##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
June 30, 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
    
    58-2179041(State or other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    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 August 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
    
    
    11ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    24ITEM 4. CONTROLS AND PROCEDURES
    
    
    25PART II  OTHER INFORMATION
    
    
    25ITEM 1. LEGAL PROCEEDINGS
    
    
    25ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    25ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    25ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    25ITEM 5. OTHER INFORMATION
    
    
    25ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    25EX-10.1 SECOND AMENDMENT TO EMPLOYMENT AGREEMENTEX-10.2 SECOND AMENDMENT TO THE LEASE AGREEMENTEX-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
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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) GLOBAL PREFERRED HOLDINGS, INC. Consolidated Balance Sheets
(Unaudited) December 31,
    
    June 30,2003
    
    2004AssetsFixed maturity securities  available for sale (amortized cost of
$15,057,808 and $19,902,730 for 2003 and 2004, respectively)
    
    $
    15,267,477
    
    
    $
    19,783,442Equity securities  available for sale (cost of $2,009,360 for 2003)
    
    
    1,998,932
    
    
    
    Other equity investments (cost of $500,000 for 2003 and 2004)
    
    
    501,259
    
    
    
    527,892Cash and cash equivalents
    
    
    11,580,045
    
    
    
    13,783,624Reinsured policy loans
    
    
    1,270,711
    
    
    
    1,408,621Total invested assets
    
    
    30,618,424
    
    
    
    35,503,579Investment income due and accrued
    
    
    197,020
    
    
    
    234,443Accounts receivable
    
    
    44,588
    
    
    
    5,250Reinsurance balances receivable
    
    
    2,112,462
    
    
    
    2,129,309Deferred acquisition costs
    
    
    45,607,865
    
    
    
    43,255,622Prepaid expenses
    
    
    519,888
    
    
    
    444,056Current income tax recoverable
    
    
    48,152
    
    
    
    50,277Fixed assets (net of accumulated depreciation of $336,817 and
$386,091 for 2003 and 2004, respectively)
    
    
    135,495
    
    
    
    86,222Total assets
    
    $
    79,283,894
    
    
    $
    81,708,758Liabilities and Stockholders EquityLiabilities:Future policy benefits
    
    $
    18,881,390
    
    
    $
    18,781,638Reinsurance balances payable
    
    
    169,481
    
    
    
    306,457Accrued expenses and accounts payable
    
    
    517,078
    
    
    
    401,561Accrued interest payable
    
    
    158,219
    
    
    
    157,706Current maturities of long-term debt
    
    
    5,000,000
    
    
    
    5,000,000Deferred tax liability
    
    
    9,252,250
    
    
    
    9,990,496Total liabilities
    
    
    33,978,418
    
    
    
    34,637,858Commitments and contingencies (Note 10)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 (loss)
    
    
    132,331
    
    
    
    (60,320
    )Retained earnings
    
    
    21,892,237
    
    
    
    23,850,312Treasury stock, at cost (7,390 shares)
    
    
    (49,267
    )
    
    
    (49,267
    )Total stockholders equity
    
    
    45,305,476
    
    
    
    47,070,900Total liabilities and stockholders equity
    
    $
    79,283,894
    
    
    $
    81,708,758
 See accompanying condensed notes to consolidated financial statements. 3




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##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC. Consolidated Statements of Income
(Unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Revenues:Premiums
    
    $
    4,363,568
    
    
    $
    4,270,641
    
    
    $
    8,752,063
    
    
    $
    8,572,859Reinsured policy revenues
    
    
    3,258,208
    
    
    
    3,112,639
    
    
    
    6,490,052
    
    
    
    6,311,451Net investment income
    
    
    87,903
    
    
    
    210,350
    
    
    
    170,889
    
    
    
    388,091Net realized loss on investments
    
    
    
    
    
    
    (29,456
    )
    
    
    
    
    
    
    (29,456
    )Other income
    
    
    5,506
    
    
    
    
    
    
    
    5,509
    
    
    
    6,980Total revenues
    
    
    7,715,185
    
    
    
    7,564,174
    
    
    
    15,418,513
    
    
    
    15,249,925Benefits and expenses:Benefits, claims and settlement
expenses
    
    
    2,455,020
    
    
    
    1,450,943
    
    
    
    4,730,590
    
    
    
    3,426,763Change in future policy benefits
    
    
    196,255
    
    
    
    157,817
    
    
    
    507,006
    
    
    
    372,286Reinsurance expense allowances,
net
    
    
    2,082,273
    
    
    
    1,991,046
    
    
    
    4,156,510
    
    
    
    3,966,341Amortization of deferred
acquisition costs
    
    
    1,280,815
    
    
    
    1,469,670
    
    
    
    2,656,241
    
    
    
    2,904,007Operating expenses
    
    
    945,390
    
    
    
    732,203
    
    
    
    1,821,869
    
    
    
    1,570,726Interest expense
    
    
    93,493
    
    
    
    93,493
    
    
    
    185,959
    
    
    
    186,986Total benefits and expenses
    
    
    7,053,246
    
    
    
    5,895,172
    
    
    
    14,058,175
    
    
    
    12,427,109Income before income tax
    
    
    661,939
    
    
    
    1,669,002
    
    
    
    1,360,338
    
    
    
    2,822,816Income tax expense
    
    
    (225,039
    )
    
    
    (542,477
    )
    
    
    (462,496
    )
    
    
    (864,741
    )Net income
    
    $
    436,900
    
    
    $
    1,126,525
    
    
    $
    897,842
    
    
    $
    1,958,075Basic earnings per share
    
    $
    0.11
    
    
    $
    0.27
    
    
    $
    0.22
    
    
    $
    0.47Diluted earnings per share
    
    $
    0.11
    
    
    $
    0.27
    
    
    $
    0.22
    
    
    $
    0.47Weighted-average common shares
outstanding
    
    
    4,141,684
    
    
    
    4,141,684
    
    
    
    4,141,684
    
    
    
    4,141,684Total weighted-average common and
common equivalent shares
outstanding
    
    
    4,141,684
    
    
    
    4,141,684
    
    
    
    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) Six Months EndedJune 30,2003
    
    2004Cash flows from operating activities:Net income
    
    $
    897,842
    
    
    $
    1,958,075Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Amortization and depreciation
    
    
    2,700,394
    
    
    
    3,028,971Net realized loss on investments
    
    
    
    
    
    
    29,456Deferred tax expense
    
    
    412,931
    
    
    
    837,491Capitalization of deferred acquisition costs
    
    
    (778,249
    )
    
    
    (551,764
    )Change in:Investment income due and accrued
    
    
    10,608
    
    
    
    (37,423
    )Accounts receivable
    
    
    215,500
    
    
    
    39,338Reinsurance balances receivable
    
    
    1,120,805
    
    
    
    (16,847
    )Prepaid expenses
    
    
    103,955
    
    
    
    75,832Current income tax recoverable
    
    
    47,315
    
    
    
    (2,125
    )Future policy benefits
    
    
    2,015,372
    
    
    
    (99,752
    )Reinsurance balances payable
    
    
    (42,130
    )
    
    
    136,976Accrued expenses and accounts payable
    
    
    (11,317
    )
    
    
    (115,517
    )Accrued interest payable
    
    
    (1,541
    )
    
    
    (513
    )Net cash provided by operating activities
    
    
    6,691,485
    
    
    
    5,282,198Cash flows from investing activities:Proceeds from principal payments on mortgage-backed
securities available-for-sale
    
    
    467,281
    
    
    
    103,589Proceeds from maturity of available-for-sale securities
    
    
    200,000
    
    
    
    200,000Proceeds from sale of equity securities
    
    
    
    
    
    
    2,009,731Purchase of fixed maturity securities
    
    
    (1,054,615
    )
    
    
    (5,254,029
    )Change in reinsured policy loans
    
    
    (60,166
    )
    
    
    (137,910
    )Net cash used in investing activities
    
    
    (447,500
    )
    
    
    (3,078,619
    )Net increase in cash and cash equivalents
    
    
    6,243,985
    
    
    
    2,203,579Cash and cash equivalents at beginning of period
    
    
    15,858,256
    
    
    
    11,580,045Cash and cash equivalents at end of period
    
    $
    22,102,241
    
    
    $
    13,783,624Supplemental disclosure of cash flow information:Interest paid
    
    $
    187,500
    
    
    $
    187,500Income taxes paid
    
    $
    2,250
    
    
    $
    29,375
 See accompanying condensed notes to consolidated financial statements. 5




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##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC.
Condensed Notes to Consolidated Financial Statements June 30, 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 six months ended June 30, 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 Taxes 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 Taxes,specifically 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 June 30,
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 accumulated
other comprehensive income or loss as shown under the equity section of the
consolidated balance sheet is the unrealized gain or loss on available-for-sale
securities. Total comprehensive income for the three months ended June 30,
2004 was $779,960 compared to $455,630 for the three months ended June 30,
2003. Total comprehensive income for the six months ended June 30, 2004 was
$1,765,424 compared to $902,680 for the six months ended June 30, 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. There were 284,752 stock options
outstanding on June 30, 2004, which were not dilutive for
the three and six month periods ended June 30, 2003 and 2004.
For additional information, refer to Note 15 to the consolidated
financial statements in our Annual Report on Form 10-K, for the
year ended December 31, 2003, as amended. For the three and six month periods ended June 30, 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 not have been dilutive. The conversion price of the note was $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. 6




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##### Table of Contents



5.
    
    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 Accounting Principles Board
(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. For purposes of this pro-forma disclosure, the estimated fair value of the
options is assumed to be amortized as a stock-based compensation expense over
the options vesting periods. Three
    
    Three
    
    Six
    
    SixMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,(In Thousands-Except Per Share Amounts)
    
    2003
    
    2004
    
    2003
    
    2004Net income, as reported
    
    $
    436.9
    
    
    $
    1,126.5
    
    
    $
    897.8
    
    
    $
    1,958.1Less: Total stock-based employee
compensation expense determined under the
fair value method for all awards, net of
tax
    
    
    (7.6
    )
    
    
    (8.7
    )
    
    
    (7.6
    )
    
    
    (11.6
    )Pro-forma net income
    
    $
    429.3
    
    
    $
    1,117.8
    
    
    $
    890.2
    
    
    $
    1,946.5Reported basic earnings per common share
    
    $
    0.11
    
    
    $
    0.27
    
    
    $
    0.22
    
    
    $
    0.47Reported diluted earnings per common share
    
    $
    0.11
    
    
    $
    0.27
    
    
    $
    0.22
    
    
    $
    0.47Pro-forma basic earnings per common share
    
    $
    0.10
    
    
    $
    0.27
    
    
    $
    0.21
    
    
    $
    0.47Pro-forma diluted earnings per common
share
    
    $
    0.10
    
    
    $
    0.27
    
    
    $
    0.21
    
    
    $
    0.47
 In May 2004, the Compensation Committee of the Board of Directors granted
options to purchase an aggregate of 39,375 shares of common stock to certain
employees in order to retain employees due to competitive market conditions and
to provide additional incentive to such persons to increase the value of Global
Preferreds stock.  6.
    
    Accounting Pronouncements In January 2003, Financial Accounting Standards Board (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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7.
    
    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. 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. 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. Three Months Ended June 30,
    
    2003
    
    2004Non
    
    
    
    
    
    
    
    
    
    
    
    
    
    NonUniversal
    
    Universal
    
    
    
    
    
    
    
    
    
    Universal
    
    Universal(Dollars in thousands)
    
    Life-Type
    
    Life-Type
    
    Other
    
    Total
    
    Life-Type
    
    Life-Type
    
    Other
    
    TotalPremiums
    
    $
    4,364
    
    
    $
    
    
    
    $
    
    
    
    $
    4,364
    
    
    $
    4,271
    
    
    $
    
    
    
    $
    
    
    
    $
    4,271Reinsured policy revenues
    
    
    
    
    
    
    3,258
    
    
    
    
    
    
    
    3,258
    
    
    
    
    
    
    
    3,113
    
    
    
    
    
    
    
    3,113Benefits, claims and
settlement expenses*
    
    
    2,220
    
    
    
    431
    
    
    
    
    
    
    
    2,651
    
    
    
    1,418
    
    
    
    191
    
    
    
    
    
    
    
    1,609Reinsurance expense
allowances, net
    
    
    1,516
    
    
    
    566
    
    
    
    
    
    
    
    2,082
    
    
    
    1,465
    
    
    
    526
    
    
    
    
    
    
    
    1,991Amortization of deferred
acquisition costs
    
    
    65
    
    
    
    1,216
    
    
    
    
    
    
    
    1,281
    
    
    
    42
    
    
    
    1,428
    
    
    
    
    
    
    
    1,470Underwriting profit
    
    
    563
    
    
    
    1,045
    
    
    
    
    
    
    
    1,608
    
    
    
    1,346
    
    
    
    968
    
    
    
    
    
    
    
    2,314Net investment income
    
    
    2
    
    
    
    60
    
    
    
    25
    
    
    
    87
    
    
    
    8
    
    
    
    22
    
    
    
    180
    
    
    
    210Net realized loss on
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (29
    )Other income
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    29
    
    
    
    66
    
    
    
    944
    
    
    
    1,039
    
    
    
    42
    
    
    
    90
    
    
    
    694
    
    
    
    826Segment operating income
(loss) before income tax
    
    
    536
    
    
    
    1,039
    
    
    
    (913
    )
    
    
    662
    
    
    
    1,312
    
    
    
    900
    
    
    
    (543
    )
    
    
    1,669Income tax expense (benefit)
    
    
    182
    
    
    
    353
    
    
    
    (310
    )
    
    
    225
    
    
    
    426
    
    
    
    292
    
    
    
    (176
    )
    
    
    542Segment net income (loss)
    
    $
    354
    
    
    $
    686
    
    
    $
    (603
    )
    
    $
    437
    
    
    $
    886
    
    
    $
    608
    
    
    $
    (367
    )
    
    $
    1,127Segment assets
    
    $
    5,930
    
    
    $
    50,791
    
    
    $
    20,832
    
    
    $
    77,553
    
    
    $
    5,692
    
    
    $
    45,417
    
    
    $
    30,600
    
    
    $
    81,709
   *
    
    Benefits, claims and settlement expenses include change in future policy
benefits. 8




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##### Table of Contents



Six Months Ended June 30,
    
    2003
    
    2004Non
    
    
    
    
    
    
    
    
    
    
    
    
    
    NonUniversal
    
    Universal
    
    
    
    
    
    
    
    
    
    Universal
    
    Universal(Dollars in thousands)
    
    Life-Type
    
    Life-Type
    
    Other
    
    Total
    
    Life-Type
    
    Life-Type
    
    Other
    
    TotalPremiums
    
    $
    8,752
    
    
    $
    
    
    
    $
    
    
    
    $
    8,752
    
    
    $
    8,573
    
    
    $
    
    
    
    $
    
    
    
    $
    8,573Reinsured policy revenues
    
    
    
    
    
    
    6,490
    
    
    
    
    
    
    
    6,490
    
    
    
    
    
    
    
    6,311
    
    
    
    
    
    
    
    6,311Benefits, claims and
settlement expenses*
    
    
    4,217
    
    
    
    1,020
    
    
    
    
    
    
    
    5,237
    
    
    
    3,060
    
    
    
    739
    
    
    
    
    
    
    
    3,799Reinsurance expense
allowances, net
    
    
    3,046
    
    
    
    1,110
    
    
    
    
    
    
    
    4,156
    
    
    
    2,947
    
    
    
    1,019
    
    
    
    
    
    
    
    3,966Amortization of deferred
acquisition costs
    
    
    159
    
    
    
    2,497
    
    
    
    
    
    
    
    2,656
    
    
    
    73
    
    
    
    2,831
    
    
    
    
    
    
    
    2,904Underwriting profit
    
    
    1,330
    
    
    
    1,863
    
    
    
    
    
    
    
    3,193
    
    
    
    2,493
    
    
    
    1,722
    
    
    
    
    
    
    
    4,215Net investment income
    
    
    4
    
    
    
    115
    
    
    
    51
    
    
    
    170
    
    
    
    15
    
    
    
    47
    
    
    
    326
    
    
    
    388Net realized loss on
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (29
    )Other income
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    7Other expenses
    
    
    72
    
    
    
    163
    
    
    
    1,773
    
    
    
    2,008
    
    
    
    79
    
    
    
    191
    
    
    
    1,488
    
    
    
    1,758Segment operating income
(loss) before income tax
    
    
    1,262
    
    
    
    1,815
    
    
    
    (1,716
    )
    
    
    1,361
    
    
    
    2,429
    
    
    
    1,578
    
    
    
    (1,184
    )
    
    
    2,823Income tax expense (benefit)
    
    
    429
    
    
    
    617
    
    
    
    (583
    )
    
    
    463
    
    
    
    744
    
    
    
    484
    
    
    
    (363
    )
    
    
    865Segment net income (loss)
    
    $
    833
    
    
    $
    1,198
    
    
    $
    (1,133
    )
    
    $
    898
    
    
    $
    1,685
    
    
    $
    1,094
    
    
    $
    (821
    )
    
    $
    1,958Segment assets
    
    $
    5,930
    
    
    $
    50,791
    
    
    $
    20,832
    
    
    $
    77,553
    
    
    $
    5,692
    
    
    $
    45,417
    
    
    $
    30,600
    
    
    $
    81,709
   *
    
    Benefits, claims and settlement expenses include change in future policy
benefits. During each of the three month periods ended June 30, 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 percentage of total premiums and reinsured policy
revenues that related to business issued by Western Reserve for the six month
periods ended June 30, 2003 and 2004 was 92%. The percentage of total
underwriting profit that related to business issued by Western Reserve for the
three month periods ended June 30, 2003 and 2004 was 94%. The percentages of
total underwriting profit that related to business issued by Western Reserve
for the six month periods ended June 30, 2003 and 2004 were 93% and 95%,
respectively.  8.
    
    Reclassification Global Preferred has reclassified the presentation of certain 2003
information to conform to the 2004 presentation.  9.
    
    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, 2006 and are renewable by agreement
of the parties for additional one-year periods.  10.
    
    Commitments and 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. 9




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##### Table of Contents



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 $276.2 million as of June 30, 2004.  11.
    
    Subsequent Events On July 28, 2004, Global Preferred issued a press release announcing that
it was in discussions with Western Reserve which may lead to the acquisition of
Global Preferreds interest in Global Preferred Re Limited, the Bermuda-based
life reinsurance company owned by Global Preferred. In the proposed
transaction, following the sale of Global Preferred Re to Western Reserve,
Global Preferred would liquidate its remaining assets and distribute to its
stockholders all of the consideration received from Western Reserve and any
other assets of Global Preferred remaining after provision for liabilities.
The proposed transaction would be subject to a number of contingencies. Global
Preferred and Western Reserve hope to enter into a definitive agreement for a
transaction prior to the end of the third quarter of 2004. There is no
assurance that a definitive agreement with respect to the proposed transaction
will be reached or that the proposed (or any) transaction will be consummated. On July 29, 2004, Global Preferred repaid the $5 million promissory note
plus outstanding interest of $187,500 due to Money Services, Inc., a subsidiary
of AEGON USA, Inc. The principal and interest were paid out of available cash
and cash equivalents. 10




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##### Table of Contents



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 June 30, 2004 compared with December 31, 2003, and its
results of operations for the three and six months ended June 30, 2004,
compared with the three and six months ended June 30, 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 on Form 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 (Global Preferred Re) is a Bermuda
company registered as a long-term insurer under the Bermuda Insurance Act 1978
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. 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. 11




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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. 12




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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, including Fair
Value Disclosure  Investments, 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 fees 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. 13




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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 14




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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 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 under our reinsurance agreements
may include provisions for claims that have been incurred but have not yet been
paid. A portion of these claims represent claims reported to us that are in
the course of settlement. The remainder of this liability represents claims
that may have been incurred but not yet reported to us. 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. The cost of investment securities sold is determined based upon
the specific identification method. 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. In determining whether a decline in market value on our
fixed income securities is other-than-temporary, we consider the cause of the
impairment, the length of impairment, the amount of impairment as a percentage
of the fair value of the security and other relevant information about the
issuer or security. Although we utilize an independent investment manager to
invest and manage our assets in accordance with our investment guidelines, we
have the ability and intent to hold these securities until a forecasted
recovery of fair value is at least equal to the amortized cost or until
maturity. 15




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##### Table of Contents



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 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 ReinsuranceCeding Life Company
    
    RenewableTerm
    
    Coinsurance
    
    ModifiedCoinsuranceWestern 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 effective January 1, 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. 16




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##### Table of Contents



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;
    
    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. 17




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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: Six MonthsYear Ended
    
    Year Ended
    
    EndedDecember 31,
    
    December 31,
    
    June 30,2002
    
    2003
    
    2004Western Reserve
    
    
    91
    %
    
    
    92
    %
    
    
    92
    %American Skandia
    
    
    8
    
    
    
    7
    
    
    
    6Kemper
    
    
    1
    
    
    
    1
    
    
    
    1Pacific Life
    
    
    
    (1)
    
    
    
    (1)
    
    
    1Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   (1)
    
    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 58% of our
reinsurance revenues for the quarter ended June 30, 2004. The policies we
reinsure on a coinsurance and modified coinsurance basis represented 42% of our
reinsurance revenues for the same period. Of the 42%, 56% relates to variable
life insurance policies and 44% relates to variable annuity policies. 18




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##### Table of Contents



Results of Operations Three Months and Six Months Ended June 30, 2004 Compared to Three Months and
Six Months Ended June 30, 2003 The following table sets forth certain operating data as a percentage of
total revenue for the periods indicated: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004(As a percentage of total revenue)Consolidated Statements of Income Data:Revenues:Premiums
    
    
    57
    %
    
    
    56
    %
    
    
    57
    %
    
    
    56
    %Reinsured policy revenues
    
    
    42
    
    
    
    41
    
    
    
    42
    
    
    
    41Net investment income
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    3Total revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Benefits and expenses:Benefits, claims and settlement expenses
    
    
    32
    
    
    
    19
    
    
    
    31
    
    
    
    23Change in future policy benefits
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    2Reinsurance expense allowances, net
    
    
    27
    
    
    
    26
    
    
    
    27
    
    
    
    26Amortization of deferred acquisition costs
    
    
    17
    
    
    
    20
    
    
    
    17
    
    
    
    19Operating expenses
    
    
    12
    
    
    
    10
    
    
    
    12
    
    
    
    10Interest expense
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Total benefits and expenses
    
    
    91
    
    
    
    78
    
    
    
    91
    
    
    
    81Income before income tax
    
    
    9
    
    
    
    22
    
    
    
    9
    
    
    
    19Income tax expense
    
    
    (3
    )
    
    
    (7
    )
    
    
    (3
    )
    
    
    (6
    )Net income
    
    
    6
    %
    
    
    15
    %
    
    
    6
    %
    
    
    13
    %
 Revenues Premiums.Premiums decreased $93,000, or 2%, and $179,000, or 2% for the
quarter and the six months ended June 30, 2004, respectively, compared to the
same periods in 2003. 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 $146,000,
or 4%, and $179,000, or 3%, for the quarter and the six months ended June 30,
2004, respectively, compared to the same periods in 2003. 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
fees due to an increase in policy account balances. Policy account balances
increased primarily because of positive separate account fund yields and
premiums and deposits, which were partially offset by policy surrender
activity. Net Investment Income and Net Realized Loss on Investments.Net
investment income increased $122,000, or 139%, and $217,000, or 127%, for the
quarter and the six months ended June 30, 2004, respectively, compared to the
same periods in 2003, 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, $5.3 million of
fixed maturity securities were purchased during the six months ended June 30,
2004. The purchases and sales activities by quarter are shown in the table
below: 19




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##### Table of Contents



Quarter EndedJune 30,
    
    Sept. 30,
    
    Dec. 31,
    
    Mar. 31,
    
    June 30,2003
    
    2003
    
    2003
    
    2004
    
    2004Fixed maturity and equity
securities:Balance, beginning of quarter
    
    $
    2,325,836
    
    
    $
    3,196,467
    
    
    $
    9,310,881
    
    
    $
    17,767,668
    
    
    $
    19,231,373Purchases
    
    
    1,054,615
    
    
    
    6,568,300
    
    
    
    9,208,384
    
    
    
    1,511,000
    
    
    
    3,743,030Sales
    
    
    
    
    
    
    
    
    
    
    (421,282
    )
    
    
    
    
    
    
    (2,009,731
    )Other activity
    
    
    (183,984
    )
    
    
    (453,886
    )
    
    
    (330,315
    )
    
    
    (47,295
    )
    
    
    (653,338
    )Balance, end of quarter
    
    $
    3,196,467
    
    
    $
    9,310,881
    
    
    $
    17,767,668
    
    
    $
    19,231,373
    
    
    $
    20,311,334
 The sale of $2.0 million of equity securities for the six months ended
June 30, 2004 resulted in a net realized loss on investments of $29,000. There
were no sales of fixed maturity or equity securities for the six months ended
June 30, 2003, thus no gains or losses were realized. Benefits and Expenses Benefits, Claims and Settlement Expenses.Benefits, claims and settlement
expenses decreased $1.0 million, or 41%, and $1.3 million, or 28%, for the
quarter and the six months ended June 30, 2004, respectively, compared to the
same periods in 2003. The decrease was primarily associated with a lower
incidence of life insurance death claims in the first six months of 2004
compared to the incidence of death claims in the same period in 2003. The
declining aggregate face value of insurance, partially offset by the increasing
age of the policies reinsured, also contributed to a decline in claims
experience. The aggregate face value of insurance underlying the policies we
reinsured at June 30, 2004 was $7.3 billion compared to $8.0 billion at June
30, 2003. Change in Future Policy Benefits.Change in future policy benefits
decreased $38,000, or 20%, and $135,000, or 27%, for the quarter and six months
ended June 30, 2004, respectively, compared to the same periods in 2003. 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 $91,000, or 4%, and $190,000, or 5%, for the quarter and the six
months ended June 30, 2004, respectively, compared to the same periods in 2003.
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 $189,000, or 15%, and $248,000, or 9%, for the
quarter and the six months ended June 30, 2004, respectively, compared to the
same periods in 2003. 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 fees associated with the coinsurance and modified coinsurance
business for the quarter and six months ended June 30, 2004, as compared to the
same periods in 2003. This was partially offset by a decrease in the number of
policies in force for the quarter and six months ended June 30, 2004, as
compared to the same periods in 2003. The increase for the six months ended
June 30, 2004 was also 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 above.) 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
result in losses of 20% or more for 2004. Operating Expenses.Operating expenses decreased $213,000, or 23%, and
$251,000, or 14%, for the quarter and the six months ended June 30, 2004,
respectively, compared to the same periods in 2003. These expenses include
salaries and benefits, professional fees for legal, actuarial and accounting
expenses and other operating expenses. For the quarter ended June 30, 2004, the
decrease was primarily attributable to decreases in legal fees, salaries,
bonuses and benefits, consulting fees and recruiting expenses. The majority of
the decrease for the six months ended June 30, 2004 20




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##### Table of Contents



was attributable to decreases in legal fees, directors and officers insurance
premiums, consulting fees and recruiting expenses. Interest Expense.Interest expense remained the same, and increased
$1,000, or 1%, for the quarter and the six months ended June 30, 2004,
respectively, compared to the same periods in 2003. Income Taxes.Due to higher levels of income before income taxes, income
taxes increased $317,000, or 141%, and $402,000, or 87%, for the quarter and
the six months ended June 30, 2004, respectively, compared to the same periods
in 2003. Income before income taxes is comprised of income subject to tax that
is recognized and due in the current period and income subject to tax 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 31% for 2004. This
reflects a benefit from the small life insurance company deduction. Our
effective tax rate was 34% and 31% for the six months ended June 30, 2003 and
2004, respectively. For the six months ended June 30, 2003, we had no current
taxable income, however we were subject to the alternative minimum tax. In accordance with Statements of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes, we have $1.8 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 to us 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 $19.8 million in fixed maturity
securities available for sale, $13.8 million in consolidated cash and cash
equivalents, and $528,000 of equity securities at June 30, 2004. The effective
duration of our fixed maturity portfolio is 4.1 years with 100% of the fixed
maturity securities having an effective maturity of less than 10 years. Our
fixed maturity portfolio represents 56% of our total invested assets, and has
an average Moodys quality rating of Aa2. We have gross unrealized losses of
$192,000 and gross unrealized gains of $101,000 on our fixed maturity and
equity securities as of June 30, 2004. The unrealized losses relate to our
fixed maturity portfolio and we have determined that these investments are not
other-than-temporarily impaired. Our capital structure consists of debt and equity. At June 30, 2004, our
current debt was comprised of a $5 million, five-year convertible term note to
Money Services, Inc., a subsidiary of AEGON USA, Inc., due on July 29, 2004.
As of June 30, 2004, we had an outstanding principal balance on the term note
of $5 million and accrued interest of $158,000, which was repaid in full out of
available cash and cash equivalents on July 29, 2004. Interest was 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. Until repayment, Money Services had
the right to convert the outstanding principal balance of this note into common
stock at any time. Upon conversion, Money Services would have received 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 reflected our three-for-two stock
split in 2001. We had the option to redeem the note, in whole or in part,
before maturity. To redeem the note before maturity, we would have paid 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. 21




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##### Table of Contents



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 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 expense allowances are significantly lower. Net cash flows provided by operating activities were $6.7 million and $5.3
million for the six months ended June 30, 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 than was provided by in
force business. The decrease in cash flows provided by operating activities
was primarily the result of lower reinsurance settlements received for the six
months ended June 30, 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 used in investing activities were $448,000 and $3.1 million
for the six months ended June 30, 2003 and 2004, respectively. The cash flows
used in investing activities in 2004 primarily related to the purchase of $5.3
million of fixed maturity securities offset by the sale of $2.0 million of
equity securities and maturity of $200,000 of fixed maturity securities. The
cash flows used in investing activities in 2003 were the result of the purchase
of $1.1 million of available-for-sale securities offset by the maturities and
principal payments from available for sale securities of $667,000. We have
incurred no significant capital expenditures during 2004. Financing Cash Flows.No financing activities occurred during the six
months ended June 30, 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 existing agreements to reinsure additional
business 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 $4.7 million of cash and invested assets, as of June
30, 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 June 30, 2004, Global Preferred Re had total
statutory capital and surplus of $25.9 million, which included up to $10.6
million available to distribute in dividends without seeking regulatory
approval. During the six months ended June 30, 2004, Global Preferred Re paid
no dividends to Global Preferred Holdings, Inc. 22




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##### Table of Contents



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. 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
    
    2007
    
    2008Short-term debt
    
    $
    5,187.5
    
    
    $
    5,187.5
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Office lease
    
    
    566.7
    
    
    
    62.5
    
    
    
    100.5
    
    
    
    127.6
    
    
    
    136.0
    
    
    
    140.1Operating leases
    
    
    56.7
    
    
    
    18.5
    
    
    
    37.0
    
    
    
    1.2
    
    
    
    
    
    
    
    Total
    
    $
    5,810.9
    
    
    $
    5,268.5
    
    
    $
    137.5
    
    
    $
    128.8
    
    
    $
    136.0
    
    
    $
    140.1
 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:  
    
    Our discussions with Western Reserve regarding a proposed
transaction for Global Preferred Re;
    
    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; 23




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##### Table of Contents




    
    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. 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 1.8%, or approximately $620,000 on a portfolio valued at
approximately $32.7 million at June 30, 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 2.0%, or approximately $678,000. The foregoing reflects the use of an
immediate time horizon. Credit spreads are assumed to remain constant in these
hypothetical examples. 24




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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. 
 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 six months ended June 30,
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 second quarter of 2004, no matters were submitted to our
security holders for a vote. 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits  10.1
    
    Second Amendment to Employment Agreement by and between the
Registrant and Edward F. McKernan, effective May 26, 2004.10.2
    
    Second Amendment to the Lease Agreement by and between the
Registrant and Metropolitan Life Insurance Company effective June 14,
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. 25




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(b)
    
    Reports on Form 8-K A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on April 19, 2004 to announce that Global Preferred had retained the
investment banking firm of Raymond James & Associates, Inc. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on May 24, 2004 to disclose the earnings press release of the first
quarter financial results. 26




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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 13th day of August, 2004. GLOBAL PREFERRED HOLDINGS, INC.By:
    /s/   EDWARD F. MCKERNANEdward F. McKernanChief Executive Officer and President and Director By:
    /s/   BRADLEY E. BARKSBradley E. BarksChief Financial Officer and Senior Vice President  Finance 27