Document:

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                                                                  EXHIBIT 10.40a

                                   EXHIBIT A
                                   ---------

                               FORM OF DEBENTURE

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                                                            Debenture No. ______

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS.  IT MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER SUCH SECURITIES LAWS OR AN OPINION OF COUNSEL, SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.

                       ANCHOR PACIFIC UNDERWRITERS, INC.

            10% Convertible Senior Subordinated Debenture, Series E
                   (convertible into shares of common stock)

$_________                                                   Concord, California
                                                            ____________, ______

          ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to Ward North America
Holding, Inc. a California corporation, or such other person in whose name this
Debenture is registered on the Debenture Register (as that term is defined
below) (the "Holder"), the principal amount of _________ _______________ Dollars
($___________), with simple interest on the unpaid balance of such principal
amount at the rate of ten percent (10%) per annum (or the maximum rate permitted
by law, whichever is less) from the date of this Debenture.  Interest on the
outstanding principal balance shall be computed on the basis of a 360 day year
of twelve 30-day months and shall be paid to the Holder on  ___________, ____,
___________, ____ and ________, ____ (each, an "Interest Payment Date"). Each
Debenture delivered upon registration of transfer or in exchange for or in lieu
of this Debenture shall carry the rights to interest accrued and unpaid, and to
accrue, which were carried by this Debenture.  This Debenture shall be superior
to all other debentures of the Company, including without limitation those
Series A, B, C and D debentures in the aggregate principal amount of $554,000,
and shall constitute "Senior Debt" for purposes of such debentures.

          The full principal amount of this Debenture, plus interest, will be
due and payable on ____________, _____ (the "Maturity Date").  Payment of
interest and principal shall be made in lawful money of the United States of
America by wire transfer to an account designated by the Holder appearing on the
Debenture Register.

          This Debenture is a duly authorized Debenture of the Company, Series
E, limited to the aggregate principal amount of $__________.

     1.   Representations, Warranties and Covenants.
          -----------------------------------------

          1.1  Organization, Good Standing and Qualification.  The Company is a
               ---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed
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to be conducted. The Company is duly qualified to transact business and is in
good standing in each jurisdiction in which the failure to so qualify would have
a material adverse effect on its business or properties.

          1.2  Valid Issuance of Debentures and Shares.  The Debenture, when
               ---------------------------------------
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, and based
in part upon the representations of the Holder contained in the Subscription
Agreement pursuant to which this Debenture is being issued, will be issued in
compliance with all applicable federal and state securities laws. The shares of
the Company's Common Stock, $.02 par value per share, issuable upon conversion
of the Debentures (the "Shares") have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of this Debenture,
shall be duly and validly issued, fully paid and nonassessable.

          1.3  Compliance with Other Instruments. The Company is not in
               ---------------------------------
violation of or default under any provisions of its Certificate of Incorporation
or Bylaws as amended and in effect on and as of the date of this Debenture or of
any material provision of any instrument or contract to which it is a party or
by which it is bound or, to its knowledge, of any material provision of any
federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company. Neither the execution, delivery and
issuance of this Debenture, nor the issuance of the Shares upon conversion
thereof, will result in: (a) any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, a default
under any such provision, instrument or contract; or (b) an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company.

          1.4  SEC Filings. The Company's Annual Report on Form 10-K for the
               -----------
fiscal year ended December 31, 1998 filed with the Securities and Exchange
commission (the "SEC") on March 3, 1999, and the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, June 30, 1999 and September 30,
1999, including all exhibits to such filings (collectively, the "SEC Filings")
as of the respective dates of filing, were accurate and complete in all material
respects and complied in all material respects with the rules, regulations and
interpretations of the SEC.

          1.5  Full Disclosure. The Company has provided Holder with all the
               ---------------
information that Holder has requested for deciding whether to purchase the
Shares. Neither this Agreement nor the representations and warranties contained
herein, nor any other written statements or certificates made or delivered in
connection herewith, when read together, contains any untrue statement of a
material facts or omits to state a material fact necessary to make the
statements herein or therein not misleading.

     2.   Subordination.
          -------------

          2.1  Subordination.  The indebtedness evidenced by this Debenture is
               -------------
subordinate and junior in right of payment to all Senior Debt (as such term is
defined below) to the extent provided herein, and the Holder, by such Holder's
acceptance hereof, agrees to the subordination herein provided and shall be
bound by the provisions hereof. Senior Debt shall continue to be Senior Debt and
entitled to the benefits of these subordination provisions irrespective of any
amendment, modification or waiver of any term of the Senior Debt or extension or
renewal of the Senior Debt.

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          2.2  Senior Debt Defined.  As used herein, the term "Senior Debt"
               -------------------
shall mean the following whether now outstanding or subsequently incurred,
assumed or created: (a) all indebtedness (whether or not secured) of the Company
or its subsidiaries to banks, insurance companies or other financial
institutions regularly engaged in the business of lending money; (b) such other
indebtedness of the Company or its subsidiaries issued prior to the date of this
Debenture, to the extent that the instrument creating or evidencing such
indebtedness provides that it shall constitute Senior Debt; (c) any indebtedness
issued in exchange for such Senior Debt, or any indebtedness arising from the
satisfaction of such Senior Debt by a guarantor; and (d) any deferrals,
renewals, or extensions of any such Senior Debt. Senior Debt shall not include
any of the Company's debentures, whether Series A, B, C, D or otherwise.

          2.3  Default on Senior Debt.  If the Company shall default in the
               ----------------------
payment of any principal of or interest on any Senior Debt when the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by declaration of acceleration or otherwise, then, upon written notice of such
default to the Company by the holders of Senior Debt or any trustee therefor,
unless and until such default shall have been cured or waived or shall have
ceased to exist, no direct or indirect payment (in cash, property, securities,
by set-off or otherwise) shall be made or agreed to be made on account of the
principal of or interest on this Debenture, or in respect of any redemption,
repayment, retirement, purchase or other acquisition of this Debenture.

          2.4  Prior Payment of Senior Debt.
               ----------------------------

               (a)  In the event of: (i) any insolvency, bankruptcy,
receivership, liquidation, reorganization, readjustment, composition or other
similar proceeding relating to the Company; (ii) any proceeding for the
liquidation, dissolution or other winding up of the Company, voluntary or
involuntary, whether or not involving insolvency or bankruptcy proceedings;
(iii) any assignment by the Company for the benefit of creditors; or (iv) any
other marshalling of the assets of the Company, all Senior Debt (including any
interest thereon accruing after the commencement of any such proceedings) shall
first be paid in full before any payment or distribution, whether in cash,
securities or other property, shall be made to any Holder on account of the
principal or interest on this Debenture. Any payment or distribution, whether in
cash, securities or other property (other than securities of the Company or any
other corporation provided for by a plan of reorganization or readjustment the
payment of which is subordinate, at least to the extent provided in these
subordination provisions with respect to the indebtedness evidenced by this
Debenture, to the payment of all Senior Debt at the time outstanding and to any
securities issued in respect thereof under any such plan of reorganization or
readjustment), which would otherwise (but for these subordination provisions) be
payable or deliverable in respect of this Debenture shall be paid or delivered
directly to the holders of Senior Debt in accordance with the priorities then
existing among such holders until all Senior Debt (including any interest
thereon accruing after the commencement of any such proceedings) shall have been
paid in full. In the event of any such proceeding, after payment in full of all
sums owing with respect to Senior Debt, the Holder of this Debenture, together
with the holders of any obligations of the Company ranking on a parity with this
Debenture, shall be entitled to be paid from the remaining assets of the Company
the amounts at the time due and owing on account of unpaid principal of and
interest on this Debenture and such other obligations before any payment or
other distribution, whether in cash, property or otherwise, shall be made on
account of any capital stock or any obligations of the Company ranking junior to
this Debenture and such other obligations.

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               (b)  In the event that, notwithstanding the foregoing, any
payment or distribution of any character, whether in cash, securities or other
property (other than securities of the Company or any other corporation provided
for by a plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in these subordination provisions
with respect to the indebtedness evidenced by this Debenture, to the payment of
all Senior Debt at the time outstanding and to any securities issued in respect
thereof under any such plan of reorganization or readjustment), shall be
received by any Holder in contravention of any of the terms hereof, such payment
or distribution or security shall be received in trust for the benefit of, and
shall be paid over or delivered and transferred to, the holders of the Senior
Debt at the time outstanding in accordance with the priorities then existing
among such holders for application to the payment of all Senior Debt remaining
unpaid, to the extent necessary to pay all such Senior Debt in full. In the
event of the failure of any such Holder to endorse or assign any such payment,
distribution or security, each holder of Senior Debt is hereby irrevocably
authorized to endorse or assign the same.

          2.5  No Impairment of Rights. Nothing contained herein shall impair,
               -----------------------
as between the Company and the Holder, the obligation of the Company to pay such
Holder the principal of and interest on this Debenture or prevent such Holder
from exercising all rights, powers and remedies otherwise permitted by
applicable law or hereunder upon an Event of Default (as defined below)
hereunder, all subject to the rights of the holders of the Senior Debt to
receive cash, securities or other property otherwise payable or deliverable to
the Holder of this Debenture.

          2.6  Subrogation. Upon the payment in full of all Senior Debt, the
               -----------
Holders of the Debentures, together with all other subordinated debt of the
Company ranking on a parity therewith, shall be subrogated to all rights of any
holders of Senior Debt to receive any further payments or distributions
applicable to the Senior Debt until the indebtedness evidenced by the Debentures
shall have been paid in full, and such payments or distributions received by the
Holders thereof, by reason of such subrogation, of cash, securities or other
property which otherwise would be paid or distributed to the holders of Senior
Debt, shall, as between the Company and its creditors other than the holders of
Senior Debt, on the one hand, and such Holders on the other hand, be deemed to
be a payment by the Company on account of Senior Debt and not on account of the
Debentures.

          2.7  No Impairment of Security Interest. The provisions of this
               ----------------------------------
Debenture shall not impair any rights, remedies or powers of any secured
creditor of the Company in respect of any security interest. The securing of any
obligations of the Company otherwise ranking on a parity with the Debentures or
ranking junior to such Debentures shall not be deemed to prevent such
obligations from constituting, respectively, obligations ranking on a parity
with such Debentures or ranking junior to such Debentures.

          2.8  Amendment of Subordination Provisions. No modification or
               -------------------------------------
amendment of the subordination provisions contained in Section 2 hereof in a
manner adverse to the holders of Senior Debt may be made without the consent of
all holders of Senior Debt.

          2.9  Undertaking. By its acceptance of this Debenture, the Holder
               -----------
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Debt in order to
implement the foregoing provisions of Section 2 hereof.

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     3.   Restrictions on Issuance of Additional Debt. Except for amendments to
          -------------------------------------------
and refinancings of Senior Debt existing as of the date hereof, the Company
shall not create, assume or incur any additional indebtedness ranking on par
with, or senior to, this Debenture without the prior written consent of the
Holder with respect thereto.

     4.   Default.
          -------

          4.1  Event of Default. Each of the following events shall be an Event
               ----------------
of Default hereunder:

               (a)  Default in the payment of any interest on this Debenture
when due, continued for two (2) business days.

               (b)  Default in the payment of the principal on the Maturity
Date.

               (c)  Material default in the performance of any of the covenants
or agreements of the Company contained in this Debenture continued for thirty
(30) days after notice thereof (provided, however, that if the default cannot
reasonably be corrected within such period, there shall be no event of default
if corrective action is instituted promptly and is pursued diligently until the
default is corrected).

               (d)  If a petition in involuntary bankruptcy is filed against the
Company under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation under the law of any
jurisdiction, whether now or hereafter in effect, and is not stayed or dismissed
within thirty (30) days after such filing, or if the Company shall make an
assignment for the benefit of creditors, or shall file a voluntary petition in
bankruptcy, or shall be adjudicated a bankrupt or insolvent, or shall file any
petition or answer seeking for itself any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, or shall seek or consent to or
acquiesce in the appointment of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, or
commence voluntary or involuntary dissolution proceedings.

               (e)  Default under Senior Debt that gives the holder thereof the
right to accelerate such Senior Debt, and such Senior Debt is in fact
accelerated by such holder.

          4.2  Remedies on Default, etc.
               ------------------------

               (a)  If an Event of Default occurs and is continuing after the
expiration of any applicable grace period, the Holder may declare the Debenture
immediately due and payable.

               (b)  In case of a default in the payment of any principal or
interest due on this Debenture, the Company shall pay to the Holder thereof the
amount owing together with: (i) simple interest on the amount owing at the rate
per annum equal to the lower of (x) twelve percent (12%) or (y) the maximum rate
permitted under applicable law on the amounts past due; and (ii) such additional
amount as shall be sufficient to cover the cost and expenses of collection,
including, without limitation, reasonable attorneys' fees, expenses and
disbursements.

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               (c)  No right, power or remedy conferred by this Debenture upon
any Holder shall be exclusive of any other right, power or remedy referred to
herein or now or hereafter available at law, in equity, by statute or otherwise.

     5.   Conversion.
          ----------

          5.1  Conversion Rights. The Holder may at any time, and from time to
               -----------------
time, prior to the first to occur of the Maturity Date or the date fixed by the
Company for redemption of this Debenture (the "Redemption Date"), convert this
Debenture or any portion of the principal amount hereof which is $5,000 or an
integral multiple of $5,000, into Shares, at a conversion price of $0.50 per
Share (the "Conversion Price"), subject to adjustment in certain events
described below.

          The number of Shares that the Holder shall receive upon any such
conversion shall be determined by dividing the principal amount of this
Debenture to be so converted by the Conversion Price in effect at the time of
such conversion.  In the event that this Debenture is called for redemption, the
right to convert the Debenture shall terminate at the close of business on the
Redemption Date and will be lost if not exercised prior to that time unless the
Company defaults in making the payment due upon redemption.  In the event of a
partial conversion of this Debenture, the Company shall execute and deliver to
the Holder a new Debenture in the aggregate principal amount equal to and in
exchange for the unconverted portion of the principal amount of the Debenture so
surrendered for conversion.

          5.2  Effect of Conversion; Issuance of Shares on Conversion.
               ------------------------------------------------------
Conversion of this Debenture shall be deemed to have been made at the close of
business on the date that the Debenture shall have been surrendered for
conversion, accompanied by written notice of election to convert in the form of
Exhibit "A" attached hereto (or such other form reasonably acceptable to the
Company), and thereupon the Holder shall have no further rights hereunder,
except with respect to the receipt of accrued interest due hereunder and the
Shares issuable upon conversion of this Debenture. As soon as practicable after
full or partial conversion of this Debenture, the Company shall pay to the
Holder all interest accrued hereunder with respect to the portion of the
Debenture so converted to the date of conversion. In addition, as soon as
practicable after full or partial conversion of this Debenture, the Company
shall, at its expense, cause to be issued in the name of, and delivered to, the
Holder a certificate or certificates for the number of Shares to which the
Holder shall be entitled on such conversion, together with any other securities
and property to which the Holder is entitled on such conversion under the terms
of this Debenture. No fractional shares will be issued on conversion of this
Debenture. If on any conversion of this Debenture a fraction of a share results,
the Company will pay the cash value of that fractional share, calculated on the
basis of the then effective Conversion Price.

          5.3  Adjustments to Conversion Price.
               -------------------------------

               (a)  If the Company shall at any time while this Debenture is
outstanding subdivide the outstanding shares of its Common Stock, the Conversion
Price then in effect immediately before that subdivision shall be
proportionately decreased, and if the Company shall at any time while this
Debenture is outstanding combine the outstanding shares of Common Stock, the
Conversion Price then in effect immediately before that combination shall be
proportionately increased. Except as otherwise provided below, any adjustment
under this Section 5.3 shall become effective at the close of business on the
date the subdivision or combination becomes effective. A dividend on any
security of the Company payable in Common Stock, or a split of the Company's
Common Stock, shall be

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considered a subdivision of Common Stock for purposes of this Section 5.3 at the
close of business on the record date with respect to such dividend or stock
split. A reverse split of the Company's Common Stock shall be considered a
combination of Common Stock for purposes of this Section 5.3 at the close of
business on the record date with respect to such reverse stock split.

               (b)  In the event the Company, at any time or from time to time
while this Debenture is outstanding, shall make or issue, or fix a record date
for the determination of holders of Common Stock entitled to receive, a dividend
or other distribution with respect to the Company's Common stock payable in
securities of the Company other than shares of Common Stock, then and in each
such event, provisions shall be made so that the Holder shall receive upon
conversion hereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the Company which he would
have received had this Debenture been converted into Common Stock on the date of
such event and had the Holder thereafter, during the period from the date of
such event to and including the conversion date, retained such securities
receivable by him.

               (c)  If while this Debenture is outstanding, the Shares issuable
upon conversion of this Debenture shall be changed into the same or a different
number of shares of any other class or classes of stock of the Company, whether
by recapitalization, reclassification or other exchange (other than a
subdivision or combination of shares, or a capital reorganization, merger or
sale of assets, provided for elsewhere in Section 5.3 hereof), the Holder shall,
upon the conversion of this Debenture, be entitled to receive, in lieu of the
Shares which the Holder would have become entitled to receive but for such
change, a number of shares of such other class or classes of stock that would
have been subject to receipt by the Holder if he had exercised his right of
conversion of this Debenture immediately before that change.

               (d)  If while this Debenture is outstanding, there shall be a
merger or consolidation of the Company with or into another corporation (other
than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the Company),
or the sale of all or substantially all of the Company's properties and assets
to any other person, then, as a part of such merger, consolidation or sale,
lawful provision shall be made so that the Holder shall thereafter be entitled
to receive upon conversion of this Debenture, during the period specified in
this Debenture, the number of shares of stock or other securities or property of
the Company, or of the successor corporation resulting from such merger,
consolidation or sale, to which a holder of the Shares deliverable upon
conversion of this Debenture would have been entitled on such merger,
consolidation or sale if this Debenture had been converted immediately before
such merger, consolidation or sale. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 5.3 with
respect to the rights of the Holder after such merger, consolidation or sale to
the end that the provisions of this Section 5.3 (including adjustments of the
Conversion Price then in effect and number of shares purchasable upon conversion
of this Debenture) shall continue to be applicable after that event and shall be
as nearly equivalent to the provisions hereof as may be practicable.

               (e)  In the event that, following the date of this Debenture, the
Company shall issue shares of Common Stock (or other securities directly or
indirectly convertible into Common Stock) without consideration or for
consideration less than the Conversion Price then in effect, the Conversion
Price shall concurrently be reduced to equal such consideration per share.

                                       7
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               (f)  The Company shall promptly and in any case not later than
ten (10) days after the date of any adjustment of the Conversion Price give
written notice of such adjustment and the number of Shares or other securities
issuable upon conversion of this Debenture, by first-class mail, postage
prepaid, to the registered Holder at the Holder's address as shown on the
Debenture Register. The certificate shall state such adjustment and show in
reasonable detail the facts on which such adjustment is based.

               (g)  The form of this Debenture need not be changed because of
any adjustment in the Conversion Price or in the number of Shares issuable upon
its conversion. A Debenture issued after any adjustment on any partial
conversion or upon replacement may continue to express the same Conversion Price
and the same number of Shares (appropriately reduced in the case of partial
conversion) as are stated on this Debenture as initially issued, and that
Conversion Price and that number of Shares shall be considered to have been so
changed as of the close of business on the date of the adjustment.

     6.   Registration of Transfer and Exchange.
          -------------------------------------

          6.1  Debenture Register.  The Company shall cause to be kept at the
               ------------------
principal office of the Company a register (the "Debenture Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration and the transfer of the Debenture subject to the
provisions regarding transferability contained in this Debenture. Upon surrender
for registration of transfer of any Debenture at the principal office of the
Company, the Company shall execute and deliver, in the name of the designated
transferee or transferees, one or more new Debentures in minimum denominations
of $5,000 and integral multiples of $5,000.

          6.2  Transfer of Debentures.  At the time the Debenture is presented
               ----------------------
or surrendered for registration of transfer it shall (if so required by the
Company) be duly endorsed, or be accompanied by a written instrument of transfer
in form satisfactory to the Company, duly executed by the Holder thereof or his
attorney duly authorized in writing. No service charge shall be made for any
registration of transfer, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer of the Debentures.

          6.3  Replacement Debenture.
               ---------------------

               (a)  If the Debenture is mutilated and is surrendered to the
Company, the Company shall execute and deliver in exchange therefor a new
Debenture of like tenor and principal amount and bearing a number not
contemporaneously outstanding. If there shall be delivered to the Company: (i)
evidence to its satisfaction of the destruction, loss or theft of the Debenture;
and (ii) such security or indemnity as may be required by it to save the Company
and any agent harmless. Then, in the absence of notice to the Company that the
Debenture has been acquired by a bona fide purchaser, the Company shall execute
and deliver, in lieu of any such destroyed, lost or stolen Debenture, a new
Debenture of like tenor and principal amount and bearing a number not
contemporaneously outstanding. In the event such mutilated, destroyed, lost or
stolen Debenture has become or is about to become due and payable, the Company
in its discretion may, instead of issuing a new Debenture, retire such
Debenture.

                                       8
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               (b)  Upon the issuance of any new Debenture under this Section
6.3, the Company may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and any other
expenses connected therewith.

               (c)  Any new Debenture issued pursuant to this Section 6.3 in
lieu of any destroyed, lost or stolen Debenture shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Debenture shall be at any time enforceable by anyone.

               (d)  The provisions of this Section 6.3 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Debentures.

     7.   Limitations on Disposition.  The Holder understands that this
          --------------------------
Debenture, the Shares issuable upon conversion of this Debenture and any other
securities issued under this Debenture are "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable restrictions such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act") only in certain limited
circumstances. In this connection, the Holder represents that it is familiar
with Rule 144 under the Act and the limitations imposed thereby and by the Act.

          The Holder further agrees not to make any disposition of all or any
portion of this Debenture, the Shares or any other securities issued hereunder
unless and until:  (a) there is then in effect a Registration Statement under
the Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or (b) the Holder shall have (i)
notified the Company of the proposed disposition and shall have furnished the
Company with a reasonably detailed statement of the circumstances surrounding
the proposed disposition; and (ii) furnished the Company with an opinion of
counsel, satisfactory to the Company, that such disposition will not require
registration of the securities under the Act.

          The Holder understands that this Debenture, the Shares and any other
securities issued hereunder may bear the following legend, together with any
other legend required by law:

          "The securities represented hereby have not been registered
          under the Securities Act of 1933, or any state securities
          laws.  These securities may not be sold or transferred in
          the absence of an effective registration statement or
          qualification under such securities laws or an opinion of
          counsel, satisfactory to the Company, that the sale or
          transfer is pursuant to an exemption from the registration
          or qualification requirements of any applicable securities
          laws."

     8.   Limitations on Dividends and Distributions. So long as this Debenture
          ------------------------------------------
is outstanding, the Company shall not declare, pay, make or set apart any sum
for a dividend or other distribution (whether in cash or other property) with
respect to any class of capital stock of the Company (other than dividends or
distributions payable in its capital stock), or for the redemption, retirement,
purchase or other acquisition for value of any share of any class of capital
stock of the Company or any warrants or rights to purchase any class of capital
stock of the Company.

                                       9
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     9.   Registration Rights.
          -------------------

          9.1  Definitions.  For purposes of Section 9 hereof, terms not
               -----------
otherwise defined herein shall have the following meanings:

               (a)  The terms "register," "registered" and "registration" refer
to the preparation and filing of a registration statement in compliance with the
Act and the rules promulgated thereunder, and the declaration of the
effectiveness of such registration statement, or the taking of similar action
under a successor statute or regulation.

               (b)  The term "Registrable Securities" means the Shares issuable
upon conversion of the Debenture, and any securities issued or issuable with
respect to such Shares by way of a stock dividend or stock split or in
connection with a combination or shares, recapitalization, merger, consolidation
or other reorganization.

               (c)  The term "Rights Holder" or "Rights Holders" means any
registered holder or holders of Registrable Securities.

               (d)  The term "Prospectus" means a prospectus that complies with
applicable provisions of the Act.

          9.2  Piggyback Registration.
               ----------------------

               (a)  If, at any time following the date of the issuance of this
Debenture, the Company proposes to register any of its securities under the Act
(other than in connection with a merger pursuant to a Form S-4 Registration
Statement or an employee stock compensation plan pursuant to a Form S-8
Registration Statement), it will give written notice by registered mail, at
least thirty (30) days prior to the filing of each such registration statement,
to the Rights Holder of its intention to do so. If the Rights Holder notifies
the Company within twenty (20) days after receipt of any such notice of its
desire to include any Registrable Securities in such proposed registration
statement, the Company shall afford such Rights Holder the opportunity to have
any of the Registrable Securities registered under such registration statement
and included in any underwriting involved with respect thereto.

               (b)  Notwithstanding the provisions of Section 9 hereof: (i) the
Company shall have the right at any time after it shall have given written
notice pursuant to said Section 9 (irrespective of whether a written request for
inclusion of any Registrable Securities shall have been made) to elect not to
file any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof; and (ii) in the event a
registration under Section 9 hereof relates to an underwritten public offering
which does not include any securities being offered and sold on behalf of
selling shareholders, the inclusion of any Registrable Securities may, at the
election of the Company, be conditioned upon the Rights Holder agreement that
the public offering of such Registrable Securities shall not commence until
ninety (90) days after the effective date of such registration.

               (c)  The rights of the Rights Holder pursuant to Section 9 hereof
shall be conditioned upon such Rights Holder's participation in the underwriting
with respect thereto and the

                                       10
<PAGE>

inclusion of such Rights Holder's Registrable Securities in such underwriting
(unless otherwise mutually agreed by the Company, the managing underwriter or,
if none, a majority of the underwriters, and such Rights Holder) to the extent
provided herein.

               (d)  Notwithstanding any other provision of this Debenture, if
the managing underwriter or, if none, a majority of the underwriters, determines
that marketing factors require a limitation of the number of shares to be
underwritten or a complete exclusion of such shares, such underwriter or
underwriters may limit the number of Registrable Securities that may be included
in the registration and underwriting or exclude all of the Registrable
Securities, as appropriate. In the case of an underwritten registration in which
the number of Registrable Securities that may be included is limited, the
Company shall advise the Rights Holder of the limited number of Registrable
Securities that may be included in the registration, and the number of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all Rights Holders thereof in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities entitled to
inclusion in such registration held by such Rights Holders at the time of filing
the registration statement.

               (e)  The Company shall (together with all Rights Holders
proposing to distribute their securities through an underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for the underwriting.

          9.3  Expenses.  All expenses incurred in connection with any
               --------
registration pursuant to this Debenture, including without limitation, all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided however the Company shall not be required to pay:

               (a)  fees of legal counsel of any Rights Holder, or underwriters'
fees, discounts, commissions or expenses relating to Registrable Securities; and

               (b)  for expenses that the Company is prohibited from paying
under Blue Sky laws or by Blue Sky administrators.

          9.4  Company Responsibilities.  In the case of a registration effected
               ------------------------
by the Company pursuant to this Debenture, the Company shall use its best
efforts to keep the Rights Holder advised in writing as to the initiation,
effectiveness and completion of such registration. At its expense the Company
shall:

               (a)  prepare and file a registration statement (and such
amendments and supplements thereto) with respect to such Registrable Securities
and use its best efforts to cause such registration statement to become and
remain effective for a period of one hundred eighty (180) days or until the
Rights Holder or Rights Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs;

               (b)  furnish such number of copies of a Prospectus in conformity
with the requirements of applicable law, and such other documents incident
thereto as a Rights Holder from time to time may reasonably request; and

                                       11
<PAGE>

               (c)  use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under the state
Blue Sky laws of such jurisdictions as the Company's Board of Directors may
reasonably determine, and do any and all other acts and things which may be
necessary under said Blue Sky laws to enable the sellers of the Registrable
Securities to consummate the public sale or other disposition of the Registrable
Securities owned by them in such jurisdictions, except that the Company shall
not for any purpose be required to qualify to do business as a foreign
corporation in any jurisdiction wherein the Registrable Securities are so
qualified.

          9.5  Indemnification.
               ---------------

               (a)  The Company shall indemnify the Rights Holder, each of the
Rights Holder's officers and directors, and each person controlling such Rights
Holder, with respect to such registration effected pursuant to Section 9.2
hereof, and each underwriter, if any, and each person who controls any
underwriter of the Registrable Securities, against all claims, losses, damages
and liabilities (or actions in respect thereto) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any registration statement or related Prospectus, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of any rule or regulation promulgated under any securities law
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, and shall reimburse the Rights
Holder, each of the Rights Holder's officers and directors, and each person
controlling such Rights Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, provided that the Company shall not be liable in
any such case to the extent that any such claim, loss, damage or liability
arises out of or is based on any untrue statement or omission based upon written
information furnished to the Company in an instrument duly executed by such
Rights Holder or underwriter specifically for use therein.

               (b)  The Rights Holder shall, if Registrable Securities held by
or issuable to the Rights Holder are included in the securities as to which such
registration is being effected, indemnify the Company, each of its directors and
officers who sign such registration statement, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company within the meaning of the Act, and each other Rights
Holder, each of such Rights Holder's officers and directors and each person
controlling such Rights Holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement or related Prospectus, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and shall reimburse
the Company, such Rights Holders, such directors, officers, persons, or
underwriters for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement or related Prospectus in
reliance upon and in conformity with written information furnished to the
Company in an instrument duly executed by such Rights Holder specifically for
use therein.

                                       12
<PAGE>

                (c)  Each party entitled to indemnification under this Section
9.5 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may he sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense; and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 9.5. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement, which does
not include as an unconditional term thereof, the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.

          9.6   Rights Holder's obligations.  The Rights Holder shall furnish to
                ---------------------------
the Company such written information regarding such Rights Holder and the
distribution proposed by such Rights Holder as the Company may reasonably
request in writing and as shall be required in connection with any registration
referred to in this Debenture.

          9.7   Assignment.  The rights granted to the Rights Holder pursuant to
                ----------
this Debenture may be assigned to a transferee or assignee of the Debenture or
any of the Registrable Securities, provided that the transferee or assignee is
an affiliated entity of the Rights Holder and the Company is given written
notice at the time of or within 10 days after said transfer, stating the name
and address of said transferee or assignee and identifying the Registrable
Securities with respect to which such registration rights are being assigned.

     10.  Miscellaneous.
          -------------

          10.1  Amendment.  The provisions of this Debenture may be amended or
modified only with the written consent of the Company and the Holder.

          10.2  Entire Agreement.  This Debenture constitutes the entire
                ----------------
agreement among the parties with regard to the subject matter hereof, and
supersedes and replaces any and all prior to contemporaneous agreements, written
or oral. The terms and conditions of this Debenture shall inure to the benefit
of, and be binding upon, the respective successors and assigns of the parties.
Nothing in this Debenture is intended to confer on any third party any rights,
liabilities or obligations, except as specifically provided.

          10.3  Headings.  The titles and subtitles used in this Debenture are
                --------
for convenience only and are not to be used in construing or interpreting this
Debenture.

          10.4  SEC Filings.  During the term of this Debenture the Company
                -----------
shall promptly forward to the Holder annual and periodic reports and proxy
statements required to be filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.

                                       13
<PAGE>

          10.5  Governing Law.  This Debenture shall be governed by the internal
                -------------
laws of the State of California as applicable to transactions performed in
California between California residents.

          10.6  Attorneys' Fees.  The prevailing party in any action or
                ---------------
proceeding between the parties arising out of or related to this Debenture shall
be entitled to recover all reasonable expenses, including without limitation
attorneys, fees and costs, incurred in connection with any such action or
proceeding.

          IN WITNESS WHEREOF, the undersigned have executed this Debenture on
the date first above written.

                         ANCHOR PACIFIC UNDERWRITERS, INC.

                         By:_______________________________________
                                 James R. Dunathan
                                 President, Chief Executive Officer
                            Exhibit "A"

                           Form of Conversion Notice

To Anchor Pacific Underwriters, Inc.:

The undersigned Holder hereby irrevocably exercises the option to convert this
Debenture, or portion hereof (which is in the amount of not less than $5,000 and
in increments of not less than $5,000 thereafter) below designated, into shares
of the Company's Common Stock, $.02 par value per share, in accordance with the
terms of the Debenture, and directs that the shares issuable and deliverable
upon such conversion, together with any check in payment for fractional shares
and any Debentures representing any unconverted principal amount hereof, be
issued and delivered to the undersigned unless a different name has been
indicated below.  If shares or Debentures are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto.  Any amount required to be paid by the undersigned
on account of interest accompanies this Debenture.

Dated: _______________           ________________________________
                                        Signature

                                        ____________________________
                                        Taxpayer Identification Number

                                       14
<PAGE>

Principal Amount to be Converted: $_______________

If shares or Debentures are to be registered in the name of a person other than
the Holder, please print such person's name and address below:

Name:    ___________________________

Address: ___________________________

         ___________________________

                                    WARRANT
                     TO PURCHASE SHARES OF COMMON STOCK OF
                       ANCHOR PACIFIC UNDERWRITERS, INC.

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) COVERED
BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN COMPLIANCE WITH
RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN FURNISHED WITH AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT NO REGISTRATION IS REQUIRED
FOR SUCH TRANSFER.

                                                  _______ Shares of Common Stock

     11.  General Terms.
          --------------

          11.1  Right to Acquire Securities.
                ---------------------------

                (a)  This Warrant certifies that for value received WARD NORTH
AMERICA, INC., a California corporation, (the "Holder"), or registered assigns,
are entitled at any

                                      -15-
<PAGE>

time before 5:00 p.m., San Francisco, California time, on
the Expiration Date (as such term is defined herein) to purchase from ANCHOR
PACIFIC UNDERWRITERS, INC., a Delaware corporation (the "Company"), ________
shares (the "Warrant Shares") of the fully paid and non-assessable Common Stock
of the Company ("Common Stock") as constituted on the date hereof (the "Issuance
Date"), at a price of $0.50 per share (the "Exercise Price"), such number of
shares and price per share subject to adjustment as provided herein and all
subject to the conditions set forth herein. This Warrant may be exercised at any
time on or before five years from the date hereof (the "Expiration Date").

                Upon any partial exercise hereof, there shall be issued to the
Holder a new Warrant or Warrants with respect to the shares of Common Stock not
so exercised. No fractions of a share of Common Stock will be issued upon the
exercise of this Warrant, but if a fractional share would be issuable upon
exercise the Company will pay in cash the fair market value thereof as
determined by the Board of Directors of the Company in good faith.

                (b)  The Warrant may be subdivided, at the Warrantholder's
option, into several warrants to purchase the Warrant Shares (collectively, also
referred to as the "Warrant"). Such subdivision may be accomplished in
accordance with the provisions of Section 1.5 hereof.

          11.2  Exercise of Warrant.
                -------------------

                (a)  The Holder or any person or entity to whom the Holder has
assigned its right under this Warrant (collectively referred to as the
"Warrantholder") may exercise the Warrant, in whole or in part, at any time or
from time to time, prior to its expiration, on any business day, by delivering a
written notice in the form attached hereto (the "Exercise Notice") to the
Company at the offices of the Company designated in Section 5.4 hereof,
exercising the Warrant and specifying (i) the total number of shares of Common
Stock the Warrantholder will purchase pursuant to such exercise and (ii) a place
and date not less than one nor more than 20 business days from the date of the
Exercise Notice for the closing of such purchase.

                (b)  At any closing under Section 1.2(a) hereof, (i) the
Warrantholder will surrender the Warrant and make payment to the Company of the
aggregate Exercise Price for the shares of Common Stock so purchased by bank,
cashier's or certified check and (ii) the Company will deliver to the
Warrantholder a certificate or certificates for the number of shares of Common
Stock issuable upon such exercise, together with cash, in lieu of any fraction
of a share, as provided in Section 1.1(a) above. Upon any partial exercise, a
new warrant or warrants of the same tenor and expiration date for the purchase
of the number of such shares not purchased upon such exercise shall be issued by
the Company to the registered holder thereof.

          11.3  Net Issue Exercise.  Notwithstanding any provisions herein to
                ------------------
the contrary, if the fair market value of one share of the Company's Common
Stock (as defined below) is greater than the Exercise Price (as adjusted to the
last trading day prior to the exercise date), in lieu of exercising this Warrant
for cash, the Warrantholder may elect to receive full shares equal to the value
(as determined below) of this Warrant (or the portion thereof being cancelled)
by surrender of this Warrant at the principal office of the Company together
with a written notice of such election in which event the Company shall issue to
the Holder a number of shares of Common Stock computed using the following

                                      -16-
<PAGE>

formula:

                X = Y (A-B)
                    -------
                       A

          Where:       X = the number of shares of Common Stock to be issued to
                           the Holder

                       Y = the number of shares of Common Stock purchasable
                           under the Warrant or, if only a portion of the
                           Warrant is being exercised, the portion of the
                           Warrant being cancelled

                       A = the fair market value of one share of the Company's
                           Common Stock (as defined below)

                       B = Warrant Price (as adjusted to the last trading day
                           prior to the exercise date)

For purposes of the above calculation, fair market value of one share of Common
Stock shall be the last trade price of the Common Stock on the last trading day
prior to the exercise date as reported in the Wall Street Journal, or, if the
Wall Street Journal ceases publication, then a publication mutually acceptable
to the parties hereto.

          11.4  Record Holder.  A Warrant shall be deemed to have been exercised
                -------------
immediately prior to the close of business on the date of its surrender for
exercise as provided in Section 1.2(b) above, and the person entitled to receive
the shares of Common Stock issuable upon such exercise shall be treated for all
purposes as the holder of such shares of record as of the close of business on
such date.

          11.5  Payment of Taxes.  The Company shall pay all taxes and other
                ----------------
governmental charges that may be imposed in respect of the issue or delivery of
the Warrant Shares or any portion thereof. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for the Warrant Shares or any portion
thereof in any name other than that of the registered holder of the Warrant
surrendered in connection with the purchase of such shares, and in such case the
Company shall not be required to issue or deliver any certificate until such tax
or other charge has been paid or it has been established to the Company's
satisfaction that no tax or other charge is due.

          11.6  Transfer and Exchange.
                ---------------------

                (a)  Subject to the terms hereof, including, without limitation,
Section 2.1, the Warrant and all rights thereunder are transferable, in whole or
in part, on the books of the Company maintained for such purpose at its office
designated in Section 5.4 hereof by the registered holder hereof in person or by
duly authorized attorney, upon surrender of the Warrant properly endorsed and
upon payment of any necessary transfer tax or other governmental charge imposed
upon such transfer. Upon any partial transfer, the Company will issue and
deliver to such holder a new warrant or warrants with respect to the Warrant
Shares not so transferred. Each taker and holder of the Warrant, by taking or
holding the same, consents and agrees that the Warrant when endorsed in blank
shall be deemed negotiable, and that when the Warrant shall have been so
endorsed, the holder may be treated

                                      -17-
<PAGE>

by the Company and all other persons dealing with the Warrant as the absolute
owner of such Warrant for any purpose and as the person entitled to exercise the
rights represented thereby, or to the transfer on the books of the Company, any
notice to the contrary notwithstanding; but until such transfer on such books,
the Company may treat the registered holder of the Warrant as the owner for all
purposes. The term "Warrant" as used herein shall include the Warrant and, any
warrants delivered in substitution or exchange therefor as provided herein.

                (b)  The Warrant is exchangeable for a warrant or warrants for
the same aggregate number of Warrant Shares, each new Warrant to represent the
right to purchase such number of shares as the holder shall designate at the
time of such exchange.

     12.  Transfer of Securities.
          -----------------------

          12.1  Restrictions of Transfer.  Neither the Warrant nor the Warrant
                ------------------------
Shares shall be transferable except upon the conditions specified in this
Section 2.1, which conditions are intended to insure compliance with the
provisions of the Securities Act of 1933 (the "1933 Act") in respect to the
transfer of the Warrant and the Warrant Shares.

                (a)  Unless and until otherwise permitted by this Section 2.1,
the Warrant and each certificate or other document evidencing any of the Warrant
Shares shall be endorsed with a legend substantially in the following form:

     "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
     ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
     OTHERWISE TRANSFERRED UNLESS (A) COVERED BY AN EFFECTIVE
     REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN COMPLIANCE WITH
     RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN FURNISHED
     WITH AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
     TO THE EFFECT THAT NO REGISTRATION IS REQUIRED FOR SUCH TRANSFER"

                (b)  Neither the Warrant nor the Warrant Shares shall be
transferred, and the Company shall not be required to register any such
transfer, unless and until one of the following events shall have occurred:

                     (i)  the Company shall have received an opinion of counsel,
in form and substance reasonably acceptable to the Company and its counsel,
stating that the contemplated transfer is exempt from registration under the
1933 Act as then in effect, and the Rules and Regulations of the Securities and
Exchange Commission (the "Commission") thereunder. Within five business days
after delivery to the Company and its counsel of such an opinion, the Company
either shall deliver to the proposed transferor a statement to the effect that
such opinion is not satisfactory in the reasonable opinion of its counsel (and
shall specify in detail the legal analysis supporting any such conclusion) or
shall authorize the Company's transfer agent to make the requested transfer;

                     (ii) the Company shall have been furnished with a letter
from the

                                      -18-
<PAGE>

Commission in response to a written request in form and substance acceptable to
counsel for the Company setting forth all of the facts and circumstances
surrounding the contemplated transfer, stating that the Commission will take no
action with regard to the contemplated transfer;

                     (iii)  the Warrant or the Warrant Shares are transferred
pursuant to a registration statement which has been filed with the Commission
and has become effective; or

                     (iv)   the Warrant or the Warrant Shares are transferred in
accordance with the provisions of Rule 144 promulgated by the Commission under
the 1933 Act.

                (c)  The restrictions on transfer imposed by this Section 2.1
shall cease and terminate as to the Warrant and the Warrant Shares when (i) such
securities shall have been effectively registered under the 1933 Act and sold by
the holder thereof in accordance with such registration, (ii) an acceptable
opinion as described in Section 2.l(b)(i) or a "no action" letter described in
Section 2.l(b)(ii) states that future transfers of such securities by the
transferor or the contemplated transferee would be exempt from registration
under the 1933 Act, or (iii) such securities may be sold in accordance with the
provisions of Rule 144 promulgated under the 1933 Act. When the restrictions on
transfer contained in this Section 2.1 have terminated as provided above, the
holder of the securities as to which such restrictions shall have terminated or
the transferee of such holder shall be entitled to receive promptly from the
Company, without expense to him, new certificates not bearing the legend set
forth in Section 2.1(a) hereof.

          12.2  Cooperation.  The Company shall cooperate in supplying such
                -----------
information as may be reasonably requested by the Warrantholder to complete and
file any information reporting forms presently or subsequently required by the
Commission as a condition to the availability of an exemption, presently
existing or subsequently adopted, from the 1933 Act for the sale of the Warrant
or the Warrant Shares.

     13.  Registration Rights
          -------------------

          13.1  Rights of Warrantholders.  Holders of the Common Stock issued or
                ------------------------
issuable upon exercise of this Warrant (collectively, the "Registrable
Securities") shall have "piggyback" registration rights as set forth below:

                (a)  If, at any time following the date of this Warrant, the
Company proposes to register any of its securities under the Act (other than in
connection with a merger, acquisition, reorganization or similar transaction
pursuant to a Form S-4 Registration Statement or an employee stock compensation
plan pursuant to a Form S-8 Registration Statement), it will give written notice
by registered mail, at least (30) days prior to the filing of each such
registration statement, to the Holder of its intention to do so. If the Holder
notifies the Company within 20 days after receipt of any such notice of its
desire to include any Registrable Securities in such proposed registration
statement, the Company shall afford such Holder the opportunity to have any of
the Registrable Securities registered under such registration statement and
included in any underwriting involved with respect thereto.

                                      -19-
<PAGE>

                (b)  Notwithstanding the provisions of Section 3 hereof:  (i)
the Company shall have the right at any time after it shall have given written
notice pursuant to this Section 3 (irrespective of whether a written request for
inclusion of any Registrable Securities shall have been made) to elect not to
file any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof; and (ii) in the event a
registration under Section 3 hereof relates to an underwritten public offering
which does not include any securities being offered and sold on behalf of
selling shareholders, the inclusion of any Registrable Securities may, at the
election of the Company, be conditioned upon the Holder agreeing that the public
offering of such Registrable Securities shall not commence until 90 days after
the effective date of such registration.

                (c)  The rights of the Holder pursuant to Section 3 hereof shall
be conditioned upon such Holder's participation in the underwriting with respect
thereto and the inclusion of such Holder's Registrable Securities in such
underwriting (unless otherwise mutually agreed by the Company, the managing
underwriter or, if none, a majority of the underwriters, and such Holder) to the
extent provided herein.

                (d)  Notwithstanding any other provision of this Warrant, if the
managing underwriter or, if none, a majority of the underwriters, determines
that marketing factors require a limitation of the number of shares to be
underwritten or a complete exclusion of such shares, such underwriter or
underwriters may limit the number of Registrable Securities that may be included
in the registration and underwriting or exclude all of the Registrable
Securities, as appropriate. In the case of an underwritten registration in which
the number of Registrable Securities that may be included is limited, the
Company shall advise the Holder of the limited number of Registrable Securities
that may be included in the registration, and the number of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders thereof in proportion, as nearly as practicable, to
the respective amounts of Registrable Securities entitled to inclusion in such
registration held by such Holders at the time of filing the registration
statement.

                (e)  The Company shall (together with all Holders proposing to
distribute their securities through an underwriting) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
the underwriting.

          13.2  Expenses.
                ---------

                All expenses incurred in connection with any registration
pursuant to this Warrant or Warrant Shares, including without limitation, all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided however the Company shall not be required to pay:

                (a)  fees of legal counsel of any Holder, or underwriters' fees,
discounts, commissions or expenses relating to Registrable Securities; and

                (b)  for expenses that the Company is prohibited from paying
under Blue Sky laws or by Blue Sky administrators.

                                      -20-
<PAGE>

          13.3  Company.
                -------

                In the case of a piggyback registration of Warrant Shares, the
Company shall use its best efforts to keep the Holder advised in writing as to
the initiation, effectiveness and completion of such registration. At its
expense the Company shall:

                (a)  prepare and file a registration statement (and such
amendments and supplements thereto) with respect to such Registrable Securities
and use its best efforts to cause such registration statement to become and
remain effective for a period of 180 days or until the Holder or Holders have
completed the distribution described in the registration statement relating
thereto, whichever first occurs;

                (b)  furnish such number of copies of a Prospectus in conformity
with the requirements of applicable law, and such other documents incident
thereto as a Holder from time to time may reasonably request; and

                (c)  use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under the state
Blue Sky laws of such jurisdictions as the Company's Board of Directors may
reasonably determine, and do any and all other acts and things which may be
necessary under said Blue Sky laws to enable the sellers of the Registrable
Securities to consummate the public sale or other disposition of the Registrable
Securities owned by them in such jurisdictions, except that the Company shall
not for any purpose be required to qualify to do business as a foreign
corporation in any jurisdiction wherein the Registrable Securities are so
qualified.

          13.4  Indemnification.
                ---------------

                (a)  The Company shall indemnify the Holder, with respect to
such registration effected pursuant to Section 3 hereof, against all claims,
losses, damages and liabilities (or actions in respect thereto) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement or related Prospectus, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, or
any violation by the Company of any rule or regulation promulgated under any
securities law applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration, and shall
reimburse the Holder and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action,
provided that the Company shall not be liable in any such case to the extent
that any such claim, loss, damage or liability arises out of or is based on any
untrue statement or omission based upon written information furnished to the
Company in an instrument duly executed by such Holder specifically for use
therein.

                (b)  The Holder shall, if Registrable Securities held by or
issuable to the Holder are included in the securities as to which such
registration is being effected, indemnify the Company, each of its directors and
officers who sign such registration statement, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the

                                      -21-
<PAGE>

Company within the meaning of the Act, and each other Holder, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement or related
Prospectus, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and shall reimburse the Company and such Holders for any legal
or any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such registration
statement or related Prospectus in reliance upon and in conformity with written
information furnished to the Company in an instrument duly executed by such
Holder specifically for use therein.

                (c)  Each party entitled to indemnification under this Section
3.4 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense; and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 3.4. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement, which does
not include as an unconditional term thereof, the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.

          13.5  Holder's Obligations.  The Holder shall furnish to the Company
                --------------------
such written information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
required in connection with any registration referred to in this Warrant.

          13.6  Assignment.  The rights granted to the Holder pursuant to this
                ----------
Warrant may be assigned to a transferee or assignee of the Warrant or any of the
Registrable Securities, provided that the transferee or assignee is an
affiliated entity of the Holder and the Company is given written notice at the
time of or within 10 days after said transfer, stating the name and address of
said transferee or assignee and identifying the Registrable Securities with
respect to which such registration rights are being assigned.

     14.  Adjustments to Exercise Price and Warrant Shares. The Exercise Price
          ------------------------------------------------
in effect from time to time and the number of Warrant Shares shall be subject to
adjustment in certain cases as set forth in this Section 4.

          14.1  Subdivision or Combination.  In the event the outstanding Common
                --------------------------
Stock shall be subdivided into a greater number of shares of Common Stock, the
Exercise Price for the Warrant

                                      -22-
<PAGE>

Shares shall, simultaneously with the effectiveness of such subdivision, be
proportionately reduced and the number of Warrant Shares proportionately
increased, and conversely, in case the outstanding Common Stock shall be
combined into a smaller number of shares of Common Stock, the Exercise Price
shall, simultaneously with the effectiveness of such combination, be
proportionately increased and the number of Warrant Shares proportionately
reduced.

          14.2  Adjustment for Reorganization, Consolidation, Merger.
                ----------------------------------------------------

                (a)  In case of any reorganization of the Company (or any other
corporation the stock or other securities of which are receivable on the
exercise of the Warrant) after the date on which this Warrant is first issued
(the "Issuance Date"), or in case, after such date, the Company (or any such
other corporation) shall consolidate with or merge into another corporation or
convey all or substantially all of its assets to another corporation, then and
in each such case the Warrantholder, upon exercise of the Warrant as provided in
Section 1.2 hereof at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the stock or other securities and property receivable upon the exercise of the
Warrant prior to such consummation, the stock or other securities or property to
which the Warrantholder would have been entitled upon such consummation if the
Warrantholder had exercised or converted the Warrant immediately prior thereto;
in each such case, the terms of this Warrant, including the exercise provisions
of Section 1.2, shall be applicable to the shares of stock or other securities
or property receivable upon the exercise or conversion of the Warrant after such
consummation.

                (b)  The Company shall not effect any consolidation, merger or
conveyance of all or substantially all of its assets unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation into or for the
securities of which the previously outstanding stock of the Company shall be
changed in connection with such consolidation or merger, or the corporation
purchasing such assets, as the case may be, shall assume by written instrument,
in form and substance satisfactory to the Warrantholder, executed and delivered
in accordance with Section 5.4 hereof, the obligation to deliver to the
Warrantholder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, the Warrantholder is entitled to purchase.

                (c)  If a purchase, tender or exchange offer is made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock of the Company, the Company shall not effect any consolidation, merger or
sale with the Person having made such offer or with any Affiliate of such
Person, unless prior to consummation of such consolidation, merger or sale the
Warrantholder shall have been given a reasonable opportunity to then elect to
receive either the stock, securities or assets then issuable upon the exercise
or conversion of the Warrant or, if different, the stock, securities or assets,
or the equivalent, issued to previous holders of the Common Stock in accordance
with such offer, computed as though the Warrantholder hereof had been, at the
time of such offer, a holder of the stock, securities or assets then purchasable
upon the exercise or conversion of the Warrant. As used in this paragraph (c),
the term "Person" shall mean and include an individual, a partnership, a
corporation, a trust, a joint venture, an unincorporated organization and a
government or any department or agency thereof, and an "Affiliate" of any Person
shall mean any Person directly or

                                      -23-
<PAGE>

indirectly controlling, controlled by or under direct or indirect common control
with, such other Person. A Person shall be deemed to control a corporation if
such Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of voting securities, by contract or otherwise.

          14.3  Adjustment for Certain Issuances. In the event that, following
                --------------------------------
the date of this Warrant, the Company shall issue shares of Common Stock (or
securities convertible into, directly or indirectly, Common Stock) without
consideration or for consideration per share less than the Exercise Price then
in effect, then (a) the Exercise Price shall concurrently be reduced to such
lower price per share, and (b) this Warrant shall concurrently become
exercisable for a number of shares obtained by dividing $45,000 by such adjusted
Exercise Price.

          14.4  Miscellaneous Exercise Matters. The Company shall at all reserve
                ------------------------------
and keep available out of its authorized but unissued Common Stock the full
number of Warrant Shares deliverable upon exercise of the Warrant Shares, as
such number may change from time to time. Also, the Company shall, at its own
expense, take all such actions and obtain all such permits and orders as may be
necessary to enable the Company lawfully to issue the Warrant Shares upon the
exercise of the Warrant.

          14.5  No Dilution or Impairment. The Company will not, by amendment of
                -------------------------
its certificate of incorporation or through reorganization, consolidation,
merger, dissolution, issue or sale of securities, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate in order to protect the rights of the Warrantholder
against dilution or other impairment. Without limiting the generality of the
foregoing, the Company will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and non-assessable shares upon the exercise or conversion of the Warrant.

          14.6  Notice of Adjustment. When any adjustment is required to be made
                --------------------
in either the Exercise Price or the number of shares issuable upon exercise of
the Warrant, the Company shall promptly notify the Warrantholder of such event,
of the calculation by which such adjustment is to be made and of the resulting
Exercise Price or conversion rate, as the case may be.

          14.7  Duty to Make Fair Adjustments in Certain Cases. If any event
                ----------------------------------------------
occurs as to which in the opinion of the Board of Directors the other provisions
of this Section 4 are not strictly applicable or if strictly applicable would
not fairly protect the purchase and exercise rights of the Warrant in accordance
with the essential intent and principles of such provisions, then the Board of
Directors shall make an adjustment in the application of such provisions, in
accordance with such essential intent and principles, so as to protect such
purchase rights as aforesaid.

     15.  Miscellaneous.
          -------------

          15.1  Entire Agreement.  This Warrant constitutes the full and entire
                ----------------
understanding and agreements between the parties hereto with respect to the
subjects hereof and thereof.

                                      -24-
<PAGE>

          15.2  Successors and Assigns. The terms and conditions of this Warrant
                ----------------------
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties hereto, except as expressly provided otherwise herein.

          15.3  Governing Law. This Warrant shall be governed by and construed
                -------------
under the laws of the State of California.

          15.4  Notices, Etc. All notices and other communications required or
               -------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or upon the seventh day following mailing by registered
air mail, postage prepaid, addressed (a) if to the Warrantholder, at 610 West
Ash Street, Suite 1500, San Diego, California 92101 or at such other address as
it shall have furnished to the Company in writing, (b) if to the Company, a copy
should be sent to 1800 Sutter Street, Suite 400, Concord, California 94520 and
addressed to the attention of the corporate secretary, or at such other address
as the Company shall have furnished in writing to the Warrantholder, or (c) if
to any other holder of any Warrant or of Warrant Shares issued upon conversion
of the Warrant, at such address as such holder shall have furnished to the
Company in writing, or, until such holder so furnishes an address to the
Company, then to and at the address of the last holder of such Warrant or
Warrant Shares who so furnished an address to the Company.

     15.5  Delays or Omissions. No delay or omission to exercise any right,
           -------------------
power or remedy accruing to any holder of any securities issued or sold or to be
issued or sold hereunder, upon any breach or default of the Company under this
Agreement, shall impair any such right, power or remedy of such holder nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or in any similar breach or default thereafter occurring, nor shall any
waiver of any single breach or default be deemed a waiver of any other breach or
default theretofore or thereafter occurring. Any waiver, permit, consent or
approval of any kind or character on the part of any holder of any breach or
default under this Agreement, or any waiver on the part of any holder of any
provisions or conditions of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.

     15.6  Survival. The representations, warranties, covenants and agreements
           --------
made herein and or made pursuant to this Agreement shall survive the execution
and delivery of this Agreement, except as expressly provided otherwise herein.

     15.7  Waivers and Amendments.  With the written consent of the record or
           ----------------------
beneficial holders of more than 50% of the Warrant Shares (treated as if
converted), the obligations of the Company and the rights of the holders of the
Warrant and the Warrant Shares may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplemental agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Warrant; provided,
however, that no such waiver or supplemental agreement shall reduce the
aforesaid percentage of the Warrant Shares, the holders of which are required to
consent to any waiver or supplemental agreement,

                                      -25-
<PAGE>

without the consent of the record or beneficial holders of all of the Warrant
Shares (treated as if converted). Upon the effectuation of each such waiver,
consent, agreement of amendment or modification, the Company promptly shall give
written notice thereof to the record holders of the Warrant and the Warrant
Shares. This Warrant or any provision hereof may not be changed, waived,
discharged or terminated orally, but only by a statement in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, except to the extent provided in this Section 5.7.

     15.8  Severability. If one or more provisions of this Warrant are held to
           ------------
be invalid, illegal or unenforceable under applicable law, such provision shall
be modified in such manner as to be valid, legal and enforceable, but so as to
most nearly retain the intent of the parties, and if such modification is not
possible, such provision shall be severed from this Agreement as if such
provision were not included, in either case, and the balance of this Warrant
shall not in any way be affected or impaired thereby and shall be enforceable in
accordance with its terms.

     15.9  Registered Holder. The Company may deem and treat the registered
           -----------------
Holder(s) hereof as the absolute owner(s) of this Warrant (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise or conversion hereof, of any distribution to the Holder(s)
hereof, and for all other purposes, and the Company shall not be affected by any
notice to the contrary.  Other than as set forth herein, this Warrant does not
entitle any Holder hereof to any rights of a stockholder of the Company.

     15.10 Titles and Subtitles.  The titles of the sections and subsections of
           --------------------
this Warrant are for convenience and are not to be considered in construing this
Warrant.

                                      -26-
<PAGE>

          IN WITNESS WHEREOF, Company has caused this Warrant to be signed by
its duly authorized officer and issued as of the date set forth below.

Dated: __________________

                                   ANCHOR PACIFIC UNDERWRITERS, INC.

                                   By:__________________________________________
                                        James R. Dunathan
                                   Its: President/CEO

                                      -27-
<PAGE>

                                EXERCISE NOTICE

                (To be executed only upon exercise of Warrant)

          The undersigned registered owner of a Warrant of ANCHOR PACIFIC
UNDERWRITERS, INC. (the "Company"), originally issued to _________________
irrevocably exercises such Warrant for the purchase of shares of Common Stock of
the Company, purchasable with the Warrant, and hereby sets the place and date
for the closing of such purchase as follows, all on the terms and conditions
specified in the Warrant.

Place of Closing:__________________

Date of Closing:___________________

          The undersigned requests that a certificate for such shares be
registered in the name of ________________, whose address is____________________
______________________.  If said number of shares is less than all of the shares
of Common Stock purchasable under the Warrant, the undersigned requests that a
new Warrant representing the remaining balance of such shares be registered in
the name of ____________________, whose address is_____________________________.

Dated:___________

                              __________________________________
                              Signature of Registered Owner

                              __________________________________
                              Street Address

                              __________________________________
                              City         State           Zip

                                      -28-
<PAGE>

                              FORM OF ASSIGNMENT

          FOR VALUED RECEIVED, the undersigned registered owner of this Warrant
issued by ANCHOR PACIFIC UNDERWRITERS, INC. hereby sells, assigns and transfers
unto the Assignee named below all of the rights of the undersigned under the
within Warrant, with respect to the number of Shares of Common Stock set forth
below:

Name of Assignee                   Address                  No. of Shares
----------------                   -------                  -------------

and does hereby irrevocably constitute and appoint ___________________ attorney
to make such transfer on the books of _______________________________maintained
for such purpose, with full power of substitution in the premises.

Dated:________________

                              __________________________________
                              Signature of Registered Owner

                              __________________________________
                              Witness

                                      A-1<PAGE>

                                                                  EXHIBIT 10.40B

                                   EXHIBIT B
                                   ---------

                          CERTIFICATE OF DESIGNATION
<PAGE>

                         CERTIFICATE OF DESIGNATIONS OF
                      SERIES A CONVERTIBLE PREFERRED STOCK
                                       OF
                       ANCHOR PACIFIC UNDERWRITERS, INC.,
                             A DELAWARE CORPORATION
                       (Pursuant to Section 151(g) of the
                       Delaware General Corporation Law)

     The undersigned, James R. Dunathan and Earl Wiklund hereby certify that:

     I.   They are the duly elected and acting President and Secretary,
respectively, of Anchor Pacific Underwriters, Inc., a Delaware corporation (the
"Corporation").

     II.  The Certificate of Incorporation of the Company authorizes 2,000,000
shares of preferred stock, par value $0.02 per share ("Preferred Stock"), of
which none are outstanding.

     III. The following is a true and correct copy of resolutions duly adopted
by the Board of Directors at a meeting duly held on March 9, 2000, which
constituted all requisite action on the part of the Corporation for adoption of
such resolutions.

                                  RESOLUTIONS

     WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") is authorized to provide for the issuance of shares of Preferred
Stock in series, and by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time the number of shares to be
included in each such series, and to fix the designations, powers, preferences
and rights of the shares of each such series and the qualifications, limitations
or restrictions thereof; and

     WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of Preferred Stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series;

     NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of Preferred Stock and the number of shares constituting
such series and fixes the rights, preferences, privileges and restrictions
relating to such series as follows:

     1.   Designation, Amount, Par Value, and Dividends. The series of Preferred
Stock shall be designated as the Series A Convertible Preferred Stock (the
"Series A Preferred Stock"), and the number of shares so designated shall be
1,853,300. The par value of each share of Series A Preferred Stock shall be
$0.02. The holders of shares of Series A Preferred Stock, in preference to the
holders of shares of Common Stock and any other Junior Stock, shall be entitled
to receive, when, as and if declared by the Board of Directors, out of the
Available Assets, cumulative cash dividends at an annual rate per share equal to
8%, compounded annually, of the Series A Liquidation Value from and after the
Series A Issue Date, as adjusted for any stock splits, combinations or dividends
with respect to such share of Series A Preferred Stock, and provided that no
dividends shall be paid on or declared and set apart on the Common Stock or
Junior Stock until all accumulated and unpaid dividends with respect to the
shares of Series A Preferred Stock shall have been paid or declared and set
aside. Dividends payable pursuant to this Section shall begin to accrue and be
<PAGE>

cumulative from the Series A Issue Date, whether or not earned or declared.  The
amount of dividends so payable shall be determined on the basis of twelve 30-day
months and a 360-day year.  Dividends paid on the shares of Series A Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding.

     2.   Liquidation Preference.

          (a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, or in the event of its
insolvency, the holders of the Series A Preferred Stock shall be entitled to be
paid out of the Available Assets, prior and in preference to any distribution to
the holders of Common Stock or any other Junior Stock, and subject to the
liquidation rights and preferences of any class or series of preferred stock
designated in the future to be senior to, or on a parity with, the Series A
Preferred Stock with respect to liquidation preferences, an amount equal to the
greater of (i) the Series A Liquidation Value for each outstanding share of
Series A Preferred Stock, or (ii) an amount per share equal to the amount such
holders would have received had the Series A Preferred Stock been converted to
Common Stock immediately prior to such liquidation, dissolution or winding up.
If, upon liquidation, dissolution or winding up of the Corporation, the
Available Assets shall be insufficient to pay the holders of Series A Preferred
Stock the full amount to which they otherwise would be entitled to receive, the
holders of Series A Preferred Stock shall share ratably in any distribution of
Available Assets pro rata in proportion to the respective liquidation preference
amounts to which they would otherwise be entitled to receive upon liquidation if
all liquidation preference dollar amounts owing to the holders of Series A
Preferred Stock were paid in full.

          (b) After payment to the holders of the Series A Preferred Stock of
the amount set forth in subsection 2(a), the then remaining assets and funds of
the Corporation legally available for distribution, if any, shall be distributed
to the holders of the Common Stock.

          (c) The amounts set forth above and throughout this Section shall be
subject to equitable adjustment whenever there shall occur a stock dividend,
stock split, reverse stock split, combination, reorganization, recapitalization,
reclassification or other similar event involving a change in the capital
structure of the Series A Preferred Stock.

          (d) For purposes of this Section, a liquidation, dissolution or
winding up of the Corporation shall be deemed to be occasioned by, or to include
(i) the acquisition of the Corporation by another entity by means of any
transaction or series of related transactions (including, without limitation,
any reorganization, merger or consolidation but, excluding any merger effected
exclusively for the purpose of changing the domicile of the Corporation), or
(ii) a sale of all or substantially all of the assets of the Corporation; or
(iii) a sale of authorized and unissued shares of the Corporation, unless in any
of the cases described in clauses (i), (ii) or (iii), the Corporation's
shareholders of record as constituted immediately prior to such acquisition or
sale will, immediately after such acquisition or sale (by virtue of securities
issued as consideration for the Corporation's acquisition or sale or otherwise)
hold at least 50% of the voting power of the surviving or acquiring entity.
Each holder of Series A Preferred Stock, upon the occurrence of an event
described in the immediately preceding sentence, shall have the option of
electing treatment of his shares of Series A Preferred Stock under either this
Section 2 or under Section 5(g) hereof by giving the Corporation written notice
of such election at least ten days prior to the close of such transaction,
unless such holders received notice of the transaction less than 20 days prior
to the close of such transaction, and

                                      -2-
<PAGE>

then the notice of election shall be given within 10 days after such notice of
the transaction. In any of such events, if the consideration received by the
Corporation is other than cash, its value will be deemed to be such
consideration's fair market value, as determined reasonably by the Board of
Directors.

     3.   Redemption.  The Series A Preferred Stock shall not be redeemable.

     4.   Voting Rights; Directors.

          (a) Except as expressly provided herein, including Section 7, or by
the Certificate of Incorporation, by the bylaws of the Corporation or as
required by law, the holder of each share of the Series A Preferred Stock shall
be entitled to the number of votes equal to the number of full shares of Common
Stock into which such shares of Series A Preferred Stock could be converted and
(except as expressly provided herein or required by law, voting together with
the Common Stock as a single class) shall have voting rights and powers equal to
the voting rights and powers of the Common Stock and shall be entitled to notice
of any shareholders' meeting, which shall be given in accordance with the bylaws
of the Corporation.  Fractional votes shall not, however, be permitted and any
fractional voting rights available on an as-converted basis (after aggregating
all shares into which shares of Series A Preferred Stock held by each holder
could be converted) shall be rounded to the nearest whole number (with one-half
being rounded downward).

          (b) In addition to those persons entitled to call a special meeting of
the Corporation's shareholders pursuant to the Delaware Corporation Laws,
special meetings of the Corporation's shareholders may be called by vote of not
less than a majority of the outstanding shares of Series A Preferred Stock.

          (c) The Board of Directors of the Corporation shall consist of between
seven (7) and thirteen (13) members, with the exact number to be fixed from time
to time by the affirmative vote of a majority of the Board of Directors.  At
each meeting or pursuant to each consent of the Corporation's shareholders for
the election of directors, the holders of the Series A Preferred Stock, voting
together as a separate class, shall be entitled to elect five (5) directors to
the Board of Directors.  In the case of any vacancy (other than a vacancy caused
by removal) in the office of a director occurring among the directors elected by
the holders of the Series A Preferred Stock pursuant to this Section, the
remaining directors so elected by the Series A Preferred Stock may by
affirmative vote of a majority thereof (or the remaining director so elected if
there be but one, or if there are no such directors remaining, by the
affirmative vote of the Series A Preferred Stock), elect a successor or
successors to hold office for the unexpired term of the director or directors
whose place or places shall be vacant.  Any director who shall have been elected
by the holders of the Series A Preferred Stock or any directors so elected as
provided in the immediately preceding sentence hereof may be removed during the
aforesaid term of office, either with or without cause, by, and only by, the
affirmative vote of the holders of the Series A Preferred Stock, given either at
a special meeting of such shareholders duly called for that purpose or pursuant
to a written consent of shareholders, and any vacancy thereby created may be
filled by the holders of the Series A Preferred Stock represented at the meeting
or pursuant to unanimous written consent.

     5.   Conversion.  The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):

                                      -3-
<PAGE>

          (a) Right to Convert.  Each share of Series A Preferred Stock shall be
              ----------------
convertible, at the option of the holder thereof, at any time after the Series A
Issue Date, at the office of the Corporation or any transfer agent for such
stock, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing the Series A Stated Value by the then applicable
Conversion Price, determined as hereinafter provided, in effect on the date the
certificate is surrendered for conversion (hereinafter sometimes the "Conversion
Rate").  The initial Conversion Price per share for Series A Preferred Stock (as
from time to time in effect, the "Conversion Price") shall be $.1079156.  Such
initial Conversion Price shall be adjusted as hereinafter provided.

          (b) Automatic Conversion.  Each share of Series A Preferred Stock
              --------------------
shall automatically be converted into shares of Common Stock at the then
effective Conversion Price as provided in Section 5(a) above, after adjustment
as provided elsewhere in this Section 5,

              (i) immediately prior to the closing of an underwritten public
offering of the Corporation's Common Stock (A) immediately following which
offering the Corporation's Common Stock trades on the New York Stock Exchange or
the Nasdaq National Market or any national securities exchange with recognition
by regulatory authorities not materially different from, and listing standards
not less stringent than those imposed by, the Nasdaq National Market and (B) at
a price per share of Common Stock (adjusted for any stock splits, stock
dividends and recapitalizations of or on the Common Stock) not less than Five
Dollars ($5.00) for each share of Common Stock into which the Series A Preferred
Stock would then convert, and which results in gross proceeds to the Corporation
of at least Ten Million Dollars ($10,000,000); or

              (ii) at the election of the holders of at least a majority of the
Series A Preferred Stock, voting as a separate class, to automatically convert
all of the outstanding shares of Series A Preferred Stock.

          (c) Mechanics of Conversion.  Before any holder of Series A Preferred
              -----------------------
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for such stock, and
shall give written notice to the Corporation at such office that it elects to
convert the same and shall state therein the name or names in which it wishes
the certificate or certificates for shares of Common Stock to be issued.  The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder a certificate or certificates for the number of shares of
Common Stock to which it shall be entitled as aforesaid.  Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of surrender of the shares of Series A Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.

          (d) Conversion Price Adjustments of Preferred Stock for Certain
Dilutive Issuances, Splits and Combinations.

              (i)  The Conversion Price of Series A Preferred Stock shall be
subject to adjustment from time to time as follows:

                    (A)  Upon each issuance by this Corporation of any
Additional Stock (as defined below) after the date the first share of Series A
Preferred Stock was originally

                                      -4-
<PAGE>

issued, without consideration or for a consideration per share less than the
Conversion Price for such series in effect immediately prior to the issuance of
such Additional Stock, the Conversion Price for such series in effect
immediately prior to each issuance shall forthwith (except as otherwise provided
in this clause (i)) be adjusted to a price determined by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance plus the
number of shares of Common Stock that the aggregate consideration received by
the Corporation for such issuance would purchase at such Conversion Price; and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance plus the number of shares of such
Additional Stock.

                    (B) No adjustment of the Conversion Price for Series A
Preferred Stock shall be made in an amount less than one cent ($.01) per share,
provided that any adjustments that are not required to be made by reason of this
sentence shall be carried forward and shall be either taken into account in any
subsequent adjustment made prior to three (3) years from the date of the event
giving rise to the adjustment being carried forward, or shall be made at the end
of three (3) years from the date of the event giving rise to the adjustment
being carried forward, and upon such adjustment the Conversion Price for such
Preferred Stock shall be rounded up or down to the nearest cent. Except to the
limited extent provided for in subsections 5(d)(i) (E)(3), or (E)(4) or
5(d)(iv), no adjustment of such Conversion Price pursuant to this subsection
5(d)(i) shall have the effect of increasing the Conversion Price above the
Conversion Price in effect immediately prior to such adjustment.

                    (C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.

                    (D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined in good faith by
the Board of Directors irrespective of any accounting treatment.

                    (E) In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this subsection 5(d)(i) and subsection 5(d)(ii):

                         (1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (whether or not then exercisable) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the sum of the consideration (determined in the manner
provided in subsections 5(d)(i)(C) and (d)(i)(D)), if any, received by the
Corporation upon the issuance of such options or rights, and the exercise price
provided for in such options or rights for the Common Stock covered thereby.

                         (2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange (whether or not then
convertible or exchangeable) for any such convertible or exchangeable securities
or upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent

                                      -5-
<PAGE>

conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the sum of the consideration, if any, received by the
Corporation for any such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued dividends), and the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities (other than the principal amount of
convertible securities to the extent the Corporation has received such
consideration as of the issuance thereof) or the exercise of any related options
or rights.

                         (3) In the event of any change in the number of shares
of Common Stock deliverable upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable securities,
including, but not limited to, a change resulting from the antidilution
provisions thereof, the Conversion Price of the Series A Preferred Stock, to the
extent in any way affected by or computed using such options, rights or
securities, shall be recomputed to reflect such change.

                         (4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities that remain in effect) actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or rights
related to such securities.

               (ii) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection 5(d)(i)(E)) by this
Corporation after the date the first share of Series A Preferred Stock was
originally issued other than:

                    (A) Common Stock issued pursuant to a transaction described
in subsection 5(d)(iii) hereof;

                    (B) Common Stock issuable or issued to employees or service
providers of this Corporation directly or pursuant to a stock option plan or
restricted stock plan at the then current fair market value, as approved and
determined by the Board of Directors of this Corporation; or

                    (C) Common Stock issued upon conversion of shares of Series
A Preferred Stock.

               (iii) In the event the Corporation should at any time or from
time to time after the date the first share of Series A Preferred Stock was
originally issued fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the

                                      -6-
<PAGE>

Conversion Price of the Series A Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be increased in proportion to such increase of
the aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents.

               (iv) If the number of shares of Common Stock outstanding at any
time after the date the first share of Series A Preferred Stock was originally
issued is decreased by a reverse-split or combination of the outstanding shares
of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be decreased in proportion to such decrease in
outstanding shares.

          (e)  Other Distributions.  In the event this Corporation shall declare
               -------------------
a distribution payable in securities of other entities, evidences of
indebtedness issued by this Corporation or other entities, assets (excluding
cash dividends) or options or rights not referred to in subsection 5(d)(iii),
then, in each such case for other purposes of this subsection 5(e), the holders
of Series A Preferred Stock shall be entitled to a proportionate share of any
such distribution as though they were the holders of the number of shares of
Common Stock of the Corporation into which their shares of Series A Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.

          (f)  Recapitalizations.  If at any time or from time to time there
               -----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 5 or Section 2), provision shall be made so that the holders of
Series A Preferred Stock shall thereafter be entitled to receive upon conversion
of such Preferred Stock the number of shares of stock or other securities or
property of the Corporation or otherwise, to which a holder of such number of
shares of Common Stock deliverable upon conversion immediately prior to that
recapitalization would have been entitled on such recapitalization.  In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 5 with respect to the rights of the holders of Series A
Preferred Stock after the recapitalization to the end that the provisions of
this Section 5 (including adjustment of the Conversion Price then in effect and
the number of shares purchasable upon conversion of Series A Preferred Stock)
shall be applicable after that event as nearly equivalent as may be practicable.

          (g)  Capital Reorganization, Merger or Sale of Assets.  If at any time
               ------------------------------------------------
or from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this Section 5) or a merger or consolidation of the
Corporation with or into another corporation, or the sale of all or
substantially all of the Corporation's properties and assets to any other
person, then, as a part of such reorganization, merger, consolidation or sale,
provision shall be made so that the holders of the Series A Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock, the number of shares of stock or other securities or property
of the Corporation, or of the successor corporation resulting from such merger,
consolidation or sale, to which a holder of Common Stock issuable upon
conversion would have been entitled on such capital reorganization, merger,
consolidation, or sale or an amount of cash receivable as if the Series A
Preferred Stock had converted into shares of Common Stock.  In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of the Series A
Preferred Stock after the reorganization, merger, consolidation or sale to the
end that the provisions of this Section 5 shall be applicable after that event
in as nearly equivalent a manner as

                                      -7-
<PAGE>

may be practicable. Each holder of Series A Preferred Stock upon the occurrence
of an event set forth in this Section 5(g), shall, subject to automatic
conversion pursuant to subsection 5(b), have the option of electing treatment of
his shares of Series A Preferred Stock under either this Section 5(g) or Section
2 hereof, if applicable, by giving the Corporation written notice of such
election at least ten days prior to the close of such transaction unless such
holders received notice of the transaction less than 20 days prior to the close
of such transaction, then the notice of election shall be given within 10 days
after such notice.

          (h)  Certificates as to Adjustments.  Upon the occurrence of each
               ------------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 5,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and cause independent public
accountants selected by the Corporation to verify such computation and prepare
and furnish to each holder of Series A Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based.  The Corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock furnish or
cause to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at the time in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series A
Preferred Stock.

          (i)  Issue Taxes.  The Corporation shall pay any and all issue and
               -----------
other taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of shares of Series A Preferred Stock pursuant
hereto; provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.

          (j)  Reservation of Stock Issuable Upon Conversion.  The Corporation
               ---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series A Preferred
Stock, the Corporation will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to its Certificate of
Incorporation.  For the purpose of increasing the number of shares of Common
Stock authorized to provide enough Common Stock to fully convert the Series A
Preferred Stock, the Series A Preferred Stock shall vote in favor of such
amendment to the Certificate of Incorporation.

          (k)  No Fractional Shares.  No fractional share shall be issued upon
               --------------------
the conversion of any share or shares of Series A Preferred Stock.  All shares
of Common Stock (including fractions thereof) issuable upon conversion of more
than one share of Series A Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of any fractional share.  If, after the aforementioned aggregation,
the conversion would result in the issuance of a fraction of a share of Common
Stock, the Corporation shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to

                                      -8-
<PAGE>

the fair market value of such fraction on the date of conversion (as determined
in good faith by the Board of Directors of the Corporation).

     6.   Amendment.  Any term relating to the Series A Preferred Stock may be
amended and the observance of any term relating to the Series A Preferred Stock
may be waived (either generally or in a particular instance) only with the vote
or written consent of holders of a majority of the outstanding shares of the
Series A Preferred Stock.  Any amendment so effected shall be binding upon the
Corporation and any holder of the Series A Preferred Stock.

     7.   Protective Provisions.  1)  So long as any shares of Series A
Preferred Stock remain outstanding, the Corporation shall not, without the vote
or written consent by the holders of a majority of the outstanding shares of
Series A Preferred Stock, voting as a separate class, authorize:

               (i)    the declaration, setting aside or payment of any dividend
or distribution with respect to any shares of equity securities of the
Corporation;

               (ii)   any increase in the authorized number of shares of any
class or series of capital stock of the Corporation;

               (iii)  the redemption or repurchase of any shares of equity
securities, except for the repurchase of shares at cost or without cost pursuant
to rights granted to the Corporation under employee stock option or stock
repurchase agreements;

               (iv)   any amendment to, or waiver of, any provision of the
Certificate of Incorporation or bylaws of the Corporation or any corporate
action that would change any of the rights, preferences, privileges of the
Series A Preferred Stock or limitations provided for herein for the benefit of
the Series A Preferred Stock or which would materially adversely affect the
rights of the holders of the Series A Preferred Stock;

               (v)    the creation or issuance of, or the obligation to create
or issue, any shares of any class or series of capital stock of the Corporation,
or any other securities convertible into capital stock of the Corporation, other
than (i) capital stock issuable or issued to employees or service providers of
this Corporation directly or pursuant to a stock option or restricted stock plan
approved by the Board of Directors of this Corporation or (ii) capital stock
issuable upon the conversion or exchange of any convertible or exchangeable
securities outstanding as of the date hereof or the issuance of which was
approved pursuant to this subsection;

               (vi)   the sale, lease, exchange or transfer, in one transaction
or a series of related transactions, of assets of the Corporation having a fair
market value in excess of $100,000, unless the Corporation's stockholders
immediately prior to such sale, lease, exchange or transfer will, as a result of
such transaction hold (by virtue of securities issued as consideration in such
transaction) at least 50% of the voting power of the purchasing entity);

               (vii)  any liquidation, dissolution or winding up of the
Corporation;

               (viii) any reorganization, merger or consolidation in which the
Corporation is not the surviving entity, or which will result in the
Corporation's stockholders immediately prior to such transaction not holding at
least 50% of the voting power of the surviving or continuing entity;

                                      -9-
<PAGE>

               (ix)   any change in the primary business of the Corporation and
its subsidiaries from the business of providing insurance claims management,
administration and related services to third parties;

               (x)    any transaction which would result in the Corporation, or
any Subsidiary of the Corporation, incurring, assuming or suffering to exist,
any new bank indebtedness that exceeds existing bank indebtedness of the
Corporation on the Series A Issue Date by an amount in excess of one hundred
thousand dollars ($100,000);

               (xi)   the acquisition (including by merger or consolidation with
the Corporation or any of its Subsidiaries) by the Corporation or any of its
Subsidiaries of shares of capital stock of or any other ownership interest in,
or the acquisition (including by purchase, lease or exchange) of all or any
substantial portion of the assets of, any entity (other than the formation of
any new Subsidiary or joint venture in the ordinary course of the Corporation's
business which has been approved by a majority of the Board of Directors);

               (xii)  the creation or issuance of any stock options, warrants or
other Common Stock Equivalents, other than options issued to employees or
service providers of this Corporation directly or pursuant to a stock option
plan approved by the Board of Directors of this Corporation granted at the then
fair market value of such Common Stock as determined by the Board of Directors;
or

               (xiii) any transaction substantially similar to any of those
enumerated in this Section.:

          (b) In addition to any other rights provided by law or otherwise
provided herein, so long as shares of the Series A Preferred Stock remain
outstanding.

               (i)    the Board of Directors of the Corporation shall not exceed
nine members; and

               (ii)   the holders of the Series A Preferred shall elect a
majority of the Corporation's Board of Directors voting separately as a single
class.

     8.  No Reissuances of Series A Preferred Stock.  No share or shares of
Series A Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be returned to the status of undesignated shares of Preferred Stock.

     9.   Certain Covenants.  Any registered holder of Series A Preferred Stock
may proceed to protect and enforce its rights and the rights of such holders by
any available remedy by proceeding at law or in equity to protect and enforce
any such rights, whether for the specific enforcement of any provision contained
herein or in aid of the exercise of any power granted herein, or to enforce any
other proper remedy.

     10.  No Dilution or Impairment.  The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
capital stock or assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of the Series A Preferred Stock set

                                      -10-
<PAGE>

forth herein, but will at all times in good faith assist in the carrying out of
all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the holders of such Preferred
Stock against dilution or other impairment.

     11.  Notices.  In the event of:

          (a) Any taking by the Corporation of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of capital stock of any
class or any other securities or property, or to receive any other right, or

          (b) Any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger or consolidation of the Corporation, or any transfer of all or
substantially all of the assets of the Corporation to any other Corporation, or
any other entity or person, or

          (c) Any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation,

     then and in each such event the Corporation shall mail or cause to be
mailed to each holder of Series A Preferred Stock a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or right
and (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective.  Such notice shall be mailed by
first class mail, postage prepaid, at least 20 days prior to the date specified
in such notice on which such action is to be taken.

     12.  Certain Definitions.

     "Available Assets" shall mean, upon the liquidation, dissolution or winding
up of the Corporation, all assets of the Corporation available for distribution
to holders of all classes of the Corporation's capital stock, whether such
assets are capital, surplus or earnings.

     "Junior Stock" shall mean any capital stock of the Corporation ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock.

     "Series A Issue Date" shall mean, as to any share of Series A Preferred
Stock, the date of original issuance of such share of Series A Preferred Stock.

     "Series A Liquidation Value" as of any date shall mean an amount per share
equal to the Series A Stated Value, plus all accrued and unpaid dividends
thereon.

     "Series A Stated Value" shall mean $1.079156.

     "Subsidiary" of any Person means any corporation or other entity of which a
majority of the voting power of the voting equity securities or equity interest
is owned, directly or indirectly, by such Person.

                                      -11-
<PAGE>

     RESOLVED FURTHER, that the President and Secretary of the Corporation be,
and they hereby are, authorized and directed to prepare, execute, verify, and
file in Delaware, a Certificate of Designation in accordance with these
resolutions and as required by law.

     IN WITNESS WHEREOF, the undersigned declare under penalty of perjury that
they have read the foregoing Certificate of Designations and know the contents
thereof, and that the statements therein are true and correct of their own
knowledge.

Executed at Concord, California, on March 9, 2000.

                                    By:/s/ James R. Dunathan
                                       -------------------------------
                                           James R. Dunathan, President

                                    By:/s/ Earl Wiklund
                                       -------------------------------
                                           Earl Wiklund, Secretary

                                      -12-

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