Edgar Filing: AMERICAN PHYSICIANS SERVICE GROUP INC

[LOGO OMITTED}
American Physicians Service Group, Inc.

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

NOTICE OF 2005 ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 14, 2005

To Our Shareholders:

You are cordially invited to attend our 2005 Annual Meeting of Shareholders
to be held at our offices, located at 1301 Capitol of Texas Hwy, Suite C-300,
Austin, Texas 78746, on Tuesday, June 14, 2005 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 approve the 2005 Incentive and Non-qualified Stock Option Plan;

(d) To transact such 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, 2005 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 6, 2005

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

PROXY STATEMENT
for
2005 ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 14, 2005

Our board of directors hereby solicits your proxy for use at our 2005
Annual Meeting of Shareholders to be held at our offices, located at 1301
Capitol of Texas Hwy, Suite C-300, Austin, Texas 78746, on Tuesday, June 14,
2005 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. This proxy statement was first
mailed to shareholders on or about May 6, 2005.

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, 2004, 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, 2005 are
entitled to notice of, and to vote at, the meeting and any adjournment(s)
thereof. At April 21, 2005, we had outstanding and entitled to vote 2,598,748
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, 2005.
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.

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 below will be unwilling or unable to
serve.

NOMINEES
Director of
Name Age Company Since
---------- ---- ------------
Lew N. Little, Jr. 48 -
Jackie Majors 71 2003
William A. Searles 62 1989
Kenneth S. Shifrin 56 1987
Cheryl Williams 53 2003

Mr. Little has been Chief Executive Officer of Harden Healthcare, LLC., an
operator and manager of senior care facilities, since December 2001. Mr. Little
was President of Capstar Partners, LLC., a private investment company, from
February 2000 until joining Harden Healthcare. Prior to his association with
Capstar, Mr. Little had spent 18 years in the banking industry, most recently as
President of Bank of America in Austin, Texas.

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. 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 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. He currently serves as a director of HealthTronics, Inc., a urology
services and equipment manufacturer which is quoted on the Nasdaq National
Market under the symbol "HTRN". Prime was merged into HealthTronics in November
2004. Mr. Searles served as a director of Prime from 1989 until the time of the
merger.

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. Mr.
Shifrin currently serves as Vice Chairman of HealthTronics, and served as the
Chairman of the Board of Prime from 1989 until its merger into HealthTronics. He
has also served as 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. The chairpersons of the Audit Committee and of the
Compensation Committee each receive an annual stipend of $5,000 for serving in
those capacities. 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 2004, Mr.
Majors, Mr. Myer, Mr. Searles and Ms. Williams were each granted options for
5,000 shares of our common stock. Mr. Shifrin received options for 10,000 shares
of our common stock, as reported in the "Options Granted in 2004" 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 are
fully vested at the date of grant. Directors are also eligible to receive grants
of our common stock under the American Physicians Service Group, Inc. Affiliated
Group Deferred Compensation Plan (the "Deferred Compensation Plan"), subject to
shareholder approval of such plan. For further discussion of this plan, see
"Proposal to Approve the American Physicians Service Group, Inc. Affiliated
Group Deferred Compensation Plan." In 2004, Mr. Shifrin was awarded 2,000 shares
and Mr. Majors, Mr. Myer, Mr. Searles and Ms. Williams were each awarded 1,000
shares. The Deferred Compensation Plan is subject to approval by the
shareholders at this Annual Meeting, as described in Proposal 3 in this Proxy
Statement. Should Proposal 3 not be approved, these deferred stock grants will
be converted to cash awards at the fair market value of the shares on the date
of grant. Such cash awards would be $20,240 to Mr. Shifrin and $10,120 each to
Mr. Majors, Mr. Myer, Mr. Searles and Ms. Williams.

CERTAIN ADDITIONAL INFORMATION CONCERNING OUR BOARD OF DIRECTORS

No family relationships exist among our officers or directors. Except
as indicated above with respect to HealthTronics 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 eleven meetings during 2004, and each
director attended at least 75% of (a) the total number of our board meetings
held during 2004 (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 2004 (or, if shorter, during the period
he or she served as a director) except for Mr. Myer who attended 73% of all
board meetings and more than 75% of all committee meetings. 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

GENERAL

There are currently five members of our board of directors, including
three directors who the board has determined to be independent under Rule
4200(a)(15) of the Nasdaq listing standards. Our board of directors has
determined that Mr. Little will be independent under Rule 4200(a)(15) of the
Nasdaq listing standards.

Our board of directors has an audit committee, a compensation committee
and a nominating committee. Our board of directors has adopted a written charter
for each of these committees.

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 2004 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 2004,
consisted of three directors, Mr. Majors, Mr. Myer and 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(h) of Regulation S-K promulgated by the SEC. The audit committee held
six meetings during 2004. Members attended all meetings, except Mr. Myer who 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 2004 consisted of three
directors, 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 five
meetings during 2004, with all members attending. 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 2004 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 2004.

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. Mr. Little, who has
not previously stood for election, was recommended by the nominating committee.

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
Underlying LTIP Compen-
Name and Principal Position Fiscal Year Salary ($) Bonus ($) Options Payouts sation
(#) (#)(1) ($)(2)
----------------------------- ----------- ---------- ----------- --------- --------- ----------

Kenneth S. Shifrin, Chairman, 2004 300,000 458,000 10,000 10,308 6,360
President and Chief 2003 300,000 421,000 50,000 -- 6,152
Executive Officer 2002 293,751 200,000 (3) 75,000 -- 4,548

William H. Hayes, Senior Vice 2004 139,992 104,000 5,000 3,326 6,355
President-Finance, Secretary and 2003 130,412 101,000 40,000 -- 6,632
Chief Financial Officer 2002 126,246 50,000 35,000 -- 5,002

Maury L. Magids, Senior Vice 2004 224,167 353,526 25,000 10,923 240
President - Insurance 2003 204,996 263,585 25,000 -- 216
2002 180,000 228,529 15,000 -- 216

William A. Searles 2004 108,000 (4) 238,102 (5) 5,000 1,000 --
Chairman of the Board 2003 72,000 (4) 453,000 (5) 35,000 -- --
of Investment Services 2002 72,000 (4) 213,000 (3)(5) 50,000 -- --

(1) These shares were granted under the Deferred Compensation Plan, which is
being submitted for shareholder approval with this Proxy Statement. See
discussion under "Proposal to Approve the American Physicians Service
Group, Inc. Affiliated Group Deferred Compensation Plan". Should the
Deferred Compensation Plan not be approved, the deferred stock awards
would be converted to non-deferred cash awards as follows: Mr. Shifrin
$113,224, Mr. Hayes $25,233, Mr. Magids $120,235 and Mr. Searles $10,120.

(2) Consists of our matching contributions to our 401(k) plan and premiums
paid for group life insurance in excess of $50,000 coverage with respect
to such officer.

(3) 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.

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

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

OPTIONS GRANTS IN LAST FISCAL YEAR

The following table provides information related to options granted to
the named executive officers during 2004. We do not have any outstanding stock
appreciation rights.

Individual Grants
-----------------------------------------------------------------------------------------------------------------------------
Number of Potential realizable
securities Percent of value at assumed
underlying total options annual rates of stock
options granted to Exercise price appreciation for
granted employees in Price Expiration option term:
Name (#)(1) fiscal year ($/Sh) Date 5%($)(2) 10%($)
--------------------- ------------ ------------- ---------- ------------ ---------- ----------

Kenneth S. Shifrin 10,000 8% $10.12 12/06/09 27,960 61,783

William H. Hayes 5,000 4% $10.12 12/06/09 13,980 30,892

Maury L. Magids 20,000 16% $9.60 1/14/09 53,046 117,218
5,000 4% $10.12 12/06/09 13,980 30,892

William A. Searles 5,000 --(3) $10.12 12/06/09 13,980 30,892

(1) These options were granted at the closing price on the date of
grant. The grant of 20,000 options to Mr. Magids vests in three
annual installments beginning one year after the date of grant.
All other options were vested at the date of grant.

(2) The potential realizable value of the options granted in 2004 was
calculated by multiplying those options by the excess of (a) the
assumed market value of our underlying common stock five years
from grant date of the options if the market value of our common
stock were to increase 5% or 10%, as applicable, in each year of
the option's 5-year term over (b) the exercise price noted above.
This calculation does not take into account any taxes or other
expenses which might be owed. The 5% and 10% appreciation rates
are set forth in the Securities and Exchange Commission rules and
we make no representation that our common stock will appreciate
at these assumed rates or at all.

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

Aggregated Option Exercises During 2004 and Option Values at December 31, 2004

The following table provides information related to options exercised
by the named executive officers during 2004 and the number and value of
unexercised options held at December 31, 2004. We do not have any outstanding
stock appreciation rights.

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

Kenneth S. Shifrin 35,000 $215,775 134,000 51,000 867,005 266,320

William H. Hayes 7,000 $78,488 40,000 40,000 202,320 185,180

Maury L. Magids -- -- 31,000 42,000 176,520 157,800

William A. Searles 45,000 $310,975 55,000 35,000 296,110 187,090

(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, 2004 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, 2004, which was $10.39, less the
exercise price of such option.

LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR

The following table provides information related to common stock granted
under the Deferred Compensation Plan during 2004.

Long-Term Incentive Plans - Awards in Last Fiscal Year
Estimated Future Payouts under
Non-Stock Priced-Based Plans
-----------------------------------------
Performance
Number of or Other
Shares, Units or Period Until
Other Rights (#) Maturation Threshold Target Maximum
Name or Payout (#) (#) (#)
------------------------- ------------- --------------- ----------- --------- ---------

Kenneth S. Shifrin 6,311 (1) (2) 6,331 6,331 6,331
2,000 (1) (3) 2,000 2,000 2,000
1,977 (1) 1,977 1,977 1,977

William H. Hayes 931 (1) (2) 931 931 931
2,000 (1) 2,000 2,000 2,000
395 (1) 395 395 395

Maury L. Magids 1,012 (1) (2) 1,012 1,012 1,012
2,000 (1) 2,000 2,000 2,000
7,911 (1) 7,911 7,911 7,911

William A. Searles 1,000 (1) (3) 1,000 1,000 1,000

(1) Represents awards under the Deferred Compensation Plan, which is being
submitted for shareholder approval in this Proxy Statement. Shares are
earned in the year of award. Payout of the shares is subject to a
schedule wherein shares become eligible for payout over five years, in
equal annual amounts, following the grant (the "eligible shares"). Upon
reaching age 60, participants are then entitled to receive the eligible
shares and the shares that become eligible each year thereafter. In the
event that a participant is terminated or resigns, and signs a
non-competition agreement, all of the shares granted become eligible
and will be paid out in four equal annual installments beginning with
the date of the non-competition agreement. In the event that a
terminating participant does not sign a non-competition agreement or if
a participant is terminated for cause, the participant will receive
only the eligible shares and shares not yet eligible will be forfeited
and allocated pro rata to the remaining participants. All shares
granted are to be paid out in the event of the death or disability of
the participant. Should the Deferred Compensation Plan not be approved
by shareholders the deferred stock awards would be converted to
non-deferred cash awards as follows: Mr. Shifrin $113,224, Mr. Hayes
$25,233, Mr. Magids $120,235, and Mr. Searles $10,120.

(2) Awarded in 2004 for 2003 performance under the newly-developed Deferred
Compensation Plan.

(3) Related to service as a director.

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. Schifrin's
agreement provides for a monthly salary, currently $29,166, and terminates March
1, 2010. Mr. Hayes' agreement provides for a monthly salary, currently $12,500,
and terminates March 1, 2008. Mr. Searles has a similar Consulting Agreement,
which provides for a monthly fee of $9,000 and terminates March 1, 2008. Each of
the agreements entitles the employee/director to receive lump-sum payments in
the event the agreements are terminated by us without cause or by the
employee/director 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 and Mr. Searles, 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/consulting 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/consulting 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,
2004, concerning shares of common stock authorized for issuance under all of our
equity compensation plans.

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

Equity compensation plans
approved by security 721,000 $6.04 149,000 (1)
holders...

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

Total... 721,000 $6.04 149,000 (1)

(1) We have made no option grants from these shares as of April 21, 2005 and we
will cancel the 149,000 shares upon shareholder approval of the 2005 Incentive
and Non-Qualified Stock Option Plan. They will otherwise expire on June 15,
2005.

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 2004, the Compensation Committee was 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 has 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.

On an annual basis, the Compensation Committee approves performance-based
compensation for the named executive officers and other officers. The
Compensation Committee typically makes these compensation decisions in the first
quarter of a particular fiscal year for the prior fiscal year's performance and
sets annual targeted performance goals for the current year. The Compensation
Committee sets annual targeted goals for one or more of the following measures
of the Company's performance: earnings per share growth, stock price growth,
revenue growth, operating income growth, and cash flow growth. In determining
the amount of performance-based compensation for a particular year, the
Compensation Committee will evaluate to what extent the annual targeted goals
for such year were achieved. In addition, the Compensation Committee will
consider the performance of the officer's unit, division or function for such
year and other performance factors the Compensation Committee deems relevant.
The amount of the compensation will be determined by the Compensation Committee
with an objective portion based on attainment of set operating income goals and
a discretionary portion based on performance across the wider range of goals. In
addition, the allocation of such compensation between cash, stock options and
deferred stock compensation awards will be determined by the Committee.

For 2004, our executive compensation program, including that of the Chief
Executive Officer, consisted of base salary, a cash bonus, 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 2004 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 2004 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 16 of the print version of the proxy.

NASDAQ Total Peer Index APS Group
---------- ----------- -----------
12/31/99 100.00 100.00 100.00
12/29/00 60.31 113.88 40.68
12/31/01 47.84 123.98 100.34
12/31/02 33.07 126.71 115.23
12/31/03 49.45 166.14 286.64
12/31/04 53.81 196.53 281.76

AUDIT COMMITTEE REPORT

The Audit Committee (the "Committee") of the Board of Directors (the
"Board") was comprised of three directors in 2004 and operates under a written
charter adopted by the Board. 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 2004 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-K for the year ended December 31, 2004,
for filing with the Securities and Exchange Commission. The Audit Committee
considered the independent auditors' provision of non-audit services in 2004 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, independent registered public accounting firm, to
audit our books and accounts for the year ended December 31, 2004. The audit
committee has not met to evaluate the performance of its independent auditors in
2004 and, consequently, has not yet selected our independent auditors for 2005.
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 2004 and 2003 were comprised of the
following:

2004 2003
---- ----

Audit Fees ......................... $135,000 $ 117,000

Audit-related Fees...................... $ 10,000 $ 8,000

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

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

Total................................... $ 145,000 $ 125,000
======== ========

AUDIT FEES. Audit fees relate to services rendered in connection with the audit
of the annual financial statements included in our Form 10-K and the quarterly
reviews of financial statements included in our Form 10-Q 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 2004 or 2003.

ALL OTHER FEES. There were no other fees in 2004 or 2003.

All fees paid in 2004 to our independent auditors were pre-approved by the Audit
Committee.

CERTAIN SHAREHOLDERS

The following table sets forth certain information as of April 21, 2005
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..........................................689,649 24.9%
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Heartland Advisors, Inc. (5) ...............................185,649 7.1%
790 North Milwaukee St.
Milwaukee, Wisconsin 53202

First Wilshire Securities Management, Inc. (4) .............230,563 8.9%
600 South Lake Street, Suite 100
Pasadena, CA 91106-3955

Dimensional Fund Advisors Inc. (3)..........................132,574 5.1%
1299 Ocean Ave., 11th Floor
Santa Monica, California 90401

Daniel Zeff (6) .......................................... 276,076 10.6%
C/o Zeff Holding Company, LLC
50 California Street, Suite 1500
San Francisco, CA 94111

W. H. Hayes.................................................137,066 5.2%
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

William A. Searles......................................... 122,000 4.6%
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Robert L. Myer.............................................. 86,400 3.3%
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Maury L. Magids..............................................44,000 1.7%
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Jackie Majors .............................................. 23,500 *
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

Cheryl Williams............................................. 13,063 *
1301 Capital of Texas Highway, Suite C-300
Austin, Texas 78746

All officers and directors as
a group (9 persons) (7)................................. 1,183,189 38.4%

* Represents less than 1% of the outstanding shares of common stock at April 21,
2005.

(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, 2005: Mr. Shifrin, 172,000; Mr. Hayes, 59,000; Mr.
Magids, 44,000; Mr. Majors, 19,500; Mr. Myer, 44,000; Mr. Searles,
82,000; Ms. Williams, 12,000. The number of shares beneficially owned
by all of our directors and officers as a group, including the
above-named directors, includes 484,500 shares subject to options that
are presently exercisable or exercisable within 60 days after April 21,
2005.

(3) Based on the Amendment to Schedule 13G filed by Dimensional Fund
Advisors Inc., or Dimensional, with the SEC on February 9, 2005,
Dimensional may be deemed to have beneficial ownership of 132,574
shares of our common stock as of December 31, 2004, all of which shares
are held in funds for which Dimensional serves as investment manager or
advisor. Dimensional possesses investment and/or voting power over the
securities of the Issuer described in this schedule that are owned by
the Funds, and may be deemed to be the beneficial owner of the shares
of the issuer held by the Funds. However, all securities reported in
this schedule are owned by the Funds. Dimensional disclaims beneficial
ownership of all such shares.

(4) Based on Schedule 13G filed by First Wilshire Securities Management,
Inc. on April 15, 2005, they beneficially own 230,563 shares of our
common stock as of December 31, 2004.

(5) Based on Amendment No. 8 to Schedule 13G filed by Heartland Advisors
and William J. Nasgovitz with the SEC on January 13, 2005, Heartland
Advisors has shared voting and investment power over 185,649 shares of
our common stock.

(6) Based on a Form 4 filed by Daniel Zeff on April 19, 2005, Mr. Zeff, in
his capacity as sole manager and member of Zeff Holding Company, LLC,
beneficially owns 276,076 shares of our common stock as of April 15,
2005.

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

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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:

Initial
Name Title Ownership %
---- ----- -----------

George S. Conwill President of Investment Services 1%

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

OTHER

During 2004, Mr. Searles also served as a director and Chairman of the
Board of Investment Services. For his additional director services, Mr. Searles
was paid monthly director fees of $9,000, plus a non-discretionary incentive
amount based on Investment Services achieving certain levels of return on
capital. His total non-discretionary incentive compensation earned for these
additional director duties was $238,102 in 2004.

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 2004, 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 and Mr. Searles who each failed to
timely file a Form 4 with respect to one transaction.

2. PROPOSAL TO APPROVE THE 2005 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN

Our Board of Directors has determined that is in our best interest to
continue our practice of making stock options available to those employees and
directors responsible for the continued growth of our business, though we expect
to significantly reduce the number of options granted in the future. Our Board
of Directors believes that providing such employees and directors with an
opportunity to acquire a proprietary interest in us creates an increased
interest in and greater concern for our growth, success and welfare.
Accordingly, our Board of Directors adopted the 2005 Incentive and Non-qualified
Stock Option Plan (the "Plan") on April 6, 2005, and directed that it be
submitted for shareholder consideration and approval.

THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE 2005 INCENTIVE AND
NON-QUALIFIED STOCK OPTION PLAN.

The following is a brief summary of the proposed Plan. The Plan is attached
as Appendix A to this Proxy Statement and reference is made to such Appendix for
a complete statement of the provisions of the Plan.

The Plan provides for the granting of options to purchase up to 350,000
shares of our common stock; provided that the maximum number of shares of our
common stock with respect to which options may be granted to any individual
during any calendar year is 150,000. If any option expires or terminates prior
to its exercise in full, the shares of our common stock allocable to the
unexercised portion of such option may again be available for options under the
Plan. The Plan will be administered by an administrative body (the "Committee")
designated by our Board of Directors. Our board may designate itself as the
Committee or appoint two or more "nonemployee" and "outside" directors, within
the meaning of the federal securities laws and the Code (as defined below), to
serve as the Committee. Participants under the Plan will be selected by the
Committee upon the recommendation of our management. All employees will be
eligible for selection to participate in the Plan. The Committee will determine
the number of shares underlying options granted to any individual under the
Plan, and options will vest and become exercisable in the manner and within the
periods specified by the Committee in its discretion. The number and kind of
shares subject to the Plan can be appropriately adjusted in the event of any
change in the capital structure of the Company (such as a stock split, reverse
stock split, stock dividend, combination or reclassification of our common
stock).

The Plan enables us to grant either "incentive stock options", as defined
in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
options that are not intended to be "incentive stock options". Options may be
granted only to our employees, directors and consultants and advisors. No
options may be granted under the Plan later than April 6, 2015. Any options
granted under the Plan must have an exercise period of no more than ten years.
The exercise price per share for each option may not be less than the fair
market value on the date of grant, as "fair market value" is defined in the
Plan. The Plan provides that payment of the exercise price may be made in cash,
by delivery of already owned shares of our common stock, valued at its fair
market value on the exercise date, or through such cashless exercise procedures
that are deemed acceptable by the Committee. Proceeds received from the optioned
shares will be used for general corporate purposes. To the extent that the
aggregate fair market value (determined as of the time such option is granted)

of the common stock for which any employee may have incentive stock options vest
in any calendar year exceeds $100,000, such excess incentive stock options shall
be treated as non-qualified options.

No options shall be assignable or transferable by the optionee except by
will or by the laws of descent and distribution or by Committee approved
transfer to a "family member" as defined in the Plan, and each option is
exercisable during the lifetime of an optionee only by the optionee or the
optionee's guardian or legal representative.

Upon a "Change in Control" (as defined in the Plan), dissolution or
liquidation, corporate separation or division, or sale of substantially all
assets, the Committee may provide for (1) the continuation of the then
outstanding options (if we are the surviving corporation), (2) the assumption of
the Plan and the then outstanding options by the surviving entity or its parent,
(3) the substitution by the surviving entity or its parent of options with
substantially similar terms as the then outstanding options, (4) the
cancellation of outstanding options for a cash payment equal to the in-the-money
value thereof or (5) the cancellation of outstanding options without payment of
consideration. If vested options would be cancelled without payment, the option
holder would have the right to exercise such options before such cancellation.
In connection with the alternatives described above, the Committee may in its
discretion accelerate unvested options.

The Board of Directors, subject to certain exceptions, may suspend,
terminate or amend the Plan at its discretion.

No determination has been made with respect to future recipients of options
under the Plan and it is not possible to specify the names or positions of the
persons to whom options may be granted, or the number of shares, within the
limitations of the Plan, to be covered by such options.

Under currently applicable provisions of the Code, as amended, an optionee
will not be deemed to receive any income for federal income tax purposes upon
the grant of any option under the Plan, nor will we be entitled to a tax
deduction at that time. Upon the exercise of a non-incentive option, the
optionee will be deemed to have received ordinary income in an amount equal to
the difference between the exercise price and the market price of the shares on
the exercise date. We will be allowed an income tax deduction equal to the
excess of market value of the shares on the date of exercise over the cost of
such shares to the optionee. No income will be recognized by the optionee at the
time of exercise of an incentive stock option. If the stock is held at least one
year following the exercise date and at least two years from the date of grant
of the option, the optionee will realize a capital gain or loss upon sale,
measured as the difference between the exercise price and the sale price. If
both of these holding period requirements are not satisfied, ordinary income tax
treatment will apply to the amount of gain at sale or exercise, whichever is
less. If the actual gain exceeds the amount of ordinary income, the excess will
be considered short-term or long-term capital gain depending on how long the
shares are actually held. No income tax deduction will allowed by us with
respect to shares purchased by an optionee upon the exercise of an incentive
stock option, provided such shares are held for the required periods as
described above.

Under the Code, an option will generally be disqualified from receiving
incentive stock option treatment if it is exercised more than three months
following termination of employment. However, if the optionee is disabled, such
statutory treatment is available for one year following termination. If the

optionee dies while employed by us or within three months thereafter, the
statutory time limit is waived altogether. In no event do these statutory
provisions extend the rights to exercise an option beyond those provided by its
terms.

3. PROPOSAL TO APPROVE THE AMERICAN PHYSICIANS SERVICE GROUP, INC.
AFFILIATED GROUP DEFERRED COMPENSATION PLAN

Our Board of Directors believes that having key employees and directors
participate in the ownership of us aligns them with our shareholders, enhances
their motivation and results in longer retention. With the objective of reducing
dilution of our shares and in light of the changes in accounting for stock
options that will be required beginning after December 31, 2005, we expect to
substantially reduce the number of stock options that will be granted in the
future. Consequently, our Board of Directors sought alternatives that would
allow key employees and directors to continue to participate in the ownership of
us while minimizing dilution and expense. The result was the American Physicians
Service Group, Inc. Affiliated Group Deferred Compensation Plan (the "Deferred
Compensation Plan"), which the Board adopted on December 7, 2004 and directed to
be submitted for shareholder consideration and approval. Shares granted under
the Plan are in lieu of cash awards or stock option grants under current
incentive plans and do not represent additional incentives.

THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE AMERICAN PHYSICIANS
SERVICE GROUP, INC. AFFILIATED GROUP DEFERRED COMPENSATION PLAN.

The following is a brief summary of the proposed Deferred Compensation
Plan. The Deferred Compensation Plan is attached as Appendix B to this Proxy
Statement and reference is made to such Appendix for a complete statement of the
provisions of the Deferred Compensation Plan.

The Deferred Compensation Plan provides for the granting of up to 150,000
shares of our common stock to directors and key employees (the "Participants").
The Deferred Compensation Plan will be administered by the Compensation
Committee, comprised of three members, all of whom are "nonemployee directors",
within the meaning of federal securities laws. The Committee will determine the
number of shares to be awarded. Distribution of the shares will be controlled by
the terms of the Deferred Compensation Plan.

The Deferred Compensation Plan is intended to be an unfunded, unsecured
promise to pay the Participant the shares, subject to the terms and conditions
of the Deferred Compensation Plan. At such time as shares are to be distributed
to Participants, our board will determine whether to fund the shares through
open market purchases or from authorized but unissued shares.

Shares are earned in the year of award. Payout of the shares is subject to
a schedule whereby shares become eligible for payout over five years, in equal
annual amounts, following the grant (the "eligible shares"). Upon reaching age
60, Participants are entitled to receive the eligible shares and the shares that
become eligible each year thereafter.

In the event that a Participant is terminated or resigns, and signs a
non-competition agreement, all of the shares granted become eligible and will be
paid out in four equal annual installments beginning with the date of the
non-competition agreement. In the event that a terminating participant does not
sign a non-competition agreement or if a participant is terminated for Cause (as
defined in the Deferred Compensation Plan), the participant will receive only
the eligible shares and shares not yet eligible will be forfeited and allocated
pro rata to the other participants.

All shares granted, whether or not eligible, are to be paid out in the
event of the death or disability of the participant.

Under currently applicable provisions of the Internal Revenue Code of 1986,
as amended, a participant will not be deemed to have received any income for
federal tax purposed upon the grant of deferred shares under the Deferred
Compensation Plan, nor will we be entitled to a tax deduction at that time. Upon
becoming entitled to receive the deferred shares the participant will be deemed
to have received ordinary income, taxable as compensation, in an amount equal to
the fair value of the shares on the date he or she is entitled to receive them.
We will be allowed an income tax deduction in a like amount at that time.

The Committee has made stock grants under the Deferred Compensation Plan to
the individuals and in the amounts set forth in the table titled "Executive
Compensation -- Long-Term Incentive Plans -- Awards in Last Fiscal Year" with
respect to our named executive officers and as described under "Election of
Directors -- Compensation of Directors" with respect to our directors. These
grants were made subject to shareholder approval of the Deferred Compensation
Plan. If our shareholders do not approve the Deferred Compensation Plan, then
such stock grants would be converted to non-deferred cash awards as follows: Mr.
Shifrin - $113,224; Mr. Hayes - $25,233; Mr. Magids - $120,235; Mr. Searles -
$10,120; Mr. Majors - $10,120; Mr. Myer - $10,120; and Ms. Williams - $10,120.

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 2006 pursuant to
Rule 14a-8 of the Exchange Act. Such shareholder must deliver such proposal to
our principal executive offices no later than January 6, 2006, 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 2006
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
2006 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 earlier then January 15,
2006 and no later than February 14, 2006, unless we notify our shareholders
otherwise.

A shareholder who intends to nominate a person for election to our board of
directors at the 2006 annual meeting must give written notice that complies with

our bylaws to our Secretary at our principal executive offices no earlier then
January 15, 2006 and no later than February 14, 2006, unless we notify our
shareholders otherwise.

As a result, a notice of a shareholder proposal for the 2006 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

/s/ W.H. Hayes
-------------------------
W. H. HAYES
Secretary