| ASSET ACCEPTANCE CAPITAL CORP Item 1A Risk Factors This Report contains forward-looking statements that involve risks and uncertainties |
| These statements include, without limitation, statements about future events or our future financial performance |
| In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “potential” or “continue”, the negative of these terms or other comparable terminology |
| These statements involve a number of risks and uncertainties |
| Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those we discuss elsewhere in this report |
| In addition, we, or persons acting on our behalf, may from time to time publish or communicate other items that could also be construed to be forward-looking statements |
| Statements of this sort are or will be based on our estimates, assumptions and projections, and are subject to risks and uncertainties, including those specifically listed below that could cause actual results to differ materially from those included in the forward-looking statements |
| Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements |
| Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations |
| Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include the following |
| If we are not able to purchase charged-off consumer receivables at appropriate prices, the resulting decrease in our inventory of purchased portfolios of receivables could adversely affect our ability to generate revenue and our ability to continue our growth |
| If we are unable to purchase charged-off consumer receivables from credit originators in sufficient face value amounts at appropriate prices, our business may be harmed |
| The availability of portfolios of consumer receivables at prices which generate an appropriate return on our investment depends on a number of factors, both within and outside of our control, including: • continued growth in the levels of consumer obligations; • continued growth in the number of industries selling charged-off consumer receivable portfolios; • continued sales of charged-off consumer receivable portfolios by credit originators; • competitive factors affecting potential purchasers and credit originators of charged-off receivables, including the number of firms engaged in the collection business and the capitalization of those firms, that may cause an increase in the price we are willing to pay for portfolios of charged-off consumer receivables or cause us to overpay for portfolios of charged-off consumer receivables; • our ability to purchase portfolios in industries in which we have little or no experience with the resulting risk of lower returns if we do not successfully purchase and collect these receivables; and • continued growth in the levels of credit being extended by credit originators |
| Over the last 24 to 30 months, we have seen prices for many asset classes of charged-off accounts receivable portfolios increase and, accordingly, it has become more difficult to acquire portfolios of charged-off accounts receivable that meet our return thresholds |
| We believe that price increases have slowed during 2005, however we cannot give any assurances about future prices either overall or within account or asset types |
| We are determined to remain disciplined and purchase portfolios only when we believe we can achieve acceptable returns |
| 17 _________________________________________________________________ [74]Table of Contents In addition, we believe that issuers of credit cards are increasingly using off-shore options in connection with their collection of delinquent accounts in an effort to reduce costs |
| If these off-shore efforts are successful, these issuers may reduce the number of portfolios available for purchase and increase the purchase price for portfolios available for sale |
| Additionally, the success of these enhanced off-shore collection efforts may render the portfolios available for sale less collectible |
| Because of the length of time involved in collecting charged-off consumer receivables on acquired portfolios and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner |
| During 2004, we entered into five forward flow contracts that commit us to purchase receivables for a fixed percentage of the face value of the receivables |
| Three of the five forward flow contracts were renewed during 2005 with only one of these forward flow contracts having terms beyond 2005 and expiring in February 2006 |
| There were no new contracts entered into during 2005 |
| During 2005, we purchased portfolios under forward flow contracts with an aggregate purchase price of approximately dlra10dtta7 million, or approximately 11prca of the total invested during the year |
| These contracts commit a debt seller to sell a steady flow of charged-off receivables to us and commit us to purchase receivables for a fixed percentage of the face value |
| Consequently, our results of operations would be negatively impacted if the fixed percentage is in excess of the appropriate market value |
| In the normal course of business, we have entered into such contracts in the past and may do so in the future depending on market conditions |
| To the extent our competition enters into forward-flow contracts, the pool of portfolios available for purchase is diminished |
| Our ability to collect on our purchased receivables may suffer if the economy suffers a material and adverse downturn for a prolonged period |
| Our success depends on our continued ability to collect on our purchased receivables |
| If the economy suffers a material and adverse downturn for a prolonged period which, in turn, increases the unemployment rate, we may not be able to collect during this period in a manner consistent with our past practice due to the inability of our customers to make payments to us |
| Any failure to collect would harm our results of operations |
| We generally account for purchased receivable revenues using the interest method of accounting in accordance with US Generally Accepted Accounting Principles, which requires making reasonable estimates of the timing and amount of future cash collections |
| If the timing and actual amount recovered by us is materially lower than our estimates, it would cause us to recognize impairments and negatively impact our earnings |
| We generally utilize the interest method of accounting for our purchased receivables because we believe that the amounts and timing of cash collections for our purchased receivables can be reasonably estimated |
| This belief is predicated on our historical results and our knowledge of the industry |
| The interest method is prescribed by the Accounting Standards Executive Committee Statement of Position 03-3 (“SOP 03-3”), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” as well as the Accounting Standards Executive Committee Practice Bulletin 6 (“PB 6”), “Amortization of Discounts on Certain Acquired Loans” |
| The provisions of SOP 03-3 were adopted by us effective January 1, 2005 and apply to purchased receivables acquired after December 31, 2004 |
| The provisions of SOP 03-3 that relate to decreases in expected cash flows are applied prospectively to purchased receivables acquired before January 1, 2005 |
| Other than the provisions relating to decreases in expected cash flow, purchased receivables acquired before January 1, 2005 will continue to be accounted for under PB 6, as amended by SOP 03-3 |
| Each static pool of receivables is modeled to determine its projected cash flows based on historical cash collections for pools with similar characteristics |
| An internal rate of return (“IRR”) is calculated for each static pool of receivables based on the projected cash flows |
| The IRR is applied to the remaining balance of each static pool of accounts to determine the revenue recognized |
| Each static pool is analyzed at least quarterly to assess the actual performance compared to the expected performance |
| To the extent there are differences in actual performance versus expected performance, the IRR is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool |
| Effective January 2005, if revised cash flow estimates are less than the original 18 _________________________________________________________________ [75]Table of Contents estimates, the IRR remains unchanged and an impairment is recognized |
| If cash flow estimates increase subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR Application of SOP 03-3 and PB 6 requires the use of reasonable estimates to calculate a projected IRR for each pool |
| These estimates are based on historical cash collections |
| If future cash collections are materially different in amount or timing than projected cash collections, earnings could be affected, either positively or negatively |
| We are required to maintain compliance with Section 404 of Sarbanes Oxley for the year ended December 31, 2005 and thereafter |
| If we are unable to maintain compliance with Section 404 or if the costs related to maintaining compliance are significant, our profitability and our stock price could be negatively affected |
| We are required to maintain compliance with Section 404 of Sarbanes Oxley (“Section 404”) for the year ended December 31, 2005 and thereafter |
| Section 404 requires that we update documentation, test our internal controls and certify that we are responsible for maintaining an adequate system of internal control procedures |
| This section also requires that our independent registered public accounting firm opine on those internal controls and management’s assessment of those controls |
| While we are committed to maintaining full and timely compliance with the requirements of Section 404, we believe that the out of pocket costs, the diversion of management’s attention from running the day-to-day operations and operational changes caused by the need to maintain compliance could be significant |
| The time and costs associated with maintaining compliance with Sarbanes Oxley could reduce our profitability |
| If we fail to maintain compliance with the requirements of Section 404, investors could lose confidence in the accuracy and completeness of our financial statements and our stock price could be negatively affected |
| We may not be able to continue to acquire charged-off consumer receivables in sufficient amounts to operate efficiently and profitably |
| To operate profitably, we must continually acquire and service a sufficient amount of charged-off consumer receivables to generate cash collections that exceed our expenses |
| Fixed costs, such as salaries and lease or other facility costs, constitute a significant portion of our overhead and, if we do not continue to acquire charged-off consumer receivable portfolios, we may have to reduce the number of our collection personnel |
| We would then have to rehire collection staff as we obtain additional charged-off consumer receivable portfolios |
| These practices could lead to: • low employee morale; • fewer experienced employees; • higher training costs; • disruptions in our operations; • loss of efficiency; and • excess costs associated with unused space in our facilities |
| We may not be able to collect sufficient amounts on our charged-off consumer receivables, which would adversely affect our results of operations |
| Our business consists of acquiring and collecting receivables that consumers have failed to pay and that the credit originator has deemed uncollectible and has charged-off |
| The credit originators or other debt sellers generally make numerous attempts to recover on their charged-off consumer receivables before we purchase such receivables, often using a combination of in-house recovery and third party collection efforts |
| Since there generally have been multiple efforts to collect on these portfolios of charged-off consumer receivables before we attempt to collect on them (three or more efforts on more than 50prca of the face value of our portfolios), our attempts to collect on these portfolios may not be successful |
| Therefore, we may not collect a sufficient amount to cover our investment associated with purchasing the charged-off consumer receivable portfolios and the costs of running our business, 19 _________________________________________________________________ [76]Table of Contents which would adversely affect our results of operations |
| There can be no assurance that our ability to make collections in the future will be comparable to our success in making collections in the past |
| We experience high turnover rates for our account representatives and we may not be able to hire and retain enough sufficiently trained account representatives to support our operations |
| Our ability to collect on new and existing portfolios and to acquire new portfolios is substantially dependent on our ability to hire and retain qualified account representatives |
| The consumer accounts receivables management industry is labor intensive and, similar to other companies in our industry, we experience a high rate of employee turnover |
| For 2005, our annual turnover rate was 57dtta3prca and our collection department employee turnover rate was 78dtta8prca |
| Based on our experience, account representatives who have been with us for more than one year are generally more productive than account representatives who have been with us for less than one year |
| In 2005, our turnover rate for all associates employed by us for at least one year was 28dtta6prca and 39dtta3prca for account representatives only |
| We compete for qualified personnel with companies in our industry and in other industries |
| Our growth requires that we continually hire, train and, in particular, retain new account representatives |
| In addition, we believe the level of training we provide to our employees makes our employees attractive to other collection companies, which may attempt to recruit them |
| A higher turnover rate among our account representatives will increase our recruiting and training costs, may require us to increase employee compensation levels and will limit the number of experienced collection personnel available to service our charged-off consumer receivables |
| If this were to occur, we would not be able to service our charged-off consumer receivables effectively, which would reduce our ability to grow and operate profitably |
| We face intense competition that could impair our ability to grow and achieve our goals |
| The consumer debt collection industry is highly competitive and fragmented |
| We compete with a wide range of other purchasers of charged-off consumer receivables, third party collection agencies, other financial service companies and credit originators and other owners of debt that manage their own charged-off consumer receivables |
| Some of these companies may have substantially greater personnel and financial resources and may experience lower account representative and employee turnover rates than we do |
| Furthermore, some of our competitors may obtain alternative sources of financing, the proceeds from which may be used to fund expansion and to increase their number of charged-off portfolio purchases |
| We believe that increasing amounts of capital are being invested in the debt collection industry, which could lead to increased prices for portfolios of charged-off accounts receivables, the enhanced ability of third parties to collect debt and the reduction in the number of portfolios of charged-off accounts receivables available for purchase |
| In addition, companies with greater financial resources than we have may elect at a future date to enter the consumer debt collection business |
| Competitive pressures affect the availability and pricing of receivable portfolios as well as the availability and cost of qualified debt account representatives |
| In addition, some of our competitors may have signed forward flow contracts under which consumer credit originators have agreed to transfer a steady flow of charged-off receivables to them in the future, which could restrict those credit originators from selling receivables to us |
| We face bidding competition in our acquisition of charged-off consumer receivable portfolios |
| We believe successful bids generally are awarded based on a combination of price, service and relationships with the debt sellers |
| Some of our current competitors, and possible new competitors, may have more effective pricing and collection models, greater adaptability to changing market needs and more established relationships in our industry than we have |
| Moreover, our competitors may elect to pay prices for portfolios that we determine are not reasonable and, in that event, our volume of portfolio purchases may be diminished |
| There can be no assurance that our existing or potential sources will continue to sell their charged-off consumer receivables at recent levels or at all, or that we will continue to offer competitive bids for charged-off consumer receivable portfolios |
| In addition, there continues to be a consolidation of issuers of credit cards, which have been a principal source of our receivable purchases |
| This consolidation has decreased the number of sellers in the market and, consequently, could over time, give the remaining sellers increasing market strength in the price and terms of the sale of charged-off credit card accounts and could cause us to accept lower returns on our investment in that paper than we have historically achieved |
| If we are unable to develop and expand our business or adapt to changing market needs as well as our current or future competitors, we may experience reduced access to portfolios of charged-off consumer receivables in 20 _________________________________________________________________ [77]Table of Contents sufficient face-value amounts at appropriate prices |
| As a result, we may experience reduced profitability which, in turn, may impair our ability to grow and achieve our goals |
| Our performance may be adversely affected by Internal Revenue Code Section 6050P and the underlying Treasury Regulations and the costs related to compliance therewith |
| Internal Revenue Code Section 6050P and the related Treasury Regulations, in certain circumstances, require creditors to send out Form 1099-C information returns to those debtors whose debt, in an amount in excess of dlra600, has been deemed to have been forgiven for tax purposes, thereby alerting them to the amount of the forgiveness and the fact that such amount may be taxable income to them |
| Under these regulations, a debt is deemed to have been forgiven for tax purposes if (i) there has been no payment on the debt for 36 months and if there were no “bona fide collection activities” (as defined in the regulation) for the preceding 12 month period, (ii) the debt was settled for less than the full amount or (iii) other similar situations outlined in the regulations |
| US Treasury Regulation Section 1dtta6050P-2 became final in 2004 and is effective for 2005 and forward and indicates that the rules apply to companies who acquire indebtedness and, therefore, we will need to comply with the reporting requirements |
| In some instances, we may engage in additional monitoring activities of accounts and will send 1099-C information returns, which will increase our administrative costs |
| If we are required to send a 1099-C information return, it may become more difficult to collect from those accounts because debtors may perceive the 1099-C as notice of debt relief rather than as tax information |
| This mistaken perception may lead to increased litigation costs for us as we may need to overcome affirmative defenses and counterclaims based on this belief by certain debtors |
| Penalties for failure to comply with these regulations are dlra50 per instance, with a maximum penalty of dlra250cmam000 per year, except where failure is due to intentional disregard, for which penalties are dlra100 per instance, with no maximum penalty |
| An additional penalty of dlra100 per information return, with no annual maximum, applies for a failure to provide the statement to the recipient |
| Our growth strategy includes acquiring charged-off receivable portfolios in industries in which we have little or no experience |
| If we do not successfully acquire and collect on these portfolios, revenue growth may slow and our results of operations may be materially and adversely affected |
| We intend to acquire portfolios of charged-off consumer receivables in industries in which we have limited experience, such as telecommunications and healthcare |
| Some of these industries may have specific regulatory restrictions with which we have no experience |
| We may not be successful in consummating any acquisitions of receivables in these industries and our limited experience in these industries may impair our ability to effectively and efficiently collect on these portfolios |
| Furthermore, we need to develop appropriate pricing models for these markets and there is no assurance that we will do so effectively |
| When pricing charged-off consumer receivables for industries in which we have limited experience, we attempt to adjust our models for expected or known differences from our traditional models |
| However, our pricing models are primarily based on historical data for industries in which we do have experience |
| This may cause us to overpay for these portfolios, and consequently, our profitability may suffer as a result of these portfolio acquisitions |
| Our strategy may include the opening of new call centers in selected locations through the acquisition of assets of businesses and the training and integration of existing account representatives into our business |
| If we open new call centers and do not successfully acquire assets of businesses and train and integrate new account representatives into our business, our results of operations would be negatively affected |
| In the past, we have opened new call centers in selected locations through the acquisition of assets of businesses and through the training and integration of the account representatives employed by these businesses |
| We have experienced higher collection recoveries in states in which we have a local or relatively close presence |
| Any future acquisitions we make, will be accompanied by the risks encountered in acquisitions of this type which include the difficulty and expense of training new account representatives and the loss of productivity due to the diversion of our management’s attention |
| If we open new call centers and do not successfully train and integrate new account representatives, it would adversely affect the growth of our business and negatively impact our operating results |
| 21 _________________________________________________________________ [78]Table of Contents Historical operating results and quarterly cash collections may not be indicative of future performance |
| Our total revenues have grown at an average annual rate in excess of 42dtta1prca for the four years 2002 through 2005 and 25dtta6prca for the two years 2004 and 2005 |
| We do not expect to achieve the same growth rates in future periods |
| Therefore, our future operating results may not reflect past performance |
| In addition, our business depends on the ability to collect on our portfolios of charged-off consumer receivables |
| Collections within portfolios tend to be seasonally higher in the first and second quarters of the year, due to consumers’ receipt of tax refunds and other factors |
| Conversely, collections within portfolios tend to be lower in the third and fourth quarters of the year, due to consumers’ spending in connection with summer vacations, the holiday season and other factors |
| Our historical growth in purchased portfolios and in our resultant quarterly cash collections has helped to minimize the effect of seasonal cash collections |
| Operating expenses are seasonally higher during the first and second quarters of the year due to expenses necessary to process the increase in cash collections |
| However, revenue recognized is relatively level due to our application of the interest method for revenue recognition |
| In addition, our operating results may be affected to a lesser extent by the timing of purchases of portfolios of charged-off consumer receivables due to the initial costs associated with purchasing and integrating these receivables into our system |
| Consequently, income and margins may fluctuate quarter to quarter |
| If the pace of our growth slows, our quarterly cash collections and operating results may become increasingly subject to fluctuation |
| Our collections may decrease if bankruptcy filings increase or if bankruptcy laws or other debt collection laws change |
| During times of economic recession, the amount of charged-off consumer receivables generally increases, which contributes to an increase in the amount of personal bankruptcy filings |
| Under certain bankruptcy filings, a debtor’s assets are sold to repay creditors, but since the charged-off consumer receivables we are attempting to collect are generally unsecured or secured on a second or third priority basis, we often would not be able to collect on those receivables |
| Our collections may decline with an increase in bankruptcy filings or if the bankruptcy laws change in a manner adverse to our business, in which case, our financial condition and results of operations could be materially adversely affected |
| In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (referred to as the “Act”) was enacted which made significant changes in the treatment of consumer filers for bankruptcy protection |
| The impact of this Act on the number of bankruptcy filings, on a prospective basis, and the collectibility of consumer debt is, as of now, undetermined |
| Failure to effectively manage our growth could adversely affect our business and operating results |
| We have expanded significantly over our history and we intend to continue to grow |
| However, any future growth will place additional demands on our resources and we cannot be sure that we will be able to manage our growth effectively |
| In order to successfully manage our growth, we may need to: • expand and enhance our administrative infrastructure; • improve our management, regulatory compliance and financial and information systems and controls; • open new call centers in select locations through the acquisition of selected assets of businesses and the development of new sites; and • recruit, train, manage and retain our employees effectively |
| Continued growth could place a strain on our management, operations and financial resources |
| We cannot assure you that our infrastructure, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth |
| If we cannot manage our growth effectively, our results of operations may be adversely affected |
| 22 _________________________________________________________________ [79]Table of Contents We are dependent on our management team for the adoption and implementation of our strategies and the loss of their services could have a material adverse effect on our business |
| Our future success depends on the continued ability to recruit, hire, retain and motivate highly skilled managerial personnel |
| The continued growth and success of our business is particularly dependent upon the continued services of our executive officers and other key personnel (particularly in purchasing and collections), including Nathaniel F Bradley IV, our President and Chief Executive Officer and Mark A Redman, our Vice President-Finance and Chief Financial Officer, each of whom has been integral to the development of our business |
| We cannot guarantee that we will be able to retain these individuals |
| Our performance also depends on our ability to retain and motivate other officers and key employees |
| The loss of the services of one or more of our executive officers or other key employees could disrupt our operations and seriously impair our ability to continue to acquire or collect on portfolios of charged-off consumer receivables and to manage and expand our business |
| We have employment agreements with each of Messrs |
| Bradley and Redman |
| However, these agreements do not and will not assure the continued services of these officers |
| We do not maintain key person life insurance policies for our executive officers or key personnel |
| Our ability to recover on our charged-off consumer receivables may be limited under federal and state laws |
| Federal and state consumer protection, privacy and related laws and regulations extensively regulate the relationship between debt collectors and debtors |
| Federal and state laws may limit our ability to recover on our charged-off consumer receivables regardless of any act or omission on our part |
| Some laws and regulations applicable to credit card issuers may preclude us from collecting on charged-off consumer receivables we purchase if the credit card issuer previously failed to comply with applicable law in generating or servicing those receivables |
| Additional consumer protection and privacy protection laws may be enacted that would impose additional or more stringent requirements on the enforcement of and collection on consumer receivables |
| Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to collect on our charged-off consumer receivable portfolios and may have a material adverse effect on our business and results of operations |
| In addition, federal and state governmental bodies are considering, and may consider in the future, other legislative proposals that would regulate the collection of consumer receivables |
| Although we cannot predict if or how any future legislation would impact our business, our failure to comply with any current or future laws or regulations applicable to us could limit our ability to collect on our charged-off consumer receivable portfolios, which could reduce our profitability and harm our business |
| In addition to the possibility of new laws being enacted, it is possible that regulators and litigants may attempt to extend debtors’ rights beyond the current interpretations placed on existing statutes |
| These attempts could cause us to (i) expend significant financial and human resources in either litigating these new interpretations or (ii) alter our existing methods of conducting business to comply with these interpretations, either of which could reduce our profitability and harm our business |
| Our growth strategy may, to a limited extent, include the acquisition of portfolios in selected countries located outside of the United States |
| If we expand our operations outside of the United States, our international acquisitions could subject us to risks that could have a material adverse effect on our business |
| We may, to a limited extent, pursue the acquisition of portfolios of charged-off consumer receivables from credit originators or collection companies located outside the United States |
| If our operations expand internationally, we will be subject to the risks of conducting business outside the United States, including: • a greater difficulty in managing collection operations globally; • compliance with multiple and potentially conflicting regulatory requirements; • fluctuations in foreign currency exchange rates; 23 _________________________________________________________________ [80]Table of Contents • changes in a specific country’s or region’s political or economic conditions; and • changes in tax laws |
| There can be no assurance that the acquisition of portfolios of charged-off consumer receivables from locations outside of the United States will produce desired levels of net revenues or profitability, or that we will be able to comply with the requisite government regulations |
| In addition, compliance with these government regulations may also subject us to additional fees, costs and licenses |
| The expansion of our operations overseas could have a material adverse effect on our business and results of operations |
| Our operations could suffer from telecommunications or technology downtime or from not responding to changes in technology |
| Our success depends in large part on sophisticated telecommunications and computer systems |
| The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty or operating malfunction (including outside influences such as computer viruses), could disrupt our operations |
| In the normal course of our business, we must record and process significant amounts of data quickly and accurately to access, maintain and expand the databases we use for our collection activities |
| Any failure of our information systems or software and their backup systems would interrupt our business operations and harm our business |
| In addition, we rely significantly on Ontario Systems LLC for the software used in operating our technology platform |
| Our business operations would be disrupted and our results of operations may be harmed if they were to cease operations or significantly reduce their support to us |
| Our access to capital through our line of credit may be critical to our ability to continue to grow |
| If our line of credit is materially reduced or terminated and if we are unable to replace it on favorable terms, our revenue growth may slow and our results of operations may be materially and adversely affected |
| We believe that our access to capital through our line of credit has been critical to our ability to grow |
| Our line of credit includes an accordion loan feature that allows us to request a dlra20dtta0 million increase in the credit facility, subject to our compliance with certain conditions and financial covenants |
| Our financial strength has increased our ability to make portfolio purchases and we believe it has also enhanced our credibility with sellers of debt who are interested in dealing with firms possessing the financial wherewithal to consummate a transaction |
| If our line of credit is materially reduced or terminated as a result of noncompliance with a covenant or other event of default and if we are unable to replace it on relatively favorable terms, our revenue growth may slow and our results of operations may be materially and adversely affected |