Zongshen PEM Power Systems Inc. Announces First Quarter 2010 Financial
Results

TSX:ZPP

VANCOUVER, May 14 /CNW/ - Zongshen PEM Power Systems Inc. ("ZPP" or "the Company") (TSX:ZPP) today announced its financial results for the three-month period ended March 31, 2010. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

For the three-month period ended March 31, 2010 the Company reported revenues of $3.5 million versus $7.7 million in the corresponding quarter last year. Volume sales during the first quarter of 2010 totalled 10,000 units, compared with 21,000 units in the first quarter of 2009. Loss during the quarter amounted to $489,000 or $0.01 per share, versus net income of $143,000 or nil per share for the first quarter of 2009. The first quarter represents the seasonally weakest quarter due to the effect of the Chinese New Year and consumer purchasing patterns.

At March 31, 2010, the Company was debt free with cash and cash equivalents amounting to $34.0 million, compared to $35.1 million at December 31, 2009.

As previously disclosed on January 4, 2010, the Company has entered into an equity purchase agreement ("Equity Purchase Agreement") with Hong Kong VAS Development Limited, an investment holding company that invests in tandem with, and is related to and controlled by the Company's strategic partner and largest shareholder, Zongshen Industrial Group Co., Ltd. ("ZIG"), to acquire its two-wheeled gas motorcycle business (the "Motorcycle Business", and the acquisition, the "Proposed Transaction"). Pursuant to the terms of the Equity Purchase Agreement, based on the audited combined financial statements for the Motorcycle Business for the year ended December 31, 2009 (the "Annual Financial Statements"), the purchase price for the Proposed Transaction will be comprised of:

    
    (a) a cash payment of Chinese Renminbi ("RMB") 503,820,000 ($76,983,727),
        of which RMB 188,932,500 ($28,868,898) shall be paid on closing to
        HKVAS, with the remaining RMB 314,887,500 ($48,114,829) to be paid
        18 months following closing, which shall be evidenced by a promissory
        note (the "Promissory Note") issued by the Company to HKVAS on
        closing; and

    (b) the issuance of 39,724,666 common shares in the capital of the
        Company (the "Common Shares") to HKVAS on closing.
    

Additionally, 39,724,666 Common Shares will be issued and delivered to an escrow agent on closing (the "Escrow Shares"), which Escrow Shares will be released in whole or in part pursuant to the terms of an earn-out agreement to be entered into on closing (the "Vendor Earn-Out").

The Promissory Note will bear nil interest for a period of eighteen (18) months following closing of the Proposed Transaction. Following the end of such period, the Company may repay the Promissory Note either in whole or in part. If the Promissory Note is not repaid in full at the end of such period, then any unpaid principal on the Promissory Note shall bear overdue interest at 10% per annum until the Promissory Note is fully repaid. The obligations of the Company under the Promissory Note shall be secured by a pledge of equity of Air Intake held by the Company in favour of HKVAS.

Pursuant to the terms of the Vendor Earn-Out, half of the Escrow Shares will be released from escrow to HKVAS if the after tax net income of the Motorcycle Business for the financial year ending December 31, 2010 shall be at least 120% of 2009 Net Income. If however, the after tax net income of the Motorcycle Business for the financial year ending December 31, 2011 ("2011 Net Income") shall be less than 144% of 2009 Net Income, then any Escrow Shares previously released shall be forfeited and surrendered to the Company for cancellation. If 2011 Net Income shall be at least 169% of 2009 Net Income, then all Escrow Shares to the extent not previously released shall be released to HKVAS.

The Special Committee and the Board of Directors of the Company have recommended that shareholders of the Company vote in favour of the Proposed Transaction at the Company's Annual and Special Meeting to be held on June 25, 2010 (the "Meeting"). A copy of the Notice of Meeting and Management Information Circular has been mailed to shareholders of the Company, and is available on SEDAR at http://www.sedar.com under the Company's profile. Shareholders of the Company should refer to the Management Information Circular for additional information relating to the Proposed Transaction.

There are certain risks associated with the Proposed Transaction. In particular, Chongqing Zongshen Group Import & Export Co., Ltd. ("Import & Export"), one of the subsidiaries comprising the Motorcycle Business, is one of the defendants together with Zongshen, Inc., Zongshen USA Holdings, Inc., Zongshen Zuo, Dexiu Yuan and Ying Zuo (collectively, the "Defendants") to three separate actions in the State of Oregon pursuant to which the plaintiffs, Rubicon Global Ventures, Inc. and Z Motors, Inc. (collectively, the "Plaintiffs"), have obtained default judgments aggregating US$324 million (the "Oregon Litigation"). The Company understands that the Defendants have retained counsel to set aside the default judgments, and that the Defendants believe they will be able to set aside the default judgments and will prevail in the litigation. In addition, ZIG has agreed to fully indemnify the Company for any liability arising from the Oregon Litigation. However, if the Proposed Transaction shall be completed while the default judgments remain outstanding, the Company may be exposed to the full extent of the default judgments, for which ZIG may not be able to fully indemnify the Company. If the default judgments are set aside, it is uncertain how long it will take to conclude the Oregon Litigation, and what the outcome of the litigation will be, and whether ZIG may be able to fully indemnify the Company if and when the litigation is concluded. The Company is closely monitoring the Oregon Litigation and hopes to provide a further update in the near future. Shareholders should refer to the Management Information Circular for these and other risk factors relating to the Proposed Transaction and the Motorcycle Business.

Assuming all the conditions of closing are satisfied or waived, the Company expects to complete the Proposed Transaction on or about June 30, 2010.

The Company will host a conference call on Monday, May 17, 2010 at 2:00 p.m., Eastern Time (ET) to further discuss the first quarter financial and operational results.

Dial in information is as follows:

    
    Dial in number:     1-800-946-0782 (North America) or 1-719-325-2112
                        (International)

    Taped Replay:       1-888-203-1112 (North America) or 1-719-457-0820
                        (International)

    Taped Replay Pass Code:  9441004 (Available until May 31, 2010,
                             11:59 p.m. ET)

    Live Webcast Link:  http://viavid.net/dce.aspx?sid=0000759B
    

About Zongshen PEM Power Systems Inc.

Zongshen PEM Power Systems Inc. is a public company trading under the symbol ZPP on the Toronto Stock Exchange. The Company is engaged in the commercialization of alternative power systems including batteries, fuel cells and solar power, for a variety of consumer and industrial applications. The Company manufactures low-cost, high quality, environmentally friendly small gas motorbikes, electric motorcycles, electric bicycles and other e-vehicles in China for the Chinese domestic and international markets. Zongshen PEM Power System's largest shareholder is Zongshen Industrial Group, one of China's largest manufacturers and distributors of motorcycles, engines, and power equipment.

Forward-Looking Information

Certain statements in this press release, including statements which may contain words such as "pro forma", "may", "could", "expects", "believes", "projects", "forecasts", "will", "anticipates", "plans", "estimates" or negative versions thereof and similar expressions, and statements related to matters that are not historical facts, are forward-looking statements. Such forward-looking statements are based on certain factors and assumptions and involve known and unknown risks and uncertainties which may cause the actual results, performances, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.

These forward-looking statements relate to, among other things, product plans, timing, content and pricing of products, market and industry expectations, the future of the alternative power and low emissions vehicle industries, general economic, business and political conditions, loss or addition of key employees, stock market volatility, changes in laws and regulations, the Company's ability to compete successfully, adapt to technological advances, changing industry standards, foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, effective income tax rates and other factors.

All forward-looking statements in this release are based on management's reasonable beliefs, intentions, and expectations with respect to future events and are subject to certain risks, uncertainties, and assumptions as of the date of this release. Some of these risks, uncertainties and factors include those disclosed herein and those disclosed under the heading "Risk Factors" in the Company's Annual Information Form dated March 25, 2010 and Management Information Circular dated May 10, 2010, both of which have been filed on SEDAR at www.sedar.com, including the impact or unanticipated impact of: the outcome of the Oregon Litigation (defined herein), affecting the Motorcycle Business (defined herein), including the motion to set aside the default judgments; the scope and content of the proposed amendment to the Company's Master Support Agreement with ZIG; current, pending and proposed legislative or regulatory developments in the jurisdictions where the Company operates, particularly in China; changes in tax laws; political conditions and developments; intensifying competition from established competitors and new entrants in the alternative power source and low emissions vehicle industries; technological change; changes in raw material and labour costs; changes in oil and other commodity prices; currency value fluctuations and changes in foreign exchange restrictions; changes in Chinese government support or restrictions on foreign investment; general economic conditions worldwide as well as in China; the Company's success in developing and introducing new products and services, expanding existing distribution channels, developing new distribution channels, realizing increased revenue from those channels; the closing of the Proposed Transaction (defined herein) and the successful integration of the Motorcycle Business (defined herein). This list is not exhaustive of the factors that may affect any of the Company's forward-looking statements. In light of the many risks and uncertainties that may cause future results to differ materially from those expected, the Company cannot give assurance that the forward-looking statements contained in this release and the documents incorporated by reference herein will be realized. Forward-looking statements are not guarantees of future performance. Except as required by applicable law, the Company assumes no obligation to update its forward-looking statements to reflect subsequent information or events.

Assumptions underlying our expectations regarding forward-looking statements or information contained in this release include, among others, that the default judgments from the Oregon Litigation will be set aside and the Oregon Litigation will eventually be resolved without liability to the Company; that the Company can continue to rely on the support of ZIG for its existing business and the Motorcycle Business proposed to be acquired; that the strength of the Zongshen brand will continue to be strong; that the Company will continue to be able to retain key personnel and attract and retain additional talent as required; that the Company's suppliers will continue to be able to provide raw materials and other key components on a timely basis and on reasonable terms; that the Company will be able to continue to protect its intellectual property; that the Company will continue to be able to access additional capital on reasonable terms and on a timely basis; that the Company will be able to establish and/or maintain relationships with key suppliers, customers and strategic partners; that the Proposed Transaction will close; that the Motorcycle Business will be successfully integrated with the Company's existing business; and that the existing customers and suppliers of the Company and the Motorcycle Business will continue, and expand, their relationships with the Company after the Motorcycle Business is acquired by the Company.

In the event that any of these assumptions prove to be incorrect, or in the event that we are impacted by any of the risks identified above, we may not be able to continue our business as planned, or at all.

For further information: Ali Mahdavi, Zongshen PEM Power Systems Inc., Investor Relations, [phone], 1-877-775-8734, [email protected]