Empire Industries Ltd.
TSX VENTURE : EIL

Empire Industries Ltd.

May 18, 2016 07:00 ET

Empire Industries Announces Plan of Arrangement for Spin-Out of Hydrovac Business

CALGARY, ALBERTA--(Marketwired - May 18, 2016) - Empire Industries Ltd. ("Empire") (TSX VENTURE:EIL) is pleased to announce that, further to its news release of February 1, 2016, Empire has entered into an arrangement agreement (the "Arrangement Agreement") with its wholly-owned subsidiaries, Tornado Global Hydrovacs Ltd. ("Tornado") and Tornado Global Hydrovacs Inc. contemplating the spin-out (the "Arrangement") to Tornado of Empire's hydrovac business including all of the tangible and intangible assets, employees and operations of Tornado Trucks, a division of Empire (the "Hydrovac Business").

Pursuant to the Arrangement, the Hydrovac Business will be owned by Tornado and the common shares of Empire will be exchanged for one quarter (1/4) of a new Empire common share and one eighth (1/8) of a new Tornado common share for every common shares of Empire currently owned.

Benefits of the Arrangement

The spin-out is expected to provide certain benefits to Empire shareholders including:

  • The Arrangement is expected to allow Empire shareholders to realize the full value of the media-based attractions and steel fabrication business through their holding of new Empire common shares and also to realize the potential of the Hydrovac Business through their holding of Tornado common shares.
  • The Arrangement is expected to enhance the ability of Empire and Tornado to pursue their respective corporate objectives and strategies by allowing Empire to focus on its media-based attractions and steel fabrication business and allowing Tornado to focus on the Hydrovac Business.
  • The creation of two separate companies dedicated to the pursuit of their respective businesses will provide Empire shareholders with additional investment flexibility as they will hold a direct interest in two separate companies that are at different stages of commercial development and focused on different objectives and strategies.

The Hydrovac Business

Tornado will acquire the Hydrovac Business and as a result, will design, manufacture and sell truck-mounted hydrovac excavation equipment in North America. The hydrovac trucks use high pressure water to pulverize soil and turn it into mud, and then vacuum up the resulting mud into its tank. Hydrovac excavation is a valuable excavation technique, in large part because it can safely excavate around underground utilities such as gas lines without damaging them. As such, this equipment is frequently used in the oil and gas production industry, the pipeline industry, and by municipalities to safely expose underground utilities for repair.

The Hydrovacs Business currently operates in North America. Following completion of the Arrangement, Tornado intends to expand its hydrovac business into China, as well as maintaining and enhancing its North American business.

In North America, Tornado intends to carry on with its existing business model of designing, manufacturing, and selling hydrovac excavation equipment to end-users. Tornado plans to increase its revenue and profitability in North America by expanding its product line, enhancing its technology, expanding its geographical sales efforts particularly into the United States, and streamlining its manufacturing processes to obtain cost efficiencies.

Historically, the Hydrovac Business' primary market has been western Canada's oil and gas and pipeline industries. Its flagship product is the Tornado F4, which is an industrial-sized hydrovac unit with wide application in the oil and gas and pipeline industries. To mitigate against the economic fluctuation of the oil and gas and pipeline industries, a smaller hydrovac unit, the Tornado F2, was developed which is more suitable for municipal markets. The Tornado F2 municipal hydrovac unit does not require as much capacity as the industrial Tornado F4. It also does not need the heavy duty off road features associated with the Tornado F4 design. These design changes bring the price point and functionality more in line with the requirements of the municipal excavation market. The municipal market is a rapidly growing market for two primary reasons. Firstly, the use of hydrovac excavation is still at a low level of market penetration versus traditional methods of excavation. Secondly, the cost is prohibitively high when collateral damage caused by utility outages and deaths caused by explosions from unsafe excavation is considered. The frequency of underground utility accidents caused by traditional excavation methods is increasingly unaffordable. Targeting increased market penetration of the municipal market provides a less volatile market for the Hydrovac Business, as the demand is not sensitive to the price of oil. The Hydrovac Business has also increased its sales efforts in the United States, where the low Canadian dollar offers a competitive cost advantage over US manufacturers.

In China, Tornado intends to develop a hydrovac service-based business model. It has designed two hydrovac truck designs to comply with the Chinese technical and regulatory requirements and to target the industrial and municipal markets. Provided the Tornado truck design satisfies all the regulatory requirements and is able to manufacture the hydrovac trucks, it will have those trucks manufactured on a subcontract basis in China, with certain proprietary components being supplied from Tornado's North American manufacturing division in order to ensure the security of Tornado's proprietary intellectual property. Detailed discussions with several qualified manufacturers have taken place and management are of the view that its Chinese hydrovac truck will be able to be manufactured to its specifications and put into service in China through this method of manufacturing.

The Arrangement Agreement

The parties entered into the Arrangement Agreement setting out the proposed terms and conditions of the Arrangement. Empire's board of directors has unanimously approved the Arrangement and recommends that Empire shareholders and Empire optionholders vote in favor of the Arrangement at the special meetings of securityholders scheduled for June 21, 2016.

The Arrangement must be approved by a resolution passed by at least 66 2/3% of the votes cast by the Empire shareholders and the Empire optionholders, voting as separate classes, present in person or by proxy at the meeting. In addition to that approval, completion of the arrangement will be subject to certain customary conditions, including the approval of the Court of Queen's Bench of Alberta and the TSX Venture Exchange ("TSXV"). It is a condition of the Arrangement that the Tornado common shares be conditionally approved for listing on the TSXV.

Details of the Arrangement and the special meeting will be set out in Empire's management information circular and proxy statement that will be mailed to Empire shareholders and Empire optionholders in respect of the meeting to approve the transaction. The Arrangement Agreement, the circular and related proxy materials will be filed with Canadian securities regulators and available on SEDAR at www.sedar.com.

Tornado Private Placement

As previously disclosed, in order to fund its planned business operations over the next year, Tornado completed a private placement (the "Private Placement") of subscription receipts ("Subscription Receipts") for an aggregate of approximately $7,500,000, which Private Placement is described in more detail below.

To ensure that Tornado would be sufficiently capitalized following the closing of the Arrangement, Tornado (through an affiliate which will be wound-up into Tornado pursuant to the Arrangement) completed the Private Placement. The Subscription Receipts were subscribed for by Excellence Raise Overseas Limited ( the "Subscriber"), a corporation incorporated in the British Virgin Islands and controlled by James Chui, a proposed director of Tornado, pursuant to the terms of a subscription receipt subscription agreement (the "Canadian Subscription Agreement") entered into by the Subscriber, Empire, Tornado and Carscallen LLP as escrow agent dated January 25, 2016 as well as a subscription agreement entered into by the Subscriber, Empire, Tornado and Everbright Law Firm dated February 29, 2016 (the "Chinese Subscription Agreement" and together with the Canadian Subscription Agreement, the "Subscription Agreements"). The closing of the Private Placement resulted in the issuance of Subscription Receipts by Tornado which entitle the Subscriber to receive, without payment of additional consideration or further action, such number of common shares of Tornado as shall equal no less than 45.5% of the issued and outstanding common shares of Tornado immediately following the completion of the Arrangement for gross proceeds of approximately $7,500,000.

Effective April 15, 2016, the Subscriber transferred: (i) Subscription Receipts representing the right to acquire approximately 4.9% of the common shares of Tornado upon satisfaction of the Escrow Release Conditions to Chao Huang, a proposed director of Tornado; and (ii) Subscription Receipts representing the right to acquire approximately 35.7% of the common shares of Tornado upon satisfaction of the Escrow Release Conditions to Shanghai Pursuance Intelligence Technologies Limited Partnership ("SPITLP"), a limited partnership organized in the People's Republic of China and controlled by James Chui, a proposed director of Tornado. The Subscriber retained Subscription Receipts representing the right to acquire 4.9% of the common shares of Tornado Class upon satisfaction of the Escrow Release Conditions.

In connection with the closing of Private Placement, the Subscriber, Empire and Tornado's affiliate entered into a governance agreement (the "Governance Agreement") providing for, amongst other things: (i) until the earlier of the termination of the Subscription Agreements and the closing date of the Arrangement, the board of Tornado will be comprised of nominees of Empire; (ii) following satisfaction of the Escrow Release Conditions, the board of Tornado will be reconstituted to be comprised of five (5) directors of which two (2) nominees shall be of Empire, two (2) nominees shall be of the Subscriber and one (1) nominee shall be jointly identified by Empire and the Subscriber; (iii) following the release of the Escrowed Funds and the organization of the WFOE (as defined below), $2,000,000 shall be used by Tornado to subscribe for shares in the WFOE, $2,000,000 shall be used by Tornado to provide the WFOE Loan (as defined below) and the balance of the funds of Tornado shall be used for general working capital; (iv) Tornado shall use its reasonable commercial efforts to organize the WFOE as soon as reasonably practicable; (v) the Subscriber shall make available to WFOE within thirty (30) days of the organization of the WFOE, a secured subordinated term loan in the principal amount of $2,500,000 maturing four (4) years following the first advances of funds accruing at a rate of 8% per annum, compounded annually; and (vi) until the listing of the common shares of Tornado on the TSXV, certain corporate matters involving the issuance of securities of Tornado, certain expenditures and certain corporate transactions shall not be carried out.

The proceeds of the Private Placement will be released if certain escrow release conditions (the "Escrow Release Conditions") are satisfied. The escrow release conditions include:

(i) the approval of the Arrangement by the securityholders of Empire;
(ii) the listing of the common shares Tornado on the TSXV;
(iii) the receipt of final order of the Court of Queen's Bench approving the Arrangement; and
(iv) the closing of the Arrangement.

A portion of the proceeds of the Private Placement, in the amount of $4,000,000 will be used by Tornado to capitalize a newly organized wholly foreign owned subsidiary (the "WFOE") of Tornado, to be organized in China to carry on the hydrovac business of Tornado in China. An amount of approximately $2,000,000 will be used by Tornado to subscribe for voting securities of the WFOE and an amount of approximately $2,000,000 (the "WFOE Loan") will be loaned by Tornado to the WFOE on acceptable terms and subordinated to the principal lender of the WFOE.

Following closing of the Arrangement, the Subscriber has agreed to provide a secured term loan to Tornado (the "Subscriber Loan") in a principal amount of Chinese Renminbi equal to $2,500,000 (the "Subscriber Loan Amount"). The Subscriber will receive, amongst other things, a subordinated note (the "Subscriber Note") in a principal amount equal to the Subscriber Loan Amount. The Subscriber Note will bear interest at a rate of 8.0% per annum, payable annually for a term of four (4) years. The principal amount of the Subscriber Note will be repayable in a lump sum at the end of the term of the loan. The Subscriber Note will be secured by all personal property of Tornado and subordinated to Tornado's principal lender.

Pro Forma Consolidated Financial Position of Tornado

Tornado will continue to operate and develop the Hydrovac Business. The pro forma consolidated financial position of Tornado and Empire as at December 31, 2015, assuming completion of the Arrangement, includes the following:

Empire
Tornado
Pro Forma as of
December 31, 2015
($000's)
Empire
With
Tornado
(
audited)
Empire
Without
Tornado
(
unaudited)
Tornado
(Spin out
Assets)
(
audited)
Subscriber
investment
in Tornado
(
unaudited)
Tornado
Global
Hydrovacs
(
unaudited)
Total Assets $80,140 $75,0122 $14,1661 $10,000 $24,166
Total Liabilities $56,480 $54,852 $5,1822 $2,500 $7,682
Total Equity $23,660 $20,1601 $8,9841 $7,500 $16,484
Revenue (2015) $151,403 $131,225 $20,178
EBITDA (2015) $8,014 $8,139 ($125)
Shareholders Equity to EBITDA 3.0X 2.5X
1 Includes gain on disposal (to Empire) and unallocated purchase price adjustment (to Tornado) of $5,484.
2 Includes note payable from Tornado to Empire of $3,554.

Proposed Insiders of Tornado

Assuming completion of the Arrangement, the proposed directors and officers of Tornado will be:

Name and Position with Tornado Principal Occupation for
Preceding Five Years
Guy Nelson
Non-Executive Chairman, Director
Chief Executive Officer and President of Empire Industries Ltd. Chairman of Empire Iron since 1997. Chairman of Better Work Place Inc. from Sept. 2001 to present. Guy holds an MBA from the Ivey Business School and a B.Comm from University of Alberta.
George Tai
Corporate Secretary & Director
Lawyer and partner at Carscallen LLP since 2006.
Darrick Evong
Director
Independent Consultant for Cordy Oil Field Services (TSX VENTURE:CKK) since February 2015. President of Darsha Business Consulting from 2014 to present. Director of Financial Projects for Mullen Group Ltd. (TSX:MTL) from 2008 to 2014.
James Chui
Director
Chairman & CEO of Excellence Raise Overseas Limited since 2013. Director/President of Sino-Pacific Agency Partners (Hong Kong) Limited since 2010. Director/President of Sino-Pacific Agricultural Investment Inc. from 2011 through 2015.
Huang Chao
Director
Chief Executive Officer of Shanghai World Trade since 2013. Previously Marketing Manager of Shanghai World Trade since 2007.
Bill Rollins
Chief Executive Officer
Chief Executive Officer of Tornado. Previously president of the Tornado business unit of Empire Industries since 2007. From 1985 to 2007, Chief Executive Officer of Tornado Technologies Inc. (TSX VENTURE:TDO) and its predecessor companies.
Connie Ping
Chief Financial Officer
Chief Financial Officer of Tornado. Since 2011, served as Manager, M&A and Commercial Finance for Shell Canada. Previously Manager, M&A and Commercial Finance for Shell China since 2009 and Finance Manager for Shell JV since 2006. Held a number of positions with increasing levels of responsibility in the finance and accounting area at Shell China since 1994.

Additionally, assuming completion of the Arrangement, Shanghai Pursuance Intelligence Technology Limited Partnership ("SPITLP") will own 21,234,661 common shares of Tornado. Fifty percent (50%) of the voting securities of SPITLP are controlled by James Chui, a proposed director of Tornado who also exercises direction or control over Excellence Raise Overseas Limited which will own 2,914,561 common shares of Tornado. In aggregate, Mr. Chui will exercise control or direction over 24,149,222 common shares of representing approximately 40.6% of the issued and outstanding common shares of Tornado. In addition, Fifty Percent (50%) of the voting securities of SPITLP are controlled by Chao Huang who will also be the registered owner of 2,914,561 common shares of Tornado. In aggregate, Mr. Huang will own or exercise control or direction over 24,149,222 common shares of Tornado representing approximately 40.6% of the issued and outstanding Tornado Class "A" Shares. SPITPL will each be considered a "Control Person" under the policies of the TSX Venture Exchange and under securities laws.

About Empire Industries Ltd.

Empire Industries Ltd. manufactures specialized engineered products and sells these products domestically and in select international export markets. The company develops, designs and engineers products for the rapidly growing, global, media based attractions market and also uses these globally competitive competencies in the optical telescope market. The company designs and manufactures Hydrovac trucks for excavation service providers to the oil and gas industry and the municipal markets. The company provides steel fabrication & installation services, primarily to the industrial, commercial and infrastructure market in Western Canada. The company has two key strategic equity partnerships; a 49% ownership of ACE Industrial Services that operates in the oil sands industrial maintenance services market, and a 45% ownership of a Chinese joint venture company in the steel fabrication market in Asia. Empire's common shares are listed on the TSX Venture Exchange under the symbol EIL.

For more information about the Company, visit www.empind.com.

Advisory

The Exchange has in no way passed upon the merits of the proposed transaction and has neither approved nor disapproved the contents of this press release.

Neither the Exchange nor its Regulation Service Provider (as that term is defined in policies of the Exchange) accepts responsibility for the adequacy or accuracy of this news release

Certain statements contained in this news release constitute forward-looking statements. These statements relate to future events. All statements other than statements of historical fact are forward-looking statements. The use of the words "may", "expected", "believes", "anticipates" and other words of a similar nature are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Although Empire believes these statements to be reasonable, no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this news release should not be unduly relied upon. Such statements include statements with respect to the anticipated benefits of the Arrangement, completion of the Arrangement and any transactions associated therewith, the receipt of any regulatory, securityholder or other approvals required in connection with any transactions described herein, the expansion of the Hydrovac Business to China and the results, if any, thereof,, any increase in revenue and profitability of the Hydrovac Business and the success of any efforts in respect thereof, the satisfaction of the Escrow Release Conditions or the release of the proceeds of the Private Placement. There is no assurance that the parties will complete the Arrangement or any related transactions. Actual results could differ materially from those anticipated in these forward-looking statements as a result of prevailing economic conditions, receipt of requisite regulatory approvals, and other factors, many of which are beyond the control of Empire. The forward-looking statements contained in this news release represent Empire's expectations as of the date hereof, and are subject to change after such date. Empire disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by applicable securities regulations.

Contact Information