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APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION OF THE COMPANY TO PERMIT CERTAIN USES OF AND DISTRIBUTIONS FROM CAPITAL SURPLUS The Board of Directors bf the Company has approved for submission to a vote of the shareholders a proposal to amend the Company's Articles of Incorporation (as heretofore amended and restated) by adding a new Article VIII thereto, in order to provide that, upon authorization by the Board, the Company may utilize its capital surplus to the maximum extent permitted by law, including (i) paying dividends or making other distributions to its shareholders out of capital surplus and (ii) purchasing its own shares out of unreserved and unrestricted capital surplus. The purpose of the proposed amendment is to provide the Company's Board of Directors with a measure of flexibility specifically available to corporations under Georgia law in deal ing with the Company's outstanding stock, whether in the payment of dividends or other distributions to the shareholders or in the repurchase of outstanding shares. The Company, because of losses in past years, had a consolidated accumulated deficit of approximately $52,43 1,000 at December 31, 1987 in its earned surplus account. As a general matter, the payment of dividends or other such distributions and the repurchase by the Company of its shares could further be accomplished in the absence of shareholder approval only to the extent that the Company has available earned surplus, unless the proposed amendments are adopted to the Company's Articles of Incorporation. These proposed amendments regarding use of capital surplus and distributions therefrom are discussed separately below and are set forth in full at Appendix A attached to this proxy statement. Notwithstanding the above deficit in earned surplus, under Georgia law the Company may make distributions from capital surplus if its articles of incorporation so provide. No such distribution may be made, however, when the corporation is insolvent or would thereby be rendered insolvent. All cumulative dividends accrued on shares entitled thereto must have been fully paid and aggregate liquidation preferences of preferred shares must not be impaired. The distribution must be identified as being from capital surplus. A distribution from capital surplus to the shareholders would have no effect on earned surplus, as defined under Georgia law, except that it obviously reduces the assets of the Company by the amount of any such distribution. Distributions to Shareholders The proposed amendment will authorize the Board of Directors of the Company to pay cash or property dividends, from time to time, to the shareholders out of capital surplus. Without this proposed amendment to the Articles, the affirmative vote of the holders of a majority of the outstanding shares of the Company would be generally required in order to authorize a distribution to shareholders of Common Stock out of capital surplus. As of March 31, 1988, based on unaudited figures, the Company’s unrestricted capital surplus equaled at least $72,000,000. There can be no assurance of any such distribution, however, and the advisability, feasibility, timing and amount of any such distribution ultimately would have to be decided by the Board of Directors in light of the financial condition of the Company and circumstances existing at such time. The Board of Directors has proposed this amendment at this time in order to facilitate efforts to enhance the value of the Company's stock by means such as (i) the payment of dividends when and as may be declared by the Board in the ordinary course of corporate management, and not solely in connection with any particular anticipated dividend obligations that may be incurred by the Company in the future, and (ii) the distribution of assets of the Company in the nature of a spin-off to shareholders of part or all of stock owned by the Company in its subsidiaries. Although the Company has no present intention to make any distribution to shareholders of dividends or other assets from capital surplus, circumstances may arise in which the Board of Directors deems it to be in the best interests of the Company's shareholders to do so, including, without limitation, in response to an attempt by a third party to acquire control of the Company for a consideration which the Company deems to be inadequate. Purchase of SharesThe Georgia Business Corporation Code limits the source for a corporation's purchase of its own shares to unreserved and unrestricted earned surplus available therefor. A corporation may, however, use unreserved and unrestricted capital surplus available therefor to make such purchases if its articles of incorporation so permit or with the affirmative vote of the holders of a majority of the outstanding shares entitled to vote thereon. The Articles of Incorporation of the Company do not currently address purchases of the Company's securities by use of capital surplus. In no event may a Georgia corporation purchase its own shares for any purpose when it is insolvent or if it would thereby become insolvent. The Board of Directors believes that a number of circumstances could arise whereby the Company would be benefitted by its increased ability to purchase its own securities. For example, to the extent that the Board feels that the Company's stock may be undervalued at the market levels at which it is trading, repurchases of the stock may represent an attractive investment for the Company. There may be other situations when repurchases of the Company's stock are appropriate or necessary to facilitate a corporate transaction wherein part of the consideration to be received by the Company consists of shares of Company stock. The increased number of shares that could be purchased by the Company by virtue of the availability of capital surplus therefor could be held in treasury, retired or utilized for any valid corporate purpose, including resale by virtue of the exercise of outstanding options or warrants or the raising of additional outside equity or for acquisitions, mergers or similar transactions, as the Board may deem advisable. The reduction in the number of the Company's outstanding shares resulting from any such purchases will increase the proportionate interest of the remaining shareholders in the Company's net worth and whatever further profits the Company may earn, but could under some circumstances result in a decrease in the book or market value per share of the remaining shares. It is the intention of the directors that any purchases of the Company's stock would be made in accordance with federal securities laws and the applicable Georgia law as well as any applicable rule s and regulations of the National Association of Securities Dealers, Inc. (NASD). Such federal securities laws impose certain volume and price limitations with respect to the shares to be purchased (other than shares acquired i n unsolicited private transactions) and the manner and time of effecting such purchases. Although the Company has no present intention of repurchasing shares of its outstanding stock, it has from time to time actively investigated the possibility of repurchasing a portion of its shares following the pric e decline of the stock in October 1987 and held certain preliminary discussions with financial lenders. There is no assurance, however, that funds would be available even if the Board of Directors determined to authorize a stock repurchase program. The number of shares repurchased, if any, and the time of any repurchases would be determined by the Board in light of prevailing market conditions, the Company's available resources and other such factors that cannot now be predicted. The Company might implement such repurchases out of available internally generated funds or through borrowings. Such repurchases could have the effect of reducing the Company's liquidity and of restricting the Company's flexibility to make new investments, but it is the Board's intention that shares wi ll be purchased only to the extent that, in the judgment of the Board of Directors, it would be in the best interests of the Company to make such purchases at particular times and at current market or negotiated prices or values. If approved, the amendment would permit the utilization of capital surplus in the distribution of cash or property to the Company's shareholders or the purchase of shares of the Company, including in response to an attempt by a third party to acquire control of the Company. In such a circumstance, the Board of Directors could determine to utilize available capital surplus in connection with a recapitalizati on or restructuring of the Company, a purchase of Corn any shares by tender offer, exchange offer or otherwise, or the declaration of an extraordinary dividend or distribution of cash, securities of the Company or its subsidiaries or other assets of the Company or its subsidiaries. The ability to utilize capital surplus in such a manner could have the possible effect of deterring take-over attempts not approved by the Board, including attempts in which shareholders might receive for some or all of their shares a premium above market value at the time such bid is made. Approval of the proposed amendment requires the affirmative vote of the holders of a majority of the shares of stock outstanding. The Board of Directors recommends a vote FOR the proposed amendment to the Articles of Incorporation of the Company. APPENDIX A Proposed Amendment to Articles of Incorporation Article VIII The Corporation may from time to time upon the approval of its Board of Directors and without shareholder approval utilize capital surplus of the Corporation to the maximum extent permitted by the Georgia Business Corporation Code, including, without limitation, purchasing its own shares of capital stock and making distributions in cash or property of a portion of its assets to its shareholders. Healthdyne, Inc. 6/13/88