Zongshen PEM Power Systems Inc. Enters into a Definitive Agreement to Acquire
the Two Wheeled Gas Motorcycle Business

TSX:ZPP

VANCOUVER , Jan. 4 /CNW/ - Zongshen PEM Power Systems Inc. ("ZPP" or the "Company") (TSX: ZPP) announced today that it has entered into a definitive equity purchase agreement (the "Equity Purchase Agreement") with Hong Kong VAS International Development Limited (the "Vendor"), an investment holding company that invests in tandem with, and is related to ZPP's strategic partner and largest shareholder, Zongshen Industrial Group Co., Ltd. ("ZIG") to acquire its two wheeled gas motorcycle business (the "Business", and the acquisition, the "Proposed Acquisition").

The Business is principally carried out through Chongqing Zongshen Automobile Industry Co., Ltd. ("Automobile Industry") and Chongqing Zongshen Automobile Air Intake System Manufacturing Co., Ltd. ("Air Intake"). Pursuant to the Equity Purchase Agreement, the Vendor will undertake a reorganization of the Business such that the Vendor will own 49% of the equity of Automobile Industry and 100% of the equity of Air Intake, which will be purchased by ZPP pursuant to the Equity Purchase Agreement. Under the terms of the Equity Purchase Agreement, ZPP will also enter into a series of agreements on closing in order to be able to fully administer Automobile Industry and obtain substantially all of the economic benefits of the remaining 51% of the equity of Automobile Industry not purchased directly under the Equity Purchase Agreement. ZIG has agreed to support the obligations of the Vendor under the Equity Purchase Agreement.

The Company believes that the Proposed Acquisition represents a unique opportunity to acquire a leading Chinese motorcycle brand in the world's largest growth markets. In addition, the Company believes that the gas motorcycle business will provide ZPP with a strong manufacturing, technology and distribution platform for its electric motorcycle business. The Proposed Acquisition will also further align the interests of ZPP and ZIG.

As ZIG owns 43.57% of ZPP's issued and outstanding common shares, the Proposed Acquisition is a "related party transaction" under Multilateral Instrument 61-101, and as such will require the preparation of a prescribed formal valuation (the "Valuation") and approval by shareholders of the Company other than ZIG, its related parties and joint actors. As previously announced on November 18, 2009 , the Company has engaged GMP Securities L.P. to provide the Valuation.

Additionally, two of the Company's directors, Mr. Zongshen Zuo and Mr. Yao Li , are directors and/or officers of ZIG or affiliates of ZIG and Mr. Zuo is ZIG's controlling shareholder. As such, Mssrs. Zuo and Li have declared their interests in the Proposed Transaction to the Company and have abstained from voting on the approval of the Proposed Transaction. In order to ensure an independent assessment of the Proposed Transaction, ZPP formed a special committee comprised of the independent members of the Board of Directors to negotiate, review and recommend the transaction to the Board.

The aggregate purchase price (the "Purchase Price") payable by ZPP to the Vendor under the Equity Purchase Agreement is six times the after tax net income of the Business for the financial year ended December 31, 2009 (the "2009 Net Income"). The payment of the Purchase Price will be comprised of:

    
    (a)  a cash payment of four times 2009 Net Income, 37.5% of which shall
         be paid in Chinese Renminbi (RMB) on closing, with the remaining
         62.5% to be paid in Chinese Renminbi (RMB) 18 months following
         closing, which shall be evidenced by a promissory note (the
         "Promissory Note") issued by ZPP to the Vendor on closing
         (collectively, the "Cash Consideration"); and

    (b)  an amount equal to two times 2009 Net Income to be paid to the
         Vendor on closing in common shares in the capital of ZPP ("Common
         Shares") at a deemed issue price of C$1.00 per share (the "Share
         Consideration").
    

In addition, an amount equal to two times 2009 Net Income will also be issued in Common Shares at a deemed issue price of C$1.00 per Common Share 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").

Half of the Escrow Shares will be released from escrow to the Vendor if the after tax net income of the Business for the financial year ended December 31, 2010 shall be at least 120% of 2009 Net Income. If however, the after tax net income of the Business for the financial year ended December 31, 2011 (the "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 the 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 the Vendor.

The Promissory Note will bear zero interest for a period of eighteen (18) months, shall bear interest at 10% per annum thereafter, and shall be secured by a pledge of 100% of the equity of Air Intake.

The parties have agreed on a fixed exchange rate of RMB6.3414:C$1.00 for purposes of calculating the Share Consideration and the Vendor Earn-Out.

ZIG has estimated that the Business will generate approximately RMB 1.8 billion (C$283.8 million) in revenue for the year ended December 31, 2009 and 2009 Net Income of approximately RMB 100 million (C$15.8 million). Based on that estimate, the Purchase Price will be approximately RMB 600 million (C$94.6 million), comprised of a Cash Consideration of RMB 400 million and a Share Consideration of 31,538,777 Common Shares. An additional 31,538,777 Escrow Shares will be issued on closing and may be released to the Vendor in accordance with the terms of the Vendor Earn-Out.

Assuming the above 2009 Net Income, Mr. Zongshen Zuo will beneficially own, control or direct, through ZIG and the Vendor, 59,400,205 Common Shares (or 62.21% of the Company), upon closing, and up to 90,938,982 Common Shares (or 71.59% of the Company) if all of the Escrow Shares are eventually released to the Vendor.

Completion of the Proposed Acquisition is subject to a number of conditions including the receipt of board, regulatory, TSX, shareholder and other governmental and third party approvals and consents, satisfactory due diligence by the Company, the completion of the audit of the Business for the financial year ended December 31, 2009 , and the completion of a Valuation which supports the Purchase Price payable by the Company.

Forward-Looking Statements:

This news release contains forward-looking statements relating to the Proposed Acquisition, including statements regarding the terms and conditions of the Proposed Acquisition including the Purchase Price, the projected 2009 Net Income and revenues and other statements that are not historical facts. Such forward-looking statements are subject to important risks, uncertainties and are based on certain factors and assumptions such as foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective income tax rates. The results or events predicted in these forward-looking statements may differ materially from actual results or events. As a result, you are cautioned not to place undue reliance on these forward-looking statements.

The completion of the Proposed Acquisition is subject to a number of terms and conditions, including, without limitation: (i) approval of the TSX and applicable PRC regulatory authorities, (ii) required shareholder approval of the Company, (iii) satisfactory due diligence of the Business by the Company, (iv) completion of an audit of the Business for the financial year ended December 31, 2009 , (v) completion of the Valuation which supports the Purchase Price, (vi) the completion of a reorganization of the Business by the Vendor, and (vii) certain termination rights which are available to the parties under the definitive purchase agreement. These approvals may not be obtained, or the conditions of the transaction may not be satisfied in accordance with their terms, and/or the parties to the definitive purchase agreement may exercise their termination rights, in which case the proposed transaction could be modified, restructured or terminated, as applicable.

The forward-looking statements contained in this news release are made as of the date of this release. Except as required by applicable law, the Company disclaims any intention and assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional information relating to the Company, including the risks and uncertainties relating to the Company's business, may be found in the Company's filings with the Canadian securities regulatory authorities, which are available on SEDAR at http://www.sedar.com under the Company's profile.

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