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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004
 or o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the
transition period from

to
 Commission file number 0-23637 Global Preferred Holdings, Inc. (Exact Name of Registrant as Specified in its Charter)
 DELAWARE(State or other Jurisdiction of
Incorporation or Organization)
    
    58-2179041(I.R.S. Employer
Identification Number)
 6455 EAST JOHNS CROSSING, SUITE 402
DULUTH, GEORGIA 30097
(770) 248-3311(Address, Including Zip Code and Telephone Number, Including Area Code, of Registrants Principal Executive Offices)   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x As of May 10, 2004, there were 4,141,684 shares of common stock
outstanding.




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TABLE OF CONTENTS PART I  FINANCIAL INFORMATION
    
    
    3ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
    
    
    3ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    10ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    23ITEM 4. CONTROLS AND PROCEDURES
    
    
    23PART II  OTHER INFORMATION
    
    
    24ITEM 1. LEGAL PROCEEDINGS
    
    
    24ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    24ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    24ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    24ITEM 5. OTHER INFORMATION
    
    
    24ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    25EX-10.1 2ND RENEWAL EMPLOYMENT AGREEMENT / BARKSEX-10.2 2ND RENEWAL EMPLOYMENT AGREEMENT/SHEPHERDEX-10.3 2ND RENEWAL EMPLOYMENT AGREEMENT/BOBOWSKIEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 2




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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL
STATEMENTS (UNAUDITED) GLOBAL PREFERRED HOLDINGS, INC. Consolidated Balance Sheets
(Unaudited) December 31,
    
    March 31,2003
    
    2004AssetsFixed maturity securities  available for sale (amortized
cost of $15,057,808 and $16,273,386 for 2003 and 2004,
respectively)
    
    $
    15,267,477
    
    
    $
    16,709,088Equity securities  available for sale (cost of $2,009,360 and
$2,024,285 for 2003 and 2004, respectively)
    
    
    1,998,932
    
    
    
    2,011,716Other equity investments (cost of $500,000 for 2003 and 2004)
    
    
    501,259
    
    
    
    510,569Cash and cash equivalents
    
    
    11,580,045
    
    
    
    13,105,915Reinsured policy loans
    
    
    1,270,711
    
    
    
    1,331,008Total invested assets
    
    
    30,618,424
    
    
    
    33,668,296Investment income due and accrued
    
    
    197,020
    
    
    
    227,704Accounts receivable
    
    
    44,588
    
    
    
    8,255Reinsurance balances receivable
    
    
    2,112,462
    
    
    
    1,605,314Deferred acquisition costs
    
    
    45,607,865
    
    
    
    44,395,027Prepaid expenses
    
    
    519,888
    
    
    
    431,303Current income tax recoverable
    
    
    48,152
    
    
    
    18,484Fixed assets (net of accumulated depreciation of $336,817 and
$361,454 for 2003 and 2004, respectively)
    
    
    135,495
    
    
    
    110,859Total assets
    
    $
    79,283,894
    
    
    $
    80,465,242Liabilities and Stockholders EquityLiabilities:Future policy benefits
    
    $
    18,881,390
    
    
    $
    18,707,217Reinsurance balances payable
    
    
    169,481
    
    
    
    121,339Accrued expenses and accounts payable
    
    
    517,078
    
    
    
    660,648Accrued interest payable
    
    
    158,219
    
    
    
    64,213Current maturities of long-term debt
    
    
    5,000,000
    
    
    
    5,000,000Deferred tax liability
    
    
    9,252,250
    
    
    
    9,620,885Total liabilities
    
    
    33,978,418
    
    
    
    34,174,302Commitments and contingencies (Note 11)Stockholders equity:Common stock, par value $.001, 15,000,000 shares
authorized; 4,149,074 shares issued for 2003 and 2004,
respectively
    
    
    4,149
    
    
    
    4,149Additional paid-in capital
    
    
    23,326,026
    
    
    
    23,326,026Accumulated other comprehensive income
    
    
    132,331
    
    
    
    286,244Retained earnings
    
    
    21,892,237
    
    
    
    22,723,788Treasury stock, at cost (7,390 shares)
    
    
    (49,267
    )
    
    
    (49,267
    )Total stockholders equity
    
    
    45,305,476
    
    
    
    46,290,940Total liabilities and stockholders equity
    
    $
    79,283,894
    
    
    $
    80,465,242
 See accompanying condensed notes to consolidated financial statements. 3




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GLOBAL PREFERRED HOLDINGS, INC. Consolidated Statements of Income
(Unaudited) Three Months EndedMarch 31,2003
    
    2004Revenues:Premiums
    
    $
    4,388,495
    
    
    $
    4,302,218Reinsured policy revenues
    
    
    3,231,844
    
    
    
    3,198,812Net investment income
    
    
    82,988
    
    
    
    177,741Other income
    
    
    
    
    
    
    6,980Total revenues
    
    
    7,703,327
    
    
    
    7,685,751Benefits and expenses:Benefits, claims and settlement expenses
    
    
    2,275,569
    
    
    
    1,975,820Change in future policy benefits
    
    
    310,751
    
    
    
    214,469Reinsurance expense allowances, net
    
    
    2,074,237
    
    
    
    1,975,295Amortization of deferred acquisition costs
    
    
    1,375,426
    
    
    
    1,434,337Operating expenses
    
    
    876,479
    
    
    
    838,522Interest expense
    
    
    92,466
    
    
    
    93,493Total benefits and expenses
    
    
    7,004,928
    
    
    
    6,531,936Income before income tax
    
    
    698,399
    
    
    
    1,153,815Income tax expense
    
    
    (237,457
    )
    
    
    (322,264
    )Net income
    
    $
    460,942
    
    
    $
    831,551Basic earnings per share
    
    $
    0.11
    
    
    $
    0.20Diluted earnings per share
    
    $
    0.11
    
    
    $
    0.20Weighted-average common shares outstanding
    
    
    4,141,684
    
    
    
    4,141,684Total weighted-average common and common
equivalent shares outstanding
    
    
    4,141,684
    
    
    
    4,141,684
 See accompanying condensed notes to consolidated financial statements. 4




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GLOBAL PREFERRED HOLDINGS, INC. Consolidated Statements of Cash Flows
(Unaudited) Three Months EndedMarch 31,2003
    
    2004Cash flows from operating activities:Net income
    
    $
    460,942
    
    
    $
    831,551Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Amortization and depreciation
    
    
    1,394,970
    
    
    
    1,496,408Deferred tax expense
    
    
    224,132
    
    
    
    289,346Capitalization of deferred acquisition costs
    
    
    (324,687
    )
    
    
    (221,499
    )Change in:Investment income due and accrued
    
    
    32,364
    
    
    
    (30,684
    )Accounts receivable
    
    
    111,500
    
    
    
    36,333Reinsurance balances receivable
    
    
    344,150
    
    
    
    507,148Prepaid expenses
    
    
    138,008
    
    
    
    88,585Current income tax recoverable
    
    
    13,325
    
    
    
    29,668Future policy benefits
    
    
    1,236,059
    
    
    
    (174,173
    )Reinsurance balances payable
    
    
    38,576
    
    
    
    (48,142
    )Accrued expenses and accounts payable
    
    
    50,834
    
    
    
    143,570Accrued interest payable
    
    
    (95,034
    )
    
    
    (94,006
    )Net cash provided by operating activities
    
    
    3,625,139
    
    
    
    2,854,105Cash flows from investing activities:Proceeds from principal payments on mortgage-backed
securities of available-for-sale securities
    
    
    255,644
    
    
    
    43,062Proceeds from maturity of available-for-sale securities
    
    
    200,000
    
    
    
    200,000Purchase of fixed maturity securities
    
    
    
    
    
    
    (1,511,000
    )Change in reinsured policy loans
    
    
    (61,253
    )
    
    
    (60,297
    )Net cash provided by (used in) investing activities
    
    
    394,391
    
    
    
    (1,328,235
    )Net increase in cash and cash equivalents
    
    
    4,019,530
    
    
    
    1,525,870Cash and cash equivalents at beginning of period
    
    
    15,858,256
    
    
    
    11,580,045Cash and cash equivalents at end of period
    
    $
    19,877,786
    
    
    $
    13,105,915Supplemental disclosure of cash flow information:Interest paid
    
    $
    187,500
    
    
    $
    187,500Income taxes paid
    
    $
    
    
    
    $
    3,250
 See accompanying condensed notes to consolidated financial statements. 5




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GLOBAL PREFERRED HOLDINGS, INC.
Condensed Notes to Consolidated Financial Statements March 31, 2004
(Unaudited)  1.
    
    Basis of Presentation The accompanying unaudited consolidated financial statements of Global
Preferred Holdings, Inc. (Global Preferred) have been prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and with the instructions for Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. The unaudited financial statements should be read in conjunction with
Global Preferreds audited financial statements included in Global Preferreds
2003 Annual Report on Form 10-K, as amended and filed with the Securities and
Exchange Commission.  2.
    
    Deferred Tax Global Preferred uses the asset and liability method to record deferred
income taxes. Accordingly, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases using an effective federal income tax rate of 34%.
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxesspecifically excludes recognition of the small life insurance
company deduction available under Section 806 of the Internal Revenue Code for
qualifying life insurance companies. This special deduction can reduce the
effective federal income tax rate from 34% to less than 20% depending upon the
amount of taxable income. Consequently, the effective tax rate on Global
Preferreds earnings may ultimately prove to be less than the deferred income
tax liabilities and related expenses determined under SFAS No. 109 at March 31,
2004.  3.
    
    Comprehensive Income SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. The primary component of other
comprehensive income or loss is the unrealized gain or loss on securities as
shown under the equity section of the consolidated balance sheet. Total
comprehensive income for the three months ended March 31, 2004 was $985,464
compared to $447,050 for the three months ended March 31, 2003.  4.
    
    Earnings Per Share Basic earnings per share are computed based on the weighted-average number
of common shares outstanding during the period, in accordance with SFAS No.
128, Earnings Per Share. Diluted earnings per share are computed based on the
total weighted-average number of common and common equivalent shares
outstanding during the period. Outstanding stock options, all of which were
granted during the second quarter of 2003, were not dilutive for the three
months ended March 31, 2004. For the three month periods ended March 31, 2003 and 2004, the incremental
shares issued and the income impact upon the conversion of the convertible note
issued to Money Services, Inc. were excluded because they would have been
anti-dilutive. The conversion price of the note is $15.99 per common share
based on the maturity value of the convertible note. The outstanding stock
options along with the convertible note could be dilutive in the future.  5.
    
    Common Stock No changes to our common stock occurred during 2003 or 2004. 6




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6.
    
    Stock Options Global Preferreds employee stock incentive plan and directors stock
option plan (the stock option plans) are accounted for under the intrinsic
value recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. As the exercise
price of all options granted under the stock option plans was not less than the
fair value of the underlying common stock on the grant date, no stock-based
employee compensation cost is recognized in net income. The following table
illustrates the effect on net income and earnings per share if Global Preferred
had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to the stock option plans as of the dates
reported. Three Months
    
    Three MonthsEnded
    
    EndedMarch 31,
    
    March 31,(In ThousandsExcept Per Share Amounts)
    
    2003
    
    2004Net income, as reported
    
    $
    460.9
    
    
    $
    831.6Less: Total stock-based employee
compensation expense determined under the
fair value method for all awards, net of
tax
    
    
    
    
    
    
    (2.9
    )Pro-forma net income
    
    $
    460.9
    
    
    $
    828.7Reported basic earnings per common share
    
    $
    0.11
    
    
    $
    0.20Reported diluted earnings per common share
    
    $
    0.11
    
    
    $
    0.20Pro-forma basic earnings per common share
    
    $
    0.11
    
    
    $
    0.20Pro-forma diluted earnings per common share
    
    $
    0.11
    
    
    $
    0.20
  7.
    
    Accounting Pronouncements In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, as revised by Interpretation 46R, issued in
December 2003.The issuance of Interpretation No. 46 did not have a material
impact on Global Preferreds financial statements. In July 2003, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts. The provisions of this SOP are effective for financial statements
for fiscal years beginning after December 15, 2003 and require, among other
things, that liabilities be established for guaranteed minimum death benefits
for certain variable annuity policies. The guaranteed minimum death benefit
liability is established with the change in the liability included in gross
profits used to determine the amortization of the deferred acquisition costs.
This change may result in an increase in the liability for future policy
benefits and an offsetting increase in deferred acquisition costs. The
implementation of this provision did not have a material impact on Global
Preferreds financial statements. 7




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8.
    
    Segment Reporting Global Preferred defines reportable segments based on the nature of its
reinsurance agreements and the accounting treatment used for the various
reinsurance agreements. Based on this definition, two reportable segments have
been identified: non-universal life-type agreements and universal life-type
agreements (as each is referenced in SFAS No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments, paragraphs 44 and 45). Global
Preferred reinsures certain variable universal life insurance policies on a
renewable term basis, which are reported below as Non-Universal Life-Type
Agreements and, as such, these revenues are classified as premium revenue.
Renewable term reinsurance involves the reinsurance of mortality risk whereby
premiums are not directly related to the premium rates on the original plan of
insurance. Global Preferreds renewable term agreements are accounted for
under SFAS No. 60, Accounting and Reporting by Insurance Enterprises,
accounting principles. Global Preferred reinsures variable annuity contracts
and certain other variable universal life insurance policies on a coinsurance
and modified coinsurance basis, which are reported below as Universal Life-Type
Agreements and, as such, these revenues are classified as reinsured policy
revenues. Coinsurance involves the reinsurance of mortality and investment
risks on the same basis as that of the underlying policies. The ceding life
companies and Global Preferred share in these risks on a pro rata basis.
Global Preferreds existing coinsurance and modified coinsurance agreements are
accounted for under SFAS No. 97 accounting principles. Items not directly related to the business segments and unallocated
corporate items (i.e., other income, interest expense on corporate debt and
unallocated operating expenses) are shown separately, consistent with Global
Preferreds internal measurement process. Segment assets reported include
those assets directly attributable to the reinsurance agreements such as
reinsurance balances receivable, deferred acquisition costs, policy loans,
prepaid expenses, invested assets and cash. Cash and invested assets are
allocated to the agreements based upon statutory reserves, the letters of
credit posted in support of the statutory reserves held, statutory receivables
and allocated surplus, which is consistent with Global Preferreds current
internal measurement process. Segment Reporting
Three Months Ended March 31, 2003Non-Universal
    
    Universal(Dollars in thousands)
    
    Life-Type
    
    Life-Type
    
    Other
    
    TotalPremiums
    
    $
    4,388
    
    
    $
    
    
    
    $
    
    
    
    $
    4,388Reinsured policy revenues
    
    
    
    
    
    
    3,232
    
    
    
    
    
    
    
    3,232Benefits, claims and settlement
expenses*
    
    
    1,997
    
    
    
    589
    
    
    
    
    
    
    
    2,586Reinsurance expense allowances, net
    
    
    1,530
    
    
    
    544
    
    
    
    
    
    
    
    2,074Amortization of deferred acquisition
costs
    
    
    94
    
    
    
    1,281
    
    
    
    
    
    
    
    1,375Underwriting profit
    
    
    767
    
    
    
    818
    
    
    
    
    
    
    
    1,585Net investment income
    
    
    2
    
    
    
    55
    
    
    
    26
    
    
    
    83Net realized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    43
    
    
    
    97
    
    
    
    830
    
    
    
    970Segment operating income (loss)
before income tax
    
    
    726
    
    
    
    776
    
    
    
    (804
    )
    
    
    698Income tax expense (benefit)
    
    
    247
    
    
    
    264
    
    
    
    (274
    )
    
    
    237Segment net income (loss)
    
    $
    479
    
    
    $
    512
    
    
    $
    (530
    )
    
    $
    461Segment assets
    
    $
    5,564
    
    
    $
    52,021
    
    
    $
    18,584
    
    
    $
    76,169
   *
    
    Benefits, claims and settlement expenses include change in future policy
benefits. 8




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Segment Reporting
Three Months Ended March 31, 2004 2004Non-Universal
    
    Universal(Dollars in thousands)
    
    Life-Type
    
    Life-Type
    
    Other
    
    TotalPremiums
    
    $
    4,302
    
    
    $
    
    
    
    $
    
    
    
    $
    4,302Reinsured policy revenues
    
    
    
    
    
    
    3,199
    
    
    
    
    
    
    
    3,199Benefits, claims and settlement
expenses*
    
    
    1,642
    
    
    
    548
    
    
    
    
    
    
    
    2,190Reinsurance expense allowances, net
    
    
    1,482
    
    
    
    493
    
    
    
    
    
    
    
    1,975Amortization of deferred acquisition
costs
    
    
    31
    
    
    
    1,403
    
    
    
    
    
    
    
    1,434Underwriting profit
    
    
    1,147
    
    
    
    755
    
    
    
    
    
    
    
    1,902Net investment income
    
    
    8
    
    
    
    24
    
    
    
    146
    
    
    
    178Net realized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    7Other expenses
    
    
    38
    
    
    
    101
    
    
    
    794
    
    
    
    933Segment operating income (loss)
before income tax
    
    
    1,117
    
    
    
    678
    
    
    
    (641
    )
    
    
    1,154Income tax expense (benefit)
    
    
    312
    
    
    
    189
    
    
    
    (179

    )
    
    
    322Segment net income (loss)
    
    $
    805
    
    
    $
    489
    
    
    $
    (462
    )
    
    $
    832Segment assets
    
    $
    5,612
    
    
    $
    46,010
    
    
    $
    28,843
    
    
    $
    80,465
   *
    
    Benefits, claims and settlement expenses include change in future policy
benefits. During each of the three month periods ended March 31, 2003 and 2004, the
percentage of total premiums and reinsured policy revenues that related to
business issued by Western Reserve Life Assurance Co. of Ohio (Western
Reserve) was 92%. The percentages of the total underwriting profit that
related to business issued by Western Reserve for the three months ended March
31, 2003 and 2004 were 93% and 96%, respectively.  9.
    
    Reclassification Global Preferred has reclassified the presentation of certain 2003
information to conform to the 2004 presentation.  10.
    
    Employment Agreements Global Preferred has written employment agreements with certain of its
executive officers. These agreements govern employee conduct and Global
Preferreds obligation to compensate such key employees. The agreements expire
on either December 31, 2004 or December 31, 2005 and are renewable by agreement
of the parties for additional one-year periods.  11.
    
    Contingencies Under its reinsurance agreements, Global Preferred is required to provide
security through letters of credit for the benefit of the ceding life companies
with which it has agreements. Global Preferred has three letters of credit
totaling $5.85 million, which are issued by its custodian, Comerica Bank, for
the benefit of the ceding life companies. Liabilities for future policy benefits under modified coinsurance
agreements equal reinsured policy account balances on the underlying life
insurance and annuity policies. With regard to the separate account benefits
reinsured on a modified coinsurance basis, liabilities are recorded as an
offset to related assets as the intentions and rights under the agreements with
the ceding life companies meet the appropriate conditions governing rights of
setoff. Separate account benefits and related assets reinsured on a modified
coinsurance basis total $282.8 million as of March 31, 2004. 9




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) addresses the financial condition of Global Preferred
Holdings, Inc. as of March 31, 2004 compared with December 31, 2003, and its
results of operations for the three months ended March 31, 2004, compared with
the three months ended March 31, 2003. This discussion should be read in
conjunction with the consolidated financial statements and accompanying
condensed notes included elsewhere in this report and with the MD&A and Global
Preferreds consolidated financial statements and notes thereto included in
Global Preferreds 2003 Annual Report onForm 10-K, as amended. Overview Global Preferred Holdings, Inc. was incorporated in Delaware in 1995 as a
holding company and owns all of the outstanding capital stock of Global
Preferred Re Limited, Global Preferred Solutions, Inc., Global Preferred
Resources, Inc. and Preferred Advantage Insurance Services, Inc. (Preferred
Advantage). Global Preferred Re Limited is a Bermuda company registered as a
long-term insurer under the Bermuda Insurance Act 1978 (Global Preferred Re)
and was formed during 1995. Global Preferred Solutions, Global Preferred
Resources and Preferred Advantage were formed during 2003. References in this
report to Global Preferred, we, us, our and our company refer to
Global Preferred Holdings, Inc. and its subsidiaries unless the context
otherwise requires or is expressly stated. Global Preferred, through its subsidiaries, provides reinsurance solutions
for independent marketing organizations or IMOs in the life insurance and
annuity industry. An IMO is an organization of independent agents that
contracts with one or more insurance companies to distribute and market
securities and insurance products. These organizations include: insurance
agencies, insurance brokers, broker-dealers, banks, savings and loans and any
other group or institution that markets life insurance and annuities. Our
reinsurance solutions include:  
    
    A reinsurance development program for IMOs utilizing proprietary
strategies that permits the members of the IMO to share in the
economics of the business reinsured, thus aligning the long-term
interests of the life insurance companies with the interests of the
marketing organizations;  
    
    Life insurance management and actuarial advisory services to IMOs
and life insurers to aid clients in their assessment of the strategic
and structural benefits of establishing a profit sharing program
through their distributor-insurer relationships, such as producer-owned
reinsurance;  
    
    A management support structure to leverage our core competencies
and provide economies of scale to IMOs and insurance companies who
already have formed, or are considering forming, a producer-owned
reinsurance enterprise; and  
    
    A managing general agency structure that facilitates product
distribution relationships between IMOs and life insurers, primarily as
a value added service to our clients. Both the IMOs and insurers benefit from mutually rewarding relationships
based on aligned interests, a dedication to improving the quality of business
written, and a focus on managing insurance and distribution risk for long-term
economic rewards. Through these collaborative relationships:  
    
    IMOs can share in the profits of the business they sell, enhance
their recruiting and retention programs, increase their role in product
development and better assess the quality of business they write;  
    
    Insurance companies can benefit from secure, stable growth in
distribution, increased attention to the quality of business written,
lower marketing costs due to continuity in distribution and renewed
focus on long-term goals; and  
    
    Global Preferred can share in the economic benefits derived from
fee income for managing the reinsurance risk and administering the
reinsurance structure, and also from our participation in a portion of
the reinsurance of the products sold by the IMOs. 10




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##### Table of Contents



Our core business consists of providing reinsurance on business that has
resulted from a relationship with the independent agents of an IMO member of
the AEGON Group. Although our reinsurance business is directed to us through
these independent agent relationships, the life insurance and annuity policies
that we currently reinsure are underwritten and issued by various ceding life
companies. In the insurance industry, the term ceding refers to the use of
reinsurance to transfer from one insurance company to another some or all of
the risks associated with one or more insurance policies. We often refer to a
life insurance company that reinsures life insurance and annuity policies
through us as a ceding life company. The ceding life companies who issue the
policies we currently reinsure are:  
    
    Western Reserve Life Assurance Co. of Ohio, a subsidiary of AEGON
USA, Inc. (Western Reserve);  
    
    American Skandia Life Assurance Corporation, a subsidiary of
Prudential Financial, Inc. (American Skandia);  
    
    Pacific Life Insurance Company (Pacific Life); and  
    
    Federal Kemper Life Assurance Company, a subsidiary of Bank One Corporation (Kemper). Under a reinsurance agreement, like the ones we have entered into with the
above insurance companies, the economic consequences of certain insurance risks
are transferred from the ceding life company to the reinsurer. Depending upon
the type of reinsurance agreement, these risks may include mortality,
persistency, investment and expense. Key considerations in evaluating the
risks include:  
    
    industry experience;  
    
    the ceding life companys pricing and assumptions;  
    
    the type of product;  
    
    the ceding life companys underwriting practices and procedures;  
    
    the type of distribution system;  
    
    the ceding life companys recent experience; and  
    
    the market for the product. The ceding life companies retain responsibility for the payment of all
claims, surrender values, commissions, and expenses involved in issuing and
maintaining the policies we reinsure. In addition, the ceding life companies
administer the reinsurance contracts and, on a monthly and quarterly basis,
provide us with information regarding premiums, reserves and benefits and the
amounts we owe to the ceding life company for claims and settlement expenses on
the policies we reinsure. Types of Reinsurance We currently write three types of reinsurance on a quota share basis:
renewable term, coinsurance and modified coinsurance. Renewable Term.Renewable term, also referred to as risk premium
reinsurance, which includes monthly renewable term and yearly renewable term,
is a plan of reinsurance in which the premium rates are not directly related to
the premium rates on the original plan of insurance. Under renewable term
reinsurance, the ceding life company reinsures a portion of the mortality risk
with us. The amount reinsured in any one period is not based on the face amount
of the policy, but rather on the portion of the net amount of risk we reinsure.
The net amount of risk is typically defined as the difference between the death
benefit and the cash value of a policy. The ceding life company establishes
the policy reserves, which are reduced for the mortality risk reinsured with
us, and pays all policy benefits, commissions and expenses involved in issuing and maintaining the business.
Correspondingly, we establish reserves specific to the mortality risk
reinsured. 11




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##### Table of Contents



Under renewable term reinsurance, we may also be subject to the effects of
persistency risk. Persistency risk is the risk that a policyholder either
stops paying premiums, which would cause the policy to lapse, or chooses to
surrender the policy for the cash surrender value. The effect of persistency
risk on us is that possible future revenue will be reduced, potentially
reducing profits. Coinsurance.Under a coinsurance arrangement, the insured risks are ceded
to us on essentially the same basis as underwritten by the ceding life company.
The ceded risks include mortality, persistency, investment, and expense. We
share the risks pro rata with the ceding life company. We receive a
proportionate share of gross premiums from the ceding life company and provide
contractual expense allowances to the ceding life company to pay for the
expenses associated with the reinsured policies. Expenses include commissions
and costs associated with underwriting, marketing, policy issue, and
maintenance. We also pay our proportionate share of death benefits and other
policy benefits to the ceding life company. The reserves on the ceded portion
of the policy are held by us and are our obligations. Correspondingly, we
invest the assets related to the reserves and receive investment income from
those assets. Modified Coinsurance.Modified coinsurance is similar to coinsurance
except the ceding life company does not transfer the reserves or the invested
assets related to the reserves. Modified coinsurance is used primarily for
products that develop cash values and allows the ceding life company to retain
the associated assets for investment purposes. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions regarding uncertainties that affect certain amounts
in the consolidated financial statements and related footnotes. Accounts that
we deem to be sensitive to changes in estimates include deferred acquisition
costs and future policy benefits. In all instances, actual results could
differ from estimates. Information included elsewhere herein and in Note 2 to
the consolidated financial statements in our Annual Report on Form 10-K, for
the year ended December 31, 2003, as amended, includes a summary of the
critical accounting policies used in the preparation of our consolidated
financial statements. Income Statement Impact Reinsurance Revenues.For renewable term reinsurance, we record as
premiums the amount of reinsurance premiums we receive over the payment
periods of the reinsured policies. For policies reinsured on a coinsurance or
modified coinsurance basis, we record as reinsured policy revenues our
proportionate share of the gross revenues received by the ceding life company
over the payment periods of the reinsured policies. These revenues represent
the policy mortality and expense charges, asset-based allowances and deferred
sales charges that have been assessed against the reinsured policy account
balances. Reinsurance Expenses.Regardless of the type of reinsurance, our related
expenses may include: (1) benefits, claims and settlement expenses, which
represent our share of the payments made under the reinsured policies during
the period, the change in claims in course of settlement, and the change in
claims incurred but not reported; (2) expense allowances paid to the ceding
life company for expenses associated with the reinsured policies, including
commissions and costs associated with underwriting, marketing, policy issue and
maintenance; and (3) amortization of deferred acquisition costs, which are
discussed in more detail below. Net Income.Our profitability, in part, depends on the volume of policies
reinsured and experience of the reinsured policies. Factors that affect the
experience of the business include reinsured policy persistency, death claims,
and investment performance of the separate account balances. While death
claims are reasonably predictable over a period of years, claims become less
predictable over shorter periods, and are subject to fluctuation from quarter
to quarter and year to year. Similarly, separate account investment returns,
upon which a significant portion of our revenues depend, may have relatively
stable returns over a period of years but can be volatile over shorter periods.
A considerable amount of separate account balances is invested in equities;
therefore, prolonged deterioration in the equity markets will result in a
decrease in our current and future income. 12




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##### Table of Contents



Balance Sheet Impact Deferred Acquisition Costs.We capitalize and defer costs that vary with
and are primarily related to the acquisition of the reinsured policies. These
expenses are deferred to the extent that such costs are deemed recoverable from
future policy revenues and are recorded as deferred acquisition costs on the
balance sheet. Such costs include reinsurance expense allowances paid to ceding
life companies, and may include other underwriting costs such as actuarial,
legal and accounting fees. Deferred acquisition costs are amortized over the lives of the underlying
policies, in conformity with the terms of the reinsurance agreement. Under the
renewable term agreements, deferred acquisition costs are amortized in
proportion to the premium revenue related to the mortality risk reinsured.
Such premium revenue is estimated using the same assumptions used for computing
liabilities for future policy benefits. Such assumptions include estimates of
expected investment yields, mortality, persistency and expenses applicable at
the time the policies are reinsured. Original assumptions on renewable term
business continue to be used in subsequent accounting periods to determine
changes in the deferred acquisition costs unless a premium deficiency exists.
Under the renewable term agreements, the amortization is in proportion to the
ratio of premiums collected during the then current period to total anticipated
premiums and is adjusted to reflect actual persistency of the insurance in
force. Under the coinsurance and modified coinsurance agreements, the
amortization of the deferred acquisition costs is in proportion to the ratio of
gross profits recognized during the then current period to total actual and
future expected gross profits. During each accounting period, assumptions used
in calculating the amortization of deferred acquisition costs reflect actual
experience for the then current accounting period. We also review, on a
periodic basis, our evolving experience with regard to our assumptions
concerning future experience as to mortality, persistency, investment yields,
and expenses in determining our estimate of anticipated future expected gross
profits. This periodic review is commonly referred to as unlocking. Our
normal period of observation is from October 1 of the previous calendar year
through September 30 of the current calendar year. If we believe variances from
expected assumptions are permanent, we will change the assumptions we use with
regard to future experience. Upon adoption of any change in assumptions used
with regard to future experience, amortization of the deferred acquisition
costs will be recalculated and reflected during the then current accounting
period. A material component of variable life and annuity product revenues is
derived from the asset-based fees that have been assessed against the policy
account balances, of which a considerable portion is invested in the equity
markets. The volatility of equity market returns over the short-term can be
significant without materially impacting long-term equity market returns.
Historical equity market performance shows equity market volatility is much
higher over short-term horizons as compared to long-term horizons. The
short-term volatility of the policy account balance would result in a
proportional adjustment to all future expected gross profits if no other
adjustments were made to account for the differences between long-term and
short-term volatility. We utilize a credibility approach  to account for the
differences between long-term and short-term volatility. Under this approach,
the estimates of future expected gross profits are adjusted to recognize the
effects short-term volatility and market yields have upon long-term yield
expectations. We review our approach annually to determine if additional
adjustments to amortization are necessary as a result of prolonged and/or
severe negative or positive equity market performance. In such instances, the
equity market performance must be sufficiently high or low to justify a belief
that the effect of current market conditions on future expected gross profits
should be more permanently reflected. In addition, certain variable annuity policies we reinsure include a death
benefit typically equal to a return of premium or the highest level the policy
account balances had accumulated over certain prescribed periods under the
annuity policy. Upon the death of an annuity policyholder, we will incur a
claim expense equal to the excess, if any, of the amount guaranteed under this
provision over the then current policy account balance. The claim expense, as
a percentage of the death benefit, tends to increase when equity markets
decline and decrease when equity markets increase. The claim expense depends,
in part, on the number and amount of death claims incurred. To account for
the expense associated with these guaranteed minimum death benefits, we utilize
an explicit method consistent with Statement of Position (SOP) 03-1, Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts. Under this method, we may establish a
guaranteed minimum death benefit liability if expected future claims expenses
are not proportionate to future expected gross profits. Future expected gross
profits are reduced to account for future expected claims expenses and adjusted
for anticipated changes 13




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##### Table of Contents



in the liability. The short-term volatility of the policy account balance will
result in significant volatility in the expected claims expense and in the
liability balance if no recognition is made to acknowledge differences between
long-term yields and short-term volatility. Using a credibility approach, our
explicit method recognizes the effect of long-term versus short-term volatility
when accounting for guaranteed minimum death benefits. The implementation of
SOP 03-1 did not have a material impact on our financial statements. Future Policy Benefits.Liabilities for future benefits on life insurance
and annuity policies are established in an amount we estimate is adequate to
meet the estimated future obligations on the policies in effect. Policy
reserves are included in future policy benefits on the consolidated balance
sheet. Liabilities for future policy benefits under the renewable term agreements
include provisions for claims in the course of settlement, claims incurred but
not reported, and expected future claims. The liability is estimated using
assumptions such as estimates of expected investment yields, mortality,
persistency and expenses applicable at the time the reinsurance contracts are
executed. Liabilities for future policy benefits under coinsurance and modified
coinsurance agreements equal reinsured policy account balances on the
underlying life insurance and annuity policies. With regard to the separate
account benefits reinsured on a modified coinsurance basis, we record the
liabilities as an offset to related assets as our intentions and rights under
the agreements with the ceding life companies meet the appropriate conditions
governing rights of setoff. The nature of separate account benefits under
variable life insurance or variable annuity policies do not permit us to
reinsure those benefits on a coinsurance basis. We currently reinsure the
fixed account portion of life insurance and annuity policies only on a
coinsurance basis and, accordingly, the liabilities for that portion of the
reinsurance are recorded as future policy benefits. Liabilities for future policy benefits reflected in the consolidated
financial statements are based on information provided to us by the ceding life
companies. Reserves established by us with respect to individual risks or
classes of business may not be the same as those established by ceding life
companies due to differing risks and assumptions regarding mortality,
persistency, investment, and expenses. Fair Value Disclosure Investments.We classify all fixed maturity securities and equity
securities, with readily determinable fair values, as available for sale.
Such securities are reported at fair value. Fixed maturity securities available
for sale are so classified based upon the possibility that such securities
could be sold prior to maturity if that action enables us to execute our
investment philosophy and appropriately match investment results to operating
and liquidity needs. Equity securities are classified as available for sale
because we do not intend to actively trade such securities. Unrealized gains
and losses on marketable equity securities and fixed maturity securities
available for sale, less applicable deferred income taxes, are reported as a
separate component of accumulated other comprehensive income within
stockholders equity. Investment income is recognized as it accrues or becomes legally due.
Realized gains or losses on sales of investments are included in income, as are
write-downs of securities where declines in value are deemed to be other than
temporary. The cost of investment securities sold is determined based upon the
specific identification method. Other Financial Assets and Liabilities.The carrying value of cash and
cash equivalents, reinsurance receivables and payables, short-term debt,
accrued expenses and accounts payable approximate their fair values due to the
short-term nature of these accounts. The carrying value of future policy
benefits approximates its fair value as credited interest approximates current
market rates. Reinsurance Relationships Current Reinsurance Business We currently provide reinsurance for variable universal life and variable
annuity policies issued by four large life insurance companies. Our
reinsurance agreements with these ceding life companies provide for our
assumption of a portion of defined risks associated with specified products
sold by certain independent agents with which we 14




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##### Table of Contents



have a relationship. Reinsurance under these agreements is automatic,
meaning we are required to accept the business ceded to us so long as the
ceding life companies satisfy the terms of the reinsurance agreements. The following table indicates, by ceding life company, the types of
policies we are currently reinsuring and the type of reinsurance applicable to
each. Type of ReinsuranceRenewable
    
    
    
    
    
    ModifiedCeding Life Company
    
    Term
    
    Coinsurance
    
    CoinsuranceWestern ReserveVariable universal life
    
    
    ü
    
    
    
    ü
    
    
    
    üVariable annuity
    
    
    
    
    
    
    ü
    
    
    
    üAmerican SkandiaVariable annuity
    
    
    
    
    
    
    
    
    
    
    üPacific LifeVariable universal life
    
    
    üKemperVariable universal life
    
    
    ü
 We have four separate reinsurance agreements with Western Reserve that
cover variable universal life insurance and variable annuity policies issued by
Western Reserve on or after January 1, 1992, which are sold by the agents of
World Financial Group, Inc., an indirect subsidiary of AEGON USA, Inc., and its
predecessor. These agreements were entered into on July 1, 1996, January 1,
1998, April 1, 1998, and October 1, 1999, respectively. The agreement with
American Skandia began on January 1, 1997 and covers policies on an American
Skandia variable annuity product issued between January 1, 1997 and December
31, 2002 sold by those same agents. The Kemper agreement was effective
September 1, 1996 and covers all policies on a Kemper variable universal life
product issued between September 1, 1996 and March 31, 2001 sold by those
agents. Our agreement with Pacific Life was signed on June 25, 2001 and covers
policies on individual variable universal life products issued on or after
January 1, 2001, sold by those agents. We believe that the terms of our reinsurance arrangements are favorable
for our industry and that we were able to obtain these terms in part because of
our relationships with the agents that sell the policies we reinsure. Our
right to reinsure new business under our reinsurance agreements generally
extends for an initial term of 3 to 5 years, with automatic renewals and
one-year notices of termination following the initial term. Termination of our
right to reinsure new business does not, however, affect our right to continue
to reinsure the policies reinsured at the time of termination. Under our
agreements, we have the right to continue to reinsure a policy for as long as
it remains in effect or until the ceding life company otherwise recaptures it.
A ceding life company may have the right to recapture a reinsured policy only
upon certain defaults or after a period of 10 years or longer, depending on the
terms of the relevant reinsurance agreement. First Right Agreement In July 2001, we entered into a First Right Agreement with Western Reserve
that provides us a first right to reinsure certain new products issued by
Western Reserve or its U.S. affiliates that are sold by agents associated with
World Financial Group. Pursuant to this agreement, we possess the following
contractual rights to:  
    
    Commence reinsurance of Freedom Elite Builder variable universal
life insurance policies and riders issued from January 1, 2002 through
December 31, 2002 up to 20% on a coinsurance and modified coinsurance
basis;  
    
    Commence reinsurance of any single life variable universal life
insurance policies and riders issued from January 1, 2003 through March
31, 2005 up to 20% on a coinsurance and modified coinsurance basis.
This contractual right is subject to certain premium production
requirements; 15




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##### Table of Contents




    
    Prospectively reinsure all new single life variable universal life
insurance policies up to 20% on a monthly renewable term basis at 105%
of premium rates otherwise available from certain commercial
reinsurers. This right extends through March 31, 2006 and is subject
to certain premium production requirements; and  
    
    Commence or increase reinsurance on certain variable annuity
policies issued from January 1, 2003 through December 31, 2004 up to
40% on a coinsurance and modified coinsurance basis, subject to certain
premium production requirements. These rights automatically extend for one-year renewal periods unless
either party gives notice of termination 180 days prior to the expiration of
the applicable initial or renewal term. Certain of these rights would have
expired at December 31, 2003 and thereafter, but have been indefinitely
extended to a date 90 days following receipt of written notice by either party.
For the coinsurance and modified coinsurance of variable universal life and
variable annuity products, rights under the First Right Agreement are subject
to minimum sales volume thresholds. Western Reserve has indicated to us,
through informal reports, that total premium production requirements were not
met for the reinsurance of variable universal life policies issued in 2003 and
2004 and for variable annuity policies issued in 2004. Global Preferreds decision to reinsure these products is based on a
number of relevant factors, including the attractiveness of the reinsurance
rates prescribed by the agreement, the volume of business and our available
capital. So far, we have chosen not to commence reinsurance of this business
because (a) deferral of the election will maximize our return on such business
reinsured, (b) continued increases in our capital may result in opportunities
of securing additional financing at a favorable cost, and (c) deferral allows
us to maintain flexibility to invest in new business initiatives for
diversification and future growth. Directed Reinsurance Agreement Global Preferred entered into a Directed Reinsurance Agreement with World
Financial Group in July 2001 that extends through June 8, 2008, which requires
World Financial Group to use its commercially reasonable best efforts to help
us attain the opportunity to reinsure all insurance products sold by its agents
for insurance companies with which it has selling agreements other than Western
Reserve and Western Reserves affiliates. Reinsurance of New Business with Other Insurance Companies We seek to enter into reinsurance agreements with other insurance
companies from time to time and such decisions will be based on a number of
relevant factors, including the proposed type of reinsurance, the
attractiveness of the reinsurance rates prescribed by the agreement, the volume
of business, our relationship with the insurance company and/or the IMO, and
our available capital capacity. We also seek to enter into agreements with
other IMOs similar to our directed reinsurance agreement with World Financial
Group. 16




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##### Table of Contents



Our Current Reinsurance Agreements The life insurance and annuity policies that we have reinsured to date are
underwritten and issued by Western Reserve, American Skandia, Kemper, and
Pacific Life. The following table indicates the percentage of our reinsurance
revenues derived from our ceding life companies: ThreeYear Ended
    
    Months EndedDecember 31,
    
    March 31,2002
    
    2003
    
    2004Western Reserve
    
    
    91
    %
    
    
    92
    %
    
    
    92
    %American Skandia
    
    
    8
    %
    
    
    7
    %
    
    
    6
    %Kemper
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Pacific Life(1)
    
    
    
    (2)
    
    
    
    (2)
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   (1)
    
    This agreement was effective as of January 1, 2001.(2)
    
    Less than 1%. The following table indicates, by ceding life company: (1) the names and
types of insurance products we currently reinsure; (2) the type of reinsurance
agreement applicable to each; (3) policy issue dates reinsured under each
agreement; and (4) the commencement date of the reinsurance. ReinsurancePolicy Issue
    
    CommencementCeding Life Company
    
    Reinsured Product Name
    
    Product Type (1)
    
    Reinsurance Type (2)
    
    Dates
    
    DateWestern Reserve
Western Reserve
Western Reserve
Western Reserve
Western Reserve
Western Reserve
Western Reserve
Kemper
Pacific Life
American Skandia
Western Reserve
Western Reserve
    
    Freedom Equity Protector
Financial Freedom Builder
Financial Freedom Builder
Financial Freedom Builder
Financial Freedom Builder
Financial Freedom Builder
Freedom Elite Builder
Power VUL
Select Exec II
Imperium
Freedom Wealth Creator
Freedom Premier
    
    VUL
VUL
VUL
VUL
VUL
VUL
VUL
VUL
VUL
VA
VA
VA
    
    MRT
MRT
Co/Modco
MRT
Co/Modco
MRT
Co/Modco
MRT
YRT
Modco
Co/Modco
Co/Modco
    
    1/92 to 12/99
7/97 to 3/98
4/98 to 12/98
1/99 to 3/01
4/01 to 12/01
1/02 to 12/02
7/01 to 12/01
9/96 to 3/01
1/01 to present
1/97 to 12/02
1/98 to 12/01
10/00 to present
    
    7/96
7/97
4/98
10/99
1/02
10/99
1/02
9/96
1/01
1/97
1/98
10/00
   (1)
    
    VUL means variable universal life product. VA means variable annuity
product.(2)
    
    MRT means monthly renewable term. YRT means yearly renewable term.
Co/Modco means coinsurance and modified coinsurance. Under our reinsurance agreements with the ceding life companies, we
currently reinsure variable life insurance and variable annuity policies on
either a renewable term basis or a coinsurance and modified coinsurance basis.
The policies we reinsure on a renewable term basis represented 57% of our
reinsurance revenues for the quarter ended March 31, 2004. The policies we
reinsure on a coinsurance and modified coinsurance basis represented 43% of our
reinsurance revenues for the same period. Of the 43%, 57% relates to variable
life insurance policies and 43% relates to variable annuity policies. 17




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##### Table of Contents



Results of Operations Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 The following table sets forth certain operating data as a percentage of
total revenue for the periods indicated: Three Months EndedMarch 31,2003
    
    2004(As a percentage of total revenue)Consolidated Statements of Income Data:Revenues:Premiums
    
    
    57
    %
    
    
    56
    %Reinsured policy revenues
    
    
    42
    
    
    
    42Net investment income
    
    
    1
    
    
    
    2Total revenues
    
    
    100
    %
    
    
    100
    %Benefits and expenses:Benefits, claims and settlement expenses
    
    
    30
    
    
    
    26Change in future policy benefits
    
    
    4
    
    
    
    3Reinsurance expense allowances, net
    
    
    27
    
    
    
    26Amortization of deferred acquisition costs
    
    
    18
    
    
    
    18Operating expenses
    
    
    11
    
    
    
    11Interest expense
    
    
    1
    
    
    
    1Total benefits and expenses
    
    
    91
    
    
    
    85Income before income tax
    
    
    9
    
    
    
    15Income tax expense
    
    
    (3
    )
    
    
    (4
    )Net income
    
    
    6
    %
    
    
    11
    %
 Revenues Premiums.Premiums decreased $86,000, or 2%, from $4.4 million for the
three months ended March 31, 2003 to $4.3 million for the comparable period in
2004. The majority of the premium decrease was due to the decreasing business
in force under our renewable term agreements, which is partially offset by an
increase in the average premium per policy. Policies in force are decreasing
because the number of policy surrenders and lapses currently exceeds the number
of new policies reinsured. Average premiums per policy increase as the insured
ages. Reinsured Policy Revenues.Reinsured policy revenues decreased $33,000,
or 1%, from the three months ended March 31, 2003 compared to the same period
in 2004. This decrease was primarily attributable to a decrease in deferred
sales charge revenue due to lower overall surrender activity partially offset
by an increase in asset-based allowances. Net Investment Income and Net Realized Gain on Investments.Net
investment income increased $95,000, or 114%, from $83,000 for the three months
ended March 31, 2003 to $178,000 for the same period in 2004, primarily due to
the increased size of our fixed maturity and equity securities portfolio. The
increase in our fixed maturity and equity securities portfolio resulted from
the purchase of $16.8 million of fixed maturity and equity securities during
2003. Additionally, $1.5 million of fixed maturity securities were purchased
during the three months ended March 31, 2004. The purchases and sales
activities by quarter are shown in the table below: Quarter EndedMar. 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,
    
    Mar. 31,2003
    
    2003
    
    2003
    
    2003
    
    2004Fixed maturity and equity
securities:Balance, beginning of quarter
    
    $
    2,798,190
    
    
    $
    2,325,836
    
    
    $
    3,196,467
    
    
    $
    9,310,881
    
    
    $
    17,767,668Purchases
    
    
    
    
    
    
    1,054,615
    
    
    
    6,568,300
    
    
    
    9,208,384
    
    
    
    1,511,000Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (421,282
    )
    
    
    Other activity
    
    
    (472,354
    )
    
    
    (183,984
    )
    
    
    (453,886
    )
    
    
    (330,315
    )
    
    
    (47,295
    )Balance, end of quarter
    
    $
    2,325,836
    
    
    $
    3,196,467
    
    
    $
    9,310,881
    
    
    $
    17,767,668
    
    
    $
    19,231,373
 18




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##### Table of Contents



There were no sales of fixed maturity or equity securities for the
quarters ended March 31, 2003 and 2004, thus no gains or losses were realized. Benefits and Expenses Benefits, Claims and Settlement Expenses.Benefits, claims and settlement
expenses decreased $300,000, or 13%, from $2.3 million for the three months
ended March 31, 2003 to $2.0 million for the comparable period in 2004. The
decrease was primarily associated with a lower incidence of life insurance
death claims in the first three months of 2004 compared to the incidence of
death claims in the same period in 2003, and the declining aggregate face value
of insurance partially offset by the increasing age of the policies reinsured.
The aggregate face value of insurance underlying the policies we reinsured at
March 31, 2003 was $8.2 billion compared to $7.5 billion at March 31, 2004. Change in Future Policy Benefits.Change in future policy benefits
decreased $97,000, or 31%, from $311,000 for the three months ended March 31,
2003 to $214,000 for the comparable period in 2004. The decrease resulted from
the aging of the policies and the decrease in business in force reinsured on a
monthly renewable term basis. Reinsurance Expense Allowances, Net.Net reinsurance expense allowances
decreased $99,000, or 5%, from $2.1 million for the three months ended March
31, 2003 to $2.0 million for the comparable period in 2004. These amounts
reflect the decrease in business in force due to policy lapse and surrender
activity partially offset by an increase in average policy account balances
because of equity market performance. Amortization of Deferred Acquisition Costs.Amortization of deferred
acquisition costs increased $59,000, or 4%, from the three months ended March
31, 2003 compared to the same period in 2004. The increase in amortization
primarily resulted from higher gross profits due to lower death claims
associated with the variable universal life coinsurance and modified
coinsurance business and higher asset-based allowances associated with the
coinsurance and modified coinsurance business for the three months ended March
31, 2004, as compared to the same period in 2003. This was partially offset by
a decrease in amortization due to a refinement in the method of calculating the
cost of guaranteed minimum death benefits on variable annuity business to be
consistent with the methodology implemented under SOP 03-1. (For further
discussion regarding SOP 03-1, refer to Critical Accounting Policies and
Estimates  Balance Sheet Impact  Deferred Acquisition Costs.) Under current assumptions, and all else being equal, we do not expect that
there would be increased amortization in 2004 from unlocking due to lower
than expected equity market performance unless separate account fund yields
resulted in losses of 20% or more for 2004. Operating Expenses.Operating expenses decreased $38,000, or 4%, from
$876,000 for the three months ended March 31, 2003 to $838,000 for the
comparable period in 2004. These expenses include salaries and benefits,
professional fees for legal, actuarial and accounting expenses and other
operating expenses. The majority of the decrease was attributable to a decrease
of $123,000 in directors and officers insurance premiums, accounting and
auditing fees, taxes and licenses, legal fees, consulting fees and recruiting
expenses. These decreases were partially offset by an $85,000 increase in
salaries, bonuses and benefits and financial printing fees for SEC reporting
requirements. Primarily due
to a reduction in the employee bonus accrual in the first quarter of
2003,
an increase in salaries, bonuses and benefits resulted for the first
quarter of 2004. Interest Expense.Interest expense increased $1,000, or 1%, from $92,000
for the three months ended March 31, 2003 to $93,000 for the comparable period
in 2004. Income Taxes.Due to higher levels of income before income taxes, income
taxes increased $85,000, or 36%, from $237,000 for the three months ended March
31, 2003 to $322,000 for the comparable period in 2004. Income before income
taxes is comprised of income subject to taxes that is recognized and due in the
current period and income subject to taxes that is recognized during the
current period but is due in future periods. The small life insurance company
deduction available under Section 806 of the Internal Revenue Code for
qualifying life insurance companies can reduce the effective federal income tax
rate from 34% to less than 20% depending upon the amount of current taxable
income. Based upon the amount of taxable income we expect in 2004, we have
estimated our effective tax rate to be 28% for 2004. This reflects a benefit
from the small life insurance company deduction. Our 19




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##### Table of Contents



effective tax rate was 28% for the three months ended March 31, 2004. For the
three months ended March 31, 2003, we had no current taxable income, however we
were subject to the alternative minimum tax. Our effective tax rate was 34%
for the three months ended March 31, 2003. In accordance with Statements of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes, we have $2.2 million of net operating
loss carry-forwards, which begin to expire in 2018. These net operating loss
carry-forwards at a 34% effective tax rate are included as an offset to the
deferred tax liability. It is our belief that it is more likely than not that
the deferred tax assets will be realized as an offset against future taxable
income, however, if we do not have sufficient taxable income in the future to
utilize this asset, a write-off may result, thereby reducing our net income. Liquidity and Capital Resources To grow our life and annuity business, we use cash to pay for the initial
marketing and underwriting expenses of the policies we reinsure. These same
policies thereafter provide cash from premiums, policy charges and policy fees
over their lifetime. We also use cash to pay for policy claims, policy benefits
and operating expenses which include: salaries and benefits, and professional
fees for management, legal, investment, custodial, accounting, tax and
consulting services. In addition to operating cash flows, cash is provided by
and used in investing and financing activities we undertake to increase our
capital position and through activities associated with our invested assets. Our primary sources of liquidity were $16.7 million in fixed maturity
securities available for sale, $13.1 million in consolidated cash and cash
equivalents, and $2.5 million of equity securities at March 31, 2004. The
effective duration of our fixed maturity portfolio is 3.2 years with 100% of
the fixed maturity securities having an effective maturity of less than 10
years. Our fixed maturity portfolio represents 50% of our total invested
assets, and has an average Moodys quality rating of Aa3. We have gross
unrealized losses of $12,000 and gross unrealized gains of $446,000 on our
fixed maturity and equity securities as of March 31, 2004. Our capital structure consists of debt and equity. Our current debt is
comprised of a $5 million, five-year convertible term note to Money Services,
Inc. due on July 29, 2004. Money Services is a subsidiary of AEGON USA, Inc.
Proceeds of this note were used to reduce a portion of the outstanding
principal balance on a line of credit with Money Services. Interest is payable
on the note at 7.5% per annum (except in the event of redemption), on the 29th
of each succeeding January and July through and including July 29, 2004. Money
Services has the right to convert the outstanding principal balance of this
note into common stock at any time. Upon conversion, Money Services would
receive 6.255 shares of common stock for each $100 of the outstanding principal
amount of the note, for a total of 312,750 shares, which reflects our
three-for-two stock split in 2001. We have the option to redeem the note, in
whole or in part, before maturity. To redeem the note before maturity, we must
pay all principal, plus interest accrued from the date of the note through the
redemption date at a higher effective interest rate of 9% per annum. As of
March 31, 2004, we had an outstanding principal balance on the term note of $5
million and accrued interest of $64,000. We anticipate repaying the $5 million
note in July 2004 out of available cash and cash equivalents. Operating Cash Flows.Under the renewable term reinsurance agreements,
premiums typically vary in proportion with the expected mortality claims
reinsured. Our cash inflows under the renewable term agreements are premiums
for the mortality risk reinsured. Our cash outflows are reinsurance expense
allowances and death benefit claims. The reinsurance expense allowances
represent our share of acquisition and maintenance expenses incurred by the
ceding life company that are attributable to the risks reinsured by us. Under the coinsurance and modified coinsurance agreements, since we are
reinsuring risks on essentially the same basis as that of the original policy,
reinsurance premiums are materially greater than premiums received on the
renewable term reinsurance. During the first year in which a policy is
reinsured on a coinsurance basis, we are required to reimburse the ceding life
company for our share of acquisition costs, including first year commissions
and issuance expenses. Thereafter, we reimburse the ceding life company for our
share of renewal commissions and maintenance expenses. Further, under modified
coinsurance, the ceding life company does not transfer to us the reserves or
the invested assets related to the reserves in support of reinsured policy
benefits (e.g., cash values). Accordingly, because of the type of reinsurance
and the basis reinsured, the net first year cash outlays could be as much as,
or more than, that 20




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##### Table of Contents



years premiums paid for variable universal life insurance, and as much as 10%
of variable annuity premiums. After the first policy year, our cash outlays for
reinsurance allowances are significantly lower. Net cash flows provided by operating
activities were $3.6 million and $2.9 million for the three months ended March 31, 2003 and 2004, respectively.
Changes in cash provided by operating activities primarily relate to: amounts
of reinsurance premiums and policy revenues received; claims, reinsurance
expense allowances and operating expenses paid; and changes in working capital.
Cash flows were provided by operating activities in 2003 and 2004 because we
utilized less cash to acquire new reinsurance business. The decrease in cash
flows provided by operating activities was the result of lower reinsurance
settlements received for the three months ended March 31, 2004 as compared to
the same period in 2003. Investment Cash Flows.We generally receive premiums in advance of paying
related benefits and claims. In addition, some policies we reinsure require
that we credit interest on funds that are deposited with us. We invest these
assets in securities that will provide a return and cash flow stream that are
consistent with these benefits. Investment cash flows are the result of buying,
selling and holding these securities in addition to activities relating to
buying and selling fixed assets. Net cash flows provided by (used in)
investing activities were $394,000
and ($1.3 million) for the three months ended March 31, 2003 and 2004,
respectively. The cash flows used in investing activities of $1.3 million in
2004 primarily related to the purchase of $1.5 million of fixed maturity and
equity securities. The cash flows provided by investing activities of
$394,000
in 2003 primarily related to the proceeds from the maturity of
available-for-sale securities and from the principal payments on
mortgage-backed securities. We have incurred no significant capital
expenditures during 2004. Financing Cash Flows.No financing activities occurred during
the three months ended March 31, 2003 and 2004. The
amount, timing, receipt and use of cash flows and cost of additional
capital, if applicable, may
determine the extent we choose to take advantage of the rights we have under
our agreements or to enter into new reinsurance transactions. Restrictions.Global Preferred Holdings, Inc. is a holding company with
no direct operations, and whose principal assets are the capital stock of
Global Preferred Re and $4.1 million of cash and invested assets, as of March
31, 2004. Global Preferred Holdings, Inc. relies primarily on funds retained
at the holding company level, debt service on amounts loaned to Global
Preferred Re, management service fees from its subsidiaries and potential
dividends from Global Preferred Re to meet ongoing cash requirements. The
ability of Global Preferred Re to pay dividends to Global Preferred Holdings,
Inc. is subject to, among other things, regulatory restrictions under the
insurance laws of Bermuda. As of December 31, 2003, Global Preferred Re had
total statutory capital and surplus of $22.6 million, which includes up to $4.7
million available to distribute in dividends without seeking regulatory
approval. During the three months ended March 31, 2004, Global Preferred Re
paid no dividends to Global Preferred Holdings, Inc. Under our reinsurance agreements, we are required to provide security
through a letter of credit for the benefit of the ceding life companies. We
have three letters of credit issued by Comerica Bank, our custodian, for the
benefit of Western Reserve, Pacific Life and Kemper, in the amounts of $5.5
million, $50,000 and $300,000, respectively. We assess our letter of credit
needs in support of each reinsurance agreement. If determined to be necessary,
we will undertake to develop facilities for future letters of credit and trust
arrangements in support of additional reinsurance agreements. 21




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##### Table of Contents



Contractual Obligations and Commitments The following table shows our contractual obligations and commitments
including our payments due by period. Further information is included
elsewhere herein and in Note 10 to the Consolidated Financial Statements in our
Annual Report on Form 10-K, as amended, for the year ended December 31, 2003. (in 000s)
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007Short-term debt
    
    $
    5,187.5
    
    
    $
    5,187.5
    
    
    $
    
    
    
    $
    
    
    
    $
    Office lease
    
    
    458.7
    
    
    
    66.6
    
    
    
    123.9
    
    
    
    132.1
    
    
    
    136.1Operating leases
    
    
    65.9
    
    
    
    27.7
    
    
    
    37.0
    
    
    
    1.2
    
    
    
    Total
    
    $
    5,712.1
    
    
    $
    5,281.8
    
    
    $
    160.9
    
    
    $
    133.3
    
    
    $
    136.1
 Forward-Looking Statements Certain statements made in this report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to the safe-harbor provisions of that Act. Additionally, any
written or oral statements made by us or on our behalf may include
forward-looking statements that reflect our current views with respect to
future events and financial performance. These statements may include, but are
not limited to statements relating to reinsurance revenues, gross profits, cash
flows, and net income in future periods. Such statements often include the
words believes, expects, assumes, predicts, continue, potential,
should, could, can, may, will, proposes, anticipates, intends,
plans, estimates, projects, and variations or negations of such
expressions or similar expressions. When we make forward-looking statements, we
are basing them on our managements beliefs and assumptions, using information
currently available to us. Because such forward-looking statements involve
risks, both known and unknown, and uncertainties, there are important factors
that could cause actual results to differ materially from those expressed or
implied by such forward-looking statements, including but not limited to:  
    
    The amount, timing, receipt, and cost of additional capital to fund
our exercise of the rights to increase our reinsurance business with
Western Reserve;
    
    A decrease in the level of demand for our reinsurance business, or increased competition in the industry;
    
    Extent to which we are able to develop new reinsurance programs;
    
    Adverse reinsurance experience, including death claims and surrenders;
    
    Estimates of reserves;
    
    Assumptions used in accounting for deferred acquisition costs;
    
    Negotiation of reinsurance agreements;
    
    Our cash requirements;
    
    Availability of capital on acceptable terms;
    
    Our ability to compete successfully;
    
    The passage of federal or state legislation subjecting our business to additional supervision or regulation, including
additional tax regulation, in the United States or other jurisdictions in which we operate; and
    
    Changes in economic conditions, including interest rate and equity market conditions, which could affect our investment
portfolio and reinsured policy revenues. 22




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##### Table of Contents



These forward-looking statements are subject to change and uncertainty
that are beyond our control and have been made based upon our expectations and
beliefs concerning future developments and their potential effect on our
business. We cannot assure you that future developments will be in accordance
with our expectations or that the effect of future developments will be those
we anticipate. Actual results could differ materially from those we expect,
depending upon the outcome of certain factors, including those described in the
forward-looking statements. We caution readers not to place undue reliance on
these forward-looking statements, which speak only as of their dates. We have
described some important factors that could cause our actual results to differ
materially from our expectations in Factors That May Affect Future Results of
Operations included as Exhibit 99.1 in our 2003 Annual Report on Form 10-K, as
amended. You should carefully review these risks and additional risks
described in other documents we file from time to time with the Securities and
Exchange Commission, including quarterly reports on the Form 10-Q. Except as
otherwise required by federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We seek to earn a favorable risk-adjusted total return on our assets by
engaging in an investment strategy that employs strategies to manage investment
risk. We attempt to maintain adequate liquidity in our fixed income portfolio
to fund operations and protect against unexpected events. We have diversified
our portfolio to reduce volatility. We seek to manage our credit risk through
industry and issuer diversification, and interest rate risk by monitoring the
duration and structure of our investment portfolio relative to the duration and
structure of our liability portfolio. We are exposed to potential loss from
various market risks, primarily changes in interest rates and equity prices.
Accordingly, earnings would be affected by these changes. We manage our market
risk based on investment policies approved by our board of directors. We do not directly manage the allocation of our assets to strategies or
underlying funds, nor do we control the manner in which they are invested by
underlying fund managers. We utilize an independent investment manager to
invest our assets in accordance with our investment guidelines. Conning Asset
Management Inc., a subsidiary of Swiss Reinsurance Company, has been our
investment manager since June 1998. Conning has discretionary authority to
manage our non-cash investment portfolio. As a result, the performance of our
aggregate investment portfolio depends largely on the ability of Conning to
select and manage appropriate investments. However, we consistently and
systematically monitor the strategies and funds in which we are invested, and
we believe our overall risk is limited as a result of our selected strategy. Our cash and fixed income portfolio includes investments that are subject
to changes in market values with changes in interest rates. The impact on our
cash and fixed income investment portfolio from an immediate 100 basis point
increase in market interest rates would have resulted in an estimated decrease
in fair value of 1.7%, or approximately $502,000, on a portfolio valued at
approximately $29.5 million at March 31, 2004. The impact on our cash and
fixed income investment portfolio from an immediate 100 basis point decrease in
market interest rates would have resulted in an estimated increase in fair
value of 1.5%, or approximately $466,000. The foregoing reflects the use of an
immediate time horizon. Credit spreads are assumed to remain constant in these
hypothetical examples. 
 ITEM 4. CONTROLS AND PROCEDURES As of the most recent fiscal quarter end, we carried out an evaluation of
the effectiveness of our disclosure controls and procedures (as defined by Rule
13a-14(c) of the Securities Exchange Act of 1934) under the supervision and
with the participation of our chief executive officer and chief financial
officer. Based on and as of the date of such evaluation, the aforementioned
officers have concluded that our disclosure controls and procedures were
effective, in all material aspects, to ensure that information required to be
disclosed in the reports we file with the Securities and Exchange Commission is
recorded, processed, summarized, and reported as and when required. There were no significant changes in our internal controls or other
factors that could significantly affect these controls subsequent to the date
our chief executive officer and chief financial officer carried out their
evaluation. There were no significant deficiencies or material weaknesses
identified in the evaluation and, therefore, no corrective actions were taken. 23




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##### Table of Contents



PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS We are currently not a party to any material legal proceedings. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS There were no changes in securities during the three months ended March
31, 2004. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES There have been no defaults in the payment of principal or interest of any
indebtedness of the issuer. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the first quarter of 2004, no matters were submitted to our
security holders for a vote. 
 ITEM 5. OTHER INFORMATION On April 16, 2004, Global Preferred announced it had retained the
investment banking firm of Raymond James & Associates, Inc. to explore a range
of long-term strategic opportunities to enhance stockholder value. There is no
assurance that any transaction will be completed. 24




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##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits 10.1
    
    Second Renewal of the Employment Agreement by and between the
Registrant and Bradley E. Barks, effective January 1, 2004.10.2
    
    Second Renewal of the Employment Agreement by and between the
Registrant and Caryl P. Shepherd, effective January 1, 2004.10.3
    
    Second Renewal of the Employment Agreement by and between the
Registrant and Thomas J. Bobowski, effective January 1, 2004.31.1
    
    Certification by Edward F. McKernan, Chief Executive Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Bradley E. Barks, Chief Financial Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Edward F. McKernan, Chief Executive Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification by Bradley E. Barks, Chief Financial Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
  (b)
    
    Reports on Form 8-KA Current Report on Form 8-K was filed with the Securities and Exchange
Commission on January 6, 2004 to disclose information sent to
stockholders regarding Global Preferreds claim experience.A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on February 5, 2004 regarding the extension and
tolling agreement between Global Preferred and Western Reserve. 25




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Duluth, State of Georgia
on the 14th day of May, 2004. GLOBAL PREFERRED HOLDINGS, INC.By:
    
    /s/ EDWARD F. MCKERNANEdward F. McKernanChief Executive Officer and President and DirectorBy:
    
    /s/ BRADLEY E. BARKSBradley E. BarksChief Financial Officer and Senior Vice President  Finance
 26