Edgar Filing: AMERICAN PHYSICIANS SERVICE GROUP INC

AMERICAN PHYSICIANS SERVICE GRIUP, INC.

1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

NOTICE OF 2004 ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 7, 2004

To Our Shareholders:

You are cordially invited to attend our 2004 Annual Meeting of Shareholders
to be held at Lakeway Inn Conference Resort, located at 101 Lakeway Drive,
Austin, Texas 78734, on Monday, June 7, 2004 at 8:30 a.m., Austin, Texas time,
for the following purposes:

(a) To elect five directors to serve on our board of directors;

(b) To transact any other business as may properly come before the
meeting or any adjournment(s) thereof.

The accompanying proxy statement contains information regarding, and a more
complete description of, the items of business to be considered at the meeting.

Only shareholders of record of our common stock at the close of business on
April 21, 2004 are entitled to notice of, and to vote at, the meeting or any
adjournment(s) thereof.

You are cordially invited and urged to attend the meeting. Whether or not
you intend to attend the meeting, we ask that you sign and date the accompanying
proxy and return it promptly in the enclosed self-addressed envelope. If you
attend the meeting, you may vote in person, if you wish, whether or not you have
returned your proxy. In any event, you may revoke your proxy at any time before
it is exercised in the manner described in the proxy statement.

By Order of our Board of Directors

W. H. HAYES Secretary
Austin, Texas
May 7, 2004

AMERICAN PHYSICIANS SERVICE GROUP, INC.
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

PROXY STATEMENT
for
2004 ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 7, 2004

Our board of directors hereby solicits your proxy for use at our 2004
Annual Meeting of Shareholders to be held at the Lakeway Inn Conference Resort,
located at 101 Lakeway Drive, Austin, Texas 78734, on Monday, June 7, 2004 at
8:30 a.m., Austin, Texas time, and any adjournment(s) thereof. This solicitation
may be made in person or by mail, telephone, or telecopy by our directors,
officers, and employees, who will receive no extra compensation for
participating in this solicitation. In addition, we will reimburse banks,
brokerage firms, and other fiduciaries for forwarding solicitation materials to
the beneficial owners of our common stock held of record by such persons. We
will pay the entire cost of this solicitation. We expect to mail this proxy
statement and the enclosed form of proxy on or about May 7, 2004.

References in this report to "we", "us", "our", and the "Company" mean
American Physicians Service Group, Inc.

ANNUAL REPORT

Enclosed is our Annual Report to Shareholders for the year ended
December 31, 2003, including our audited financial statements. The Annual Report
to Shareholders does not form any part of the material for the solicitation of
proxies.

OUTSTANDING COMMON STOCK

Only shareholders of record at the close of business on April 21, 2004
are entitled to notice of, and to vote at, the meeting and any adjournment(s)
thereof. At April 21, 2004, we had outstanding and entitled to vote 2,504,467
shares of our common stock.

QUORUM; VOTING

The presence, in person or by proxy, of the holders of a majority of
the outstanding shares of our common stock is necessary to constitute a quorum
at the meeting. Abstentions and "broker non-votes" (i.e., shares held by brokers
or nominees that are represented at the meeting but with respect to which they
have no discretionary power to vote on a particular matter and have received no
instructions from the beneficial owners thereof or persons entitled to vote
thereon) will be counted in determining whether a quorum is present at the
meeting. If a quorum is not present or represented at the meeting, the
shareholders entitled to vote thereat, present in person or represented by
proxy, have the power to adjourn the meeting from time to time, without notice
other than an announcement at the meeting, until a quorum is present or
represented. At any such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally notified.

On all matters (including election of directors) submitted to a vote of
the shareholders at the meeting or any adjournment(s) thereof, each holder of
our common stock will be entitled to one vote for each share of our common stock
owned of record by such shareholder at the close of business on April 21, 2004.
Cumulative voting is not permitted in the election of our directors.

Proxies in the accompanying form which are properly executed and
returned and that are not revoked will be voted at the meeting and any
adjournment(s) thereof and will be voted in accordance with the instructions
thereon. Any proxy upon which no instructions have been indicated with respect
to a specified matter will be voted according to the recommendations of our
board of directors, which are contained in this proxy statement. Our board of
directors knows of no matters, other than those presented in this proxy
statement, to be presented for consideration at the meeting. If, however, other
matters properly come before the meeting or any adjournment(s) thereof, the
persons named in the accompanying proxy will vote such proxy in accordance with
their judgment on any such matters. The persons named in the accompanying proxy
may also, if they believe it advisable, vote such proxy to adjourn the meeting
from time to time.

Each matter submitted to the shareholders requires the affirmative vote
of a majority of the shares entitled to vote and present in person or by proxy.
If you abstain from voting on a proposal, your abstention will have the effect
of a negative vote on such proposal. Broker non-votes will have the effect of a
negative vote on any proposal.

REVOCATION OF PROXY

You have the power to revoke your proxy at any time before the shares
it represents are voted. A revocation will be effective upon receipt, at any
time before the meeting is called to order, by our Secretary of either (a) an
instrument revoking your proxy or (b) a proxy duly executed by you bearing a
later date than the preceding proxy. Additionally, you may change or revoke a
previously executed proxy by voting in person at the meeting.

PROPOSAL NO. 1
ELECTION OF DIRECTORS

GENERAL

Pursuant to our bylaws, our board of directors has, by resolution,
fixed the number of directors at five, and five directors will be elected. All
nominees will be elected to hold office until our next annual meeting of
shareholders and until his or her successor is duly elected and qualified, or
until his or her earlier death, resignation or removal.

Should any nominee for director become unwilling or unable to accept
nomination or election, the proxies will be voted for the election, in his or
her stead, of such other persons as our board of directors may recommend or our
board of directors may reduce the number of directors to be elected. We have no
reason to believe that any nominee named above will be unwilling or unable to
serve.

Nominees
Director of
Name Age Company Since
------ --- -------------
Jackie Majors 70 2003
Robert L. Myer 55 1996
William A. Searles 61 1989
Kenneth S. Shifrin 55 1987
Cheryl Williams 52 2003

Mr. Majors has been a director since March 2003. He previously served
on our board of directors from 1989 through 1993. Mr. Majors was a director and
President of Prime Medical Services, Inc. or Prime, a provider of lithotripsy
services and a manufacturer of specialty vehicles for the transport of medical
and broadcast/communications equipment from 1989 until his retirement in 1996.
He was an independent business consultant from 1986 to 1989 and our Vice
President-Merger and Acquisitions from 1984 to 1986.

Mr. Myer has been a director of ours since 1996. He has served as a
consultant to Americo Life, Inc., or Americo, a life insurance company, since
1998. Before the sale of certain of his insurance related businesses to Americo
in 1998, he was President and Chief Executive Officer of College Insurance
Group, Inc., an insurance holding company which owned 100% of Annuity Service
Corp. and Financial Assurance Life Insurance Company. Annuity Service Corp.
managed and administered tax qualified plan annuity and life insurance business
for several insurance companies. Financial Assurance Life Insurance Company was
a provider of annuity and life insurance products.

Mr. Searles has been a director of ours since 1989. He has been an
independent business consultant since 1989. Before then, he spent 25 years with
various Wall Street firms, the last ten of which were with Bear Stearns (an
investment banking firm) as an Associate Director/Limited Partner. He has served
as a director of Prime since 1989 and as Chairman of the Board of APS Investment
Services, Inc., a wholly-owned subsidiary of ours (which we will refer to as
Investment Services), since May 1998. From 1972 to 1999, Mr. Searles was the
sole owner of Travelmart, Inc. a privately held New Jersey based travel agency,
which was liquidated in early 1999 under the bankruptcy code.

Mr. Shifrin has been our Chairman of the Board since March 1990. He has
been our President and Chief Executive Officer since March 1989 and he was
President and Chief Operating Officer from June 1987 to February 1989. He has
been a director of ours since February 1987. From February 1985 until June 1987,
Mr. Shifrin served as our Senior Vice President - Finance and Treasurer. He has
been Chairman of the Board of Prime since 1989 and a director of Financial
Industries Corporation, or FIC, a provider of life insurance and annuity
products, since June 2003. Mr. Shifrin is a member of the World Presidents
Organization.

Ms. Williams has been a director of ours since December 2003. She has
been a private investor and business consultant since 2002. She was Chief

Financial Officer of Prime from 1989 to 2002. Prior to that she held finance and
accounting positions in the data processing and aircraft industries.

The Board recommends that you vote FOR each nominee for director.

COMPENSATION OF DIRECTORS

Nonemployee directors receive a fee of $2,500 for each in-person board
meeting, $400 for teleconference board meetings and $400 for each committee
meeting they attend. Mr. Myer has requested that we contribute his fees to a
charity of his choice. Mr. Shifrin does not receive separate compensation for
his services as a director. Directors are eligible to receive stock option
grants under our 1995 Incentive and Non-Qualified Stock Option Plan. In 2003 Mr.
Majors was granted options for 30,000 shares of our common stock, Mr. Myer was
granted options for 35,000 shares of our common stock, Mr. Searles was granted
options for 35,000 shares of our common stock, and Ms. Williams was granted
options for 15,000 shares of our common stock. Mr. Shifrin received options for
50,000 shares of our common stock, as reported in the "Options Granted in 2003"
chart of the "Executive Compensation" section of this proxy statement. All of
these options have an exercise price equal to the closing price on the date of
grant and vest in two equal annual installments beginning on the first
anniversary of the date of grant.

CERTAIN ADDITIONAL INFORMATION CONCERNING OUR BOARD OF DIRECTORS

No family relationships exist among our officers or directors. Except
as indicated above with respect to Prime and FIC, no director is a director of
any company with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, or subject to the requirements of Section 15(d)
of the Exchange Act or any company registered as an investment company under the
Investment Company Act of 1940.

Our board of directors held nine meetings during 2003, and each
director attended at least 75% of (a) the total number of our board meetings
held during 2003 (or, if shorter, during the period he or she served as a
director) and (b) the total number of meetings held by all committees of the
board on which he or she served during 2003 (or, if shorter, during the period
he or she served as a director). It is the policy of the Board of Directors to
hold an executive session without the presence of management at each Board
meeting.

BOARD COMMITTEES; CORPORATE GOVERNANCE

BOARD MEETINGS

In regard to directors' attendance at annual shareholders meetings,
although we do not have a formal policy regarding such attendance, our board of
directors encourages all board members to attend such meetings, but such
attendance is not mandatory. All of our board members attended the 2003 annual
shareholders meeting. In addition, our board of directors holds its regular
annual meeting immediately following the annual shareholders meeting.

AUDIT COMMITTEE

Our board of directors has an audit committee that, during 2003,
consisted of three directors. Mr. Myer served on the committee along with former
director Mr. Brad Hummel, who resigned in October 2003. Mr. Majors and Ms.
Williams served on the committee upon being appointed to the Board of Directors
in March 2003 and December 2003, respectively. The chairperson of the committee
is Ms. Williams. Our board has determined that the committee members are
"independent" as defined in Rule 4200(a)(15) of the Nasdaq listing standards. In
addition, our board has determined that the committee members meet the
independence standards set forth in Rule 10A-3(b)(1) of the Exchange Act. Our
board has further determined that Ms. Williams is an "audit committee financial
expert" as such term is defined in Item 401(e) of Regulation S-B promulgated by
the SEC. The audit committee held six meetings during 2003. Mr. Myer was unable
to attend one meeting. The audit committee meets with our independent auditors,
reviews our financial statements, and selects our independent auditors for each
fiscal year.

The audit committee's policy is to pre-approve all audit and
permissible non-audit services provided by our independent auditors.
Pre-approval is generally provided for up to one year and any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The audit committee has delegated pre-approval
authority to Ms. Williams, the chairperson of the audit committee, when
expedition of services is necessary.

COMPENSATION COMMITTEE

Our board has a compensation committee, which in 2003 was expanded from two
to three directors. Mr. Myer and Mr. Searles were joined by Ms. Williams upon
her appointment to the board. Mr. Majors succeeded Mr. Searles and the committee
now consists of Mr. Majors, Mr. Myer and Ms. Williams, all of whom are
"independent" directors as defined in Rule 4200(a)(15) of the Nasdaq listing
standards. The chairperson of the committee is Mr. Majors. The compensation
committee held four meetings during 2003. The compensation committee recommends
to the board the compensation of our executive officers and directors.

NOMINATING COMMITTEE

Our board of directors has a nominating committee that assists the board in
identifying qualified individuals to become directors. During 2003 the committee
consisted of two members, Mr. Majors and Mr. Myer. Both are "independent"
directors as defined in Rule 4200(a)(15) of the Nasdaq listing standards. The
chairperson of the committee is Mr. Majors. The nominating committee held one
meeting in 2003.

The nominating committee identifies nominees by first evaluating the
current members of the board who are willing to continue in service. Current
members of the board with skills and experience that are relevant to our
business and who are willing to continue in service are considered for
re-nomination, balancing the value of continuity of service by existing members
of the board with that of obtaining a new perspective. If any member of the
board does not wish to continue in service or if the nominating committee
decides not to recommend a member for re-election, the nominating committee will
identify the desired skills and experience of a new nominee in light of the

criteria below. Research may be performed to identify qualified individuals. To
date, the nominating committee has not engaged third parties to identify or
evaluate or assist in identifying potential nominees, although it may do so in
the future if it considers doing so necessary or desirable. Ms. Williams, who
has not previously stood for election, was recommended by our chairman of the
board and chief executive officer to fill a vacancy in December 2003.

The consideration of any candidate for service on our board is based on
the nominating committee's assessment of the candidate's professional and
personal experiences and expertise relevant to our operations and goals. The
committee evaluates each candidate on his or her ability to devote sufficient
time to board activities to effectively carry out the work of the board. The
ability to contribute positively to the existing collaborative culture among
board members is also considered by the committee. In addition, the committee
considers the composition of the board as a whole; the status of the nominee as
"independent" under the Nasdaq's listing standards and the rules and regulations
of the SEC; and the nominee's experience with accounting rules and practices.
Other than the foregoing, there are no stated minimum criteria for director
nominees, although the nominating committee may also consider such other factors
as it may deem are in our and our shareholders' best interests.

After completing its evaluation, the nominating committee makes a
recommendation to the full board of directors as to the persons who should be
nominated by the board, and the board determines the nominees after considering
the recommendation and report of the nominating committee.

The nominating committee will consider director candidates recommended
by our shareholders. The nominating committee does not have a formal policy on
shareholder nominees, but intends to assess them in the same manner as other
nominees, as described above. To recommend a prospective nominee for the
nominating committee's consideration, shareholders should submit in writing the
candidate's name and qualifications, and otherwise comply with our bylaws'
requirements for shareholder nominations, which are described under "Shareholder
Proposals" below, to:

American Physicians Service Group, Inc.
Corporate Secretary
1301 Capital of Texas Hwy, Suite C-300
Austin, TX 78746

A copy of the nominating committee's charter is available on our web
site at http://www.amph.com. The contents of this web site are not incorporated
by reference and the web site address provided in this proxy statement is
intended to be an inactive textual reference only.

SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS

If a shareholder desires to send a communication to our board of
directors, such shareholder should send the communication to:

American Physicians Service Group, Inc.
1301 Capital of Texas Hwy, Suite C-300
Austin, TX 78746
Attention: Chairman of the Board

The chairman of the board will forward the communication to the other board
members.

If a shareholder desires to send a communication to a specific board
member, such shareholder should send the communication to the above address with
attention to the specific board member, not the chairman of the board (unless
such shareholder desires to send the communication to the chairman).

CODE OF ETHICS

We have established a Code of Ethics for our chief executive officer,
senior finance officers and all other employees. A current copy of this code is
available on our web site at http://www.amph.com. The contents of this web site
are not incorporated by reference and the web site address provided in this
proxy statement is intended to be an inactive textual reference only.

EXECUTIVE COMPENSATION

Summary Compensation Table

Set forth below is information concerning aggregate cash compensation
earned during each of our last three fiscal years by our chief executive officer
and each of our other most highly compensated executive officers who received in
excess of $100,000 in salary and bonuses during any of the last three years, who
we will refer to as our named executive officers.

Long Term
Annual Compensation Compensation
------------------------------- ----------------
Securities All Other
Name and Principal Position Fiscal Year Salary ($) Bonus ($) Underlying Options Compensation
(#) ($) (1)
---------------------------- ----------- ------------ ----------- ----------------- -------------

Kenneth S. Shifrin, Chairman, 2003 300,000 421,000 50,000 6,152
President and Chief 2002 293,751 200,000(2) 75,000 4,548
Executive Officer 2001 275,004 50,000 -- 3,229

William H. Hayes, Senior Vice 2003 130,412 105,000 40,000 6,632
President-Finance, Secretary and 2002 126,246 50,000 35,000 5,002
Chief Financial Officer 2001 114,996 20,000 -- 3,174

Maury L. Magids, Senior Vice 2003 204,996 263,585 25,000 216
President - Insurance 2002 180,000 228,529 15,000 216
2001 179,588 120,200 10,000 216

William A. Searles 2003 72,000(3) 453,000(4) 35,000 --
Chairman of the Board 2002 72,000(3) 213,000(2)(4) 50,000 --
of Investment Services 2001 72,000(3) 223,000(4) -- --

(1) Consists of our matching contributions to our 401(k) plan and the value of
group insurance in excess of $50,000 with respect to such officer.

(2) The amount shown excludes $276,000 and $56,000 paid to Mr. Shifrin and Mr.
Searles, respectively, under a 1999 incentive plan related to profits we
realize upon the sale of our investment in Prime.

(3) Director's fee for serving as Chairman of Investment Services.

(4) Non-discretionary incentive bonus based on Investment Services achieving
specified levels of return on capital.

OPTIONS GRANTED IN 2003

The following table provides information related to options granted to
the named executive officers during 2003. We do not have any outstanding stock
appreciation rights.

Individual Grants
---------------------------------------------------------------------------------------------------------------------
Number of
securities Percent of total
underlying options granted
options granted to employees in Exercise Price Expiration
Name (#) (1) fiscal year ($/Sh) Date
----------- ----------------- ---------------- --------------- --------------

Kenneth S. Shifrin 25,000.00 13% $ 4.29 1/7/08
25,000.00 13% $ 9.10 12/4/08

William H. Hayes 20,000.00 10% $ 4.29 1/7/08
20,000.00 10% $ 9.10 12/4/08

Maury L. Magids 25,000.00 13% $ 4.29 1/7/08

William A. Searles 20,000.00 (2) $ 4.29 1/7/08
15,000.00 (2) $ 9.10 12/4/08

-----------------------------------------------------------------------------------------------------------------------

(1) These options were granted at the closing price on the date of grant.
Options for all board members, including Mr. Shifrin, vest in two
annual installments beginning one year after the date of grant. All
other options vest in three annual installments beginning one year
after the date of grant.

(2) Mr. Searles is a director and Chairman of Investment Services, but is
not an employee.

AGGREGATED OPTION EXERCISES DURING 2003 AND OPTION VALUES AT DECEMBER 31, 2003

The following table provides information related to options exercised
by the named executive officers during 2003 and the number and value of
unexercised options held at December 31, 2003. We do not have any outstanding
stock appreciation rights.

Number of Value of Unexercised
Underlying Unexercised Options In-the-Money Options at
at Fiscal Year-End Fiscal Year-End (2)
---------------------------------- ------------------------------
Shares Acquired Value
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)(1) (#) (#) (#) (#)
--------------- ------------ --------- ----------- ------------- ---------- ------------

Kenneth S. Shifrin 60,000 $75,000 110,000 100,000 844,450 543,250

William H. Hayes 58,000 $143,000 18,000 64,000 139,068 322,760

Maury L. Magids 22,000 $108,343 9,000 39,000 66,430 251,080

William A. Searles 30,000 $43,360 61,000 69,000 444,515 378,410

(1) The Value Realized is calculated by subtracting the per share exercise
price of the option from the closing price of our common stock on the
date of exercise and multiplying the difference by the number of shares
of our common stock acquired upon exercise.

(2) The Value of Unexercised In-the-Money Options is before any income
taxes and is determined by aggregating for each option outstanding as
of December 31, 2003 the amount calculated by multiplying the number of
shares underlying such option by an amount equal to the closing price
of our common stock on December 31, 2003, which was $10.47, less the
exercise price of such option.

EMPLOYMENT AGREEMENTS

We have entered into employment agreements with Mr. Shifrin and Mr.
Hayes. Each of these agreements provides for the payment of a base salary,
eligibility for performance bonuses as determined by our board of directors, and
such other benefits as are available to our other salaried employees. Mr.
Shifrin's agreement provides for a monthly salary, currently $25,000, and
terminates April 1, 2007. Mr. Hayes' agreement provides for a monthly salary,
currently $11,666, and terminates April 1, 2005. Each of the agreements entitles
the employee to receive lump-sum payments in the event the agreements are
terminated by us without cause or by the employee following a "change in
control" of us, as defined in the agreements. These payments are calculated as
the greater of (a) for Mr. Shifrin, five times, and for Mr. Hayes, three times,
their respective average annual cash compensation earned for the past five
years, or (b) the total cash compensation that would otherwise have been payable
to them throughout the remainder of the term of their employment agreements
assuming their current compensation, including the amount of any bonuses for the
immediately preceding calendar year, would have remained the same throughout the
remainder of the term of their employment agreements.

INDEMNITY AGREEMENTS

We have entered into indemnity agreements with our directors and
certain of our officers. The agreements generally provide that, to the extent
permitted by law, we must indemnify each such person for judgements, expenses,
fines, penalties and amounts paid in settlement of claims that result from the
fact that such person was our officer, director or employee. In addition, our
articles of incorporation and certain of our subsidiaries' articles of
incorporation provide for certain indemnifications and limitations on director
liability.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information, as of December 31, 2003,
concerning shares of common stock authorized for issuance under all of our
equity compensation plans.

Number of Securities
Remaining Available
Number of Securities To be For Future Issuance Under
Issued Upon Exercise of Weighted Average Exercise Equity Compensation Plans
Outstanding Options, Price of Outstanding (Excluding Securities
Plan category Warrants and Rights Options, Warrants and Rights Reflected in Column (a))
------------------ ------------------- ---------------------------- ------------------------
(a) (b) (c)

Equity compensation plans
approved by security 815,000 $4.49 295,000
holders...

Equity compensation plans not
approved by security -- $ -- --
holders...

Total... 815,000 $4.49 295,000

REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS

The Company is engaged in several highly competitive industries. For
the Company to succeed, the Company believes that it must be able to attract and
retain qualified executives. To achieve this objective, we have structured an
executive compensation policy tied to operating performance that we believe has
enabled the Company to attract and retain key executives.

During 2003, up to December 4, 2003, the Compensation Committee was
comprised of Messrs. Myer and Searles, and from December 4, 2003 until December
19, 2003, the Compensation Committee was comprised of Mr. Myer, Mr. Searles and
Ms. Williams. Since December 19, 2003, the committee has been comprised of Mr.
Majors, chairman, Mr. Myer and Ms. Williams. Mr. Myer, Mr. Majors and Ms.
Williams are all independent non-employee directors. The Compensation Committee
had primary responsibility for determining executive compensation levels. The
board of directors as a whole maintains a philosophy that a significant
component of both annual and long-term compensation of executive officers,
including that of the Chief Executive Officer, should be linked to measurable
performance. A portion of the management compensation has been comprised of
bonuses, based on operating and stock price performance, with a particular
emphasis on the attainment of planned objectives. Accordingly, in years in which
performance goals are achieved or exceeded, executive compensation tends to be
higher than in years in which performance is below expectations. Stock options
are granted from time to time to members of management, based primarily on such
person's potential contribution to the Company's long-term growth and
profitability. The Committee feels that options are an effective incentive to
create value for shareholders since the value of an option bears a direct
relationship to our stock price. The Committee further recognizes that long-term
performance is becoming an increasingly more important component of overall
executive compensation.

For 2003, our executive compensation program, including that of the
Chief Executive Officer, consisted of base salary, a cash bonus and deferred
compensation based on current year performance and long-term stock option
awards, all of which relate to the achievement of specific current and long-term
goals. Specifically, the cash bonus and deferred compensation paid to the
executives of our subsidiaries was based upon achieving, among other things, a
targeted pretax income. The Chief Executive Officer was paid a bonus for 2003
based upon achieving specific operating income, cash flow and stock price
thresholds, and implementing short and long-term initiatives for improving the
Company's return on investment.

One of the Company's primary objectives is financial performance that
achieves several long-term goals, including earnings-per-share growth, revenue
growth, stock price growth and a proper diversification of business risks. The
Committee believes that its compensation policy promotes those objectives and
that compensation levels during 2003 adequately reflect the Company's
compensation goals and policies.

Compensation Committee: Jackie Majors, Chairperson
Robert L. Myer
Cheryl Williams

PERFORMANCE GRAPH

The graph below compares, assuming $100 was invested on December 31,
1998 and assuming the reinvestment of any dividends, our cumulative total
shareholder return with the total shareholder returns of all NASDAQ stocks (the
"NASDAQ Total") and of all stocks (the "Peer Index") contained in the following
three NASDAQ indexes (with each index being given equal weight): Financial,
Health Services and Insurance.

The following is a table representation of the performance graph depicted on
page 13 of the print version of the proxy.

PEER
FYE NASDAQ INDEX APSG
---------- ----------- ----------- ------------
12/31/03 91.753 152.832 234.889
12/31/02 61.369 111.645 94.422
12/31/01 88.765 114.622 82.222
12/31/00 111.832 105.505 33.333
12/31/99 185.428 87.905 81.944
12/31/98 100.000 100.000 100.000

AUDIT COMMITTEE REPORT

The Audit Committee (the "Committee") of the Board of Directors (the
"Board") was comprised of three directors in 2003 and operates under a written
charter adopted by the Board and attached to the proxy statement as Appendix A.
The Committee, among other things,

o reviews with the independent auditors and management the adequacy
of the Company's accounting and financial reporting controls;

o reviews with management and the independent auditors significant
accounting and reporting principles, practices and procedures
applied in preparing the Company's financial statements;

o discusses with the independent auditors their judgment about the
quality, not just the acceptability, of the Company's accounting
principles used in the Company's financial reporting;

o reviews the activities and independence of the independent auditors;

o reviews and discusses the audited financial statements with management
and the independent auditors and the results of the audit; and

o appoints independent auditors.

The Audit Committee is responsible for hiring, terminating and
compensating the auditor and approving all related fees. The Audit Committee or
a designated member thereof, pre-approves audit and non-audit services rendered
by its independent auditors. If pre-approval authority is delegated, the
delegate must report back to the Audit Committee at the first Audit Committee
meeting following any approval.

It is the responsibility of our executive management to prepare
financial statements in accordance with accounting principles generally accepted
in the United States of America and of our independent auditors to audit those
financial statements.

In this context, the Committee has reviewed and held discussions with
management and the independent auditors regarding the Company's 2003 financial
statements. Management represented to the Committee that our consolidated
financial statements were prepared in accordance with accounting principles
generally accepted in the United States of America, and the Committee has
reviewed and discussed the consolidated financial statements with management and
the independent auditors. The Committee discussed with the independent auditors
the matters required to be discussed by Statement on Auditing Standards No. 61
(Codification of Statements on Auditing Standards).

In addition, the Committee has discussed with the independent auditors
the auditor's independence from the Company and management and has received the
written disclosure and the letter from the independent auditors required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit

Committees). Further, the Committee has considered whether the provision of
non-audit services by the independent auditors is compatible with maintaining
the auditor's independence.

The Committee meets with the independent auditors, with and without
management present, to discuss the results of their examinations, the
evaluations of our internal controls, and the overall quality of our financial
reporting.

Based on the reviews and discussions referred to above, the Committee
recommended to the Board that the audited financial statements be included in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003,
for filing with the Securities and Exchange Commission. The Audit Committee
considered the independent auditors' provision of non-audit services in 2003 and
determined that the provision of those services is compatible with and does not
impair the auditors' independence.

Audit Committee: Cheryl Williams, Chairperson
Jackie Majors
Robert L. Myer

DESIGNATION OF AUDITORS

Upon the recommendation of our audit committee, our board of directors
designated BDO Seidman, LLP to audit our books and accounts for the year ended
December 31, 2003. The audit committee has not met to evaluate the performance
of its independent auditors in 2003 and, consequently, has not yet selected our
independent auditors for 2004. Representatives of our independent auditors will
be present at the meeting to respond to appropriate questions, and they will
have the opportunity, if they desire, to make a statement.

Fees paid to our auditors' firm during 2003 and 2002 were comprised of
the following:

2003 2002
---- ----

Audit Fees........................ $117,000 $ 93,700

Audit-related Fees................... $ 8,000 $ 8,100

Tax Fees......................... $ -- $ --

All Other Fees..................... $ -- $ --
---------- ---------

Total.................................. $125,000 $101,800
======== ========

AUDIT FEES. Audit fees relate to services rendered in connection with the audit
of the annual financial statements included in our Form 10-KSB and the quarterly
reviews of financial statements included in our Form 10-QSB filings.

AUDIT-RELATED FEES. Audit-related services include fees for assurance and
related services, such as consultations concerning financial accounting and
reporting matters.

TAX FEES. There were no tax fees in 2003 or 2002.

ALL OTHER FEES. There were no other fees in 2003 or 2002.

All fees paid in 2003 to our independent auditors were pre-approved by the Audit
Committee.

CERTAIN SHAREHOLDERS

The following table sets forth certain information as of April 21, 2004
regarding the amount and nature of the beneficial ownership of our common stock
by (a) each person who is known by us to be the beneficial owner of more than
five percent of the outstanding shares of our common stock, (b) each of our
directors and nominees for director, (c) each of our named executive officers,
and (d) all of our officers and directors as a group:

Amount and Nature
of Beneficial Percent
Name and Address of Ownership of
Beneficial Owner See Notes (1)(2) Class
--------------------------------------------------------------------------------

Kenneth S. Shifrin....................................643,141 24.3%
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Heartland Advisors, Inc. (5) .........................247,100 9.9%
790 North Milwaukee St.
Milwaukee, Wisconsin 53202

First Wilshire Securities Management, Inc. (4) .......182,438 7.3%
600 South Lake Street, Suite 100
Pasadena, CA 91106-3955

Dimensional Fund Advisors Inc. (3)....................138,300 5.6%
1299 Ocean Ave., 11th Floor
Santa Monica, California 90401

Daniel Zeff (6) .................................... 124,750 5.0%
C/o Zeff Holding Company, LLC
50 California Street, Suite 1500
San Francisco, CA 94111

W. H. Hayes...........................................107,813 4.3%
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

William A. Searles.................................... 98,000 3.8%
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Robert L. Myer........................................ 73,000 2.8%
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Maury L. Magids........................................22,000 *
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Jackie Majors...........................................4,000 *
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Cheryl Williams.........................................1,063 *
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

All officers and directors as
a group (9 persons) (7)............................1,006,734 34.6%

* Represents less than 1% of the outstanding shares of common stock at April 21,
2004.

(1) Except as otherwise indicated, and subject to community property laws
where applicable, each individual has sole voting and investment power
with respect to all shares owned by such individual.

(2) The number of shares of our common stock beneficially owned by our
officers and directors includes the following number of shares subject
to options that are presently exercisable or exercisable within 60 days
after April 21, 2004: Mr. Shifrin, 147,000; Mr. Hayes, 29,000; Mr.
Magids, 22,000; Mr. Myer, 73,000; Mr. Searles, 88,000. The number of
shares beneficially owned by all of our directors and officers as a
group, including the above-named directors, includes 404,000 shares
subject to options that are presently exercisable or exercisable within
60 days after April 21, 2004.

(3) Based on the Amendment to Schedule 13G filed by Dimensional Fund
Advisors Inc., or Dimensional, with the SEC on February 6, 2004,
Dimensional may be deemed to have beneficial ownership of 138,300
shares of our common stock as of December 31, 2003, all of which shares
are held in portfolios of DFA Investment Dimensions Group Inc., a
registered open-end investment company, or in the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.

(4) Based on Schedule 13G filed by First Wilshire Securities Management,
Inc. on December 22, 2003, they beneficially own 182,438 shares of our
common stock as of December 31, 2003.

(5) Based on Amendment No. 7 to Schedule 13G filed by Heartland Advisors
and William J. Nasgovitz with the SEC on February 12, 2004, Heartland
Advisors has shared voting power over 222,700 shares of our common
stock and shared investment power over 247,100 shares of our common
stock.

(6) Based on Amendment No. 1 to Schedule 13G filed by Daniel Zeff on
January 22, 2004, Mr. Zeff, in his capacity as sole manager and member
of Zeff Holding Company, LLC, beneficially owns 124,750 shares of our
common stock as of December 31, 2003.

(7) Includes the president and chairman of the board, if any, of each of
our consolidated subsidiaries.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

UNCOMMON CARE

On January 1, 1998 we invested in the preferred stock of Uncommon Care,
Inc., a developer and operator of specialized care facilities for individuals
with Alzheimer's disease. Certain of our officers, directors and employees also
invested in the common stock of Uncommon Care, paying the same price per share
for their investment as we did. The initial ownership of Mr. Hayes, Mr. Myer,
Mr. Searles and Mr. Shifrin was 2.3% in the aggregate.

At the same time, these officers, directors and employees also
participated in a $2.4 million secured line of credit to Uncommon Care, with
each individual participant funding their pro rata portion of the line of
credit. We subsequently extended two unsecured lines of credit totaling an
additional $2.45 million to Uncommon Care. Beginning July 1, 2001, we agreed to
take payments on the lines of credit in-kind, receiving Uncommon Care common
stock in place of cash. The officers, directors and employees who participated
in the line of credit did not participate in the in-kind program. Uncommon Care
defaulted on all of these loans in 2002. At March 31, 2003, the preferred shares
of Uncommon Care we held, assuming conversions, plus our common shares of
Uncommon Care earned in-kind, amounted to approximately 42% of the total voting
power of Uncommon Care. In November 2004 we sold all of our stock in Uncommon
Care for a nominal amount and wrote off the loans.

ASSET MANAGEMENT

In May 1998, we formed APS Asset Management, Inc., or Asset Management,
of which we initially owned 95%. Asset Management was organized to manage fixed
income and equity assets for institutional and individual clients on a fee
basis. Certain of our officers, directors and employees also invested in Asset
Management, paying the same price per share as we did. Their investments are as
follows:

Name Title Initial Ownership %
---- ----- -----------------
George S. Conwill President of Investment
Services 1%

William A. Searles Director and Chairman of
Investment Services 1%

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, or
the Exchange Act, requires our directors and officers, and persons who own more
than 10% of a registered class of our equity securities, to file initial reports
of ownership and reports of changes in ownership with the Securities and
Exchange Commission, or the SEC, and the NASDAQ Smallcap Market. Such persons
are required by SEC regulation to furnish us with copies of all Section 16(a)
forms they file.

Based solely on review of the copies of such forms received by us with
respect to 2003, or written representations from certain reporting persons, we
believe that all filing requirements applicable to our directors and officers
and persons who own more than 10% of a registered class of our equity securities
have been complied with except for Mr. Myer who reported on Form 5 two
transactions that were not timely filed on Form 4.

SHAREHOLDER PROPOSALS

Any of our shareholders meeting certain minimum stock ownership and
holding period requirements may present a proposal to be included in our proxy
statement for action at the annual meeting of shareholders to be held in 2005
pursuant to Rule 14a-8 of the Exchange Act. Such shareholder must deliver such
proposal to our principal executive offices no later than January 5, 2005,
unless we notify the shareholders otherwise. Only those proposals that are
appropriate for shareholder action and otherwise meet the requirements of Rule
14a-8 of the Exchange Act may be included in our proxy statement.

A shareholder who otherwise intends to present business, other than for
the nomination of a person for election to our board of directors, at our 2005
annual meeting of shareholders must comply with the requirements set forth in
our bylaws, which require, among other things, that to bring business before our
2005 annual meeting, a shareholder must give written notice that complies with
our bylaws to our Secretary at our principal executive offices. A shareholder's
notice shall be timely if received by our Secretary no later than 30 days
before, and no earlier than 50 days before, the 2005 annual meeting, provided,
however, if we give less than 40 days notice of the date of the 2005 annual
meeting, a shareholder's notice shall be timely if received by our Secretary not
later than the close of business on the 7th day following the day on which we
mail our proxy statement for the 2005 annual meeting.

A shareholder who intends to nominate a person for election to our
board of directors at the 2005 annual meeting must give written notice that
complies with our bylaws to our Secretary at our principal executive offices no
later than 90 days before the date of our 2005 annual meeting.

As a result, a notice of a shareholder proposal for the 2005 annual
meeting, submitted other than pursuant to Rule 14a-8, will be untimely if not
received by us within the time deadlines required by our bylaws as described
above. As to any such proposals, the proxies named in management's proxy for
that meeting will be entitled to exercise their discretionary authority on that
proposal unless we receive notice of the matter to be proposed within the time
deadlines required by our bylaws as described above. Even if proper notice is
received on a timely basis, the proxies named in management's proxy for that
meeting may nevertheless exercise their discretionary authority with respect to
such matter by advising shareholders of such proposal and how they intend to
exercise their discretion to vote on such matter to the extent permitted under
Rule 14a-4(c)(2) of the Exchange Act.

OTHER MATTERS

Our board of directors does not intend to bring any other matters before the
meeting and does not know of any matters which will be brought before the
meeting by others. However, if any other matters properly come before the
meeting, the persons named in the accompanying proxy will vote the proxies in
accordance with their judgment on such matters.

By Order of our Board of Directors

W. H. HAYES
Secretary

APPENDIX A
[GRAPHIC OMITTED]
AUDIT COMMITTEE CHARTER

GENERAL

The Audit Committee of the Board of Directors (the "Committee") assists
the Board of Directors in fulfilling its responsibility for oversight of the
quality and integrity of the accounting, auditing and financial reporting
practices of American Physicians Service Group, Inc. (the "Company"). More
specifically, the Committee provides assistance to the Board of Directors in
overseeing:

o the quality and integrity of the financial statements of the Company,

o the Company's compliance with legal and regulatory requirements,

o the independent auditor's qualifications and independence, and

o the performance of the Company's internal audit function and
independent auditors.

The Committee is expected to maintain free and open communication with
the independent auditors, any internal auditors and the management of the
Company and periodically meet separately with them. The independent auditors for
the Company shall report directly to the Committee, and the Committee has the
direct authority and responsibility for the appointment, compensation, oversight
and, where appropriate, replacement of the independent auditors. The Committee
also has the authority and will have the funding to engage independent counsel
and other outside advisers as it determines is necessary or advisable to
discharge its responsibilities under this Charter.

MEMBERSHIP

The Committee shall consist of at least three directors and shall be
composed entirely of directors who are "independent" as defined in the rules of
the National Association of Securities Dealers, Inc. (the "NASD"). Each member
will also meet the audit committee independence requirements of the listing
standards of the NASD and applicable law. All members of the Committee must be
able to read and understand fundamental financial statements (including a
balance sheet, income statement, and cash flow statement), with at least one
member who is a "financial expert" under the NASD audit committee composition
rules and as such term is defined by Securities and Exchange Commission rules.

The Board of Directors shall appoint one member of the Committee as
chairperson. He or she shall be responsible for leadership of the Committee,
including preparing the agenda, presiding over the meetings, making Committee
assignments and reporting to the Board of Directors.

MEETINGS

The Committee shall meet at least four times per year or more
frequently as it shall determine is necessary to carry out its duties and
responsibilities. The Committee shall keep minutes of each meeting and make such
minutes available to the Board of Directors for its review.

The Committee will meet at the call of the chairperson or at the
request of a majority of the members. The Committee may meet by telephone
conference call or any other means permitted by law and the Company's bylaws. A
majority of the members of the Committee shall constitute a quorum. The
Committee shall act on the affirmative vote of a majority of members present at
a meeting at which a quorum is present. The Committee may act by unanimous
written consent of all members.

RESPONSIBILITIES

To fulfill its responsibilities, the Committee shall:

Engagement of Independent Auditors and Appointment of Internal Auditor

o Have a clear understanding with the independent auditors that they
are ultimately accountable, and shall report directly, to the
Committee.

o Select annually the independent auditors to audit the financial
statements of the Company (subject, if applicable, to stockholder
ratification). In so doing, the Committee will obtain from the
independent auditors a formal written statement delineating all
relationships between the independent auditors and the Company,
including all non-audit services and fees, discuss with the
auditors any disclosed relationships or services that may impact
the auditors' objectivity and independence, and take any
appropriate action in response to the auditors' statement to
ensure the independence of the independent auditors. The Committee
shall also review and approve fees paid to the independent
auditors and review and approve dismissal of the independent
auditors.

o At least annually, obtain and review a report of the independent
auditors' firm describing (1) the firm's internal quality control
procedures, (2) any material issues raised by the most recent
internal quality-control review, or peer review, of the firm, or
by any inquiry or investigation by governmental or professional
authorities, within the last five years with respect to one or
more independent audits carried out by the firm, and any steps
taken to address any such issues, and (3) with a view towards
assessing the independent auditor's independence, all
relationships between the independent auditors and the Company.

o Have sole authority to approve (1) all audit and non-audit
services (other than those non-audit services prohibited by law)
to be provided by the independent auditors and (2) all fees and
other terms of engagement of the independent auditors in providing
such services. Before the independent auditors are engaged to
perform any such non-audit services, the Committee must review and
approve such services. The chairperson of the Committee may
represent the entire Committee for purposes of this review and
approval so long as any such approval by the chairperson is
disclosed to the Committee no later than the Committee's next
scheduled meeting.

o Review and approve the appointment, reassignment or dismissal of
the director of internal audit. If any.

o If an outside firm is retained to provide internal audit services,
review and concur with management's appointment, termination, or
replacement of the audit firm providing those services.

Review of Internal Audits, Annual External Audit and Quarterly Reviews

o Review with the independent auditors the annual audit scope and
plan.

o Review with management and a representative of internal audit the
internal audit department's budget and staffing, results of
internal audit department findings and proposed audit plans.

o Review the following items with management and the independent
auditors upon the completion of the annual audit and before
issuance of the financial statements and the filing of the Form
10-K:

a. The Company's annual financial statements and related
footnotes and the disclosures under Management's Discussion
and Analysis of Financial Condition and Results of
Operations.

b. The results of the independent auditors' audit of the
financial statements and the report thereon.

c. The qualitative judgments about the appropriateness and
acceptability of accounting principles, financial
disclosures and underlying estimates, the clarity of the
financial disclosure practices used or proposed to be used,
and other significant decisions made in preparing the
financial statements.

d. Any other matters about the audit procedures or findings
that SAS No. 61, as amended, requires the independent
auditors to discuss with the Committee.

e. The certificates of the Chief Executive Officer and Chief
Financial Officer required pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as amended.

Based on the review and other procedures performed as set forth in
this Charter, the Committee shall make its recommendation to the
Board of Directors as to the inclusion of the Company's audited
financial statements in the Company's Annual Report on Form 10-K.

o Review the following items with management and the
independent auditors beforethe filing of a Form 10-Q:

a. The Company's quarterly financial statements and related
footnotes and the disclosures under Management's Discussion
and Analysis of Financial Condition and Results of
Operations.

b. The results of the independent auditors' review of the
financial statements.

d. Any other matters about the review procedures or findings
that SAS No. 71, as amended, requires the independent
auditors to discuss with the Committee.

e. The certificates of the Chief Executive Officer and Chief
Financial Officer required pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as amended.

o Review with management and the independent auditors the financial
statements, related notes and other financial disclosure included
in other Company filings with the Securities and Exchange
Commission containing the Company's financial statements before
such filings are made.

o Review with management and the independent auditors any
significant changes, either proposed or adopted, in accounting
principles and their impact on the financial statements and in
financial statement presentations.

o Require the independent auditors to timely (and no less than
quarterly) report to the Committee (1) all critical accounting
policies and practices used (or to be used), (2) all alternate
treatments of financial information within generally accepted
accounting principles that have been discussed with management,
ramifications of the use of these alternative disclosures and
treatments, and the treatment preferred by the independent
auditors and (3) the content of other material written
communications between the independent auditors and management,
including but not limited to management letters and schedules of
audit differences (whether or not recorded by the Company).

o Review of effect of regulatory and accounting initiatives, as well
as off-balance sheet structures, on the Company's financial
statements.

o Review separately with each of management, the independent
auditors and the director of internal audit any significant
problems or difficulties encountered while conducting the audit
and the quarterly reviews, including any restrictions on the scope
of work or access to required information and any communications
between the audit team and the audit firm's national office with
respect to auditing or accounting issues presented by the
engagement, and management's response.

o Review with management, the independent auditors and the director
of internal audit:

a. The Company's internal accounting controls, and any special
audit or review steps adopted in light of any material
control deficiencies.

b. Any significant findings and recommendations made by the
independent auditors or internal audit, together with
management's responses thereto.

c. Management's assessment of internal controls and related
internal control report.

o Review with management earnings press releases, as well as
financial information and earnings guidance provided to analysts
and rating agencies. The Committee's responsibility to review
press releases as well as financial information and earnings
guidance may be done generally (i.e., discussion of the types of
information to be disclosed and the type of presentation to be
made). The Committee need not discuss in advance each earnings
release or each instance in which the Company may provide earnings
guidance.

Other

o Regularly report Committee activities to the full Board of
Directors with such recommendations as the Committee may deem
appropriate.

o Inquire of management, the director of internal audit, and the
independent auditors about significant risks or exposures and
assess the steps management has taken to minimize such risks to
the Company, including legal and ethical compliance programs.

o Review and approve all (1) Company related party transactions (as
"related party transactions" is defined by NASD rules or
interpreted by the NASD) and (2) waivers for executive officers
and directors of the Company's code of conduct.

o Review periodically with management and the General Counsel the
status of legal and regulatory matters that may have a material
impact on the Company's financial statements and compliance
policies.

o Receive any report by legal counsel regarding any evidence of a
material violation of securities laws, breach of fiduciary duty or
similar violation by the Company or its agents.

o Establish and maintain appropriate procedures for (1) the receipt,
retention and treatment of complaints regarding accounting,
internal accounting controls or auditing matters and (2) the
confidential, anonymous submission by employees of concerns
regarding accounting or auditing matters.

o Establish hiring policies for current and former employees of the
independent auditors.

o Prepare the report, for inclusion in the Company's annual proxy
statement, required by the Securities and Exchange Commission
concerning certain matters relating to the Committee's activities.

o Perform an annual performance evaluation of the Committee and
review and reassess the adequacy of this Charter annually. If any
revisions are deemed necessary or appropriate, submit the same to
the Board for its consideration and approval.

While the Committee has the duties and responsibilities set forth in
this Charter, the Committee's role is one of oversight, whereas the Company's
management is responsible for preparing the Company's financial statements and
the independent auditors are responsible for auditing those financial
statements. The Committee is not providing any expert or special assurance as to
the Company's financial statements or any professional certification as to the
independent auditors' work. Similarly, it is not the responsibility of the
Committee to ensure that the Company complies with all laws and regulations.