Receiver Report, May 2, 2002

Carl F. Schoeppl, Esq., Receiver
4651 North Federal Highway,
Boca Raton, Florida 33431-5133
Toll Free: (888) 670-4700

May 2, 2002

Re: SEC v. First Capital Services, Inc., U.S. Capital Funding, Inc., Larry Schwartz, and Raphael "Ray" Levy, Case No. 00-8445-CIV-MIDDLEBROOKS (S.D. Fla.) (the "SEC Case"); and In re: First Capital Services, Inc., Case No. 00-32103-BKC-PGH (Bankr. S.D. Fla.) (the "First Capital Bankruptcy Case")

Dear Investors and Potential Creditors:

As you are aware, I was appointed by the United States District Court for the Southern District of Florida (the "District Court"), to act as the Receiver for U.S. Capital Funding, Inc. ("U.S. Capital") in the SEC Case. While I have been in contact with a significant number of investors and creditors personally or through their counsel, I felt it important to update you on the status of the Receivership Estate as I have received formal court approval for a claims procedure in the SEC Case, reached an agreement with counsel for First Capital regarding the amount of U.S. Capital's claim, and have agreed on a procedure to transfer claims from the First Capital Bankruptcy Case to the U.S. Capital Receivership Estate.

I. The SEC Case

The case brought by the United States Securities and Exchange Commission ("SEC") against Defendants Larry Schwartz ("Schwartz"), and Raphael "Ray" Levy ("Levy"), in the United States District Court for the Southern District of Florida is nearing completion. The Court has entered default judgments against Schwartz and Levy and in favor of the SEC, and Levy is also serving a sentence of 14 years in federal prison for actions relating to his association with American Benefits Services, Inc. in the case of United States v. Brandau, et al., Case No. 99-CR-8125-10 (S.D. Fla.), which is unrelated to the SEC Case. Levy is presently incarcerated at the Yazoo City Federal Correction Institution in Yazoo City, Mississippi. In my capacity as Receiver for U.S. Capital, I have agreed to enter into a consent judgment with the SEC to resolve all of the SEC's claims against U.S. Capital, provided, however, that the Court approves of the same.

II. The First Capital Bankruptcy Case

In my previous letter to you, I informed you that First Capital had filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida (the "First Capital Bankruptcy"). The case is called In re First Capital Services, Inc., Case No. 00-32103-BKC-PGH (Bankr. S.D. Fla.). I also informed you that while First Capital initially disputed that it owed U.S. Capital any money, once U.S. Capital filed a claim against First Capital's bankruptcy estate, First Capital eventually admitted that it owes U.S. Capital at least $33 million in connection with the corporate notes it issued to U.S. Capital in 1998 and 1999.

Immediately upon my appointment, I retained an experienced team of accountants and bankruptcy counsel to undertake all necessary actions to ensure that the U.S. Capital Receivership Estate secured the maximum amount of funds from the First Capital Bankruptcy Estate on behalf of U.S. Capital and its note holders. Specifically, the accountants for the Receiver conducted an initial forensic accounting analysis of, among other things, the U.S. Capital funds transferred to First Capital, for purposes of determining the actual amount of U.S. Capital's claim in the First Capital Bankruptcy Case. After consultation with my accountants and bankruptcy counsel, I determined that the correct amount of U.S. Capital's claim in the First Capital Bankruptcy Case was approximately $33 million which roughly equated to the amount First Capital was prepared to allow in the First Capital Bankruptcy Case. Accordingly, I met with bankruptcy counsel for First Capital and reached an agreement on the amount of U.S. Capital's claim in the First Capital Bankruptcy Case, and agreed upon a mechanism to recognize the claims of individual U.S. Capital note holders in the U.S. Capital Receivership as opposed to the First Capital Bankruptcy Case. Once any funds are received into the U.S. Capital Receivership Estate from First Capital, I will hold all such funds in safe keeping for eventual distribution, less receivership expenses, to defrauded investors and creditors.

In addition, counsel for First Capital has filed a motion in the First Capital Bankruptcy Case seeking, among other things, to transfer the claims of individual U.S. Capital note holders to the U.S. Capital Receivership Estate. On April 24, 2002, the Bankruptcy Court in the First Capital Bankruptcy Case conducted a hearing on the Debtor's Motion to Transfer Claims and on the Receiver's Motion for an Interim Distribution. In light of an objection raised by the creditor's committee seeking to subrogate the claim of the U.S. Capital Receivership Estate, the Bankruptcy Court ordered the Debtor to file a proposed plan of distribution within twenty-one (21) days, and that the representative for the creditor's committee had thirty (30) days to file a claim for equitable subrogation. As a result of these objections, the Receiver withdrew his Motion for an Interim Distribution from consideration by the Bankruptcy Court as moot. Following the hearing, Bankruptcy Counsel for the Receiver has been undertaking all reasonable and necessary steps to ensure that the rights of the Receivership Estate are protected to the fullest extent of the law.

III. The U.S. Capital Receivership Estate Claims Procedure

As Receiver, I have the authority and responsibility to, among other things, take control of the funds, assets, and property, wherever situated, belonging to or in the possession of U.S. Capital for eventual distribution to investors under the supervision of the District Court. It is very important that you understand that there are no guarantees as to whether and to what extent assets and property will be recovered for the Receivership Estate. You can be assured, however, that I am acting diligently to discharge my responsibilities under the Receivership Order, particularly with respect to securing the maximum funds from the First Capital Bankruptcy for subsequent distribution on a pro rata basis to investors in the U.S. Capital Receivership proceeding before the District Court. Accordingly, I have filed with the District Court, and the District Court has granted, a Motion for an Order Establishing a Claims Procedure and Claims Bar Date, to ensure that all investors will be properly recognized as creditors of the U.S. Capital Receivership Estate. I have sent written notice of the District Court's Order and blank claim forms to over 600 known investors and creditors of U.S. Capital.

Specifically, the District Court has established the following claims procedure for the U.S. Capital Receivership Estate:

A. All persons with claims or demands against the U.S. Capital must file pre-approved claim forms together with verification of such claims, unless such claim form has been previously filed with the First Capital Bankruptcy Estate; and

B. All creditors, claimants, and other persons failing to make and present claims and supporting proof to the Receiver postmarked on or before April 23, 2002 (90 days from the date of the Court Order approving the claims procedure) [(the "Claims Bar Date")] are enjoined from participating in any distribution of the assets of U.S. Capital.

Prior to the Claims Bar Date, I received hundreds of completed Claim Forms, and my staff and I have spent a substantial amount of time reviewing various claims of investors, putative creditors, and other interested persons, as well as over three hundred claims submitted by investors and creditors of U.S. Capital in the First Capital Bankruptcy Case. As part of my duties as the Receiver for U.S. Capital, I will review all claims submitted to the Receiver or in the First Capital Bankruptcy Case and determine whether the claims or any portions thereof should be accepted or should be rejected because the claimant does not have a valid claim against U.S. Capital. From past experience, I anticipate that some of the claim forms initially submitted may be improperly completed, insufficiently documented, and/or claim amounts not properly against the Receivership Estate (e.g., accrued interest). In those cases, I will send to the claimants a Notice of Insufficient Documentation informing them that they have thirty (30) days in which to supplement their claims, with additional documentation or an amendment as to the amount claimed, or I will recommend that such incomplete or unsupported claims be rejected, in whole or in part. After the 30-day insufficient documentation period has expired, I will complete the claims review process and file, if necessary, with the District Court an accounting of all claims submitted, together with an objection to any claims which I believe should be rejected, in whole or in part. All persons holding claims subject to an objection will be sent a notice of objection stating briefly the reasons I have objected to their claim. Any claimant who believes that an objection is not well-founded may, within thirty (30) days after the mailing of the notice of objection, file with the District Court a response to my objection. All objections which are not resolved between me and the claimant may then be heard by the District Court at a court hearing. I want to give you every assurance that investors presenting claims in the U.S. Capital Receivership Estate will have a forum and procedural mechanism to exercise their rights under federal court oversight and supervision.

IV. Litigation Against U.S. Capital

Soon after my appointment as Receiver for U.S. Capital, I became aware of a number of civil litigation matters pending against U.S. Capital throughout the United States. Indeed, some of these matters resulted in judgments against U.S. Capital which were entered prior to my appointment. The existence of these matters has the potential to result in possible claims against the limited assets of the Receivership Estate. To protect the rights of U.S. Capital and the interests of all investors and creditors of U.S. Capital, I have sought to stay each of these cases pursuant to the stay provisions contained in the Receivership Order.

V. The Merchants Capital Litigation

A number of you have expressed an interest in obtaining information regarding funds transferred from U.S. Capital to Merchants Capital Corp. ("Merchants Capital"), pursuant to a so-called "Funding Agreement" between Ray Levy and Yasar Samarah, the President of Merchants Capital. Essentially, Levy agreed in May 1999 to loan money to Samarah, for reasons heretofore unknown, in exchange for promissory notes executed by Merchants Capital. Between May 1999 and August 1999, Levy allegedly raised approximately $12 million from loans with Merchants Capital.

In or about December 1999, prior to my appointment as Receiver, Merchants Capital filed a lawsuit against U.S. Capital in Palm Beach County Circuit Court claiming that U.S. Capital breached its contract with Merchants Capital by failing to honor its obligations under the Funding Agreement. U.S. Capital denied that it breached any contract with Merchants Capital, and filed a counterclaim against Merchants Capital asserting that Merchants Capital defaulted on millions of dollars worth of promissory notes held by U.S. Capital.

Immediately upon my appointment by the District Court to act as the Receiver for U.S. Capital, I filed in the Palm Beach County Circuit Court a copy of the District Court's Receivership Order, which operated as an automatic stay of Merchants Capital's lawsuit against U.S. Capital. This, however, did not prevent the U.S. Capital from continuing its prosecution of the case against Merchants Capital for defaulting on the promissory notes. Initially, Merchants Capital was willing to engage in formal mediation with U.S. Capital, which I had hoped would result in a settlement with Merchants Capital. However, prior to the scheduled mediation, Merchants Capital informed the Receiver that it was not willing to settle U.S. Capital's claims against it. Accordingly, the mediation was cancelled and has not been rescheduled.

I have subpoenaed various documents from Merchants Capital relating to the arrangement it had with U.S. Capital, and am now in the process of reviewing these documents and deciding upon a proper course of action with respect to the case against Merchants Capital. I will continue to keep you apprized of the status of the Merchants Capital litigation as it progresses.

VI. Contact Information

In order to keep investors informed as to the progress of the Receivership proceedings in the District Court, I continue to maintain a toll-free investor "Hotline" at (888) 670-4700. This Hotline provides investors with a recorded message detailing brief highlights of the case, and an opportunity to leave recorded voice messages if they so desire. In the interest of conserving the limited assets of the Receivership Estate, and to maximize potential distributions to investors, all communications to me should be made in writing. In addition, you will continue to receive an updated report from me at least once every ninety (90) days informing you of the status of the Receivership.

Finally, please be advised that neither I, nor my legal counsel, can give you individual legal advice concerning your claim, and that you should consult with the attorney of your choice regarding your legal rights.



By: Carl F. Schoeppl, As Receiver