Fill and Sign the Amendment No 1 to Preliminary Proxy Statement Secgov Form

- 1 - AMENDMENT OF THE COMPANY'S AMENDED AND RESTATED BYLAWS(Increase the authorized size of the Board of Directors) (Item I on the Proxy) On March 12, 1996, the Board of Directors approved proposing an amendment to the Company's Amended and Restated Bylaws ("Restated Bylaws") to increase the authorized size of the Board of Directors so as to provide for not less than five nor more than nine directors, with the authorized number of directors set at seven. The Restated Bylaws of the Company currently provide for a range of directors between four and five, with the authorized number of directors currently set at five. The Board of Directors of the Company believes it is in the best interest of the Company and its shareholders to increase the size of the Board of Directors to allow for the election of additional individuals to the Board of Directors with specific talents beneficial to the development and growth of the Company. In addition, management has proposed seven directors for election at this Annual Meeting. See "Election of Directors." The Restated Bylaws are available for inspection during business hours at the principal executive offices of the Company. In addition, copies may be obtained by writing to the Company at 6059 Cornerstone Court West, San Diego, California 92121, Attention: Secretary. A summary description of the proposed amendment to the Restated Bylaws follows, which is qualified in its entirety by reference to the full text of the Certificat e of Amendment of the Amended and Restated Bylaws set forth in Appendix A (which includes the amendment proposed in Proposal 2 below). The Board recommends that you vote FOR the amendment of theRestated Bylaws to increase the authorized size of the Board of Directors so as to provide for not less than rive nor more than nine directors, with the authorized number of directors set at seven, as set forth in Item I of the Proxy. Requisite Shareholder Approvals The affirmative vote of 66 2/3 percent of the outstanding shares of the Company's Common Stock is required for the approval of this amendment to the Restated Bylaws. The proposed amendment to the Restated Bylaws will become effective upon the receipt of the required approval of the shareholders at the Annual Meeting. Significant Changes Caused by the Proposal ENCAD's Restated Bylaws currently authorize a number of directors of not less than four nor more than five, with the exact number of directors fixed at five. The proposed amendment to the Rest ated Bylaws would change the authorized number of directors such that the number is not less than five nor more than nine, with the exact number of directors fixed at seven. The proposed amendment will not otherwise alter or modift - the Restated Bylaws, however. the Company has proposed an additional amendment to the bylaws with respect to a classified board. See "Amendment of the Company's Restated Articles of Incorporation and Amende d and Restated Bylaws (Classify, the Board of Directors into two classes)" below. If this Proposal I is not approved by the required vote of the shareholders of the Company, Proposal 2 cannot be considered at the Annual Meeting. In addition, in the event Proposal I is not approved by the requi red vote of - 2 - the shareholders of the Company, the number of directors to be elected at this Annual Meeting will be limited to five and Messrs. Andrews and Plante will not stand for election. If the proposed amendment is approved, Article Ill, Section 2 of the Company's Restated Byl aws ,,%ill read as follows: Section 2. - Number and Qualification of Directors. The authorized number of directors shall not be less than five (5) nor more than nine (9) until changed by amendment of the articl es of incorporation or by a bylaw amending this Section 2 duly adopted by the vote of holders of a majority of the outstanding shares entitled to vote, provided that a proposal to reduce the authorized number or the minimum number of directors below five cannot be adopted if the vot es cast against its adoption at a meeting are equal to more than 16-213 percent of the outstanding shares entitled to vote. The exact number of directors shall be fixed from time to time, within the limits specified in the articles of incorporation or in this Section 2, by a byl aw or amendment thereof duly adopted by the vote of a majority of the shares entitled to vote re presented at a duly held meeting at which a quorum is present or by the board of directors. Subject to the foregoing provisions for changing the number of directors, the number of directors of this corporation has been fixed at seven (7). AMENDMENT OF THE COMPANY'S RESTATED ARTICLES OF INCORPORATION AND AMENDED AND RESTATED BYLAWS (Classify the Board of Directors into two classes) (Item 2 on the Proxy) General The Board of Directors believes that it is in the best interest of the Company and its shareholders to approve the amendment of the Company's Restated Articles of Incorporation (“Restated Articles") and Restated Bylaws to adopt measures eliminating certain procedural advantages in favor of a hostile acquiror and to strengthen the ability of management to resist removal of directors and management or takeovers deemed undesirable. It is proposed that the Restated Articles and Restated Bylaws be amended to provide that the Board of Directors be classified into two classes, each class elected for staggered two-year term s. Such proposal will only be considered at the Annual Meeting in the event Proposal I is approved by the required vote of the shareholders. California law requires that there be a minimum of six directors to allow cla ssifications of the Board of Directors into two classes. Takeover attempts that have not been negotiated or approved by the board of directors of a c orporation can seriously disrupt the business and management of a corporation and generally present to the shareholders the risk of terms that may be less than favorable to all of the shareholders than would be a vailable in a board- approved transaction. Board-approved transactions may be carefully planned and undertaken at an opportune time in order to obtain maximum value for the corporation and all of its shareholders wi th due consideration to matters such as the recognition or postponement of gain or loss for tax purposes the management and business of the acquiring corporation and maximum strategic deployment of corporate assets. The Board of Directors recognizes that takeover attempts do not always have the unfavorabl e consequences or effects described above and may frequently be beneficial to the shareholders, providing all of the shareholders with considerable value for their shares. However, the Board of Directors believes that the potential disadvantages of unapproved takeover attempts are sufficiently great that prudent steps to reduce the likelihood - 3 - of such takeover attempts are in the best interests of the Company and its shareholders. Accordingly, the Board of Directors believes that certain proposals should be adopted that may have the effec t of eliminating certain provisions that would permit procedural advantages in favor of a hostile acquiror. Notwithstanding the belief of the Board of Directors as to the benefits to shareholders of the changes, shareholders should recognize that one of the effects of such changes may be to discourage a fut ure attempt to acquire control of the Company that is not presented to and approved by the Board of Direct ors. but .which a substantial number, and perhaps even a majority of the Company's shareholders, might believe to be in their best interests or in which shareholders might receive a substantial premium for their shares over the current market prices. As a result, shareholders who might desire to participate in such a tra nsaction may, not have an opportunity to do so. The new provisions in the Company's charter documents could make it more difficult to im plement a change in control of the Company that is opposed by the Board of Directors. This strengthened authority of the Board of Directors could enable the Board of Directors to resist change and otherwise thwart the de sires of a majority of the shareholders and presents a potential conflict of interest to the Board of Directors and management by allowing management the ability to negotiate terms beneficial to itsel f in the event of a negotiated business combination. In addition, the new provisions in the Company's charter documents might discourage t he accumulation of shares or tender offers by third parties. Such an accumulation of shares othe rwise might result in temporary fluctuations in the market prices of ENCAD Common Stock to the advantage of its shareholders. While the Board of Directors has no knowledge of any specific cffort to accumulate ENC AD Common Stock or to obtain control of the Company by other means, it believes that it is prudent to be prepared in advance and, for that reason, it has carefully considered what measures might be taken to protect agai nst takeover attempts that the Board of Directors is unable to recommend as being in the best interests of the Company and its shareholders. On the basis of this consideration, the Board of Directors, by consensus, has recommended the adoption of Proposal 2. Management has no current intention to propose other measures to the Compa ny's shareholders designed to discourage takeovers apart from those included in the proposed amendments t o the Restated Articles and Restated Bylaws described in Proposals 2 and 3 of this Proxy Stat ement, although additional measures may be proposed if warranted from time to time in the judgment of the Board of Directors. In general, the Company's corporate affairs are governed at present by the corporate laws of California and by the Restated Articles -and Restated Bylaws, which have been adopted pursuant to C alifornia law. The Restated Articles and Restated Bylaws are available for inspection during business hours at the pri ncipal executive offices of the Company. In addition, copies may be obtained by writing to the Company at 6059 Cornerstone Court West, San Diego, California 92121, Attention: Secretary. A summary description of the proposed amendments to the Restated Articles and Restated Bylaws follows, which is quali fied in its entirety by reference to the full text of the Certificate of Amendment of the Amended and Restated B ylaws set forth in Appendix A (which includes the amendment proposed in Proposal I above) and the Restated Articles of Incorporat ion, as amended, set forth in Appendix B (which includes the amendment proposed in Proposal 3 below). The Board of Directors recommends that you vote FOR theamendment of the Restated Articles and Restated Bylaws to classify the board of directors into two classes, each class elected for staggered two-year terms, as set forth in Item 2 of the Proxy. Requisite Shareholder Approvals - 4 - The consent of a majority of the outstanding shares of ENCAD Common Stock is required for approval of the amendment to the Restated Articles and Restated Bylaws to classify the board of directors into two classes, each class elected for staggered two-year terms. The Board of Directors of the Company has the ability to amend the Bylaws of the Com pany in the circumstances involved in Proposal 2 without submitting such amendments to a shareholder vote. The Board has determined that, in light of the nature of the proposed amendments and their potentia l antitakeover effect. the shareholders should be provided with the opportunity to approve such amendments. In the event t hat the shareholders do not approve this Proposal 2, the Board of Directors does not at this time anticipa te exercising its authority to amend the Bylaws as set forth herein. Significant Changes Caused by this Proposal Currently the Restated Articles and Restated Bylaws contain no provisions for the ele ction of directors on a staggered basis. California law requires that there be a minimum of six directors t o allow classification of the Board of Directors into two classes. California law permits a corporation with outstanding securities designated as qualified for trading as a national market system security on the National Associ ation of Securities Dealers Automated Quotation System ("Nasdaq") to divide its Board of Directors into two or three cl asses to serve for terms of two or three years, respectively. The corporation must also have at least 800 holders of its equity securities as of the record date of its most recent annual meeting. The Company's Common Stock is designated as qualified for trading on the Nasdaq National Market and the Company had more than 800 Common shareholders as of March 24, 1995. If Proposal 2 is approved by the required vote of the shareholders of the Company, the Board of Directors will be divided into two classes with each class elected for a term of office of two ye ars. The initial term of one of the classes of directors will be one year to allow the staggering of the term s of office of the two classes of the Board. Approval of Proposal 2 will allow Messrs. Purcell, Adams, Hall and Jenkins to stand for election for terms to expire in 1998 and Messrs. Andrews, Plante and Volpe to stand for election for terms to expire in 1997. Vacancies in the Board that occur before an Annual Meeting will be filled by the B oard of Directors and such replacements will serve only until the next Annual Meeting Considerations If the proposed amendment is approved, Article V, Section (A) of the Company's Restated Articles will read as follows and the current Article V will become Article V, Section (B): (A) Classes, Election and Term of Office of Directors. At the 1996 Annual Meeting of the Shareholders, the directors shall be classified into two classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1997 Annual Meeting of Shareholders and the term of office of the second class to expire at the 1998 Annual Meeting of Shareholders. At each Annual Meeting of Shareholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the second succeeding Annual Meeting of Shareholders after their election. - 5 - In addition, if the proposed amendment is approved, Article 111, Section 4 of the Company's Restated Bylaws will read as follows: Section 4 - Classification of Board of Directors. At the 1996 Annual Meeting of Shareholders, the directors shall be classified into two classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1997 Annual Meeting of Shareholders and the term of office of the second class to expire at the 1998 Annual Meeting of Shareholders. At each Annual Meeting of Shareholders following such initial classification and election. directors elected to succeed those directors whose terms expire shall be elec ted for a term of office to expire at the second succeeding Annual Meeting of Shareholders after their election. Additional Considerations The classification of directors will have the effect of making it more difficul t to change the composition of the Board of Directors. At least two shareholder meetings, instead of one, may be required to e ffect a change in the majority control of the Board. The longer time required to elect a majority of a classified board will also help to assure continuity and stability of the Company's management and policies. The Company has not experienced any lack of continuity or stability of the Company's management or policies in the past. It should also be noted that the classification provision will apply to every election of directors. whether or not a change in the Board would be beneficial to the Company and its shareholders and whether or not a majority of the Company's shareholders believes that such a change would be desirable. The overall effect of a classified Board of Directors could, under certain circumstanc es, deter or discourage hostile takeover attempts by making it more difficult for a person who has gained a substantial equity interest in the Company to effectively exercise control. In addition, the classification of the Board may result in the then incumbent directors of the Company retaining their positions even though a person holding a ma jority of shares might desire a change. If Proposal 2 is approved by the shareholders of the Company, the Board of Directors will be divide d into two classes with each class being elected for a staggered terms of two years. One cla ss will consist of three directors and the other class will consist of four directors. Each year, shareholders will vote for the election of directors to only one class. With the classification of directors, it would be impossible for an a cquiror or controlling shareholder to gain control of the Board of Directors in a year in which shareholders arc voting for a three- member class of directors.