Receiver Report, October 31, 2001

Carl F. Schoeppl, Esq., Receiver
U.S. CAPITAL FUNDING, INC.
RECEIVERSHIP ESTATE
4651 North Federal Highway,
Boca Raton, Florida 33431-5133

Toll Free: (888) 670-4700


October 31, 2001

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:

I am writing to you as the Receiver, recently appointed by the United States District Court for the Southern District of Florida, for U.S. Capital Funding, Inc. ("U.S. Capital"). My responsibilities include a requirement that I take control of the funds, assets and property of U.S. Capital so that, under the direct supervision of a federal court, there is a distribution of these assets to investors who hold promissory notes sold through U.S. Capital. This letter is being sent to you in order to advise you of the circumstances leading to my appointment as the receiver for U.S. Capital and to explain to you some of the legal procedures that will occur under the receivership.

I. The SEC Case

On May 31, 2000, the United States Securities and Exchange Commission ("SEC") filed a complaint (the "Complaint") in the United States District Court for the Southern District of Florida against First Capital Services, Inc. ("First Capital"), U.S. Capital Funding, Inc. ("U.S. Capital"), Larry Schwartz ("Schwartz"), and Raphael "Ray" Levy ("Levy") (collectively, the "Defendants"). The SEC's complaint alleges that the Defendants fraudulently offered and sold unregistered securities in the form of promissory notes to over 600 individual investors in violation of the federal securities laws.

In essence, the Complaint alleges that between 1995 and 1997, First Capital, using false and misleading representations, sold between $5 million and $7 million of unregistered promissory notes to investors, many of whom were elderly, of ill-health, or living on fixed incomes, for a minimum of $25,000.00 per investment. In 1997, apparently as a result of an investigation by the Comptroller's Office of the State of Florida, Schwartz allegedly ceased selling the notes through First Capital. However, starting in 1998, Levy, at the suggestion of Schwartz, allegedly formed U.S. Capital to continue the sale of unregistered notes under practically identical terms. Under an agreement between U.S. Capital and First Capital, U.S. Capital then forwarded a substantial amount of the money raised from investors by U.S. Capital to First Capital in exchange for corporate notes from First Capital and commissions to sales agents for U.S. Capital, including Levy. Through this venture, U.S. Capital raised an estimated $48 million from approximately 680 investors between January 1998 and the summer of 1999.

In the summer of 1999, First Capital allegedly began defaulting on the corporate notes which it had issued to U.S. Capital in exchange for the funds raised from the investors through the promissory notes. As a result, U.S. Capital was unable to make the required interest payments to the investors or honor individual requests from investors to redeem the notes they had purchased. In October 1999, U.S. Capital sued First Capital for defaulting on the corporate notes.

II. The First Capital Bankruptcy Case

In May 2000, after being sued by U.S. Capital, First Capital 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. 2000). In the First Capital Bankruptcy, First Capital initially disputed that it owed U.S. Capital any money. U.S. Capital, however, filed a claim against First Capital's bankruptcy estate in the amount of $37 million. First Capital now admits 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. Accordingly, there is currently an approximate $4 million discrepancy between U.S. Capital's claim and the amount First Capital admits it owes. Since the time of my appointment, I have collected thousands of documents which my professional advisors and I are currently reviewing. We expect to complete our analysis shortly and reach an agreement with First Capital regarding the exact amount of U.S. Capital's allowed claim in the First Capital Bankruptcy within the next few weeks.

I know that many investors to whom U.S. Capital owes money also filed individual claims directly in the First Capital Bankruptcy. Because First Capital now recognizes U.S. Capital's claim (as opposed to the claims of the individual investors), First Capital has objected to the claims filed by individual investors on the basis that the individual claims simply duplicate U.S. Capital's accepted claim. First Capital has informed me that when it distributes funds from its bankruptcy estate, it will not distribute funds to individual investors, but rather, directly to the receivership that has now been established for U.S. Capital. Thereafter, I will hold all such funds in safe keeping for eventual distribution, less receivership expenses, to defrauded investors. Please note that investors who have filed a claim in the First Capital Bankruptcy will not be required to file a new claim in the U.S. Capital Receivership Estate. I will treat all claims filed by investors in the First Capital Bankruptcy as if such claims were filed in the U.S. Capital Receivership. PLEASE NOTE THAT THE RECEIVER CANNOT GIVE LEGAL ADVICE TO INDIVIDUAL NOTE HOLDERS. IF YOU HAVE ANY LEGAL QUESTIONS OR CONCERNS, YOU SHOULD CONSULT YOUR INDIVIDUAL ATTORNEY.

III. The Appointment of a Receiver for U.S. Capital

On October 11, 2001, the United States District Court for the Southern District of Florida, in the SEC action (described in Section I above), entered an Order for Appointment of Receiver for Defendant U.S. Capital Funding, Inc. (the "Receivership Order"), which contains provisions for my appointment as the permanent Receiver for U.S. Capital. A copy of the Receivership Order is enclosed with this letter.

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 to investors in the U.S. Capital Receivership proceeding before the District Court. Accordingly, I am filing a Motion for an Order Establishing a Claims Procedure and Claims Bar Date with the District Court contemporaneous with the issuance of this letter to ensure that all investors will be properly recognized as creditors of the U.S. Capital Receivership Estate. Once the District Court formally approves a procedure for the collection and review of all claims, I will send written notice and claim forms to all holders of U.S. Capital notes (who have not already filed claims with the First Capital Bankruptcy Estate), as well as publish notice of the claims procedure in a national newspaper, advising investors and potential creditors of U.S. Capital of the claims procedure and the bar date for filing claims with the Receivership Estate.

In summary, I will be requesting that the District Court approve a claims procedure which:

a. Requires all persons with claims or demands against the U.S. Capital to 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

2. Enjoins all creditors, claimants, and other persons failing to make and present claims and supporting proof to the Receiver postmarked on or before 90 days from the date of the Court Order approving the claims procedure from participating in any distribution of the assets of U.S. Capital.

Once I have received all investor claim forms, whether filed previously with the First Capital Bankruptcy or filed with me in the District Court, I will review the claims 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 a number of the claim forms initially submitted will be either improperly completed, insufficiently documented, or both. 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 or I will recommend that such incomplete 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 the 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. Contact Information

In order to keep investors informed as to the progress of the Receivership proceedings in the District Court, I have established 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 reducing expense to the Receivership Estate and to maximize potential distributions to investors, all communications to me should be made in writing. I am currently in the process of creating a "U.S. Capital Receivership Estate" Web Page, which should be operational in the very near future. In addition, you will be receiving an update report at least once every ninety (90) days from me 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.

Sincerely,

U.S. CAPITAL FUNDING, INC. RECEIVERSHIP ESTATE

By:

Carl F. Schoeppl, As Receiver

Enc. As Stated