QUESTION 1 Superb Vehicle Spares (Pty) Ltd (SVS) is a manufacturer of motor vehicle spare parts, located in Durban, KwaZulu-Natal, South Africa. The managing director and principal shareholder is Lionel Superb. The company has manufactured spare parts for many years under the brand name Superb Spares, which are high quality spares manufactured under various patents. In recent years, many of the international motor vehicle manufacturers returned to South Africa, which resulted in the introduction of several new makes and models of motor vehicles into the local market. In 2015, SVS recognized that they were unable to produce spares of many of these new makes and models. In addition, it had become increasingly difficult to compete with cheap Asian imported spares. In an attempt to regain lost market share, SVS acquired several businesses which manufactured and sold so-called "pirate parts. While pirate parts are similar to genuine parts manufactured under license, they are not of the same quality and they are not manufactured under any patent, and royalties are not payable. Consequently, pirate parts may be produced and sold more cheaply. The investment in the new businesses and the manufacture of pirate parts allowed SVS to produce a greater variety of vehicle spares to fit most makes and models of vehicles that are sold in South Africa. The ability to do so was only achieved by substantial investment in the new businesses, inventory, and manufacturing plant. The additional investments were financed as follows: 1. The new plant was leased. 2. A mortgage bond was registered over existing land and buildings. 3. Existing plant was sold and leased back. 4. Extended bank facilities and credit terms from suppliers were negotiated in order to finance the working capital needed.
While the sale of the "pirate parts" was quite successful for SVS, it also resulted in several lawsuits being initiated against the company; some of the pirate parts were believed to be inferior, and resulted in several instances of engine damage. Various widely publicized lawsuits have negatively affected the company's sales. SVS spent R2.8 million on legal and related costs defending themselves during the 2019 financial year-end. In addition to the lawsuits, there have been several related disputes with customers who have claimed that SVS has supplied them with pirate parts, instead of genuine Superb Spares parts. Customers have contended that deliveries have been opened (prior to delivery) and that boxes have been damaged (prior to delivery). Customers have also alleged that prompt payment discounts of 5% have not been processed to their accounts - even though they have paid well within the 30-day limit. The following is a summarized extract from the financial statements of SVS (Pty) Limited, as at 28 February 2019: EXTRACTS FROM STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 28 FEBRUARY 2019 Revenue Net operating (loss) / profit (7 200) Net loss for the period (16 700) 2019 R'000 48 100 2018 R'000 52 900 2 700 (5 450)
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2019 ASSETS