Empire Industries Announces Proposed Spin-Out Transaction and Closing of Subscription Receipt Private Placement by Affiliate

CALGARY, ALBERTA--(Marketwired - Feb. 1, 2016) - Empire Industries Ltd. ("Empire") (TSX VENTURE:EIL) is pleased to announce its proposal to complete transactions whereby Empire will spin-out (the "Spin-Out Transaction") to a new corporation ("SpinCo"), its wholly-owned hydrovac business including all of the tangible and intangible assets, employees and operations of Tornado Trucks, a division of Empire (the "Hydrovac Business"). Empire also announces that today, SpinCo has closed a private placement of subscription receipts for aggregate gross proceeds of US$3,521,127 (approximately $5,000,000) and expects to close a second private placement of subscription receipts for aggregate gross proceeds of $2,500,000. If the Spin-Out Transaction is completed, the aggregate gross proceeds of the subscription receipt private placements will be used as working capital of SpinCo and a wholly-owned subsidiary of SpinCo to be organized in China to carry on the hydrovac business of SpinCo in China.

"I am very pleased to announce this Spin-Out Transaction for Empire Industries and Empire's shareholders," said Guy Nelson, Empire's Chief Executive Officer. "Firstly, we are creating a stand-alone public company that will have approximately $10 million of cash and approximately $6 million of operating assets to leverage Empire's hydrovac truck business in both North America and China. Empire shareholders will own 54.5% of SpinCo and the Subscriber will own 45.5% for a cash investment of $7.5 million. The second reason I am pleased with this announcement is that it is the culmination of over two years of work to find a Chinese partner to implement our strategy of exploiting our hydrovac truck technology and knowledge in the Chinese market. The third reason is that it is an excellent step towards Empire being able to focus more on growing its globally competitive, media based attractions and precision equipment design/build business by completing the Spin-Out Transaction of Empire's Manufactured Products segment."

The Spin-Out Transaction

Subject to legal, tax and financial review, Empire proposes to complete a court approved plan of arrangement (the "Arrangement") under the Business Corporations Act (Alberta) pursuant to which Empire will spin-out working capital and fixed assets of the Hydrovac Business to SpinCo (the "Spin-Out Assets"), which assets shall have a value of no less than $6,000,000. In consideration of the Spin-Out Assets, Shareholders of Empire will receive shares of SpinCo ("SpinCo Shares") representing 54.5% of the issued and outstanding shares of SpinCo and Empire will receive a subordinated loan in a principal amount equal to the difference between the value of the Spin-Out Assets and $3,500,000 (the "Empire Loan"), which amount is anticipated to be approximately $3,000.000. The Empire Loan will bear interest at a rate of 2.7% per annum, payable annually for a term of 7 years. Principal will be payable in an amount of $20,000 per month for the first 5 years of the term with lump sum payments of approximately $900,000 payable on the sixth and seventh anniversaries of the closing of the Arrangement. The Empire Loan will be secured by all personal property of SpinCo and subordinated to SpinCo's principal lender and convertible into equity of SpinCo under certain conditions including but not limited to, a default of the terms of the Empire Loan that has not been remedied within 60 days and the approval of the TSX Venture Exchange (the "Exchange"). The conversion price of the Empire Loan will be equal to the volume weighted average trading price of the SpinCo Shares for the 30 days ending on the fifth trading day preceding conversion.

The First Subscription Receipt Private Placement

To ensure that SpinCo would be sufficiently capitalized following the closing of the Arrangement, SpinCo has completed a private placement (the "First Subscription Receipt Private Placement") of subscription receipts ("Subscription Receipts"). The Subscription Receipts have been subscribed for by Excellence Raise Overseas Limited ( the "Subscriber") pursuant to the terms of a subscription receipt subscription agreement (the "Subscription Agreement") entered into by the Subscriber, Empire, SpinCo and Carscallen LLP as escrow agent dated January 25, 2016. The closing of the First Subscription Receipt Private Placement resulted in the issuance of of Subscription Receipts which entitle the Subscriber to receive, without payment of additional consideration or further action, such number of SpinCo Shares as shall equal no less than 30.33% of the issued and outstanding SpinCo Shares immediately following the completion of the Arrangement for gross proceeds of US$3,521,127 (approximately $5,000,000). The proceeds of the First Subscription Receipt 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 holders of Empire's common shares; (ii) the listing of the SpinCo Shares on the Exchange; (iii) the receipt of final order of the Court of Queen's Bench approving the Arrangement; and (iv) the closing of the Arrangement.

The Second Subscription Receipt Private Placement

It is a condition of the First Subscription Receipt Private Placement that the Subscriber shall subscribe for additional subscription receipts for aggregate gross proceeds of such amount in Chinese Renminbi equal to $2,500,000 (the "Second Subscription Receipt Private Placement"). The Second Subscription Receipt Private Placement will be completed on substantially the same terms as the Subscription Agreement, including the Escrow Release Conditions. The proceeds of the Second Subscription Receipt Private Placement will be used to capitalize a newly organized wholly foreign owned subsidiary (the "WFOE") of SpinCo, to be organized in China to carry on the hydrovac business of SpinCo in China. An amount of approximately $2,000,000 will be used to subscribe for voting securities of the WFOE and an amount of approximately $500,000 will be loaned by SpinCo to the WFOE on acceptable terms and subordinated to the principal lender of the WFOE. In the event that the Second Subscription Receipt Private Placement is not completed, the Empire Break Fee (described below) shall be paid to Empire, the balance of the proceeds of the First Subscription Receipt Private Placement shall be returned to the Subscriber and the Spin-Out Transaction and all other transactions contemplated in connection with the Spin-Out Transaction and discussed herein shall be terminated.

Assuming the Arrangement is completed and the Subscription Receipts are exchanged for SpinCo Shares, the Subscriber will become a "control person" (as such term is defined under the policies of the Exchange) of SpinCo, holding 45.5% of the issued and outstanding SpinCo Shares. Shareholders of Empire will hold 54.5% of the SpinCo Shares. The Spin-Out Transaction will be an arm's length transaction under the policies of the Exchange.

Post-Closing Borrowing Facility of SpinCo

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

Governance Agreement

In connection with the closing of the First Subscription Receipt Private Placement, the Subscriber, Empire and SpinCo have entered into a governance agreement (the "Governance Agreement") providing for, amongst other things:

• Until the earlier of the termination of the Subscription Agreement and the closing date of the Arrangement, the board of SpinCo will be comprised of nominees of Empire.
• Following satisfaction of the Escrow Release Conditions, the board of SpinCo shall be reconstituted to be comprised of five directors of which two nominees shall be of Empire, two nominees shall be of the Subscriber and one nominee shall be jointly identified by Empire and the Subscriber.
• Following the release of the Escrowed Funds, $2,000,000 shall be used by SpinCo to subscribe for shares in the WFOE, $500,000 shall be used by SpinCo to provide the SpinCo Loan and the balance of the funds of SpinCo shall be used for general working capital.
• SpinCo shall use its reasonable commercial efforts to organize the WFOE as soon as reasonably practicable.
• the Subscriber shall make available to WFOE within 30 days of the organization of the WFOE, a secured subordinated term loan in the principal amount of $2,500,000 maturing 4 years following the first advances of funds accruing at a rate of 8% per annum, compounded annually.
• Until the listing of the SpinCo Shares on the Exchange, certain corporate matters involving the issuance of securities of SpinCo, certain expenditures and certain corporate transactions shall not be carried out.

Break Fee

The Subscription Agreement and the obligation of the Subscriber and SpinCo to complete the transactions contemplated thereby including the Arrangement, may be terminated upon (i) the mutual consent of the parties, (ii) by the Subscriber, upon written notice to SpinCo, if there has been a material violation, breach or inaccuracy of any representation, warranty or covenant of SpinCo or Empire contained in the Subscription Agreement in which case Empire shall pay the Subscriber the amount of $40,000 (the "Subscriber Break Fee"), (iii) by SpinCo or Empire, upon written notice to the Subscriber, if there has been a material violation, breach or inaccuracy of any representation, warranty or covenant of the Subscriber contained in the Subscription Agreement in which case the amount of $300,000 (the "Empire Break Fee") shall be released by the escrow agent and paid to the Corporation, or (iv) by the Subscriber if there is a material adverse effect. The Subscriber Break Fee and Empire Break Fee, as applicable, shall represent full and final satisfaction of any claims the parties may have against the each other for failing to complete the contemplated transactions.

In connection with the First Subscription Receipt Private Placement and the Spinout Transaction, Empire and SpinCo will pay a finder's fee to an arm's length finder comprised of a cash fee payable by Empire in the amount of $56,250, a cash fee payable by SpinCo in the amount of $84,375 and subject to receipt of all applicable regulatory approvals, the issue of SpinCo Shares having an aggregate value equal to approximately $84,375.

Empire intends to provide a further update on the Spin-Out Transaction, including any substantive changes to the proposed structure or any of the terms and conditions set out herein, if and when an arrangement agreement is entered into.

The Spin-Out Transaction, including the First Subscription Receipt Private Placement, the Second Subscription Receipt Private Placement and the Arrangement and all the securities transactions associated therewith or arising therefrom shall be subject to all applicable rules, policies and regulations of securities regulatory authorities (including applicable stock exchange and shareholder approvals) and securities and corporate laws.

All references to currency in this news release are to Canadian Dollars unless otherwise specified.

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.

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 closing of the Second Subscription Receipt Private Placement, completion of the Arrangement and any transactions associated therewith, the organization of the WFOE, obtaining the SpinCo Note and the timing thereof and the receipt of any regulatory, shareholder or other approvals required in connection with any transactions described herein. There is no assurance that the parties will complete the Spin-Out Transaction, the Arrangement, the Second Subscription Receipt Private Placement or any related transactions, or that an arrangement agreement, if entered into in connection with the Arrangement, will reflect the terms set forth herein. 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.