ASSISTANCE FOUNDATION

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STUDENT ASSISTANCE FOUNDATION

OF MONTANA

CONSOLIDATED FINANCIAL REPORT

STUDENT

ASSISTANCE

J

FOUNDATION

AND AFFILIATE

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STUDENT ASSISTANCE FOUNDATION

OF MONTANA

AND AFFILIATE

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Page

INDEPENDENT AUDITOR'S REPORT 1

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Financial Position _{2 and 3}

Consolidated Statement of Activities 4

Consolidated Statement of Cash Flows 5

Notes to Consolidated Financial Statements 6 through 14 INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY 15

INFORMATION

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828 GREAT NORTHERN BOULEVARD

P .O . BOX 1040 - HELENA, MONTANA 5962-4-10-10 406 " 442^10-10 FAX406-4-42^1100

To the Board of Directors Student Assistance Foundation

of Montana

Helena, Montana 59601

INDEPENDENT AUDITOR'S REPORT

We have audited the accompanying consolidated statement of financial position of Student Assistance Foundation of Montana and affiliate (the Corporation) as of June 30, 2004, and the related consolidated statements of activities and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Student Assistance Foundation of Montana and Affiliate as of June 30, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United State of America.

Helena, Montana August 27, 2004

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2004

The Notes to Consolidated Financial Statements are an integral part of this statement. ASSETS

CURRENT ASSETS

Cash and cash equivalents $1,290,426 Accounts receivable :

Lender Services 40,697

Other lender receivables 164,278 Related parties 533,323 Interest Receivable 277,890

Investments 700,006

Prepaid costs, net 347,201 Total current assets 3,353,821 PROPERTY AND EQUIPMENT, at cost

Land and building 2,880,045 Building improvements 228,237 Equipment and furniture 2,047,376 5,155,658 Less: accumulated depreciation 1,148,036 Total property and equipment 4,007,622 RESTRICTED ASSETS

Cash and cash equivalents 828,719 Educational Loans receivable, net 54,651,396 Prepaid costs, net 638,167 Total restricted assets 56,118,282

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2004

LIABILITIES AND NET ASSETS CURRENT LIABILITIES

Other accounts payable and accrued expenses $1,403,016 Funds held for loan servicing client 558,045 Accrued interest payable 54,212 Grant program liability 503,930 Current portion of deferred compensation liability 92,302 Compensated absence liability 566,986 Current maturities of notes payable 124,068 Current maturities of loans payable 28,000,000 Total current liabilities 31,302,559

LONG-TERM LIABILITIES

Notes payable, net of current maturities 2,584,800 Loans Payable 28,000,000 Total long-term liabilities 30,584,800 Total Liabilities 61,887,359

NET ASSETS

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CONSOLIDATED STATEMENT OF ACTIVITIES

For the Year Ended June 30, 2004

The Notes to Consolidated Financial Statements are an integral part of this statement. 4

UNRESTRICTED NET ASSETS Revenue and Support:

Management fee income $3,976,452 Interest on educational loans 1,201,029 Loan servicing income 6,165,082 Lender services income 508,358

Interest income 18,999

Contributions Received 22,350

Other income 18,377

Total unrestricted revenue and support 11,910,647 Program and Operating Expenses:

Loan Servicing

Salaries, payroll taxes and employee benefits 4,852,625 Contract sub-servicing fees 573,572 Professional services 357,478

Advertising 5,846

Marketing and outreach 554,734

Contract labor 86,814

Staff travel and training 392,885

Insurance 28,462

Office supplies and copier charges 101,596

Computer charges 327,602

Telecommunications and utilities 306,234 Mail, postage and courier 283,784

Printing 139,514

Dues, subscriptions and memberships 46,287 Recruitment and relocation 15,507

Automobile expense 5,554

Repairs, maintenance and service 59,797

Depreciation 338,004

Amortization of prepaid costs 125,222

Conversion costs 316,993

Loan Fees 295,134

Other costs 154,009

Interest expense 553,232

Grants and public purpose program expenses 892,291 Lender services expenses 347,421 Total direct program expenses 11,160,597 General and administrative expenses

Salaries, payroll taxes and employee benefits 308,794 Board and officer expenses 19,099 Professional services 11,477

Insurance 29,861

Advertising 23,383

Other general and administrative costs 16,578 Total general and administrative expenses 409,192

Income tax expense 10,711

Total expenses 11,580,500

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STUDENT ASSISTANCE FOUNDATION OF MONTANA AND AFFILIATE CONSOLIDATED STATEMENT OF CASH FLOWS

The Notes to Consolidated Financial Statements are an integral part of this statement. CASH FLOWS FROM OPERATING ACTIVITIES :

Increase in net assets $330,147 Adjustments to reconcile net assets to net cash provided by

operating activities :

Depreciation _359,402

Amortization _126,046

Change in investment values 7,017 Change in deferred compensation investment value (14,646) (Gain)/loss on sale of assets (545) Change in assets and liabilities:

(Increase) decrease in current assets:

Receivables (172,377)

Interest Receivable (277,890) Prepaid costs _(685,123) Increase (decrease) in current liabilities:

Accounts and accrued expenses payable 1,051,651 Compensated Absence 147,009 Funds held for servicing clients (94,775) Net cash provided by operating activities 775,916 CASH FLOWS FROM INVESTING ACTIVITIES :

Purchase of property and equipment (1,194,657) Purchase of educational loans (63,414,502) Repayments of educational loans 8,763,106 Purchase of investments (132,436) Proceeds from sale of Investments 132,245 Proceeds from sale of fixed assets 545 Net cash used in investing activities (55,845,69 CASH FLOWS FROM FINANCING ACTIVITIES :

Proceeds from line of credit 56,000,000 Principal payments on real estate note payable (63,140) Principal payments on operating note payable (87,138) Net cash provided in financing activities 55,849,722 Net increase (decrease) in cash and cash equivalents 779,939 CASH AND CASH EQUIVALENTS, beginning of year 1,339,206 CASH AND CASH EQUIVALENTS, end of year $2,119,145 Supplemental schedule of noncash investing and financing activities:

Cash paid for interest $567,094

Cash and cash equivalents are reported on the consolidated statement fo financial position as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Principles of Consolidation:

Student Assistance Foundation of Montana (herein referred to as SAF or the Corporation) is a Montana not-for-profit corporation incorporated in July of 1999 to provide education finance services to Montana students and support services for student financial aid industry participants . SAF was formed as part of a major restructuring plan adopted by the Montana Higher Education Student Assistance Corporation (MHESAC) Board of Directors in response to changes in the student loan industry and in an effort to expand financial aid benefits available to Montana students. As part of this plan, on February 1, 2000, the employees and operating assets of MHESAC were transferred to SAF and MHESAC contracted with SAF for student loan servicing and management functions. SAF also

provides student loan servicing to 37 other financial institutions. SAF provides financial support as well as a variety of counseling and information services to Montana students in post-secondary education.

On June 28, 2003, SAF created a wholly owned limited liability company named Montana Student Loan Funding, LLC (MSLF). , The new corporation is a bankruptcy remote company that will acquire and originate student loans and has a perpetual life. The nature of the loans held by this entity are short-term as one-half of the loans are required to be redeemed every 15 months under the indenture . The accompanying consolidated financial statements include the accounts of MSLF. All significant inter-company transactions and accounts have been eliminated

Income Tax Status:

SAF is a not-for-profit corporation exempt from taxation under Internal Revenue Code Section 501(c)(3).

MSLF is a Limited Liability Company that has elected to be taxed as a partnership. The Company's income and deductions are passed through to SAF as a disregarded entity. SAF will report the income and deductions on its income tax return. The Corporation's share of any pass through income and deductions are deemed unrelated trade or business income subject to tax under 501(c). For the year ended June 30, 2004, SAF's tax liability resulting from MSLF net income is $10,711 .

Accounting Estimates :

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.

Financial Statement Presentation :

The Corporation reports information regarding its financial position and activities according to three classes: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The net assets are reported as follows:

Unrestricted Net Assets - Net assets that are not subject to stipulations.

Temporarily Restricted Net Assets - Net assets subject to donor-imposed stipulations that may or will be met, either byactions of the Corporation or the passage of time. When a

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STUDENT ASSISTANCE FOUNDATION OF MONTANA AND AFFILIATE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004

NOTE 1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. There were no temporarily restricted net assets at June 30,2004.

Permanently Restricted Net Assets - Net assets subject to donor-imposed stipulations that they be maintained permanently by the Corporation, but permit the use of all or part of the income earned on any related investment for general or specific purposes. The Corporation had no permanently restricted net assets at June 30, 2004.

Method of Accounting:

The accompanying consolidated financial statements are presented on the accrual basis of accounting.

Contributions :

Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions . Support that is restricted by the donor is reported as an increase in unrestricted net assets if the restriction expires in the reporting period in which the support is recognized . All other donor-restricted support is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction . When a restriction expires (that is, when a stipulated time restriction ends or purpose of restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions.

Marketing and Outreach:

The Corporation expenses program marketing and promotional costs as incurred . Cash and Cash Equivalents.

Cash and cash equivalents includes all checking, money market accounts and highly liquid securities with a maturity of three months or less at the date of purchase.

Accounts Receivable :

Accounts receivable consist primarily of servicing and management fees due from MHESAC, loan servicing fees and receivables from cost sharing arrangements with the Montana Guaranteed Student Loan Program (MGSLP) and the Office of the Commissioner of Higher Education (OCHE) . No allowance for uncollectible accounts has been provided because management considers potential uncollectible amounts to be immaterial. Property and Equipment

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NOTE 1 . SUMMARY OF SIGN IFICANTACCOUNTING POLICIES (CONTINUED)

Depreciation expense incurred for loan servicing was $338,004. Depreciation expense included in lender services and administrative programs was $18,544 and $2,854, respectively, for the year ended June 30, 2004. Total depreciation expense was $359,402.

Amortization expense incurred for loan servicing was $125,222. Amortization expense included in administrative programs was $824 . Total amortization expense was $126,046 for the year ended June 30, 2004.

Investments:

Corporation investments consist of mutual funds, certificates of deposit, bonds and corporate issues and are carried at fair value. Interest and dividends subject to donor restrictions are reported as increases in temporarily restricted net assets. When the restrictions are met, they are reclassified to unrestricted net assets. Unless gains and losses on donor-restricted investments are specifically restricted by the donor, they are reported as increases or decreases in unrestricted net assets.

Interest on Educational Loans:

The United States Department of Education makes quarterly interest payments on subsidized loans until the borrower is required to begin repayment under the provisions of the Higher Education Act. For Stafford loans repayment generally begins 6 to 9 months after the student completes his course of study, leaves school or fails to carry a minimum academic load. Repayment begins immediately upon full disbursement for Consolidation,

PLUS and SLS loans.

Special Allowance Payments:

The United States Department of Education provides a special allowance or subsidy to lenders participating in the Federal Family Education Loan Program. This allowance is paid on the average quarterly unpaid principal balance of student loans, based on an annual rate equal to the average yield rate of 91-day U. S. Treasury Bills or 3-month Commercial Paper Rates forthat quarter increased by various rates, depending on loan origination date.

Pre-Paid Costs:

Costs of acquiring educational loans are capitalized and amortized using the effective interest method over the average life of the loan portfolio. Other pre-paid costs are amortized over the period benefited.

Allowance for Uncollectible Loans:

The educational loans receivable are loan portfolios purchased from various banks and other financial institutions. Under contracts with the Montana Guaranteed Student Loan Program (MGSLP) and United States Department of Education, MSLF is guaranteed reimbursement of principal and accrued interest on defaulted educational loans for which the applicable due diligence procedures have been performed. Defaulted loans are reimbursed at 98%. A provision for uncollectible educational loans has not been made for those loans subject to 2% risk sharing as it is anticipated that these loans will be sold within 15 months to the Montana Higher Education Student Assistance Corporation (MHESAC) .

Assets restricted per MSLF agreement:

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JUNE 30, 2004

NOTE 1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

the Citicorp indenture. These assets are presented as other assets in the statement of financial position.

NOTE 2. CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. SAF & MSLF maintain cash deposits at two financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At June 30, 2004, the carrying amount of those deposits was $1,290,426 and the bank balance was $1,883,921 with $1,669,240 in excess of FDIC insured limits.

NOTE 3. INVESTMENTS

Investments are reported at fair value which approximates cost for the year ended June 30 2004 . At June 30, 2004, the Company had investments consisting of the following :

Investment earnings on nvestments consist of the followingat June 30, 2004: Net realized and unrealized gains (losses) $(7,017)

Interest and dividends 26,016

NOTE 4. EDUCATIONAL LOANS RECEIVABLE

The educational loans receivable are classified as student/interim or repayment status . Student/interim status represents the period from the date the educational loan is made until a student is out of school, including the grace period and any authorized deferment periods, at which time repayment status commences. Educational loans are summarized as follows:

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NOTE 4. EDUCATIONAL LOANS RECEIVABLE (CONTINUED)

Depending on factors specified in the Higher Education Act, educational loans have either fixed or variable interest rates and various maximum repayment terms. Fixed interest rates on Consolidation loans are based upon the weighted average interest rates of the loans consolidated rounded up to the nearest one-eighth . Consolidation loans disbursed on or after November 13, 1997 have a maximum interest rate of 8.25% . Variable interest rates are based upon either the 91 day or one year constant maturity Treasury bill, subject to maximum interest rates ranging from 751 to 12%. All Stafford and PLUS loans disbursed on or after July 1, 1994 are variable rate and have maximum interest rates of 8.25% and 9%, respectively. SLS, PLUS, and FISL loans have a maximum repayment term of 10 years. Stafford loans have maximum repayment terms of 10 or 25 years depending on the borrower's original disbursement date. Consolidation loans have maximum repayment terms of 10 to 30 years depending on original balance.

NOTE 5. LONG-TERM DEBT

Long-term debt at June 30, 2004 long term debt consisted of the following: SAF

Notes Payable

Note payable to MHESAC, bearing interest at the rate of 8.22%; payable in monthly installments ranging from $21630 to $28,526 through February 2019; secured by real property.

Note payable to MHESAC, bearing interest at the rate of 7.87% ; payable in monthly installments ranging from $7,929 to $11,623 through February 2005 ; secured by

asset. 5Q78

Less: current maturities (124 .068)

Future maturity requirements of long-term debt forthe five years subsequent to June 30, 2004 are as follows:

Page 10

$2,654,790

WK-41.=

MSLF

A Citicorp Line of Credit was established by indenture, originally dated August 5, 2003, for the express purpose of acquiring and originating student loans. The line of credit may be a maximum of $100,000,000 and has a maturity date of August 5, 2008 subject to annual renewals. The proceeds from any advances on the line are restricted to acquiring or making

2005 $124,068 2006 $ 76,276 2007 $ 81,569 2008 $ 86,315

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JUNE 30, 2004 NOTE 5. LONGTERM DEBT (CONTINUED)

student loans, or paying fees and expenses specified by the agreement. Collateral for the line of credit includes the loans acquired with the proceeds, related guarantee agreements, borrower interest, all funds on deposits in the accounts established under the indenture and all personal property of MSLF. The program limit may be reduced to not less than one-half of the original amount ($50,000,000) and advances may be prepaid prior to the maturity date . Accordingly, one-half of the outstanding balance may be called for reimbursement. The interest rate is reset on the first of each month and is the commercial paper rate established by Citicorp on behalf of its conduit lenders. The balances of advances drawn on the line of credit as of June 30, 2004 are as follows:

Loans Payable

Citicorp line of credit; maturity date August 5, 2008;

secured by student loans. $ 56,000,000

Less: current maturities. (28,000,000)

NOTE 6 RETIREMENT PLAN

Effective February 1, 2000, the MHESAC 403(b) Tax Sheltered Investment Program was amended and renamed the Student Assistance Foundation of Montana 403(b) Tax Sheltered Investment Program . This plan was adopted by SAF and is now available to employees of SAF. This plan is a defined contribution pension plan and covers all employees working at least 20 hours per week. Employees may contribute to the plan immediately upon employment. After a six-month waiting period, the Corporation matches each participant's contribution up to six percent of the participants salary. SAF incurred pension costs of $214,608 in the year ended June 30, 2004.

Deferred Compensation Liability:

Effective July 1, 2001 and July 1, 2004, the Corporation executed separate deferred compensation agreements with a key employee . Under the terms of each agreement, the Corporation is required to make three annual deposits of $33,333 to an investment account on behalf of the participant, beginning on the effective date of the specific plan. Investment earnings, including gains and losses, are credited to the account. Benefits are payable under the plan upon termination, subject to the plan's provisions regarding vesting and forfeiture. The following is a summary ofeach retirement obligation: July 1, 2001 Agreement:

Vesting 25% on December 15, 2003 and 100% on September 24, 2004. Forfeiture Key employee is not employed on September 24, 2004 .

Payout Lump sum upon separation of service after September 24, 2004. Payout is also available up to the amount that is fully vested upon request by the employee.

June 30, 2004

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NOTE 6 RETIREMENT PLAN (CONTINUED) July 1, 2004 Agreement:

Vesting 10% on June 30,2005; 20% on June 30, 2006 and 100% on June 30, 2007.

Forfeiture Key employee is not employed on June 30, 2005; additional requirements for subsequent years

Payout Lump sum upon separation of service after June 30, 2007. Payout is also available up to the amount that is fully vested upon request by the employee

Distributions equivalent to the vested amount of 25% under the July 1, 2001 agreement were made during the year ending June 30, 2004.

NOTE 7 COMMITMENTS AND CONTINGENCIES Management and Servicing Agreements :

SAF has entered into management and servicing agreements with MHESAC. SAF will provide portfolio servicing for a term equal to the life of each of MHESAC's related financings. Management services will be provided to MHESAC for an 18-year term beginning February 1, 2000 . The cost of these services will be an amount equal to the allocable cost incurred by SAF in performing its duties and obligations under the agreements plus, for the period prior to February 1, 2003, fifteen percent of those costs. For each successive three-year period the mark-up percentage of such cost will be mutually agreed upon by MHESAC and SAF, but in no event will it be less than five percent. For the three year period beginning February 1, 2003, MHESAC and SAF agreed to continue the mark-up percentage at fifteen percent. By contract, the fees are payable in advance for each month. Therefore, an estimate is made of anticipated cost levels and SAF bills MHESAC on that basis with a final adjustment to the advance billing based on actual expenses incurred. During the year ended June 30, 2004, SAF billed MHESAC $9,271,923. At June 30, 2004, the reconciliation of billed and actual costs resulted in a balance receivable from MHESAC of $489,618.

On August 1, 2003, SAF entered into a servicing agreement with MSLF. SAF will provide student loan portfolio servicing in accordance with procedures established by the Higher Education Act and Guarantee Program regulations for a term that will extend as long as any warehoused loans or other secured obligation remains outstanding, unless the agreement is otherwise terminated in accordance with the terms stated. The cost of these services will be a monthly fee based on an amount equal to 0.041667% of the average outstanding principal balance of all financed FFELP loans during the immediate preceding month. MSLF also pays rent for office space in the SAF building . SAF received $140,590 in servicing fees from MSLF during the year ended June 30, 2004. Additional MSLF overhead cots have been absorbed by SAFwithout reimbursement. Group Benefits Flan:

SAF provides a medical and dental insurance coverage plan for employees. Effective July 1, 2002, SAF opted for an insured plan with Blue Cross/Blue Shield .

Line of Credit:

On May 17, 2004 SAF extended a bank line of credit with First Interstate Bank, originally secured on April 3, 2003 for operating purposes. The $400,000 line is secured by a

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JUNE 30, 2004

NOTE 7 COMMITMENTS AND CONTINGENCIES (CONTINUED)

certificate of deposit and interest on the line is charged at 3% . There were no amounts outstanding under this line of credit at June 30, 2004. The credit agreement expires on March 27, 2005.

On June 14, 2004 SAF secured a bank line of credit with First Interstate Bank of $640,514 for acquisition and implementation of a new telephone system . The line is secured by the equipment being purchased and interest on the line is charged at 4% . There were no amounts outstanding under this line of credit at June 30, 2004. The credit agreement matures on September 20, 2004when it will be converted to a 5 year note. MSLF secured a $100 million line of credit with Citicorp on August 6, 2003 for the express purpose of acquiring and originating student loans. As of June 30, 2004, MSLF had drawn $56,000,000 to acquire student loans. Note 5 details the requirements of the line of credit.

NOTE 8 RELATED PARTY TRANSACTIONS Relationship with MHESAC:

On February 1, 2000, SAF entered into agreements with Montana Higher Education Student Assistance Corporation (MHESAC) to provide management and servicing to MHESAC as described in Note 7. SAF has some common board members with MHESAC . Effective February 1, 2000, MHESAC transferred, for fair value, all of its operations and non-financial assets, including personnel, all furniture and equipment, as well as its interest in the office building and land, to SAF. These assets were transferred

in exchange for two notes more fully described in Note 5. Shared Cost Agreements:

The Corporation has sublease and shared cost agreements with Montana Guaranteed Student Loan Program (MGSLP) and Office of the Commissioner of Higher Education (OCHE), both of which are agencies of the Board of Regents of Montana. SAF and the Board of Regents have some common board members. The costs shared are primarily related to computer operations, personnel and building operations. The sublease and shared cost amounts and the related accounts receivable and accounts payable were as follows for the year ended June 30, 2004:

Sublease and Shared Costs Payments from: MGSLP $428,894 OCHE $ 57,730 Payments to: OCHE $138,158 Accounts Receivable: Payments due from :

MGSLP $ 38,271

OCHE $ 5,434

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NOTE 9 RISK MANAGEMENT

SAF faces a number of risks of loss, including a) damage to and loss of property, b) employee torts, c) professional liability, i .e. errors and omissions, and d) workers' compensation . A variety of methods are used to provide insurance for these risks. Commercial policies transferring all risks of loss except for relatively small deductible amounts are purchased for property damage, employee torts, and professional liabilities. SAF participates in a state-wide workers' compensation coverage plan .

NOTE 10 MAJOR CUSTOMER

Fees from MHESAC accounted for 84.7% of SAF's total revenues for the year ended June 30, 2004. Accounts receivable outstanding relating to these revenues accounted for 66% of SAF's total receivables for the year ended June 30, 2004.

NOTE 11 SUBSEQUENT EVENT

SAF drew $300,000 on the Telephony Equipment line of credit with First Interstate Bank described in Note 7 in July 2004.

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DISCOVERY BLOCK

828 GREAT NORTHERN BOULEVARD

P .O . BOX 10-10 e HELENA, MONTANA 5962-4-1040 4060442-1040 FAX 406-442-1100

To the Board of Directors Student Assistance Foundation

of Montana

Helena, Montana 59601

Helena, Montana August 27, 2004

INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION

Our report of the basic consolidated financial statements of Student Assistance Foundation of Montana and affiliate for 2004 appears on page 1 . Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole . The consolidating schedules presented on pages 16 to 18 are presented for purposes of additional analysis of the consolidated financial statements only and not intended to present the financial position, results of operations, and cash flows of the individual entities.

Accordingly, we do not express an opinion on the consolidating schedules of financial position, results of operations, and cash flows of the individual entities. However, in our opinion, the consolidating information is fairly stated in all material respects in relation to the combined financial statements taken as a whole.

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CONSOLIDATING SCHEDULE OF FINANCIAL POSITION June 30, 2004

ASSETS Student Assistance Foundation Montana Student Loan Funding Consolidating Adjustments Total CURRENT ASSETS

Cash and cash equivalents $1,278,461 $11,965 $1,290,426 Accounts receivable :

Lender Services 40,697 40,697

Montana Student Loan Funding 22,378 -$22,378 0 Other lender receivables 164,278 164,278

Related parties 533,323 533,323

Due From Subsidiary 141,561 -141,561 0

Interest receivable 277,890 277,890

Investments 700,006 _700,006

Prepaid costs, net 347,201 347,201

Funds held for loan servicing client 0 8,987 -8,987 0 Total current assets 3,227,905 298,842 -172,926 3,353,821 PROPERTY AND EQUIPMENT, at cost

Land and building 2,880,045 2,880,045

Building improvements 228,237 228,237

Equipment and furniture 2,047,376 2,047,376 5,155,658 0 0 5,155,658 Less: accumulated depreciation 1,148,036 1,148,036 Total property and equipment 4,007,622 0 0 4,007 622 RESTRICTED ASSETS

Cash and cash equivalents 828,719 828,719 Educational loans receivable, net 54,651,396 54,651,396

Prepaid costs, net 638,167 638,167

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CONSOLIDATING SCHEDULE OF FINANCIAL POSITION June 30, 2004

LIABILITIES AND NET ASSETS

Student Assistance Foundation

Montana Student

Loan Funding Consolidated Adjustments Totals CURRENT LIABILITIES

Other accounts payable and accrued expenses $1,263,159 $162,235 -$22,378 $1,403,016 Funds held for loan servicing client 558,163 8,869 -8,987 558,045 Accrued interest payable 54,212 54,212 Grant program liability 503,930 503,930 Due to Parent Corporation 141,561 -141,561 0 Current portion of deferred compensation liability 92,302 _92,302 Compensated absence liability 5 66,986 _566,986 Current maturities of notes payable 1 24,068 _124,068 Current maturities of loans payable 28,000,000 28,000,000 Total current liabilities 3,108,608 28,366,877 -172,926 31,302,559

LONG-TERM LIABILITIES

Notes payable, net of current maturities 2,584,800 _2,584,800 Loans payable, net of current maturities 28,000,000 28,000,000 Total long-term liabilities 2,584,800 28,000,000 0 30,584,800 Total Liabilities 5,693,408 56,366,877 -172,926 61,887,359 NET ASSETS

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STUDENT ASSISTANCE FOUNDATION OF MONTANA AND AFFILIATE CONSOLIDATING SCHEDULE OF REVENUE AND EXPENSE

18

Student Assistance

Foundation Montana Student Loan Funding Consolidating Adjustments Total UNRESTRICTED NET ASSETS

Revenue and Support:

Management fee income $3,976,452 _$3,976,452 Interest on educational loans $1,201,029 1,201,029 Loan servicing income 6,305,672 _{-$140,590 6,165,082}

Lender services income 508,358 _508,358

Interest income 9,758 9,241 _18,999

Contributions Received 22,350 _22,350

Other income 19,148 9 -780 18,377

Total unrestricted revenue and support 10,841 738 1,210 279 -141370 11,910,647 Program and Operating Expenses:

Loan Servicing

Salaries, payroll taxes and employee benefits 4,852,625 _4,852,625 Contract sub-servicing fees 573,572 140,590 -140,590 573,572 Professional services 317,131 40,347 357,478

Advertising 5,846 _5,846

Marketing and outreach 554,734 554,734

Contract labor 86,814 86,814

Staff travel and training 392,885 _392,885

Insurance 28,462 _28,462

Office supplies and copier charges 101,596 101,596

Computer charges 327,602 327,602

Telecommunications and utilities 306,157 77 306,234 Mail, postage and courier 283,671 113 283,784

Printing 138,974 540 139,514

Dues, subscriptions and memberships 46,287 46,287 Recruitment and relocation 15,507 _15,507

Automobile expense 5,554 _5,554

Repairs, maintenance and service 59,797 _59,797

Depreciation 338,004 338,004

Amortization of prepaid costs 97,509 27,713 125,222

Conversion costs - 316,993 _316,993

Loan Fees - 295,134 295,134

Other costs 153,548 1,241 -780 154,009 Interest expense 218,948 334,284 553,232 Grants and public purpose program expenses 892,291 _892,291

Lender services expenses 347,421 _347,421

Servicing costs allocated to MSLF -140,590 140,590 0 Total direct program expenses 10, 004,345 1,157, 032 -780 11,160-597 General and administrative expenses

Salaries, payroll taxes and employee benefits 308,794 _308,794 Board and officer expenses 16,099 3,000 19,099

Professional services 11,477 11,477

Insurance 29,861 _29,861

Advertising 23,383 _23,383

Servicing costs allocated to MSLF 140,590 -140,590 0 Other general and administrative costs 16,578 _16,578 Total general and administrative expenses 546,782 3,000 -140,590 409,192

Income tax expense 10,711 10,711

(23)

SCHEDULE OF PROGRAMS EXPENSE For the Year Ended June 30, 2004

Operating & overhead expenses

Program administration $ 111,555 Camps outreach

Outreach staff & offices 70,322 Outreach program

MCIS program 77,500

College Goal Sunday 7,412

P-20 36,924

Grants awarded

Scholarships 1,549

Gear up contributions 47,201

MSU SAFE project 15,447

Access grants 500,000

MPSEOC college fair 3,000

Sponsorships

High school 21,298

Program support