE OUR BRAND AND NAME RECOGNITION, OUR ABILITY TO SELLOUR PRODUCTS WILL BE REDUCED AND OUR BUSINESS AND OPERATING RESULTS WILLSUFFER.**

 

Most of our target customersare small- and medium-sized businesses. We believe that establishing andmaintaining recognition in the payphone business is critical for attracting andexpanding this targeted customer base because we believe these targetedcustomers generally prefer to do business with established companies. We alsobelieve that the importance to us of name recognition and reputation willincrease as competition 

 

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in our market increases. Promotion andenhancement of our current or future acquired products will depend on the effectivenessof our marketing and advertising efforts and on our ability to continueproviding high-quality products and services. We may not be successful ineither regard. If we are not successful, our ability to generate revenue willbe limited.

 

**IFWE CANNOT ATTRACT, RETAIN, MOTIVATE AND INTEGRATE ADDITIONAL SKILLED PERSONNEL,OUR ABILITY TO COMPETE WILL BE IMPAIRED.**

 

Many of our current andpotential competitors have more employees than we do. Our success depends inlarge part on our ability to attract, retain and motivate highly qualifiedmanagement and technical personnel. We face intense competition for qualifiedpersonnel. The industry in which we compete has a high level of employeemobility and aggressive recruiting of skilled personnel. If we are unable tocontinue to employ our key personnel or to attract and retain qualifiedpersonnel in the future, our ability to successfully execute our business planwill be jeopardized and our growth will be inhibited.

 

**OUR FAILURE TO MANAGE PLANNED GROWTH COULD ADVERSELY AFFECT OUR ABILITYTO INCREASE REVENUES AND BECOME PROFITABLE.**

 

If we do not effectivelymanage our planned growth, our ability to significantly increase revenues andbecome profitable will be limited. Our growth has strained and will continue tostrain our management, financial controls, operations systems, personnel andother resources. If we do not manage our planned future growth effectively, ourefforts to increase our customer base and product and service offerings may notbe successful. In addition, our planned growth could adversely affect ourability to provide services and technical support in a timely manner and inaccordance with customer expectations. To manage growth of our operations, wemust:

 

•                  improve existingoperational, financial and management information controls, reporting systemsand procedures;

 

•                  hire, train and manage additional qualifiedpersonnel; and

 

•                  effectively manage multiple relationships withour customers, vendors and other third parties.

 

We may not be able to install managementinformation and control systems in an efficient and timely manner, and ourcurrent or planned personnel, systems, procedures and controls may not beadequate to support our future operations.

 

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**WE MAY BEUNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS OR MAY BE SUED BY THIRDPARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS.**

 

The telecommunicationsindustry is characterized by the existence of a large number of patents andfrequent litigation based on allegations of trade secret, copyright or patentinfringement. We may inadvertently infringe a patent of which we are unaware.In addition, because patent applications can take many years to issue, theremay be a patent application now pending of which we are unaware that will causeus to be infringing when it is issued in the future. If we make anyacquisitions, we could have similar problems in those industries. Although weare not currently involved in any intellectual property litigation, we may be aparty to litigation in the future to protect our intellectual property or as aresult of our alleged infringement of another’s intellectual property, forcingus to do one or more of the following:

 

•           Cease selling, incorporating or using productsor services that incorporate the challenged intellectual property;

•           Obtain from the holder of the infringedintellectual property right a license to sell or use the relevant technology,which license may not be available on reasonable terms; or

•           Redesign those products or services thatincorporate such technology.

 

A successful claim ofinfringement against us, and our failure to license the same or similartechnology, could adversely effect our business, asset value or stock value.Infringement claims, with or without merit, would be expensive to litigate orsettle, and would divert management resources.

 

Our employees may be bound byconfidentiality and other nondisclosure agreements regarding the trade secretsof their former employers. As a result, our employees or we could be subject toallegations of trade secret violations and other similar violations if claimsare made that they breached these agreements.

 

**BECAUSE OUROFFICERS AND DIRECTORS ARE INDEMNIFIED AGAINST CERTAIN LOSSES, WE MAY BEEXPOSED TO COSTS ASSOCIATED WITH LITIGATION.**

 

If our directors or officers become exposedto liabilities invoking the indemnification provisions, we could be exposed toadditional unreimbursable costs, including legal fees. Our articles ofincorporation and bylaws provide that our directors and officers will not beliable to us or to any shareholder and will be indemnified and held harmlessfor any consequences of any act or omission by the directors and officersunless the act or omission constitutes gross negligence or willful misconduct.Extended or protracted litigation could have a material adverse effect on ourcash flow.

 

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**WE WILLDEPEND ON OUTSIDE MANUFACTURING SOURCES AND SUPPLIERS.**

 

We may contract with thirdparty manufacturers to produce our products and we will depend on third partysuppliers to obtain the raw materials necessary for the production of ourproducts. We do not know what type of contracts we will have with such thirdparty manufacturers and suppliers. In the event we outsource the manufacture ofour products, we will have limited control over the actual production process.Moreover, difficulties encountered by any one of our third party manufacturers,which result in product defects, delayed or reduced product shipments, costoverruns or our inability to fill orders on a timely basis, could have anadverse impact on our business. Even a short-term disruption in ourrelationship with third party manufacturers or suppliers could have a materialadverse effect on our operations. We do not intend to maintain an inventory ofsufficient size to protect ourselves for any significant period of time againstsupply interruptions, particularly if we are required to obtain alternativesources of supply.

 

**OUR STOCKPRICE MAY BE VOLATILE.**

 

The market price of our common stock willlikely fluctuate significantly in response to the following factors, some ofwhich are beyond our control:

 

•             Variations in our quarterlyoperating results;

•             Changes in financial estimates ofour revenues and operating results by securities analysts;

•             Changes in market valuations oftelecommunications equipment companies;

•             Announcements by us of significantcontracts, acquisitions, strategic partnerships, joint ventures or capitalcommitments;

•             Additions or departures of keypersonnel;

•             Future sales of our common stock;

•             Stock market price and volumefluctuations attributable to inconsistent trading volume levels of our stock;

•             Commencement of or involvement inlitigation.

 

In addition, the equity markets haveexperienced volatility that has particularly effected the market prices ofequity securities issued by technology companies and that often has beenunrelated or disproportionate to the operating results of those companies.These broad market fluctuations may adversely effect the market price of ourcommon stock.

 

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**WE DO NOTANTICIPATE PAYING ANY DIVIDENDS ON OUR COMMON STOCK.**

 

We have not paid any dividends on our CommonStock since inception and do not anticipate paying any dividends on our CommonStock in the foreseeable future. Instead, we intend to retain any futureearnings for use in the operation and expansion of our business.

 

**IF WE ARESUBJECT TO SEC REGULATIONS RELATING TO LOW-PRICED STOCKS, THE MARKET FOR OURCOMMON STOCK COULD BE ADVERSELY EFFECTED.**

 

The Securities and Exchange Commission hasadopted regulations concerning low-priced (or “penny”) stocks. The regulationsgenerally define “penny stock” to be any equity security that has a marketprice less than $5.00 per share, subject to certain exceptions. If our sharesare offered at a market price less than $5.00 per share, and do not qualify forany exemption from the penny stock regulations, our shares may become subjectto these additional regulations relating to low-priced stocks.

 

The penny stock regulations require thatbroker-dealers who recommend penny stocks to persons other than institutionalaccredited investors make a special suitability determination for thepurchaser, receive the purchaser’s written agreement to the transaction priorto the sale and provide the purchaser with risk disclosure documents thatidentify risks associated with investing in penny stocks. Furthermore, the broker-dealermust obtain a signed and dated acknowledgment from the purchaser demonstratingthat the purchaser has actually received the required risk disclosure documentbefore effecting a transaction in penny stock. These requirements havehistorically resulted in reducing the level of trading activity in securitiesthat become subject to the penny stock rules.

 

The additional burdens imposed uponbroker-dealers by these penny stock requirements may discourage broker-dealersfrom effecting transactions in the common stock, which could severely limit themarket liquidity of our common stock and our shareholders’ ability to sell ourcommon stock in the secondary market.

 

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**ITEM 7.        FINANCIAL STATEMENTS**

 

**USIP.COM, INC.**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

**TABLE OF CONTENTS**

 
| **INDEPENDENT AUDITORS’ REPORT**                                                                   |
|---------------------------------------------------------------------------------------------------------|
|                                                                                                    |   |
| **FINANCIAL  STATEMENTS**                                                                               |
|                                                                                                    |   |
| Consolidated Balance Sheet At December 31, 2001                                                         |
|                                                                                                    |   |
| Consolidated Statements of Income and  Retained Earnings For the Years Ended December 31, 2001 and 2000 |
|                                                                                                    |   |
| Consolidated Statements of Stockholders’ Equity For the Years Ended December  31, 2001 and 2000    |
|                                                                                                    |   |
| Consolidated Statements of Cash Flows For  the Years Ended December 31, 2001 and 2000                   |
|                                                                                                    |   |
| Notes to Consolidated Financial Statements  For the Years Ended December 31, 2001 and 2000              |

 

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Report of IndependentAuditors

 

The Stockholders and Board ofDirectors

USIP.COM, Inc.

 

We have audited theaccompanying consolidated balance sheets of USIP.Com, Inc. as of December 31,2001 and 2000 and the related consolidated statements of income, stockholders’equity and cash flows for the years then ended. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements base on our audit.

 

We conducted our audit inaccordance with generally accepted auditing standards generally accepted in theUSA. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatements. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the overall financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of USIP.Com, Inc. and subsidiaries as of December 31, 2001and 2000, and the results of operations and their cash flows for the year thenended, in conformity with generally accepted accounting principles, generallyaccepted in the USA.

 

CE Forse & Co., Ltd.

 

March 26, 2002

 

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USIP.COM,INC

CONSOLIDATED BALANCE SHEET

December31

 
|                                                                                                       |   | **2001**  |      | **2000**  |   |
|------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| ASSETS                                                                                                     |   |      |      |      |   |
| CURRENT ASSETS                                                                                             |   |      |      |      |   |
| Cash                                                                                                       |   | $         | 10,825    |      | $      | 117,619 |   |
| Commissions and Sales Receivable, Net                                                                      |   | 144,772   |      | 166,033   |   |
| Inventory                                                                                                  |   | 46,410    |      | 36,250    |   |
| Prepaid Expenses                                                                                           |   | 2,866     |      |      |   |
| TOTAL CURRENT ASSETS                                                                                       |   | 204,873   |      | 319,902   |   |
| FIXED ASSETS                                                                                               |   |      |      |      |   |
| Telephone and Office Equipment                                                                             |   | 1,922,887 |      | 1,846,572 |   |
| Vehicle                                                                                                    |   | 74,542    |      | 74,542    |   |
|                                                                                                       |   | 1,997,429 |      | 1,921,114 |   |
| Less: Accumulated Depreciation                                                                             |   | (609,882  | )         | (310,711  | )      |
|                                                                                                       |   |      |      |      |   |
| Net Fixed Assets                                                                                           |   | 1,387,547 |      | 1,610,403 |   |
| TOTAL ASSETS                                                                                               |   | $         | 1,592,420 |      | $      | 1,930,305 |   |
|                                                                                                       |   |      |      |      |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                  |   |      |      |      |   |
| Current Liabilities                                                                                        |   |      |      |      |   |
| Accounts Payable                                                                                           |   | $         | 294,605   |      | $      | 203,809 |   |
| Line of Credit                                                                                             |   | 212,952   |      | 98,886    |   |
| Accrued Payroll and Payroll Taxes                                                                          |   | 5,622     |      | 5,345     |   |
| Accrued State Gross Receipts Taxes                                                                         |   | 13,036    |      | 20,642    |   |
| Other Accrued Expenses                                                                                     |   | 23,149    |      | 1,508     |   |
| Current Portion of Long-Term Debt                                                                          |   | 10,291    |      | 13,990    |   |
| TOTAL CURRENT LIABILITIES                                                                                  |   | 559,655   |      | 344,180   |   |
|                                                                                                       |   |      |      |      |   |
| Long-Term Liabilities                                                                                      |   |      |      |      |   |
| Notes Payable                                                                                              |   | 40,814    |      | 53,228    |   |
| Less Current Portion                                                                                       |   | 10,291    |      | 13,990    |   |
| TOTAL LONG-TERM LIABILITIES                                                                                |   | 30,523    |      | 39,238    |   |
| TOTAL LIABILITIES                                                                                          |   | 590,178   |      | 383,418   |   |
|                                                                                                       |   |      |      |      |   |
| STOCKHOLDERS’ EQUITY                                                                                  |   |      |      |      |   |
| Common Stock, $.01 par value   25,000,000 Shares authorized, 17,619,388 shares issued and outstanding |   | 176,194   |      | 176,194   |   |
|                                                                                                       |   |      |      |      |   |
| Additional Paid In Capital                                                                                 |   | 1,382,358 |      | 1,382,358 |   |
|                                                                                                       |   |      |      |      |   |
| Retained Earnings                                                                                          |   | (556,310  | )         | (11,665   | )      |
|                                                                                                       |   |      |      |      |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                            |   | 1,002,242 |      | 1,546,887 |   |
|                                                                                                       |   |      |      |      |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                            |   | $         | 1,592,420 |      | $      | 1,930,305 |   |

 

See Accountant’s Report and Notes To Financial Statement

 

28

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USIP.COM,INC.

CONSOLIDATEDSTATEMENT OF INCOME AND RETAINED EARNINGS

Forthe Years Ended December 31,

 
|                               |   | **2001**   |     | **2000**   |   |
|------------------------------------|--------|------------|----------|------------|--------|
| SALES                              |   |       |     |       |   |
| Commissions                        |   | $          | 224,560  |       | $      | 255,380 |   |
| Coin Collections                   |   | 468,069    |     | 543,900    |   |
| Dial Around                        |   | 213,097    |     | 310,136    |   |
| Equipment Sales                    |   | 19,537     |     | 79,055     |   |
| Phone Card Sales                   |   | 74,594     |     | 24,415     |   |
| ATM Revenue                        |   | 15,273     |     | —     |   |
| Service and Repair Sales           |   | 89,255     |     | 70,436     |   |
| Reimbursed Fees                    |   | —     |     | 5,800      |   |
| Total Sales                        |   | 1,104,385  |     | 1,289,122  |   |
|                               |   |       |     |       |   |
| COST OF SALES                      |   |       |     |       |   |
| Telecommunications Costs           |   | 570,747    |     | 535,862    |   |
| Commissions                        |   | 24,924     |     | 38,521     |   |
| Contractor Fees                    |   | 76,807     |     | 36,197     |   |
| Repairs and Service Supplies       |   | 28,193     |     | 17,944     |   |
| Depreciation                       |   | 303,887    |     | 214,769    |   |
| Phone Cards and Phone Costs        |   | 36,301     |     | 48,720     |   |
| Travel                             |   | 18,326     |     | 7,008      |   |
| Supplies                           |   |       |     | 8,133      |   |
| Total Cost of Sales                |   | 1,059,185  |     | 907,154    |   |
| GROSS PROFIT                       |   | 45,200     |     | 381,968    |   |
|                               |   |       |     |       |   |
| OPERATING EXPENSES                 |   |       |     |       |   |
| Salaries and Wages                 |   | 238,240    |     | 230,424    |   |
| Payroll Taxes                      |   | 24,145     |     | 32,345     |   |
| Insurance                          |   | 58,449     |     | 52,009     |   |
| Telephone                          |   | 25,818     |     | 84,211     |   |
| Outside Services                   |   | 27,208     |     | 19,070     |   |
| Bad Debt                           |   | —     |     | 64,611     |   |
| Utilities                          |   | 10,024     |     | 11,848     |   |
| Vehicle Expenses                   |   | 23,213     |     | 22,116     |   |
| Rent                               |   | 74,218     |     | 65,150     |   |
| Professional Fees                  |   | 41,313     |     | 21,426     |   |
| Commissions                        |   | —     |     | 19,918     |   |
| Travel and Entertainment           |   | 6,528      |     | 7,239      |   |
| Office Expense                     |   | 30,928     |     | 16,647     |   |
| Total Operating Expenses           |   | 560,084    |     | 647,014    |   |
| OPERATING INCOME (LOSS)            |   | (514,884   | )        | (265,046   | )      |
|                               |   |       |     |       |   |
| OTHER INCOME (EXPENSE)             |   |       |     |       |   |
| Interest Income                    |   | 204        |     | 1,936      |   |
| Prov For State Tax                 |   | (9,113     | )        | (11,000    | )      |
| Interest Expense                   |   | (20,852    | )        | (9,755     | )      |
| Total Other Income                 |   | (29,761    | )        | (18,819    | )      |
|                               |   |       |     |       |   |
| NET INCOME (LOSS)                  |   | (544,645   | )        | (283,865   | )      |
|                               |   |       |     |       |   |
| RETAINED EARNINGS - BEGINNING      |   | (11,665    | )        | 272,200    |   |
|                               |   |       |     |       |   |
| RETAINED EARNINGS - ENDING         |   | $          | (556,310 | )          | $      | (11,665 | ) |
|                               |   |       |     |       |   |
| Weighted Common Shares Outstanding |   | 17,619,378 |     | 17,619,378 |   |
|                               |   |       |     |       |   |
| Net Loss per Common Share          |   | $          | —   |       | $      | — |   |

 

See Accountant’s Report and Notes To Financial Statement

 

29

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USIP.COM,INC

CHANGES IN STOCKHOLDERS’EQUITY

Forthe Years Ended December 31, 2001 and 2000

 
|                                             |   | **Common Stock** |   | **Additional   Paid-inCapital** |    | **RetainedEarnings** |   | **Total  Stockholder’sEquity** |   |
|--------------------------------------------------|--------|------------------|--------|---------------------------------|---------|----------------------|--------|-------------------------------------|--------|
| **Shares**                                       |   | **Amount**       |
| Balance as of January 1, 2000                    |   | 1,595,500        |   | $                               | 15,955  |                 | $      | 57,334                              |   | $ | 272,200 |   | $ | 345,489 |   |
|                                             |   |             |   |                            |    |                 |   |                                |   |   |   |
| Issuance of common stock to Datone, Inc          |   | 7,268,388        |   | 72,684                          |    | 1,032,411            |   |                                |   | 1,105,095 |   |
|                                             |   |             |   |                            |    |                 |   |                                |   |   |   |
| Issuance of common stock to acquire NB Payphones |   | 8,750,000        |   | 87,500                          |    | 287,168              |   |                                |   | 374,668 |   |
|                                             |   |             |   |                            |    |                 |   |                                |   |   |   |
| Issuance of common stock                         |   | 5,500            |   | 55                              |    | 5,445                |   |                                |   | 5,500 |   |
|                                             |   |             |   |                            |    |                 |   |                                |   |   |   |
| Net Loss - 2000                                  |   |             |   |                            |    |                 |   | (283,865                            | )      | (283,865 | ) |
| Balance as of December 31, 1999                  |   | 1,595,500        |   | $                               | 176,194 |                 | $      | 1,382,358                           |   | $ | (11,665 | )  | $ | 1,546,887 |   |
|                                             |   |             |   |                            |    |                 |   |                                |   |   |   |
| Balance as of January 1, 2001                    |   | 1,595,500        |   | 176,194                         |    | 1,382,358            |   | (11,665                             | )      | $ | 1,546,887 |   |
|                                             |   |             |   |                            |    |                 |   |                                |   |   |   |
| Net Loss - 2001                                  |   |             |   |                            |    |                 |   | (544,645                            | )      | (544,645 | ) |
|                                             |   |             |   |                            |    |                 |   |                                |   |   |   |
| Balance as of December 31, 2000                  |   | 1,595,500        |   | $                               | 176,194 |                 | $      | 1,382,358                           |   | $ | (556,310 | ) | $ | 1,002,242 |   |

 

See Accountant’s Report and Notes To Financial Statement

 

30

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USIP.COM,INC

CONSOLIDATED STATEMENT OFCASH FLOWS

YearsEnded December 31, 

 
|                                                                                            |   | **2001** |     | **2000** |   |
|-------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Cash Flows From Operating Activities:                                                           |   |     |     |     |   |
| Net (Loss)                                                                                      |   | $        | (544,645 | )        | $      | (283,865 | ) |
| Adjustments to reconcile net   (loss) to netcash provided (used) by  operating activities: |   |     |     |     |   |
| Depreciation Expense                                                                            |   | 303,887  |     | 214,769  |   |
|                                                                                            |   |     |     |     |   |
| (Increase) Decrease in Commission Receivables                                                   |   | 27,019   |     | 28,167   |   |
| (Increase) in Inventory                                                                         |   | (10,160  | )        | (14,816  | )      |
| (Increase) Decrease in Prepaid Insurance                                                        |   | (2,866   | )        | 9,889    |   |
| Increase in Accounts Payable                                                                    |   | 90,796   |     | 72,402   |   |
| Increase (Decrease) in Accrued Expenses                                                         |   | 21,918   |     | (7,155   | )      |
| Increase (Decrease) in Gross Receipts Tax                                                       |   | (7,606   | )        | 7,985    |   |
| Net cash (used) by operating activities                                                         |   | (121,657 | )        | 27,376   |   |
|                                                                                            |   |     |     |     |   |
| Cash Flows From Investing Activities:                                                           |   |     |     |     |   |
| Capital Expenditures                                                                            |   | (76,315  | )        | (68,814  | )      |
| Net cash (used) by investing activities                                                         |   | (76,315  | )        | (68,814  | )      |
|                                                                                            |   |     |     |     |   |
| Cash Flows From Financing Activities:                                                           |   |     |     |     |   |
| Proceeds received from Line of Credit                                                           |   | 114,066  |     | 70,000   |   |
| Proceeds from issuance of Notes Payable                                                         |   | —   |     | 80,945   |   |
| Payments on Notes Payable                                                                       |   | (12,413  | )        | (6,801   | )      |
| Payments on Lines of Credit                                                                     |   | (10,475  | )        | —   |   |
| Proceeds from issuance of stock                                                                 |   | —   |     | 5,500    |   |
| Net cash provided by financing activities                                                       |   | 91,178   |     | 149,644  |   |
|                                                                                            |   |     |     |     |   |
| Net Increase in cash                                                                            |   | (106,794 | )        | 108,206  |   |
|                                                                                            |   |     |     |     |   |
| Cash - Beginning of Period                                                                      |   | 117,619  |     | 9,413    |   |
|                                                                                            |   |     |     |     |   |
| Cash - End of Period                                                                            |   | $        | 10,825   |     | $      | 117,619 |   |
|                                                                                            |   |     |     |     |   |
| Supplemental Disclosures of Cash Flow Information:                                              |   |     |     |     |   |
| Cash Paid During Period The Period For:                                                         |   |     |     |     |   |
| Interest                                                                                        |   | $        | 7,002    |     | $      | 9,755 |   |
| Income Taxes                                                                                    |   | $        | 7,606    |     | $      | 4,447 |   |

 

See Accountant’s Report and Notes To Financial Statement

 

31

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**USIP.COM, INC.**

**CONSOLIDATED NOTES TO THE FINANCIALSTATEMENTS**

**December 31, 2001**

 

**NOTE1.**                **NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**NATUREOF BUSINESS**

 

USIP.COM, Inc. owns, operatesand manages privately owned public payphones in New York, Pennsylvania, andMassachusetts. The Company derives its revenue from coin-calls, non-coin calls,sales and service of payphones and prepaid phone cards.

 

**SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

**MANAGEMENTESTIMATES**

 

The preparation of financialstatements in conformity with generally accepted accounting principals requiresmanagement to make estimates and assumptions that effect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

**CONSOLIDATIONPOLICIES**

 

On January 31, 2000, theCompany issued 7,268,388 shares of its common stock, in exchange for all theissued and outstanding stock of Datone Communications, Inc. The combinationwill be accounted for by the pooling of interests methods. All intercompanytransactions have been eliminated in the preparation of the FinancialStatements.

 

On April 29, 2000, the Companyissued 8,750,000 shares in exchange for all the issued and outstanding sharesof NB Payphone, Ltd., and Cointel Leasing Inc. The combination will beaccounted for by the pooling of interests method of accounting forconsolidations. All intercompany transactions have been eliminated in thepreparation of the Financial Statements.

 

**PRINCIPLESOF CONSOLIDATION**

 

The accompanying consolidatedFinancial Statements include the accounts of USIP.COM, Inc. and its whollyowned subsidiaries, Datone, Inc. and NB Payphones Ltd, Inc. Intercompanytransactions and balances have been eliminated in consolidation andcombination.

 

32

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**CONCENTRATIONSOF CREDIT RISK**

 

The Company’s payphones arelocated primarily in New York State and parts of Pennsylvania and usage ofthose phones may be affected by economic conditions in those areas. However,the use of payphones has demonstrated immunity to economic fluctuations.

 

The Company maintains cashbalances with a financial institution insured by the Federal Deposit InsuranceCorporation up to $100,000. There are no uninsured balances at December 31,2001.

 

**CASHAND CASH EQUIVALENTS**

 

The Company considers allhighly liquid instruments with maturity of three months or less when purchasedto be cash equivalents for purposes of classification in the balance sheets andstatement of cash flows. Cash and Cash equivalents consists of cash in bank(checking) accounts.

 

**FIXEDASSETS AND DEPRECIATION**

 

Fixed assets are stated atcost. Depreciation is calculated on a straight-line basis over the useful livesof the related assets, which range from five to seven years.

 

**INCOMETAXES**

 

Income taxes are accounted forin accordance with Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes”. Under SFAS No. 109, deferred income taxes are recognizedusing the asset and liability method by applying tax rates to cumulativetemporary differences based on when and how they are expected to affect the taxreturn. Deferred tax assets and liabilities are adjusted for income tax ratechanges.

 

**NET(LOSS) PER COMMON SHARE**

 

Net loss per common share hasbeen calculated by taking the net loss for the current period and dividing bythe weighted average shares outstanding at the end of the period.

 

**REVENUERECOGNITION**

 

The Company derives its primaryrevenue from the following sources, dial-around revenues, coin collections, andcommissions. Other revenues generated by the company include, prepaid phonecard sales, telephone equipment repairs and sales.

 

The Company recognizesdial-around revenues from toll-free calls that are dialed from its payphones togain access to a long distance carrier other than the one selected by theCompany as the primary carrier for the phone. Revenues from dial around callsare recorded based upon estimates. Coin collection revenues are generated whencustomers

 

33

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deposit coins into the phonesto make calls. Coin revenues are recorded in an amount equal to the coinscollected.

 

**ADVERTISING**

 

The corporation expensesadvertising costs as incurred. Advertising expense amounted to $7,455 and $0for the years ended December 31, 2001 and 2000 respectively.

 

**NOTE2.**                **INVENTORY**

 

Inventory is valued at thelower of cost, determined on the first-in, first-out basis (FIFO), or marketvalue. At December 31, inventory consists of the following:

 
|                  |   | **2000** |   | **2001** |   |
|-----------------------|--------|----------|--------|----------|--------|
| Calling Cards         |   | $        | 13,750 |     | $      | 9,350 |   |
| Parts and accessories |   | 22,500   |   | 37,060   |   |
|                  |   | $        | 36,250 |     | $      | 46,410 |   |

 

**NOTE3.**                **LINE OF CREDIT**

 

**REVOLVINGLINE OF CREDIT**

 

The Company has a revolvingline of credit, of which $ 212,952 and $ 98,886 was outstanding at December 31,2001 and 2000 respectively. Bank advances on the credit line are payable ondemand and carry an interest rate of 10% & 7%.

 

**NOTE4.                LONG-TERM DEBT**

 
|                                                                    |   | **2000** |   | **2001** |   |
|-------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                    |   |     |   |     |   |
| Long-term debt as of December  31 is as follows:                        |   |     |   |     |   |
| Note payable, Vehicle, Monthly payments of  $261 with interest at 12.4% |   | $        | 9,501  |     | 7,475  |   |
|                                                                    |   |     |   |     |   |
| Note payable, Vehicle, Monthly payments of  $226 with interest at 12.4% |   | 8,240    |   | 6,483    |   |
|                                                                    |   |     |   |     |   |
| Note payable, Vehicle, Monthly payments of  $302 with interest at 12.9% |   | 11,302   |   | 9,074    |   |
|                                                                    |   |     |   |     |   |
| Note payable, Bank, Monthly payments of  $272 with interest at 9.25%    |   | 19,327   |   | 14,398   |   |
|                                                                    |   |     |   |     |   |
| Lease on ATM Machine                                                    |   | 4,858    |   | 3,384    |   |
|                                                                    |   |     |   |     |   |
|                                                                    |   | $        | 53,228 |     | $      | 40,814 |   |
|                                                                         |        |          |        |          |        |  |  |

 

34

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Aggregate annual maturitiesrequired on long-term debt at December 31, 2001 are as follows:

 
| 2001   |   | 10,291 |   |
|--------|--------|--------|--------|
| 2002   |   | 11,696 |   |
| 2003   |   | 14,161 |   |
| 2004   |   | 4,666  |   |
|   |   | $      | 40,814 |   |
|        |        |        |        |  |

 

**NOTE5.                OPERATING LEASES**

 

The Company is the lessee ofone vehicle, office equipment and its corporate offices accounted for asnon-cancelable operating leases. The leases have terms of thirty (30) tothirty-six (36) months, expiring at various months through October 2002. Futureminimum lease payments, in the aggregate, through maturities are as follows:

 
| **Years  Ending  December 31,** |   |   |    |   |
|---------------------------------|--------|--------|---------|--------|
| 2001                            |   | $      | 53,821  |   |
| 2002                            |   | 53,088 |    |
|                            |   | $      | 106,909 |   |

 

**NOTE6.                MAJOR DIAL AROUNDCOMPENSATION PROVIDERS**

 

The Company received 100% oftotal dial around compensation from one provider.

 

**NOTE7.                INCOME TAXES**

 

**OPERATINGLOSS CARRYFORWARDS**

 

The Company has loss carryforwards totaling $ 888,643 that may be offset against future taxable income.If not used, the carry forwards will expire as follows:

 
|      |   | **Operating****Losses** |    |
|-----------|--------|-------------------------|---------|
| Year 2020 |   | $                       | 343,998 |   |
| Year 2021 |   | 544,645                 |    |
|      |   | $                       | 888,643 |   |

 

35

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**ITEM 8.       CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

NONE

 

**PART III**

 

**ITEM 9****.**       **DIRECTORSEXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT**

 
| **Name**             |   | **Age** |   | **Position  with Company** |   | **Director  Continuously Since** |   |
|----------------------|--------|---------|--------|----------------------------|--------|----------------------------------|--------|
| Craig H. Burton      |   | 40      |   | President                  |   | January  2000                    |   |
|                 |   |    |   |                       |   |                             |   |
| Joseph J. Passalaqua |   | 28      |   | Secretary/Treasurer        |   | January  2000                    |   |
|                 |   |    |   |                       |   |                             |   |
| Lilly O. Beter       |   | 67      |   | Director                   |   | January  2000                    |   |
|                 |   |    |   |                       |   |                             |   |
| Carl E Worboys       |   | 58      |   | Director                   |   | January  2000                    |   |

 

Craig H. Burton attended theUniversity of South Carolina-Coastal and was a duly licensed real estate agentin the State of New York. He began working in marketing for a long distancecarrier in 1996 and then moved to Datone as Director of Marketing for payphonesand prepaid cards.

 

Joseph J. Passalaqua hasserved as a technical support employee for Datone Communications, Inc., apayphone company. He was elected an officer and director of Datone in 1999.Several other payphone companies in the Central New York area have employedhim.

 

Lilly O. Beter is the formerPresident of Lilly Beter Capital Group, Ltd. The firm was founded over 30 yearsago when she had been associated with her husband, Dr. Peter David Beter, inhis law practice until his death in 1987. Dr. Beter had been General Counselfor the Export-Import Bank of Washington, co-founder of a mining explorationcompany in Zaire, and represented international financial interests in Europe,South America, and the Middle East. Ms. Beter provided governmentrepresentation to their clients. Ms. Beter, having lived extensively abroad, isnow active in overseas investment management.

 

Carl E. Worboys is apracticing attorney in the State of New York. He formed Datone Communicationsin 1997.

 

36

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** **

**BOARDOF DIRECTORS; ELECTION OF OFFICERS**

 

All directors hold officeuntil the next annual meeting of shareholders and until their successors areduly elected and qualified. Any vacancy occurring in the Board of Directors maybe filled by the shareholders, the Board of Directors, or if the Directorsremaining in office constitute fewer than a quorum of the Board of Directors,they may fill the vacancy by the affirmative vote of a majority of theDirectors remaining in office. A director elected to fill a vacancy is electedfor the unexpired term of his predecessor in office. Any directorship filled byreason of an increase in the number of directors shall expire at the nextshareholders’ meeting in which directors are elected, unless the vacancy isfilled by the shareholders, in which case the term shall expire on the later of(i) the next meeting of the shareholders or (ii) the term designated for thedirector at the time of creation of the position being filled.

 

**SECTION16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**

 

Section 16(a) of theSecurities Exchange Act of 1934, as amended, requires our officers anddirectors and persons who own more than 10% of a registered class of our equitysecurities to file initial reports of ownership and reports of changes inownership with the Securities and Exchange Commission (the “SEC”). Such personsare required by SEC regulation to furnish us with copies of all Section 16(a)forms they file.

 

Based solelyon review of the copies of such forms received by us with respect to fiscalyear 2001, or written representations from certain reporting persons, we believethat all filing requirements applicable to its directors, officers and personswho own more than ten percent of a registered class of the Company’s equitysecurities have been complied with.

 

**Item 10****.       EXECUTIVECOMPENSATION**

 

SUMMARYCOMPENSATION TABLE

 
| **NAME AND  PRINCIPAL POSITION**                 |   | **FISCAL****YEAR  PAID** |   | **SALARY** |   | **BONUS** |   |
|--------------------------------------------------|--------|--------------------------|--------|------------|--------|-----------|--------|
| Craig Burton, President                          |   | 2001                     |   | $          | 40,540 |      | -0-    |   |
|                                             |   |                     |   |       |   |      |   |
| Joseph  J, Passalaqua,  Secretary/Treasurer |   | 2001                     |   | $          | 27,040 |      | -0-    |   |

#### ** **

We have health insurance for our employees.We do not have retirement, pension, profit sharing, stock options, or othersimilar programs for the benefit of our employees.

 

37

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**ITEM 11****.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.**

 

The following table setsforth information, as of December 31, 2001, concerning all persons known by usto own beneficially more than 5% of our common stock and concerning sharesbeneficially owned by each director and executive officer and by all directorsand executive officers as a group. Unless expressly indicated otherwise, eachstockholder exercises sole voting and investment power with respect to theshares beneficially owned. The address for each of our executive officers anddirectors is 7325 Oswego Rd., Liverpool, N.Y., 13090.

 

SHARESBENEFICIALLY OWNED (1)

 
| **PERSON OR GROUP**                                         |   | **NUMBER** |   | **PERCENT (2)** |   |
|-------------------------------------------------------------|--------|------------|--------|-----------------|--------|
| NAMED EXECUTIVE OFFICERS AND DIRECTORS:                     |   |       |   |            |   |
| Craig H. Burton                                             |   | 150,000    |   | *               |   |
| Joseph J. Passalaqua                                        |   | 200,000    |   | *               |   |
| Lilly O. Beter                                              |   | —     |   | *               |   |
| Carl E. Worboys                                             |   | 200,000    |   | *               |   |
| All directors and executive officers as a group (4 persons) |   | 550,000    |   | *               |   |

 

BENEFICIAL OWNERS OF 5% OR MORE OF OUROUTSTANDING COMMON STOCK

 
| **NAME AND  ADDRESS OF BENEFICIAL OWNER** |   | **NUMBER** |   | **PERCENT (2)** |   |
|-------------------------------------------|--------|------------|--------|-----------------|--------|
| Epic Events Trust                         |   | 6,086,111  |   | 34.5            | %      |
| Gibraltar                                 |   |       |   |            |   |
| Riviera Bay Holding Trust                 |   | 6,798,161  |   | 38.6            | %      |
| Gibraltar                                 |   |       |   |            |   |
| International Caribbean Trust, Ltd.       |   | 1,601,839  |   | 9.1             | %      |
| Gibraltar                                 |   |       |   |            |   |

 

----

*              Representsless than one percent.

 

(1)           Pursuantto Rule 13d-3 under the Exchange Act, a person has beneficial ownership of anysecurities as to which such person, directly or indirectly, through anycontract, arrangement, undertaking, relationship or otherwise has or sharesvoting power and/or investment power or as to which such person has the rightto acquire such voting  and/orinvestment power within 60 days.

 

(2)           Percentage of beneficial ownership as to any person as ofa particular date is calculated by dividing the number of shares beneficiallyowned by such person by the sum of the number of shares outstanding as of suchdate and the number of unissued

 

38

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shares as to which such personhas the right toacquire voting and/or investment power within 60 days. The number of sharesshown includes outstanding shares of Common Stock owned as of December 31, 2001by the person indicated. Our total issued and outstanding stock as of December31, 2001 was 17,619,388 shares.

 

**ITEM  12****.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

NotApplicable.

 

**ITEM 13****.      EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)           Exhibits

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                              |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3               |   | Articles of Incorporation  (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-SB) filed  on July 28, 2000(the “2000 10SB”).                                                                                                                   |
| 3.1             |   | Amended Articles of  Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form  10-SB) filed on July 28, 2000(the “2000 10-SB”).                                                                                                          |
| 3.2             |   | Amended Articles of  Incorporation (incorporated by reference to Exhibit 3.2 of the Company’s Form  10-SB) filed on July 28, 2000(the “2000 10SB”).                                                                                                           |
| 3.3             |   | Bylaws (incorporated by  reference to Exhibit 4 of the 2000 10-SB).                                                                                                                                                                                                          |
| 4.1             |   | Specimen Stock Certificate  (incorporated by reference to Exhibit 5 of the 2000 10SB).                                                                                                                                                                                       |
| 10.1            |   | Credit Agreement dated  April 29, 2000 between USIP.Com, Inc., and Lilly Beter Capital Group, Ltd.,  (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report  on Form 10-QSB for the period ended June 30, 2000(the “June 2000 10-QSB”). |
| 21.1            |   | Subsidiaries of the  Registrant. (1)                                                                                                                                                                                                                                         |

 

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(1)           Filedherewith.

 

(b)           Reports on Form 8K

 

No reports on Form 8-K were filed in thefourth quarter of 2001.

 

39

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SIGNATURES

 

In accordance with Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   |   | USIP.COM, INC.             |
|--------|--------|----------------------------|
|   |   | Date:  March 25, 2002 |
|   |   |                       |
|   | By:    | /s/ CRAIG H. BURTON        |   |
|   |   | CRAIG H. BURTON            |
|   |   | President                  |

 

**Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, this report has been signed belowby the following persons on behalf of the Company and in the capacities and onthe dates indicated.**

 
| **SIGNATURE**                  |   | **TITLE** |                | **DATE** |
|--------------------------------|--------|-----------|---------------------|----------|
|                           |   |      |                |     |
| /s/  CRAIG H. BURTON      |   |      | President           |     | March 25, 2002 |
| Craig H. Burton                |   |      |                |     |
|                           |   |      |                |     |
| /s/  JOSEPH J. PASSALAQUA |   |      | Secretary/Treasurer |     | March 25, 2002 |
| Joseph J. Passalaqua           |   |      |                |     |
|                           |   |      |                |     |
| /s/  LILLY O. BETER       |   |      | Director            |     | March 25, 2002 |
| Lilly O. Beter                 |   |      |                |     |
|                           |   |      |                |     |
| /s/ CARL E. WORBOYS            |   |      | Director            |     | March 25, 2002 |
| Carl E. Worboys                |   |      |                |     |
|                                |        |           |                     |          |  |  |  |  |

 

 

40

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