Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

** **

**x**** Quarterly report pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**For the quarterly period ended September 27, 2008**

** **

**o**** Transition report pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**For the transition period from                        to**

** **

**Commission file number:  1-32266**

 

**POLYPORE INTERNATIONAL, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Delaware**                                                                              | ** ** | **43-2049334**                     |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|
| (State or Other Jurisdiction of

Incorporation or Organization)                           |       | (IRS Employer

Identification No.) |
|                                                                                      |       |                               |
| **11430 North Community House Road, Suite 350**

** Charlotte, North Carolina** | ** ** | **28277**                          |
| (Address of Principal Executive Offices)                                                  |       | (Zip Code)                         |

 

**(704) 587-8409**

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

x Yes o No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany. See the definitions of “large accelerated filer”, “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
|---------------------------|--------------------------|-------------------------|----------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

o Yes x No

 

Therewere 44,374,169 shares of the registrant’s common stock outstanding as of October 31,2008.

 

 

** **

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**Polypore International, Inc.**

**Index to Quarterly Report on Form 10-Q**

**For the Three Months Ended September 27, 2008**

** **
| ** **       | ** **                                                                                         | **Page**   |
|------------------|----------------------------------------------------------------------------------------------------|------------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                          | ** ** |
| ** **       | ** **                                                                                         | ** ** |
| **Item 1.**      | **Financial Statements**                                                                           | **4**      |
| **Item 2.**      | **Management’s  Discussion and Analysis of Financial Condition and****Results of Operations** | **19**     |
| **Item 3.**      | **Quantitative  and Qualitative Disclosures About Market Risk**                                    | **28**     |
| **Item 4.**      | **Controls and  Procedures**                                                                       | **29**     |
| ** **       | ** **                                                                                         | ** ** |
| **PART II** | **OTHER INFORMATION**                                                                              | ** ** |
| **Item 1.**      | **Legal Proceedings**                                                                              | **29**     |
| **Item 1A.**     | **Risk Factors**                                                                                   | **29**     |
| **Item 6.**      | **Exhibits**                                                                                       | **30**     |
| ** **       | ** **                                                                                         | ** ** |
| **SIGNATURES**   | ** **                                                                                         |

 

Inthis Quarterly Report on Form 10-Q, the words “Polypore International,” “Company,”“we,” “us” and “our” refer to Polypore International, Inc. together withits subsidiaries, unless the context indicates otherwise.

 

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**Forward-looking Statements**

 

This Quarterly Report on Form 10-Q includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”), and the Private Securities Litigation ReformAct of 1995.  All statements other thanstatements of historical facts included in this Quarterly Report on Form 10-Qthat address activities, events or developments that we expect, believe oranticipate will or may occur in the future are forward-looking statements,including, in particular, the statements about Polypore International’s plans,objectives, strategies and prospects regarding, among other things, thefinancial condition, results of operations and business of PolyporeInternational.  We have identified someof these forward-looking statements with words like “believe,” “may,” “will,” “should,”“expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate” or “continue”and other words and terms of similar meaning. These forward-looking statements may be contained under the captions “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” or “Controlsand Procedures” or the Company’s financial statements or the notes thereto.

 

These forward-looking statements are based oncurrent expectations about future events affecting us and are subject touncertainties and factors relating to our operations and business environment,all of which are difficult to predict and many of which are beyond ourcontrol.  Many factors mentioned in ourdiscussion in this Quarterly Report on Form 10-Q, including the risks outlinedunder the caption entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the fiscal year ended December 29, 2007, will be important indetermining future results.  Although webelieve that the expectations reflected in our forward-looking statements arereasonable, we do not know whether our expectations will prove correct.  They can be affected by inaccurateassumptions we might make or by known or unknown risks and uncertainties,including with respect to Polypore International, the following, among otherthings:

 

·                  the highly competitive nature of themarkets in which we sell our products;

·                  the failure to continue to developinnovative products;

·                  the loss of our customers;

·                  the vertical integration by our customersof the production of our products into their own  manufacturing process;

·                  increases in prices for raw materials orthe loss of key supplier contracts;

·                  our substantial indebtedness;

·                  interest rate risk related to ourvariable rate indebtedness;

·                  our inability to generate cash;

·                  restrictions related to the seniorsecured credit facilities;

·                  employee slowdowns, strikes or similaractions;

·                  product liability claims exposure;

·                  risks in connection with our operationsoutside the United States;

·                  the incurrence of substantial costs tocomply with, or as a result of violations of, or liabilities under,environmental laws;

·                  the failure to protect our intellectualproperty;

·                  the failure to replace lost seniormanagement;

·                  the incurrence of additional debt,contingent liabilities and expenses in connection with future acquisitions;

·                  the failure to effectively integratenewly acquired operations;

·                  the adverse impact on our financialcondition of restructuring activities;

·                  the absence of expected returns from theamount of intangible assets we have recorded;

·                  the adverse impact from legal proceedingon our financial condition; and

·                  natural disasters, epidemics, terroristacts and other events beyond our control.

 

Becauseour actual results, performance or achievements could differ materially fromthose expressed in, or implied by, the forward-looking statements, we cannotgive any assurance that any of the events anticipated by the forward-lookingstatements will occur or, if any of them do, what impact they will have on PolyporeInternational’s results of operations and financial condition.  You are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date of thisQuarterly Report on Form 10-Q.  Wedo not undertake any obligation to update these forward-looking statements toreflect new information, future events or otherwise, except as may be requiredunder federal securities laws.

 

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**PART I – FINANCIALINFORMATION**

 

**Item 1.  Financial Statements**

 

**PolyporeInternational, Inc.**

**CondensedConsolidated Balance Sheets**

* *
| **(in thousands, except share data)**                                                                                                                                 | ** ** | **September 27, 2008** | ** **    | **December 29, 2007*** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|---------------|----------------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **(unaudited)**                  | ** **    | ** **                       | ** ** |
| **Assets**                                                                                                                                                                                |       |                             |          |                             |       |
| Current assets:                                                                                                                                                                           |       |                             |          |                             |       |
| Cash and cash equivalents                                                                                                                                                                 | ** ** | **$**                            | **80,054**    |                             | $          | 54,934 |   |
| Accounts receivable, net                                                                                                                                                                  | ** ** | **117,351**                      |          | 115,619                          |       |
| Inventories                                                                                                                                                                               | ** ** | **64,601**                       |          | 64,329                           |       |
| Refundable income taxes                                                                                                                                                                   | ** ** | **3,582**                        | ** **    | **—**                       | ** ** |
| Deferred income taxes                                                                                                                                                                     | ** ** | **1,573**                        |          | 1,808                            |       |
| Prepaid and other                                                                                                                                                                         | ** ** | **18,249**                       |          | 12,665                           |       |
| Total current assets                                                                                                                                                                      | ** ** | **285,410**                      |          | 249,355                          |       |
| Property, plant and equipment, net                                                                                                                                                        | ** ** | **461,968**                      |          | 401,284                          |       |
| Goodwill                                                                                                                                                                                  | ** ** | **601,848**                      |          | 568,784                          |       |
| Intangibles and loan acquisition costs, net                                                                                                                                               | ** ** | **191,461**                      |          | 187,861                          |       |
| Environmental indemnification receivable                                                                                                                                                  | ** ** | **18,641**                       |          | 15,640                           |       |
| Other                                                                                                                                                                                     | ** ** | **2,365**                        |          | 6,119                            |       |
| Total assets                                                                                                                                                                              | ** ** | **$**                            | **1,561,693** |                             | $          | 1,429,043 |   |
|                                                                                                                                                                                      |       |                             |          |                             |       |
| **Liabilities and shareholders’ equity**                                                                                                                                             |       |                             |          |                             |       |
| Current liabilities:                                                                                                                                                                      |       |                             |          |                             |       |
| Accounts payable                                                                                                                                                                          | ** ** | **$**                            | **30,918**    | ** **                       | $          | 33,795 | ** ** |
| Accrued liabilities                                                                                                                                                                       | ** ** | **63,858**                       |          | 50,759                           |       |
| Income taxes payable                                                                                                                                                                      | ** ** | **—**                       |          | 424                              |       |
| Current portion of debt                                                                                                                                                                   | ** ** | **3,740**                        |          | 4,549                            |       |
| Current portion  of capital lease obligation                                                                                                                                              | ** ** | **1,480**                        |          | 1,435                            |       |
| Total current liabilities                                                                                                                                                                 | ** ** | **99,996**                       |          | 90,962                           |       |
| Debt, less current portion                                                                                                                                                                | ** ** | **810,748**                      |          | 813,536                          |       |
| Capital lease obligation, less current  portion                                                                                                                                           | ** ** | **2,204**                        |          | 3,319                            |       |
| Pension and postretirement benefits                                                                                                                                                       | ** ** | **68,528**                       |          | 65,779                           |       |
| Postemployment benefits                                                                                                                                                                   | ** ** | **2,742**                        |          | 3,673                            |       |
| Environmental reserve, less current portion                                                                                                                                               | ** ** | **23,776**                       |          | 22,627                           |       |
| Deferred income taxes                                                                                                                                                                     | ** ** | **93,126**                       |          | 74,833                           |       |
| Other                                                                                                                                                                                     | ** ** | **17,604**                       |          | 18,983                           |       |
| Commitments and contingencies                                                                                                                                                             |       |                             |          |                             |       |
|                                                                                                                                                                                      |       |                             |          |                             |       |
| Shareholders’ equity:                                                                                                                                                                |       |                             |          |                             |       |
| Preferred stock – 15,000,000 shares  authorized, zero issued and outstanding                                                                                                         | ** ** | **—**                       | ** **    | **—**                       | ** ** |
| Common stock, $.01 par value – 200,000,000  shares authorized, 44,374,169 and 40,326,537 issued and outstanding at  September 27, 2008 and December 29, 2007, respectively | ** ** | **444**                          |          | 403                              |       |
| Paid-in capital                                                                                                                                                                           | ** ** | **477,576**                      |          | 390,337                          |       |
| Retained deficit                                                                                                                                                                          | ** ** | **(22,310**                      | **)**         | (51,484                          | )          |
| Accumulated other comprehensive loss                                                                                                                                                      | ** ** | **(12,741**                      | **)**         | (3,925                           | )          |
| ** **                                                                                                                                                                                |       | **442,969**                      |          | 335,331                          |       |
| Total liabilities and shareholders’ equity                                                                                                                                           | ** ** | **$**                            | **1,561,693** |                             | $          | 1,429,043 |   |

 

----

* Derived fromaudited consolidated financial statements

 

*See notes to condensedconsolidated financial statements*

 

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**PolyporeInternational, Inc.**

**CondensedConsolidated Statements of Operations (unaudited)**

 
| ** **                                                                                           | ** ** | **Three Months Ended** | ** **  | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| **(in thousands, except share data)**                                            | ** ** | **September 27,  2008**     | ** **  | **September 29,  2007**    | ** ** | **September 27,  2008** | ** ** | **September 29,  2007** | ** ** |
| Net sales                                                                                            | ** ** | **$**                            | **154,923** |                            | $          | 129,930 | ** ** | **$** | **464,917** |   | $ | 390,029 |   |
| Cost of goods sold                                                                                   | ** ** | **108,055**                      |        | 84,092                          | ** ** | **303,894** |   | 248,270 |   |
| Business interruption insurance recovery                                                             |       | —                           |        | —                          | ** ** | **(2,400** | **)** | **—** | ** ** |
| Gross profit                                                                                         | ** ** | **46,868**                       |        | 45,838                          | ** ** | **163,423** |   | 141,759 |   |
| Selling, general and administrative  expenses                                                        | ** ** | **26,233**                       |        | 23,056                          | ** ** | **81,298** |   | 69,693 |   |
| Business restructuring                                                                               | ** ** | **—**                       |        | 223                             | ** ** | **—** |   | 358 |   |
| Operating income                                                                                     | ** ** | **20,635**                       |        | 22,559                          | ** ** | **82,125** |   | 71,708 |   |
| Other (income) expense:                                                                              |       |                             |        |                            |       |   |   |   |   |
| Interest expense, net                                                                                | ** ** | **14,600**                       |        | 16,713                          | ** ** | **46,623** |   | 64,185 |   |
| Costs related to purchase of 10.50% senior  discount notes                                           | ** ** | **—**                       |        | 30,038                          | ** ** | **—** |   | 30,038 |   |
| Write-off of loan acquisition costs  associated with refinancing of senior secured credit facilities | ** ** | **—**                       | ** **  | 7,173                           | ** ** | **—** |   | 7,173 |   |
| Foreign currency and other                                                                           | ** ** | **(574**                         | **)**       | 390                             | ** ** | **(1,217** | ) | 764 |   |
| ** **                                                                                           |       | **14,026**                       |        | 54,314                          | ** ** | **45,406** |   | 102,160 |   |
| Income (loss) from continuing operations  before income taxes                                        | ** ** | **6,609**                        |        | (31,755                         | )          | **36,719** |   | (30,452 | ) |
| Income taxes                                                                                         | ** ** | **1,521**                        |        | (17,132                         | )          | **9,905** |   | (16,861 | ) |
| Income (loss) from continuing operations                                                             | ** ** | **5,088**                        |        | (14,623                         | )          | **26,814** |   | (13,591 | ) |
| Income from discontinued operations                                                                  | ** ** | **—**                       |        | 43                              |       | **2,360** |   | 70 |   |
| Net income (loss)                                                                                    | ** ** | **$**                            | **5,088**   |                            | $          | (14,580 | ) | **$** | **29,174** |   | $ | (13,521 | ) |
|                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Net income (loss) per share – basic and  diluted:                                               | ** ** | ** **                       | ** **  | ** **                      |       | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                                                                                | ** ** | **$**                            | **0.11**    |                            | $          | (0.36 | ) | **$** | **0.63** |   | $ | (0.44 | ) |
| Discontinued operations                                                                              |       | —                           |        | —                          |       | **0.06** |   | — |   |
| Net income (loss) per share                                                                          | ** ** | **$**                            | **0.11**    |                            | $          | (0.36 | ) | **$** | **0.69** |   | $ | (0.44 | ) |
|                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Weighted average shares outstanding - basic                                                          | ** ** | **44,342,597**                   |        | 40,306,928                      | ** ** | **42,204,732** |   | 30,483,644 |   |
| Effect of dilutive stock options                                                                     | ** ** | **259,349**                      |        | —                          | ** ** | **250,363** |   | — |   |
| Weighted average shares outstanding -  diluted                                                       | ** ** | **44,601,946**                   |        | 40,306,928                      | ** ** | **42,455,095** |   | 30,483,644 |   |

 

*Seenotes to condensed consolidated financial statements*

 

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**PolyporeInternational, Inc.**

**CondensedConsolidated Statements of Cash Flows (unaudited)**

 
| ** **                                                                                           | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                                                                              | ** ** | **September 27, 2008** | ** ** | **September 29, 2007** | ** ** |
| **Operating activities:**                                                                            |       |                             |       |   |   |
| Net income (loss)                                                                                    | ** ** | **$**                            | **29,174** |   | $ | (13,521 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities:            |       |                             |       |   |   |
| Depreciation expense                                                                                 | ** ** | **27,714**                       |       | 23,119 |   |
| Amortization expense                                                                                 | ** ** | **13,980**                       |       | 13,408 |   |
| Amortization of loan acquisition costs                                                               | ** ** | **1,941**                        |       | 2,154 |   |
| Amortization of debt discount                                                                        | ** ** | **—**                       |       | 13,297 |   |
| Stock-based compensation                                                                             | ** ** | **808**                          |       | 460 |   |
| Loss on disposal of property, plant and  equipment                                                   | ** ** | **946**                          |       | 1,153 |   |
| Foreign currency gain                                                                                | ** ** | **(1,878**                       | **)**      | (25 | ) |
| Deferred income taxes                                                                                | ** ** | **(133**                         | **)**      | (25,881 | ) |
| Business restructuring                                                                               | ** ** | **—**                       | ** ** | 358 |   |
| Gain on sale of synthetic paper business                                                             | ** ** | **(3,774**                       | **)**      | **—** | ** ** |
| Costs related to purchase of 10.50% senior  discount notes                                           | ** ** | **—**                       |       | 30,038 |   |
| Write-off of loan acquisition costs  associated with refinancing of senior secured credit facilities | ** ** | **—**                       |       | 7,173 |   |
| Changes in operating assets and  liabilities, net of acquisitions:                                   |       |                             |       |   |   |
| Accounts receivable                                                                                  | ** ** | **5,810**                        |       | (2,403 | ) |
| Inventories                                                                                          | ** ** | **2,732**                        |       | 8,262 |   |
| Prepaid and other current assets                                                                     | ** ** | **(3,172**                       | **)**      | 1,153 |   |
| Accounts payable and accrued liabilities                                                             | ** ** | **3,426**                        |       | 5,206 |   |
| Income taxes payable                                                                                 | ** ** | **468**                          |       | (778 | ) |
| Other, net                                                                                           | ** ** | **2,058**                        |       | (1,007 | ) |
| Net cash provided by operating activities                                                            | ** ** | **80,100**                       |       | 62,166 |   |
| **Investing activities:**                                                                            |       |                             |       |   |   |
| Acquisitions, net of cash acquired                                                                   | ** ** | **(86,050**                      | **)**      | (5,475 | ) |
| Purchases of property, plant and equipment                                                           | ** ** | **(40,038**                      | **)**      | (16,282 | ) |
| Proceeds from sale of synthetic paper  business                                                      | ** ** | **4,000**                        | ** ** | **—** | ** ** |
| Net cash used in investing activities                                                                | ** ** | **(122,088**                     | **)**      | (21,757 | ) |
| **Financing activities:**                                                                            |       |                             | ** ** |   |   |
| Proceeds from issuance of common stock, net  of underwriting fees and other offering related costs   | ** ** | **84,949**                       |       | 264,814 |   |
| Proceeds from revolving credit facility                                                              | ** ** | **46,000**                       | ** ** | **—** | ** ** |
| Payments on revolving credit facility                                                                | ** ** | **(46,000**                      | **)**      | **—** | ** ** |
| Principal payments on debt                                                                           | ** ** | **(18,569**                      | )          | (371,201 | ) |
| Proceeds from stock option exercises                                                                 | ** ** | **1,522**                        | ** ** | **—** | ** ** |
| Proceeds from the senior secured credit  facility                                                    | ** ** | **—**                       |       | 370,000 |   |
| Purchase of the 10.50% senior discount  notes                                                        | ** ** | **—**                       |       | (293,648 | ) |
| Loan acquisition costs                                                                               | ** ** | **—**                       |       | (8,672 | ) |
| Repurchase of common stock                                                                           | ** ** | **—**                       |       | (320 | ) |
| Net cash provided by (used in) financing  activities                                                 | ** ** | **67,902**                       |       | (39,027 | ) |
| Effect of exchange rate changes on cash and  cash equivalents                                        | ** ** | **(794**                         | **)**      | 4,607 |   |
| **Net increase in cash and cash equivalents**                                                        | ** ** | **25,120**                       | ** ** | 5,989 |   |
| Cash and cash equivalents at beginning of  period                                                    | ** ** | **54,934**                       |       | 54,712 |   |
| **Cash and cash equivalents at end of the  period**                                                  | ** ** | **$**                            | **80,054** |   | $ | 60,701 |   |

 

***See notes to condensed consolidated financial statements***

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**1.             Description of Business and Basisof Presentation**

 

**Description of Business**

** **

PolyporeInternational, Inc. (the “Company”) is a leading global high technologyfiltration company that develops, manufactures and markets specializedmicroporous membranes used in separation and filtration processes. The Companyhas a global presence in the major geographic markets of North America, SouthAmerica, Western Europe and Asia.

 

**Basisof Presentation**

** **

**Theaccompanying unaudited condensed consolidated financial statements of theCompany are prepared in accordance with U.S. generally accepted accountingprinciples for interim financial information. Accordingly, the unaudited condensed consolidated financial statementsand notes do not contain certain information included in the Company’s annualfinancial statements. In the opinion of management, all normal and recurringadjustments that are necessary for a fair presentation have been made.  Operating results for the three and ninemonths ended September 27, 2008 are not necessarily indicative of theresults that may be expected for the fiscal year ending January 3,2009.  The unaudited condensedconsolidated financial statements should be read in conjunction with the annualaudited financial statements for the fiscal year ended December 29, 2007.**

** **

**2.             Recent Accounting Pronouncements**

** **

**In March 2008,the FASB issued Statement No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities* (“FAS 161”). FAS 161requires companies with derivative instruments to disclose information abouthow and why a company uses derivative instruments, how derivative instrumentsand related hedged items are accounted for under Statement No. 133, *Accounting for Derivative Instruments and Hedging Activities*andhow derivative instruments and related hedged items affect a company’sfinancial position, financial performance and cash flows. FAS 161 is effectivefor financial statements issued for fiscal years beginning after November 15,2008.**

** **

**In May 2008,the FASB issued Statement No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles* (“FAS 162”). FAS 162 identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements.  FAS No. 162 is effective November 15,2008. The Company does not expect the adoption of FAS 162 will have a materialimpact on the Company’s consolidated financial statements.**

** **

**3.             Issuance of Common Stock**

** **

**On June 27,2007, the Company priced its initial public offering of common stock and signedan underwriting agreement, pursuant to which the underwriters agreed topurchase 15,000,000 shares of its common stock on a firm commitment basis at aprice of $19.00 per share.  Publictrading of the Company’s common stock commenced on June 28, 2007.  The Company received net proceeds from theoffering of $264,814,000, net of underwriting fees of $17,100,000 and otheroffering related costs.**

** **

**In May 2008,the Company completed a follow-on public offering of 8,031,000 shares of commonstock at $24.00 per share, pursuant to which 3,750,000 shares were sold by theCompany and 4,281,000 shares were sold by certain selling shareholders,including certain of the Company’s executive officers.  The Company received net proceeds from theoffering of $84,949,000, net of underwriting fees of $4,275,000 and otheroffering related costs.  The net proceedswere used to repay outstanding borrowings under the Company’s revolving creditfacility and for general corporate purposes.**

** **

**4.             Acquisitions**

 

On February 29, 2008,the Company purchased 100% of the stock of Microporous Holding Corporation, theparent company of Microporous Products L.P. (“Microporous”).  The acquisition broadens the Company’sparticipation in the deep-cycle industrial battery market, adds to its membranetechnology portfolio and product breadth, enhances service to common customersand adds cost-effective production capacity. The purchase price for Microporous stock, includingacquisition-related costs, was $27,246,000. The Company also repaid $33,643,000 in indebtedness of Microporous andassumed $14,235,000 of debt.  The assumeddebt was repaid subsequent to the acquisition. The purchase price is subject to post-closing adjustments.    The purchase agreement provides foradditional cash payments of up to an aggregate of $3,750,000 over the nextthree years beginning in 2008, contingent upon the acquired business meetingdefined earnout provisions.

 

On April 1, 2008, theCompany acquired the battery separator manufacturing assets of Super-TechBattery Components Pvt. Ltd., located in Bangalore, India for $1,949,000.

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

On May 20, 2008, theCompany purchased 100% of the capital stock of Yurie-Wide Corporation, a SouthKorean company, for $23,212,000, including acquisition related costs.  The acquisition broadens the Company’sparticipation in the lithium battery separator market, adds to its membranetechnology portfolio and product breadth and adds cost-effective productioncapacity.

 

Theresults of operations from the acquisitions described above are included in theCompany’s energy storage segment from the date of acquisition.  The Company accounts for acquisitions inconformity with FASB Statement No. 141, *BusinessCombinations* and FASB Statement No. 142, *Goodwill andOther Intangible Assets*.  Thefollowing table summarizes the aggregate preliminary purchase price allocationsfor these acquisitions based upon the estimated fair values of the assetsacquired and liabilities assumed at the date of acquisition.  During the three months ended September 27,2008, the aggregate purchase price and purchase price allocation was adjustedfor certain items, including adjustments for acquisition related costs andenvironmental matters at Microporous.

 
| **(in thousands)**              | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Current assets                       |       | $          | 15,846     |   |
| Property, plant and equipment        |       | 58,863     |       |
| Intangible assets                    |       | 19,494     |       |
| Goodwill                             |       | 33,156     |       |
| Total assets acquired                |       | 127,359    |       |
| Current liabilities                  |       | 8,862      |       |
| Debt assumed                         |       | 14,235     |       |
| Deferred taxes and other liabilities |       | 18,212     |       |
| Total liabilities assumed            |       | 41,309     |       |
| Net assets acquired                  |       | $          | 86,050     |   |

 

Theexcess of the purchase price over the fair value of the net assets acquired was$33,156,000 and was allocated to goodwill. The goodwill is not deductible for income tax purposes.

 

Pro forma information is notpresented because the impact of these acquisitions, either individually or inthe aggregate, on the Company’s consolidated results of operations for thethree months ended September 27, 2008 is not considered to be significant.

 

**5**.             Inventories

** **

**Inventoriesare carried at the lower of cost or market using the first-in, first-out methodof accounting and consist of:**

 
| **(in thousands)** | ** ** | **September 27, 2008** | ** ** | **December 29, 2007** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials           | ** ** | **$**                            | **27,687** |                            | $          | 23,545 |   |
| Work-in-process         | ** ** | **11,802**                       |       | 11,544                          |       |
| Finished goods          | ** ** | **25,112**                       |       | 29,240                          |       |
| Total                   | ** ** | **$**                            | **64,601** |                            | $          | 64,329 |   |

 

**6.             Debt**

 

**Debt,in order of priority, consists of:**

 
| **(in thousands)**         | ** ** | **September 27, 2008** | ** **  | **December 29, 2007** | ** ** |
|---------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| Senior credit facilities:       |       |                             |        |                            |       |
| Revolving credit facility       |       | $                                | —      |                            | $          | — |   |
| Term loan facilities            | ** ** | **370,181**                      |        | 373,122                         |       |
| 8.75% senior subordinated notes | ** ** | **444,240**                      |        | 444,825                         |       |
| Other                           | ** ** | **67**                           |        | 138                             |       |
| ** **                      |       | **814,488**                      |        | 818,085                         |       |
| Less current maturities         | ** ** | **3,740**                        |        | 4,549                           |       |
| Long-term debt                  | ** ** | **$**                            | **810,748** |                            | $          | 813,536 |   |

 

8

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Table of Contents

 

**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**In January 2008,the Company entered into two interest rate swap agreements with notionalprincipal amounts totaling**$250,000,000. Theswap agreement with a notional amount of $200,000,000 effectively fixes theinterest rate on that amount of debt at 5.54% and expires on December 31,2009.  The swap agreement with anotional amount of $50,000,000 effectively fixes the interest rate on thatamount of debt at 5.58% and expires on June 30, 2009.  The swap agreements are accounted for underFASB Statement No. 133, *Accounting forDerivative Instruments and Hedging Activities*(“FAS 133”)*.*  In accordance with FAS 133, theCompany designated these swap agreements as cash flow hedges with changes infair value, net of income taxes, recorded to “Accumulated other comprehensive loss” in the accompanyingbalance sheets. The fair value of the interest rate swap agreements, based oncurrent settlement values, was an obligation of $622,028 at September 27,2008 and was included in “Other” non-current liabilities in the accompanyingbalance sheets.

** **

**7.             Employee Benefit Plans**

** **

**The Company and its subsidiaries sponsor multipledefined benefit pension plans and an other postretirement benefit plan.  The following table provides the componentsof net periodic benefit cost:**

 
| ** **                         | ** ** | **Pension Plans**           | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| **(in thousands)**            | ** ** | **September 27, 2008** | ** ** | **September 29, 2007** | ** ** | **September 27, 2008** | ** ** | **September 29, 2007** | ** ** |
| ** **                         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                       | ** ** | **$**                            | **596**    |   | $ | 815 | ** ** | **$** | **1,795** |   | $ | 2,416 |   |
| Interest cost                      | ** ** | **1,062**                        |       | 842 |   | **3,198** |   | 2,496 |   |
| Expected return on plan assets     | ** ** | **(284**                         | )          | (245 | ) | **(855** | ) | (725 | ) |
| Amortization of prior service cost | ** ** | **(21**                          | **)**      | **—** |   | **(63** | **)** | **—** | ** ** |
| Recognized net actuarial loss      | ** ** | **111**                          |       | 94 | ** ** | **335** |   | 278 |   |
| Net periodic benefit cost          | ** ** | **$**                            | **1,464**  |   | $ | 1,506 | ** ** | **$** | **4,410** |   | $ | 4,465 |   |

 
| ** **                    | ** ** | **Other Postretirement Benefits** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended**            | ** ** | **Nine Months Ended** | ** ** |
| **(in thousands)**       | ** ** | **September 27, 2008**            | ** ** | **September 29, 2007** | ** ** | **September 27, 2008** | ** ** | **September 29, 2007** | ** ** |
| ** **                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                  | ** ** | **$**                                       | **17**     |   | $ | 8 | ** ** | **$** | **51** |   | $ | 25 |   |
| Interest cost                 | ** ** | **34**                                      |       | 28 | ** ** | **102** |   | 83 |   |
| Recognized net actuarial loss | ** ** | **5**                                       | ** ** | **—** | ** ** | **13** |   | — |   |
| Net periodic benefit cost     | ** ** | **$**                                       | **56**     |   | $ | 36 | ** ** | **$** | **166** |   | $ | 108 |   |

** **

**8.             Environmental Matters**

 

TheCompany accrues for environmental obligations when such expenditures areprobable and reasonably estimable. The amount of liability recorded is based oncurrently available information, including the progress of remedialinvestigations, current status of discussions with regulatory authoritiesregarding the method and extent of remediation, presently enacted laws andexisting technology. Accruals for estimated losses from environmentalobligations are adjusted as further information develops or circumstanceschange. Costs of future expenditures for environmental obligations are notdiscounted to their present value. Recoveries of environmental costs from otherparties are recognized as assets when their receipt is deemed probable.Environmental reserves, which are predominately euro-denominated, were$30,919,000 and $29,153,000 as of September 27, 2008 and December 29,2007, respectively.

 

**Inconnection with the acquisition of Membrana in 2002, the Company recorded areserve for costs to remediate known environmental issues and operationalupgrades at the Wuppertal, Germany facility. In 2004, the Company identified potential environmental contamination atits manufacturing facility in Potenza, Italy. The Company anticipates that expenditures will be made over the nextseven to ten years.**

** **

TheCompany has indemnification agreements for certain environmental matters fromAcordis A.G. (“Acordis”) and Akzo Nobel N.V. (“Akzo”), the prior owners ofMembrana.  Akzo originally provided broadenvironmental protections to Acordis with the right to assign such indemnitiesto Acordis’s successors. Akzo’s indemnifications relate to conditions existingprior to December 1999, which is the date that Membrana was sold toAcordis. The Akzo agreement provides indemnification of claims through December 2007,with the indemnification percentage decreasing each year during the coverageperiod.  In addition to the Akzoindemnification, Acordis provides separate indemnification of claims incurredfrom December 1999 through February 2002, 

 

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Table of Contents

 

**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

theacquisition date. At September 27, 2008 and December 29, 2007,amounts receivable under the indemnification agreements were $19,899,000 and$19,952,000, respectively. The current portion of the indemnificationreceivable is included in “Prepaid and other” in the accompanying balancesheets.

 

Inconnection with the acquisition of Microporous on February 29, 2008, theCompany identified potential environmental contamination at the acquired manufacturingsite in Piney Flats, Tennessee. Subsequent to the acquisition, the Company performed additionalenvironmental studies and confirmed that environmental contamination waspresent.  The estimated cost ofremediation is approximately $3,076,000. As part of the acquisition, the seller purchased an environmentalinsurance policy on behalf of the Company and also provided indemnification fora portion of the insurance policy deductible. At September 27, 2008, amounts due under the insurance policy andindemnification agreement were $2,522,000. The Company recorded the estimated cost of remediation and the relatedreceivables from the insurance company and indemnification agreement as anadjustment to the preliminary allocation of purchase price during the threemonths ended September 27, 2008. The current portion of the indemnification receivable is included in “Prepaidand other” in the accompanying balance sheets.

 

**9.             Business Restructuring**

** **

**2006 Restructuring Plan**

** **

**Inresponse to a significant decline in demand for cellulosic hemodialysismembranes driven by a shift in industry demand toward synthetic membranes, theCompany’s separations media segment exited the production of cellulosicmembranes and realigned its cost structure at its Wuppertal, Germanyfacility.  On August 24, 2006, theCompany announced a layoff of approximately 150 employees.  Production of cellulosic hemodialysismembranes ceased on December 27, 2006 and the majority of the employeeswere laid off effective January 1, 2007. The total cost of the plan is expected to be approximately $33,753,000,consisting of a $17,492,000 non-cash impairment charge for buildings andequipment used in the production of cellulosic hemodialysis membranes,$10,466,000 for the employee layoffs and $5,795,000 for other costs related tothe shutdown of portions of the Wuppertal facility that will no longer beused.  The other costs included in therestructuring plan are related to local regulations surrounding complete orpartial shutdowns of a facility.  TheCompany expects to complete these activities by the end of the 2010.  The timing, scope and costs of theserestructuring measures are subject to change as the Company proceeds with itsrestructuring plan and further evaluates its business needs and costs.**

** **

**2005 Restructuring Plan**

** **

**Inorder to better accommodate customer growth and related demand for bothlead-acid and lithium battery separators in the greater Asian market, theCompany’s energy storage segment transferred certain assets from Europe and theUnited States to its facilities in Thailand and China.  The total cost of the realignment plan was$9,117,000.**

** **

**Restructuring activity during the nine months ended September 27,2008 consisted of:**

 
| **(in thousands)**      | ** ** | **Balance at  December 29,  2007** | ** ** | **Restructuring  Charges** | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  September 27,  2008** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------------------------|------------|-----------------------------------------------|------------|
| 2006  Restructuring Plan:    |       |                                         |       |                       |       |               |       |                               |       |                                          |       |
| Severance and  benefit costs |       | $                                            | 3,548      |                       | $          | —             |       | $                                  | (452       | )                                             | $          | 5 |   | $ | 3,101 |   |
| Other                        |       | 1,288                                        |       | —                     |       | (523               | )          | 15                                 |       | 780                                           |       |
|                         |       | 4,836                                        |       | —                     |       | (975               | )          | 20                                 |       | 3,881                                         |       |
| ** **                   | ** ** | ** **                                   | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                                    | ** ** |
| 2005  Restructuring Plan:    |       |                                         |       |                       |       |               |       |                               |       |                                          |       |
| Severance and  benefit costs |       | 404                                          |       | —                     |       | (87                | )          | 3                                  |       | 320                                           |       |
| ** **                   | ** ** | ** **                                   | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                                    | ** ** |
| Total                        |       | $                                            | 5,240      |                       | $          | —             |       | $                                  | (1,062     | )                                             | $          | 23 |   | $ | 4,201 |   |

** **

**10**.          Income Taxes

** **

Theincome tax provision for the interim periods presented is computed at theeffective rate expected to be applicable in each respective full year using thestatutory rates on a country-by-country basis. Income tax expense recorded in the financial statements differs from theFederal statutory income tax rate due to a variety of factors, including stateincome taxes, the mix of income between U.S. and foreign jurisdictions taxed atvarying rates and various changes in estimates of permanent differences andvaluation allowances.

 

Duringthe three months ended September 27, 2008, the Company eliminated thevaluation allowance relating to net operating loss carryforwards in Austria,resulting in a reduction of income taxes during the period of approximately$946,000.

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

Duringthe three months ended September 27, 2008, the U.S. tax authoritysubstantially completed its audit of the Company’s Federal income tax returnsfor tax years 2003 and 2004.  Inaccordance with FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes – An Interpretation of FASB Statement 109*(“FIN 48”), the Company reclassified approximately $5,484,000 from its FIN 48reserve (included in “Other” non-current liabilities in the accompanyingbalance sheet) to non-current deferred income tax liabilities to reflect theeffective settlement of tax issues in these tax years.

 

**11.          Business Interruption Insurance Recovery**

 

**On September 30,2007, a customer in the Company’s energy storage segment experienced a fire atone of their facilities.  In 2008, theCompany settled a business interruption insurance claim with its insuranceprovider and received total proceeds of $2,400,000.**

** **

**12.          Comprehensive Income (Loss)**

 

**Comprehensiveincome (loss) is as follows:**

 
| ** **                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                                                       | ** ** | **September 27, 2008** | ** ** | **September 29, 2007** | ** ** | **September 27, 2008** | ** ** | **September 29, 2007** | ** ** |
|                                                                          |       |                             |       |                             |       |   |   |   |   |
| Net income (loss)                                                             | ** ** | **$**                            | **5,088**  |                             | $          | (14,580 | ) | **$** | **29,174** |   | $ | (13,521 | ) |
| Foreign currency translation adjustment,  net of income taxes                 | ** ** | **2,597**                        |       | (6,876                           | )          | **(8,447** | **)** | (2,203 | ) |
| Net actuarial gain (loss) and prior service  credit, net of income taxes      | ** ** | **280**                          |       | (151                             | )          | **22** | ** ** | (265 | ) |
| Unrealized gain (loss) on interest rate  swap agreements, net of income taxes | ** ** | **138**                          |       | —                           |       | **(391** | **)** | — |   |
| Comprehensive income (loss)                                                   | ** ** | **$**                            | **8,103**  |                             | $          | (21,607 | ) | **$** | **20,358** |   | $ | (15,989 | ) |

** **

**13.          Related Party Transactions**

** **

**TheCompany’s German subsidiary has equity investments in two companies** thatprovide patent, trademark and research services for the Company and othercompanies that have invested in them. The Company’s investments represent 25% ownership in each of the firmsand are accounted for by the equity method of accounting.  The Company’s equity investment accountbalance was $435,000 and $278,000 at September 27, 2008 and December 29,2007, respectively.  Charges from theaffiliates for work performed were $416,000 and $1,275,000 for the three monthsand nine months ended September 27, 2008, respectively.  Charges from the affiliates for workperformed were $425,000 and $953,000 for the three months and nine months endedSeptember 29, 2007, respectively. Amounts due to the affiliates were$40,000 and $112,000 at September 27, 2008 and December 29, 2007,respectively.

** **

**14.          Segment Information**

 

TheCompany’s operations are principally managed on a products basis and arecomprised of three operating segments that have been aggregated into tworeportable segments: energy storage and separations media. The energy storagesegment produces and markets membranes that provide the critical function ofseparating the cathode and anode in a variety of battery markets, includinglithium, industrial and transportation applications. The separations mediasegment produces and markets membranes used as the high technology filtrationelement in various medical and industrial applications.

 

TheCompany evaluates the performance of segments and allocates resources tosegments based on operating income before interest, income taxes, depreciationand amortization. In addition, it evaluates business segment performance beforebusiness restructuring charges and the impact of certain non-recurring costs.

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**Financialinformation relating to the reportable operating segments is presented below:**

 
| ** **                                                                                           | ** ** | **Three Months Ended** | ** **  | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| **(in thousands)**                                                                              | ** ** | **September 27,  2008**     | ** **  | **September 29,  2007**    | ** ** | **September 27,  2008** | ** ** | **September 29,  2007** | ** ** |
| Net sales to external customers (by major  product group):                                           | ** ** | ** **                       | ** **  | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Lead-acid battery separators                                                                         | ** ** | **$**                            | **86,893**  |                            | $          | 69,625 | ** ** | **$** | **264,595** |   | $ | 212,924 |   |
| Lithium battery separators                                                                           | ** ** | **28,643**                       |        | 24,265                          | ** ** | **76,852** |   | 65,918 |   |
| Energy storage                                                                                       | ** ** | **115,536**                      |        | 93,890                          | ** ** | **341,447** |   | 278,842 |   |
| Healthcare                                                                                           | ** ** | **24,415**                       |        | 22,820                          | ** ** | **79,078** |   | 72,178 |   |
| Filtration and specialty                                                                             | ** ** | **14,972**                       |        | 13,220                          | ** ** | **44,392** |   | 39,009 |   |
| Separations media                                                                                    | ** ** | **39,387**                       |        | 36,040                          | ** ** | **123,470** |   | 111,187 |   |
| Total net sales to external customers                                                                | ** ** | **$**                            | **154,923** |                            | $          | 129,930 | ** ** | **$** | **464,917** |   | $ | 390,029 |   |
|                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Operating income:                                                                                    |       |                             |        |                            |       |   |   |   |   |
| Energy storage                                                                                       | ** ** | **$**                            | **15,018**  |                            | $          | 19,924 | ** ** | **$** | **62,687** |   | $ | 59,645 |   |
| Separations media                                                                                    | ** ** | **5,893**                        | ** **  | 3,123                           | ** ** | **20,266** |   | 12,736 |   |
| Corporate                                                                                            | ** ** | **(276**                         | **)**       | (265                            | )          | **(828** | **)** | (315 | ) |
| Segment operating income                                                                             | ** ** | **20,635**                       |        | 22,782                          |       | **82,125** | ** ** | 72,066 |   |
| Business  restructuring                                                                              | ** ** | **—**                       |        | 223                             | ** ** | **—** |   | 358 |   |
| Total operating income                                                                               | ** ** | **20,635**                       |        | 22,559                          | ** ** | **82,125** |   | 71,708 |   |
| Reconciling items:                                                                                   |       |                             |        |                            |       |   |   |   |   |
| Interest expense, net                                                                                | ** ** | **14,600**                       |        | 16,713                          | ** ** | **46,623** |   | 64,185 |   |
| Costs related to purchase of 10.50% senior  discount notes                                           | ** ** | **—**                       |        | 30,038                          | ** ** | **—** |   | 30,038 |   |
| Write-off of loan acquisition costs  associated with refinancing of senior secured credit facilities | ** ** | **—**                       | ** **  | 7,173                           | ** ** | **—** | ** ** | 7,173 |   |
| Foreign currency and other                                                                           | ** ** | **(574**                         | **)**       | 390                             | ** ** | **(1,217** | **)** | 764 |   |
| Income (loss) from continuing operations  before income taxes                                        | ** ** | **$**                            | **6,609**   |                            | $          | (31,755 | ) | **$** | **36,719** |   | $ | (30,452 | ) |
|                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Depreciation and amortization:                                                                       |       |                             |        |                            |       |   |   |   |   |
| Energy storage                                                                                       | ** ** | **$**                            | **9,666**   |                            | $          | 8,024 | ** ** | **$** | **27,826** |   | $ | 24,387 |   |
| Separations media                                                                                    | ** ** | **4,587**                        |        | 4,017                           | ** ** | **13,868** |   | 12,140 |   |
| Total depreciation and amortization                                                                  | ** ** | **$**                            | **14,253**  |                            | $          | 12,041 | ** ** | **$** | **41,694** |   | $ | 36,527 |   |

 

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Table of Contents

 

**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**15.**  Commitments and Contingencies

** **

*Contingency*

 

On March 20, 2008, theCompany received a letter from the Federal Trade Commission (the “FTC”)regarding the acquisition of Microporous. On April 7, 2008, the Company and its wholly-owned subsidiary,Daramic LLC, received a subpoena and interrogatories requesting substantiallysimilar documents and information as requested in the FTC’s initial letter, aswell as additional documents and information. The Company responded fully to this request and met on several occasionswith various members of the FTC staff in an effort to answer their questionsand resolve the investigation.  On September 9,2008, the FTC issued an administrative complaint against the Company alleging that its actions and theacquisition of Microporous have substantially lessened competition in NorthAmerican markets for lead-acid battery separators.  The Company filed ananswer to the complaint on October 15, 2008 denying the materialallegations of the complaint. Proceedings will be held before an Administrative Law Judge of the FTCwith an initial hearing currently scheduled for April 14, 2009. The timingof a final resolution of this matter is uncertain.  The Company cannot predict the outcomeof the investigation at this time and does not believe that the finalresolution of this matter will have a material adverse impact on the business,financial condition or results of operations of the Company.

 

*CollectiveBargaining Agreement*

 

OnAugust 6, 2008, the union at the Company’s lead-acid battery separatorfacility in Owensboro, Kentucky initiated a strike.  On September 26, 2008, the Company andthe union agreed to an extension of the current labor contract for a period of18 months through March 30, 2010. Employees began returning to workon September 30, 2008.

 

**16.  Discontinued Operations**

 

InJanuary 2008, the Company sold a non-core synthetic paper business, acomponent of the energy storage segment, for $4,000,000, resulting in a gain onsale of $2,372,000, net of income taxes of $1,402,000.  The results of operations and the gain onsale from the synthetic paper business are presented as discontinued operationsfor all periods presented in the Company’s condensed consolidated statements ofoperations.

 

**17.**  Subsequent Event

** **

Asupply contract between the Company’s lead-acid battery separator business andJohnson Controls, Inc. (“JCI”) expires on December 31, 2008.  During the fourth quarter of 2008, JCIrejected all recent contract proposals and offers to renew the supply contract,and the Company now anticipates that it will not have a material supplyposition with JCI for automotive lead-acid battery separators in 2009.  Therefore, the Company will implement arestructuring plan during the fourth quarter of 2008 to align lead-acid batteryseparator production capacity with demand, reduce costs and position theCompany to meet future growth opportunities.

 

The plan includes closing the Company’s facility inPotenza, Italy and streamlining production at the Company’s facility inOwensboro, Kentucky.  The currentestimated cost of the plan is expected to be in the range of $54,000,000 to$63,000,000, including estimated cash charges of $24,000,000 to $30,000,000 forsite clean-up and remediation and other costs, including severance benefits,and an estimated non-cash impairment charge of $30,000,000 to $33,000,000primarily for buildings and equipment that will no longer be used in Potenza,Italy.  The Company expects to record theestimated restructuring charge of $54,000,000 to $63,000,000 in the fourthquarter of 2008.  Cash paymentsassociated with the plan are expected to be paid over the next five years.  The timing, scope and costs of theserestructuring measures are subject to change as the Company implements the planand evaluates its business needs and costs.

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**18.**  FinancialStatements of Guarantors

** **

OnJuly 31, 2007, Polypore, Inc. merged with and into the Company, andthe Company assumed all of Polypore, Inc.’s obligations under the 8.75%senior subordinated notes.  The seniorsubordinated notes are unconditionally guaranteed, jointly and severally, on asenior basis by certain of the Company’s wholly owned subsidiaries (“Guarantors”).  Management has determined that separatecomplete financial statements of the Guarantors would not be material to usersof the financial statements.

 

Thefollowing sets forth condensed consolidating financial statements of theGuarantors and non-Guarantor subsidiaries.

 

**Condensed ConsolidatingBalance Sheet**

**As of September 27,2008**

** **
| **(in thousands)**                                    | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|----------------------------------------------|------------|------------------|------------|
| **Assets**                                                 | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **           | ** ** | ** **                                   | ** ** | ** **       | ** ** |
| Cash and cash equivalents                                  |       | $                                     | —     |                                      | $          | 26,893               |       | $                                            | 53,161     |             | $          | — |   | $ | 80,054 |   |
| Accounts receivable, net                                   |       | 40,795                                |       | 76,556                                    |       | —               |       | —                                       |       | 117,351          |       |
| Inventories                                                |       | 20,587                                |       | 44,014                                    |       | —               |       | —                                       |       | 64,601           |       |
| Refundable income taxes                                    |       | 1,130                                 |       | 9,985                                     |       | (7,533               | )          | —                                       |       | 3,582            |       |
| Deferred income taxes                                      |       | —                                |       | —                                    |       | 1,573                |       | —                                       |       | 1,573            |       |
| Prepaid and other                                          |       | 3,114                                 |       | 13,675                                    |       | 1,460                |       | —                                       |       | 18,249           |       |
| Total current assets                                       |       | 65,626                                |       | 171,123                                   |       | 48,661               |       | —                                       |       | 285,410          |       |
| Due from affiliates                                        |       | 335,765                               |       | 368,316                                   |       | 304,325              |       | (1,008,406                                   | )          | —           |       |
| Investment in subsidiaries                                 |       | 232,039                               |       | 285,204                                   |       | 351,339              |       | (868,582                                     | )          | —           |       |
| Property, plant and equipment, net                         |       | 160,579                               |       | 301,389                                   |       | —               |       | —                                       |       | 461,968          |       |
| Goodwill                                                   |       | —                                |       | —                                    |       | 601,848              |       | —                                       |       | 601,848          |       |
| Intangibles and loan acquisition costs, net                |       | 34                                    |       | —                                    |       | 191,427              |       | —                                       |       | 191,461          |       |
| Other                                                      |       | 993                                   |       | 20,013                                    |       | —               |       | —                                       |       | 21,006           |       |
| Total assets                                               |       | $                                     | 795,036    |                                      | $          | 1,146,045            |       | $                                            | 1,497,600  |             | $          | (1,876,988 | ) | $ | 1,561,693 |   |
| ** **                                                 | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **           | ** ** | ** **                                   | ** ** | ** **       | ** ** |
| **Liabilities and shareholders’ equity**              | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **           | ** ** | ** **                                   | ** ** | ** **       | ** ** |
| Accounts payable and accrued liabilities                   |       | $                                     | 34,344     |                                      | $          | 46,867               |       | $                                            | 13,565     |             | $          | — |   | $ | 94,776 |   |
| Current portion of debt                                    |       | —                                |       | 511                                       |       | 3,229                |       | —                                       |       | 3,740            |       |
| Current portion of capital lease obligation                |       | 1,480                                 |       | —                                    |       | —               |       | —                                       |       | 1,480            |       |
| Total current liabilities                                  |       | 35,824                                |       | 47,378                                    |       | 16,794               |       | —                                       |       | 99,996           |       |
| Due to affiliates                                          |       | 396,538                               |       | 338,179                                   |       | 273,689              |       | (1,008,406                                   | )          | —           |       |
| Debt, less current portion                                 |       | —                                |       | 50,072                                    |       | 760,676              |       | —                                       |       | 810,748          |       |
| Capital lease obligation, less current  portion            |       | 2,204                                 |       | —                                    |       | —               |       | —                                       |       | 2,204            |       |
| Pension and postretirement benefits, less  current portion |       | 2,728                                 |       | 65,800                                    |       | —               |       | —                                       |       | 68,528           |       |
| Postemployment benefits                                    |       | —                                |       | 2,742                                     |       | —               |       | —                                       |       | 2,742            |       |
| Environmental reserve, less current portion                |       | —                                |       | 23,776                                    |       | —               |       | —                                       |       | 23,776           |       |
| Deferred income taxes and other                            |       | 65,153                                |       | 42,105                                    |       | 3,472                |       | —                                       |       | 110,730          |       |
| Shareholder’s equity                                  |       | 292,589                               |       | 575,993                                   |       | 442,969              |       | (868,582                                     | )          | 442,969          |       |
| Total liabilities and shareholders’ equity            |       | $                                     | 795,036    |                                      | $          | 1,146,045            |       | $                                            | 1,497,600  |             | $          | (1,876,988 | ) | $ | 1,561,693 |   |

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**Condensed ConsolidatingBalance Sheet**

**As of December 29, 2007**

** **
| **(in thousands)**                                    | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|----------------------------------------------|------------|------------------|------------|
| **Assets**                                                 | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **           | ** ** | ** **                                   | ** ** | ** **       | ** ** |
| Cash and cash equivalents                                  |       | $                                     | —     |                                      | $          | 40,055               |       | $                                            | 14,879     |             | $          | — |   | $ | 54,934 |   |
| Accounts receivable, net                                   |       | 36,116                                |       | 79,503                                    |       | —               |       | —                                       |       | 115,619          |       |
| Inventories                                                |       | 20,360                                |       | 43,969                                    |       | —               |       | —                                       |       | 64,329           |       |
| Deferred income taxes                                      |       | —                                |       | —                                    |       | 1,808                |       | —                                       |       | 1,808            |       |
| Prepaid and other                                          |       | 2,578                                 |       | 10,242                                    |       | (155                 | )          | —                                       |       | 12,665           |       |
| Total current assets                                       |       | 59,054                                |       | 173,769                                   |       | 16,532               |       | —                                       |       | 249,355          |       |
| Due from affiliates                                        |       | 237,033                               |       | 324,314                                   |       | 287,491              |       | (848,838                                     | )          | —           |       |
| Investment in subsidiaries                                 |       | 224,443                               |       | 283,721                                   |       | 270,952              |       | (779,116                                     | )          | —           |       |
| Property, plant and equipment, net                         |       | 111,379                               |       | 289,905                                   |       | —               |       | —                                       |       | 401,284          |       |
| Goodwill                                                   |       | —                                |       | 1,240                                     |       | 567,544              |       | —                                       |       | 568,784          |       |
| Intangibles and loan acquisition costs, net                |       | 44                                    |       | —                                    |       | 187,817              |       | —                                       |       | 187,861          |       |
| Other                                                      |       | 1,552                                 |       | 17,659                                    |       | 2,548                |       | —                                       |       | 21,759           |       |
| Total assets                                               |       | $                                     | 633,505    |                                      | $          | 1,090,608            |       | $                                            | 1,332,884  |             | $          | (1,627,954 | ) | $ | 1,429,043 |   |
| ** **                                                 | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **           | ** ** | ** **                                   | ** ** | ** **       | ** ** |
| **Liabilities and shareholders’ equity**              | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **           | ** ** | ** **                                   | ** ** | ** **       | ** ** |
| Accounts payable and accrued liabilities                   |       | $                                     | 30,548     |                                      | $          | 47,206               |       | $                                            | 6,800      |             | $          | — |   | $ | 84,554 |   |
| Income taxes payable                                       |       | —                                |       | —                                    |       | 424                  |       | —                                       |       | 424              |       |
| Current portion of debt                                    |       | —                                |       | 513                                       |       | 4,036                |       | —                                       |       | 4,549            |       |
| Current portion of capital lease obligation                |       | 1,435                                 |       | —                                    |       | —               |       | —                                       |       | 1,435            |       |
| Total current liabilities                                  |       | 31,983                                |       | 47,719                                    |       | 11,260               |       | —                                       |       | 90,962           |       |
| Due to affiliates                                          |       | 315,847                               |       | 310,017                                   |       | 222,974              |       | (848,838                                     | )          | —           |       |
| Debt, less current portion                                 |       | —                                |       | 50,661                                    |       | 762,875              |       | —                                       |       | 813,536          |       |
| Capital lease obligation, less current  portion            |       | 3,319                                 |       | —                                    |       | —               |       | —                                       |       | 3,319            |       |
| Pension and postretirement benefits, less  current portion |       | 2,343                                 |       | 63,436                                    |       | —               |       | —                                       |       | 65,779           |       |
| Postemployment benefits                                    |       | —                                |       | 3,673                                     |       | —               |       | —                                       |       | 3,673            |       |
| Environmental reserve, less current portion                |       | —                                |       | 22,627                                    |       | —               |       | —                                       |       | 22,627           |       |
| Deferred income taxes and other                            |       | 70,954                                |       | 22,418                                    |       | 444                  |       | —                                       |       | 93,816           |       |
| Shareholder’s equity                                  |       | 209,059                               |       | 570,057                                   |       | 335,331              |       | (779,116                                     | )          | 335,331          |       |
| Total liabilities and shareholders’ equity            |       | $                                     | 633,505    |                                      | $          | 1,090,608            |       | $                                            | 1,332,884  |             | $          | (1,627,954 | ) | $ | 1,429,043 |   |

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**Condensed Consolidating Statement of Income For the Three Months Ended September 27, 2008**

 
| **(in thousands)**                                | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|------------------|------------|
|                                                   |       |                                  |       |                                      |       |                 |       |                                    |       |             |       |
| Net sales                                              |       | $                                     | 57,271     |                                      | $          | 97,652               |       | $                                       | —     |             | $          | — |   | $ | 154,923 |   |
| Cost of goods sold                                     |       | 30,114                                |       | 77,941                                    |       | —               |       | —                                  |       | 108,055          |       |
| Gross profit                                           |       | 27,157                                |       | 19,711                                    |       | —               |       | —                                  |       | 46,868           |       |
| Selling, general and administrative  expenses          |       | 17,315                                |       | 8,642                                     |       | 276                  |       | —                                  |       | 26,233           |       |
| Operating income (loss)                                |       | 9,842                                 |       | 11,069                                    |       | (276                 | )          | —                                  |       | 20,635           |       |
| Interest expense and other                             |       | (2,967                                | )          | 3,853                                     |       | 13,140               |       | —                                  |       | 14,026           |       |
| Equity in earnings of subsidiaries                     |       | —                                |       | —                                    |       | (10,522              | )          | 10,522                                  |       | —           |       |
| Income from continuing operations before  income taxes |       | 12,809                                |       | 7,216                                     |       | (2,894               | )          | (10,522                                 | )          | 6,609            |       |
| Income taxes                                           |       | 7,068                                 |       | 2,435                                     |       | (7,982               | )          | —                                  |       | 1,521            |       |
| Income from continuing operations                      |       | $                                     | 5,741      |                                      | $          | 4,781                |       | $                                       | 5,088      |             | $          | (10,522 | ) | $ | 5,088 |   |

 

**Condensed ConsolidatingStatement of Income****Forthe Three Months Ended September 29, 2007**

** **
| **(in thousands)**                                                                              | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|------------------|------------|
|                                                                                                 |       |                                  |       |                                      |       |                 |       |                                    |       |             |       |
| Net sales                                                                                            |       | $                                     | 46,763     |                                      | $          | 83,167               |       | $                                       | —     |             | $          | — |   | $ | 129,930 |   |
| Cost of goods sold                                                                                   |       | 20,739                                |       | 63,353                                    |       | —               |       | —                                  |       | 84,092           |       |
| Gross profit                                                                                         |       | 26,024                                |       | 19,814                                    |       | —               |       | —                                  |       | 45,838           |       |
| Selling, general and administrative  expenses                                                        |       | 14,534                                |       | 8,258                                     |       | 264                  |       | —                                  |       | 23,056           |       |
| Business restructuring                                                                               |       | —                                |       | 223                                       |       | —               |       | —                                  |       | 223              |       |
| Operating income (loss)                                                                              |       | 11,490                                |       | 11,333                                    |       | (264                 | )          | —                                  |       | 22,559           |       |
| Interest expense and other                                                                           |       | (1,831                                | )          | 3,012                                     |       | 15,922               |       | —                                  |       | 17,103           |       |
| Costs related to purchase of 10.50% senior  discount notes                                           |       | —                                |       | —                                    |       | 30,038               |       | —                                  |       | 30,038           |       |
| Write-off of loan acquisition costs  associated with refinancing of senior secured credit facilities |       | —                                |       | —                                    |       | 7,173                |       | —                                  |       | 7,173            |       |
| Equity in earnings of subsidiaries                                                                   |       | —                                |       | —                                    |       | (16,397              | )          | 16,397                                  |       | —           |       |
| Income (loss) from continuing operations  before income taxes                                        |       | 13,321                                |       | 8,321                                     |       | (37,000              | )          | (16,397                                 | )          | (31,755          | )          |
| Income taxes                                                                                         |       | 6,910                                 |       | (1,665                                    | )          | (22,377              | )          | —                                  |       | (17,132          | )          |
| Income (loss) from continuing operations                                                             |       | $                                     | 6,411      |                                      | $          | 9,986                |       | $                                       | (14,623    | )                | $          | (16,397 | ) | $ | (14,623 | ) |

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**Condensed Consolidating Statement of Income**

**For the Nine Months Ended September 27, 2008**

 
| **(in thousands)**                                       | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|------------------|------------|
|                                                          |       |                                  |       |                                      |       |                 |       |                                    |       |             |       |
| Net sales                                                     |       | $                                     | 172,705    |                                      | $          | 292,212              |       | $                                       | —     |             | $          | — |   | $ | 464,917 |   |
| Cost of goods sold                                            |       | 84,254                                |       | 219,640                                   |       | —               |       | —                                  |       | 303,894          |       |
| Business interruption insurance recovery                      |       | (2,400                                | )          | —                                    |       | —               |       | —                                  |       | (2,400           | )          |
| Gross profit                                                  |       | 90,851                                |       | 72,572                                    |       | —               |       | —                                  |       | 163,423          |       |
| Selling, general and administrative  expenses                 |       | 51,831                                |       | 28,639                                    |       | 828                  |       | —                                  |       | 81,298           |       |
| Operating income (loss)                                       |       | 39,020                                |       | 43,933                                    |       | (828                 | )          | —                                  |       | 82,125           |       |
| Interest expense and other                                    |       | (5,763                                | )          | 9,028                                     |       | 42,141               |       | —                                  |       | 45,406           |       |
| Equity in earnings of subsidiaries                            |       | —                                |       | —                                    |       | (46,653              | )          | 46,653                                  |       | —           |       |
| Income (loss) from continuing operations  before income taxes |       | 44,783                                |       | 34,905                                    |       | 3,684                |       | (46,653                                 | )          | 36,719           |       |
| Income taxes                                                  |       | 21,899                                |       | 11,136                                    |       | (23,130              | )          | —                                  |       | 9,905            |       |
| Income from continuing operations                             |       | $                                     | 22,884     |                                      | $          | 23,769               |       | $                                       | 26,814     |             | $          | (46,653 | ) | $ | 26,814 |   |

 

**Condensed ConsolidatingStatement of Income**

**For the Nine Months Ended September 29,2007**

** **
| **(in thousands)**                                                                              | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|------------------|------------|
|                                                                                                 |       |                                  |       |                                      |       |                 |       |                                    |       |             |       |
| Net sales                                                                                            |       | $                                     | 140,208    |                                      | $          | 249,821              |       | $                                       | —     |             | $          | — |   | $ | 390,029 |   |
| Cost of goods sold                                                                                   |       | 61,293                                |       | 186,977                                   |       | —               |       | —                                  |       | 248,270          |       |
| Gross profit                                                                                         |       | 78,915                                |       | 62,844                                    |       | —               |       | —                                  |       | 141,759          |       |
| Selling, general and administrative  expenses                                                        |       | 43,668                                |       | 25,431                                    |       | 594                  |       | —                                  |       | 69,693           |       |
| Business restructuring                                                                               |       | —                                |       | 358                                       |       | —               |       | —                                  |       | 358              |       |
| Operating income (loss)                                                                              |       | 35,247                                |       | 37,055                                    |       | (594                 | )          | —                                  |       | 71,708           |       |
| Interest expense and other                                                                           |       | (5,353                                | )          | 7,007                                     |       | 63,295               |       | —                                  |       | 64,949           |       |
| Costs related to purchase of 10.50% senior  discount notes                                           |       | —                                |       | —                                    |       | 30,038               |       | —                                  |       | 30,038           |       |
| Write-off of loan acquisition costs  associated with refinancing of senior secured credit facilities |       | —                                |       | —                                    |       | 7,173                |       | —                                  |       | 7,173            |       |
| Equity in earnings of subsidiaries                                                                   |       | —                                |       | —                                    |       | (44,352              | )          | 44,352                                  |       | —           |       |
| Income (loss) from continuing operations  before income taxes                                        |       | 40,600                                |       | 30,048                                    |       | (56,748              | )          | (44,352                                 | )          | (30,452          | )          |
| Income taxes                                                                                         |       | 22,305                                |       | 3,991                                     |       | (43,157              | )          | —                                  |       | (16,861          | )          |
| Income (loss) from continuing operations                                                             |       | $                                     | 18,295     |                                      | $          | 26,057               |       | $                                       | (13,591    | )                | $          | (44,352 | ) | $ | (13,591 | ) |

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**Condensed ConsolidatingStatement of Cash Flows**

**For the Nine Months Ended September 27,2008**

 
| **(in thousands)**                                                                            | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|----------------------------------------------|------------|------------------|------------|
| Net cash provided by operating activities                                                          |       | $                                     | 58,415     |                                      | $          | 49,260               |       | $                                            | 29,075     |             | $          | (56,650 | ) | $ | 80,100 |   |
| **Investing activities:**                                                                          |       |                                  |       |                                      |       |                 |       |                                         |       |             |       |
| Acquisitions, net of cash acquired                                                                 |       | —                                |       | —                                    |       | (86,050              | )          | —                                       |       | (86,050          | )          |
| Purchases of property, plant and equipment                                                         |       | (20,933                               | )          | (19,105                                   | )          | —               |       | —                                       |       | (40,038          | )          |
| Proceeds from sale of synthetic paper  business                                                    |       | 4,000                                 |       | —                                    |       | —               |       | —                                       |       | 4,000            |       |
| Net cash used in investing activities                                                              |       | (16,933                               | )          | (19,105                                   | )          | (86,050              | )          | —                                       |       | (122,088         | )          |
| **Financing activities:**                                                                          |       |                                  |       |                                      |       |                 |       |                                         |       |             |       |
| Proceeds from issuance of common stock, net  of underwriting fees and other offering related costs |       | —                                |       | —                                    |       | 84,949               |       | —                                       |       | 84,949           |       |
| Principal payments on debt                                                                         |       | (5,883                                | )          | (10,273                                   | )          | (2,413               | )          | —                                       |       | (18,569          | )          |
| Proceeds from stock option exercises                                                               |       | —                                |       | —                                    |       | 1,522                |       | —                                       |       | 1,522            |       |
| Intercompany transactions, net                                                                     |       | (36,355                               | )          | (31,494                                   | )          | 11,199               |       | 56,650                                       |       | —           |       |
| Net cash provided by (used in) financing  activities                                               |       | (42,238                               | )          | (41,767                                   | )          | 95,257               |       | 56,650                                       |       | 67,902           |       |
| Effect of exchange rate changes on cash and  cash equivalents                                      |       | 756                                   |       | (1,550                                    | )          | —               |       | —                                       |       | (794             | )          |
| **Net  increase (decrease) in cash and cash equivalents**                                          |       | —                                |       | (13,162                                   | )          | 38,282               |       | —                                       |       | 25,120           |       |
| Cash and cash equivalents at beginning of  period                                                  |       | —                                |       | 40,055                                    |       | 14,879               |       | —                                       |       | 54,934           |       |
| **Cash and cash equivalents at end of period**                                                     |       | $                                     | —     |                                      | $          | 26,893               |       | $                                            | 53,161     |             | $          | — |   | $ | 80,054 |   |

 

**Condensed ConsolidatingStatement of Cash Flows For the Nine Months Ended September 29, 2007**

 
| **(in thousands)**                                                                           | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|------------------|------------|
| Net cash provided by operating activities                                                         |       | $                                     | 27,857     |                                      | $          | 46,110               |       | $                                       | 32,621     |             | $          | (44,422 | ) | $ | 62,166 |   |
| **Investing  activities:**                                                                        |       |                                  |       |                                      |       |                 |       |                                    |       |             |       |
| Acquisitions, net of cash acquired                                                                |       | —                                |       | (5,475                                    | )          | —               |       | —                                  |       | (5,475           | )          |
| Purchases of property, plant and equipment                                                        |       | (7,069                                | )          | (9,213                                    | )          | —               |       | —                                  |       | (16,282          | )          |
| Net cash used in investing activities                                                             |       | (7,069                                | )          | (14,688                                   | )          | —               |       | —                                  |       | (21,757          | )          |
| **Financing  activities:**                                                                        |       |                                  |       |                                      |       |                 |       |                                    |       |             |       |
| Proceeds from initial public offering, net  of underwriting fees and other offering related costs |       | —                                |       | —                                    |       | 264,814              |       | —                                  |       | 264,814          |       |
| Principal payments on debt                                                                        |       | (1,027                                | )          | (1,991                                    | )          | (368,183             | )          | —                                  |       | (371,201         | )          |
| Proceeds from new senior secured credit  facility                                                 |       | —                                |       | 42,551                                    |       | 327,449              |       | —                                  |       | 370,000          |       |
| Purchase of 10.50% senior discount notes                                                          |       | —                                |       | —                                    |       | (293,648             | )          | —                                  |       | (293,648         | )          |
| Loan acquisition costs                                                                            |       | —                                |       | —                                    |       | (8,672               | )          | —                                  |       | (8,672           | )          |
| Repurchase of common stock                                                                        |       | —                                |       | —                                    |       | (320                 | )          | —                                  |       | (320             | )          |
| Intercompany transactions, net                                                                    |       | (19,796                               | )          | (69,475                                   | )          | 44,849               |       | 44,422                                  |       | —           |       |
| Net cash used in financing activities                                                             |       | (20,823                               | )          | (28,915                                   | )          | (33,711              | )          | 44,422                                  |       | (39,027          | )          |
| Effect of exchange rate changes on cash and  cash equivalents                                     |       | 35                                    |       | 4,572                                     |       | —               |       | —                                  |       | 4,607            |       |
| **Net increase (decrease) in cash and cash  equivalents**                                         |       | —                                |       | 7,079                                     |       | (1,090               | )          | —                                  |       | 5,989            |       |
| Cash and cash equivalents at beginning of  period                                                 |       | —                                |       | 30,807                                    |       | 23,905               |       | —                                  |       | 54,712           |       |
| **Cash and cash equivalents at end of period**                                                    |       | $                                     | —     |                                      | $          | 37,886               |       | $                                       | 22,815     |             | $          | — |   | $ | 60,701 |   |

 

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

** **

*The following discussion of our financial condition and results ofoperations should be read together with our unaudited consolidated financialstatements and the related notes included elsewhere in this Quarterly Report onForm 10-Q and our audited consolidated financial statements and therelated notes included in our Annual Report on Form 10-K for the fiscalyear ended December 29, 2007 and Registration Statement No. 333-150754**on Form S-1.*

 

**Overview**

 

Weare a leading global high technology filtration company that develops,manufactures and markets specialized microporous membranes used in separationand filtration processes. In fiscal 2007, we generated total net sales of$534.7 million and net income of $0.5 million. We operate in twobusiness segments: (i) the energy storage segment, which accounted forapproximately 71% of our fiscal 2007 net sales; and (ii) the separationsmedia segment, which accounted for approximately 29% of our fiscal 2007 netsales. We manufacture our products at facilities in North America, Europe andAsia. Net sales from foreign locations were approximately $349.4 millionfor fiscal 2007.

 

In the energy storagesegment, our membrane separators are a critical performance component inlithium batteries, which are used in consumer electronic applications, andlead-acid batteries, which are used in transportation and industrialapplications. The energy storage segment has benefited from the overallincrease in demand by consumers for mobile power, which we believe willcontinue.

 

Lithium batteries are thepower source in a wide variety of electronics applications ranging from laptopcomputers and mobile phones to power tools. In addition, many new applications,such as consumer power tools and electric bikes and developing applicationssuch as electric and hybrid electric vehicles incorporate large-formatbatteries that require much greater membrane separator volume per battery. As aresult, we believe that membrane separator growth will exceed battery unitsales growth.  In September 2007, westarted a lithium battery separator capacity expansion at our Charlotte, NorthCarolina facility, which was  completedin the third quarter of 2008.  Productionis scheduled to begin ramping up in the fourth quarter of 2008.

 

In May 2008,we acquired Yurie-Wide Corporation, a South Korean company, which we subsequentlyrenamed Celgard Korea, Inc. (“Celgard Korea”).  The acquisition broadens the Company’sparticipation in the lithium battery separator market, adds to its membranetechnology portfolio and product breadth and adds cost-effective productioncapacity.  After the acquisition, wediscontinued Celgard Korea sales and made significant operational changes toalign Celgard Korea’s operations with our global standards.  Celgard Korea will not generate any revenuesuntil their manufacturing processes and products meet our higher qualitystandards, which we expect to occur beginning in 2009.

 

In the motor vehicle batterymarket, the high proportion of aftermarket sales and the steady growth of theworldwide fleet of motor vehicles provide us with a growing, recurring revenuebase in lead-acid battery membrane separators. We believe we will also benefitfrom the worldwide conversion of alternative separator materials to the higherperformance polyethylene-based membrane separators such as those we produce.Growth is strongest in the Asia-Pacific region as a result of increasing percapita penetration of automobiles, growth in the industrial and manufacturingsectors and a high rate of conversion to polyethylene-based membraneseparators. We have positioned ourselves to benefit from this growth byexpanding capacity at our Prachinburi, Thailand facility, acquiring a 60% sharein a production facility in Tianjin, China and establishing an Asian TechnicalCenter in Thailand.  In September 2007,we started an additional capacity expansion at our Prachinburi, Thailandfacility, expected to be completed by the end of 2008.

 

In February 2008, wepurchased Microporous Holding Corporation, the parent company of MicroporousProducts L.P. (“Microporous”).  Theacquisition of Microporous adds rubber-based battery separator technology toour product line.  This acquisitionbroadens our participation in the deep-cycle industrial battery market (*e.g.,* golf cart and stationary batteries), adds to ourmembrane technology portfolio and product breadth, enhances service to commoncustomers and adds cost-effective production capacity.  On April 1, 2008, we acquired thebattery separator manufacturing assets of Super-Tech Battery Components Pvt.Ltd., located in Bangalore, India.

 

OnAugust 6, 2008, the union at our lead-acid battery separator facility inOwensboro, Kentucky initiated a strike. On September 26, 2008, we and the union agreed to an extension ofthe current labor contract for a period of 18 months through March 30,2010. Employees began returning to work on September 30, 2008.

 

Asupply contract between Polypore’s lead-acid battery separator business andJohnson Controls, Inc. (“JCI”) expires on December 31, 2008.  During the fourth quarter of 2008, JCIrejected all recent contract proposals and offers to renew the supply contract,which leads us to believe that we will not have a material supply position withJCI for automotive lead-acid battery separators in 2009.  Therefore, we will implement a restructuringplan during the fourth quarter of 2008 to align lead-acid battery separatorproduction capacity with demand, reduce costs and position us to meet futuregrowth opportunities.

 

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The plan includes closing our facility in Potenza,Italy and streamlining production at our facility in Owensboro, Kentucky.  The current estimated cost of the plan isexpected to be in the range of $54.0 million to $63.0 million, includingestimated cash charges of $24.0 to $30.0 million for site clean-up andremediation and other costs, including severance benefits, and an estimatednon-cash impairment charge of $30.0 to $33.0 million primarily for buildingsand equipment that will no longer be used in Potenza, Italy.  We expect to record the estimatedrestructuring charge of $54.0 to $63.0 million in the fourth quarter of2008.  Cash payments associated with theplan are expected to be paid over the next five years.  The timing, scope and costs of theserestructuring measures are subject to change as we implement the plan andevaluate its business needs and costs.

 

In the separations mediasegment, our filtration membranes and modules are used in healthcare andhigh-performance filtration and specialty applications. Healthcare applicationsinclude hemodialysis, blood oxygenation and plasmapheresis. Growth in demandfor hemodialysis membranes is driven by the increasing worldwide population ofend-stage renal disease patients. We estimate that conversion to single-usedialyzers and increasing treatment frequency will result in additional dialyzermarket growth.

 

We produce a wide range ofmembranes and membrane-based elements for micro-, ultra- and nanofiltration andgasification/degasification of liquids. Micro-, ultra- and nanofiltrationmembrane element market growth is being driven by several factors, includingend-market growth in applications such as water treatment and pharmaceuticalprocessing, displacement of conventional filtration media by membranefiltration due to membranes’ superior cost and performance attributes andincreasing purity requirements in industrial and other applications.

 

***Issuanceof Common Stock and Related Transactions***

** **

**On June 27,2007, we completed our initial public offering by issuing 15,000,000 shares ofour common stock at a price of $19.00 per share.  Public trading of our common stock commencedon June 28, 2007. ** Wereceived net proceeds from the offering of approximately $264.8 million, net ofunderwriting fees of $17.1 million and other offering related costs.   In July 2007, we used thenet proceeds from the initial public offering and cash on hand to purchase andretire our outstanding 10.50% senior discount notes.  The purchase of the notes was accomplished bya tender offer and subsequent redemption of the notes not tendered.  The total purchase price of the notes was$293.7 million, consisting of principal of $264.1 million and tender andredemptionpremiumsof $29.5 million.  As a result of thepurchase of the notes, we incurred a $30.0 million charge to income, which wascomprised of redemption and tender premiums of $29.5 million and the write-offof unamortized loan acquisition costs of $0.5 million.

** **

**On July 3,2007, we refinanced our senior secured credit facility with a new seniorsecured credit facility.  The new creditfacility provides for a $322.9 million term loan facility, a €35.0 million termloan facility and a $90.0 million revolving credit facility. The term loansmature in July 2014 and the revolving credit facility matures in July 2013.  In connection with the refinancing, wecapitalized loan acquisition costs of approximately $8.7 million and wrote-offloan acquisition costs of $7.2 million associated with the previous seniorsecured credit facility.**

** **

**In May 2008,we completed a follow-on public offering of 8,031,000 shares of common stock at$24.00 per share, pursuant to which 3,750,000 shares were sold by us and4,281,000 shares were sold by certain selling shareholders, including certainof our executive officers.  We receivednet proceeds from the offering of approximately $84.9 million, net ofunderwriting fees of $4.3 million and other offering related costs.  The net proceeds were used to repayoutstanding borrowings under our revolving credit facility and for generalcorporate purposes.**

** **

**Critical accounting policies**

** **

Critical accounting policies are those accountingpolicies that can have a significant impact on the presentation of our financialcondition and results of operations and that require the use of complex andsubjective estimates based on past experience and management’s judgment.  Because of uncertainty inherent in suchestimates, actual results may differ from these estimates.  These policies are critical to theunderstanding of our operating results and financial condition and include thepolicies related to the allowance for doubtful accounts, the impairment ofintangibles and goodwill, pension and other postretirement benefits andenvironmental matters.  For a discussionof each of these policies, please see the discussion entitled “CriticalAccounting Policies” under “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our Annual Report on Form 10-Kfor the year ended December 29, 2007.

 

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###### **Results of Operations**

###### ** **

The following table sets forth, for the periodsindicated, certain operating data in amount and as a percentage of net sales:

 
| ** **                                                                                           | ** ** | ** **                       | ** ** | ** **                       | ** ** | **Percentage of Net Sales** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
| **($’s in millions)**                                                                 | ** ** | **September 27,  2008**     | ** ** | **September 29,  2007**     | ** ** | **September 27,  2008**               | ** ** | **September 29,  2007** | ** ** |
|                                                                                                 |       |                             |       |                             |       |                                       |       |   |   |
| Net sales                                                                                            |       | $                                | 154.9      |                             | $          | 129.9                                      |       | 100.0 | % | 100.0 | % |
|                                                                                                 |       |                             |       |                             |       |                                       |       |   |   |
| Gross profit                                                                                         |       | 46.8                             |       | 45.8                             |       | 30.3                                       | %          | 35.3 | % |
|                                                                                                 |       |                             |       |                             |       |                                       |       |   |   |
| Selling, general and administrative  expenses                                                        |       | 26.2                             |       | 23.0                             |       | 16.9                                       | %          | 17.7 | % |
| Business restructuring                                                                               |       | —                           |       | 0.2                              |       | —                                     |       | 0.2 | % |
| Operating income                                                                                     |       | 20.6                             |       | 22.6                             |       | 13.3                                       | %          | 17.4 | % |
|                                                                                                 |       |                             |       |                             |       |                                       |       |   |   |
| Interest expense, net                                                                                |       | 14.6                             |       | 16.7                             |       | 9.4                                        | %          | 12.9 | % |
| Costs related to purchase of 10.50% senior  discount notes                                           |       | —                           |       | 30.0                             |       | —                                     |       | 23.1 | % |
| Write-off of loan acquisition costs  associated with refinancing of senior secured credit facilities |       | —                           |       | 7.2                              |       | —                                     |       | 5.5 | % |
| Foreign currency and other                                                                           |       | (0.6                             | )          | 0.4                              |       | (0.4                                       | )%         | 0.3 | % |
| Income (loss) from continuing operations  before income taxes                                        |       | 6.6                              |       | (31.7                            | )          | 4.3                                        | %          | (24.4 | )% |
| Income taxes                                                                                         |       | 1.5                              |       | (17.1                            | )          | 1.0                                        | %          | (13.2 | )% |
| Income (loss) from continuing operations                                                             |       | 5.1                              |       | (14.6                            | )          | 3.3                                        | %          | (11.2 | )% |
| Discontinued operations, net of income  taxes                                                        |       | —                           |       | —                           |       | —                                     |       | — |   |
| Net income (loss)                                                                                    |       | $                                | 5.1        |                             | $          | (14.6                                      | )          | 3.3 | % | (11.2 | )% |

 
| ** **                                                                                           | ** ** | ** **                      | ** ** | ** **                      | ** ** | **Percentage of Net Sales** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| **($’s in millions)**                                                                 | ** ** | **September 27,  2008**    | ** ** | **September 29,  2007**    | ** ** | **September 27,  2008**               | ** ** | **September 29,  2007** | ** ** |
|                                                                                                 |       |                            |       |                            |       |                                       |       |   |   |
| Net sales                                                                                            |       | $                               | 464.9      |                            | $          | 390.0                                      |       | 100.0 | % | 100.0 | % |
|                                                                                                 |       |                            |       |                            |       |                                       |       |   |   |
| Gross profit                                                                                         |       | 163.4                           |       | 141.8                           |       | 35.2                                       | %          | 36.3 | % |
|                                                                                                 |       |                            |       |                            |       |                                       |       |   |   |
| Selling, general and administrative  expenses                                                        |       | 81.3                            |       | 69.7                            |       | 17.5                                       | %          | 17.9 | % |
| Business restructuring                                                                               |       | —                          |       | 0.4                             |       | —                                     |       | 0.1 | % |
| Operating income                                                                                     |       | 82.1                            |       | 71.7                            |       | 17.7                                       | %          | 18.4 | % |
|                                                                                                 |       |                            |       |                            |       |                                       |       |   |   |
| Interest expense, net                                                                                |       | 46.6                            |       | 64.2                            |       | 10.0                                       | %          | 16.5 | % |
| Costs related to purchase of 10.50% senior  discount notes                                           |       | —                          |       | 30.0                            |       | —                                     |       | 7.7 | % |
| Write-off of loan acquisition costs  associated with refinancing of senior secured credit facilities |       | —                          |       | 7.2                             |       | —                                     |       | 1.8 | % |
| Foreign currency and other                                                                           |       | (1.2                            | )          | 0.8                             |       | (0.3                                       | )%         | 0.2 | % |
| Income (loss) from continuing operations  before income taxes                                        |       | 36.7                            |       | (30.5                           | )          | 7.9                                        | %          | (7.8 | )% |
| Income taxes                                                                                         |       | 9.9                             |       | (16.9                           | )          | 2.1                                        | %          | (4.3 | )% |
| Income (loss) from continuing operations                                                             |       | 26.8                            |       | (13.6                           | )          | 5.8                                        | %          | (3.5 | )% |
| Discontinued operations, net of income  taxes                                                        |       | 2.4                             |       | 0.1                             |       | 0.5                                        | %          | 0.0 | % |
| Net income (loss)                                                                                    |       | $                               | 29.2       |                            | $          | (13.5                                      | )          | 6.3 | % | (3.5 | )% |

 

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***Comparison of the three monthsended September 27, 2008 with the three months ended September 29,2007***

 

*Net sales.** *Net sales for the three months ended September 27,2008 were $154.9 million, an increase of $25.0 million, or 19.2%, from the sameperiod in the prior year.  Energy storagesales for the three months ended September 27, 2008 were $115.5 million,an increase of $21.6 million, or 23.1%. The increase in energy storage sales was due to higher lead-acid andlithium battery separator sales and the positive impact of dollar/euro exchangerate fluctuations of $3.3 million.  Lead-acid battery separator salesincreased by 24.8%, due primarily to the acquisition of Microporous, as well asthe positive impact of dollar/euro exchange rate fluctuations and priceadjustments to partially offset ongoing escalation in raw material and energycosts.  Lithium battery separator salesincreased by 18.0% due to increasing demand for mobile power and  the penetration of lithium-ion batteries in anincreasing number of electronic devices and into new applications for large formatcells.

 

Aspreviously discussed, we believe that the expiration and anticipatednon-renewal of a lead-acid separator supply contract with JCI will impact oursales for fiscal 2009.  Sales ofautomotive lead-acid battery separators covered by this expiring contract areexpected to represent approximately 8.0% to 9.0% of 2008 consolidated netsales.  In response, we are implementinga restructuring plan to align lead-acid battery separator production capacitywith demand, reduce costs and position the Company to meet future growthopportunities.

 

Separationsmedia sales for the three months ended September 27, 2008 were $39.4million, an increase of $3.3 million, or 9.3%, from the same period in theprior year.  The increase in separationsmedia sales was due to higher sales of healthcare and industrial and filtrationspecialty products and the positive impact of dollar/euro exchange ratefluctuations of $2.6 million.  Healthcaresales increased by 7.0%.  The prior-yearperiod included $2.8 million in sales of cellulosic hemodialysis membranes,which were discontinued in 2007. Excluding those sales, healthcare sales growth was 21.1% due to stronggrowth in synthetic hemodialysis membranes and the positive impact ofdollar/euro exchange rate fluctuations. Filtration and specialty product sales increased by 13.2%, driven bycontinued demand for high performance filtration applications and the positiveimpact of dollar/euro exchange rate fluctuations.

 

*Gross Profit**. *Gross profit as apercent of net sales was 30.3% for the three months ended September 27,2008, as compared to 35.3% in the same period of the prior year.  Energy storage gross profit as a percent ofnet sales was 29.1% as compared to 38.3% in the same period of the prior year.  The decline was primarily attributable to$6.0 million of incremental costs associated with a strike at the Owensboro,Kentucky lead-acid battery separator facility during the third quarter, theacquisition of Microporous, which has lower gross profit margins than our otherlead-acid battery separator production facilities, and increased raw materialand energy costs.  Separations mediagross profit as a percent of net sales increased to 33.6% for the three monthsended September 27, 2008, from 27.5% in the same period of the prioryear.  The increase was due primarily toincreased hemodialysis membrane production volumes and investments to enhanceproduction efficiencies.

 

*Selling, general and administrative expenses**. *Selling, general andadministrative expenses as a percent of net sales was 16.9% for the threemonths ended September 27, 2008, which is a decrease from 17.7% for thesame period in the prior year.

 

*Interest expense. *Interest expense for the three months ended September 27,2008 decreased by $2.1 million from the same period in the prior year.  The decrease in interest expense wasprimarily driven by lower interest rates under our senior credit facilities.

 

*Income taxes**. *The income taxprovision for the interim periods presented is computed at the effective rateexpected to be applicable in each respective full year using the statutoryrates on a country-by-country basis.  Theeffective tax rate on continuing operations was 23.0% for the three monthsended September 27, 2008, as compared to 54.0% for the same period in theprior year.  Our effective tax ratefluctuates due to a variety of factors, including state income taxes, the mixof income between U.S. and foreign jurisdictions taxed at varying rates,various changes in estimates of permanent differences and valuation allowancesand the relative size of our consolidated income before income taxes.

 

Theprimary factor impacting our effective tax rate is the mix of earnings betweenthe various tax jurisdictions in which we do business.  Each tax jurisdiction has its own set of taxlaws and tax rates.  The income earned byour subsidiaries in each jurisdiction is taxed independently by these variousjurisdictions.   Currently, the applicablestatutory income tax rates in the jurisdictions in which we operate range from0% to 39%.   Therefore, the amount ofincome tax expense in each jurisdiction as compared to our consolidated income(loss) before income taxes has a significant impact on our annual effective taxrate.

 

Duringthe three months ended September 27, 2008, the Company eliminated thevaluation allowance relating to net operating loss carryforwards in Austria,resulting in a reduction of income taxes during the period of approximately$0.9 million.

 

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Theeffect of each of these items on our effective tax rate on continuingoperations is quantified in the table below:

 
| ** **                                                                                                                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **September 27, 2008**      | ** ** | **September 29, 2007** | ** ** |
| U.S. Federal statutory rate                                                                                                                    |       | 35.0                             | %          | 35.0 | % |
| State income taxes                                                                                                                             |       | 0.3                              |       | (3.7 | ) |
| Mix of income in taxing jurisdictions                                                                                                          |       | (8.5                             | )          | (19.1 | ) |
| Other permanent differences and valuation  allowances                                                                                          |       | (3.8                             | )          | 6.4 |   |
| Change in estimate of 2007 annualized  income as a result of the refinancing of the credit facility and purchase of  the senior discount notes |       | —                           |       | 16.0 |   |
| Impact of German tax reform legislation                                                                                                        |       | —                           |       | 19.4 |   |
| Total effective tax rate                                                                                                                       |       | 23.0                             | %          | 54.0 | % |

 

***Comparison of the nine monthsended September 27, 2008 with the nine months ended September 29,2007***

 

*Net sales.** *Net sales for thenine months ended September 27, 2008 were $464.9 million, an increase of$74.9 million, or 19.2%, from the same period in the prior year.  Energy storage sales for the nine monthsended September 27, 2008 were $341.4 million, an increase of $62.6million, or 22.5%.  The increase inenergy storage sales was due to higher lead-acid and lithium battery separatorsales and the positive impact of dollar/euro exchange rate fluctuations of$15.6 million.  Lead-acid battery separator sales increased by 24.3%, dueprimarily to the acquisition of Microporous, as well as the positive impact ofdollar/euro exchange rate fluctuations, higher volume associated market growth andprice adjustments to partially offset ongoing escalation in raw material andenergy costs.  Lithium battery separatorsales increased by 16.6% due to increasing demand for mobile power and  the penetration of lithium-ion batteries inan increasing number of electronic devices and into new applications for largeformat cells.

 

As previously discussed, we believe that theexpiration and anticipated non-renewal of a lead-acid separator supply contractwith JCI will impact our sales for fiscal 2009. Sales of automotive lead-acid battery separators covered by thisexpiring contract are expected to represent approximately 8.0% - 9.0% of 2008consolidated net sales.  In response, weare implementing a restructuring plan to align lead-acid battery separatorproduction capacity with demand, reduce costs and position the Company to meetfuture growth opportunities.

 

Separationsmedia sales for the nine months ended September 27, 2008 were $123.5million, an increase of $12.3 million, or 11.0% from the same period in the prioryear.  The increase in separations mediasales was due to higher sales of industrial and filtration specialty productsand the positive impact of dollar/euro exchange rate fluctuations of $11.4million.  Healthcare sales increased by9.6%.  The prior-year period included$13.0 million in sales of cellulosic hemodialysis membranes, which werediscontinued in 2007.  Excluding thosesales, healthcare sales growth was 32.1% due to strong growth in synthetichemodialysis membranes and the positive impact of dollar/euro exchange ratefluctuations.  Filtration and specialtyproduct sales increased by 13.8%, driven by continued demand for highperformance filtration applications and the positive impact of dollar/euro exchangerate fluctuations.

 

*Gross Profit**.  *Gross profit as a percent of net sales was 35.2% for the nine monthsended September 27, 2008, as compared to 36.3% in the same period of theprior year.  Energy storage gross profitas a percent of net sales was 35.1%, as compared to  38.8% in the same period of the prioryear.  The decline was primarilyattributable to $6.0 million of incremental costs associated with a strike atthe Owensboro, Kentucky lead-acid battery separator facility during the thirdquarter, the acquisition of Microporous, which has lower gross profit marginsthan our other lead-acid battery separator production facilities, and increasedraw material and energy costs. Separations media gross profit as a percent of net sales increased to35.3% for the nine months ended September 27, 2008, from 30.1% in the sameperiod of the prior year.  The increasewas due primarily to increased hemodialysis membrane production volumes andinvestments to enhance production efficiencies.

 

*Selling, general and administrative expenses**. *Selling, general andadministrative expenses as a percent of net sales was 17.5% for the nine monthsended September 27, 2008, which is comparable to 17.9% for the same periodin the prior year.

 

*Interest expense. *Interest expense for the nine months ended September 27,2008 decreased by $17.6 million from the same period in the prior year.  The decrease in interest expense wasprimarily driven by the purchase of our 10.50% senior discount notes in July 2007and lower interest rates under our refinanced senior credit facilities.

 

*Income taxes**. *The income taxprovision for the interim periods presented is computed at the effective rateexpected to be applicable in each respective full year using the statutoryrates on a country-by-country basis.  Theeffective tax rate on continuing operations was 27.0% for the nine months endedSeptember 27, 2008, as compared to 55.4% for the same period in the prioryear.  Our effective tax rate fluctuatesdue to a variety of factors, including state income taxes, the mix of incomebetween U.S. and foreign jurisdictions taxed at varying rates, various changesin estimates of permanent differences and valuation allowances and the relativesize of our consolidated income before income taxes.

 

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Theprimary factor impacting our effective tax rate is the mix of earnings betweenthe various tax jurisdictions in which we do business.  Each tax jurisdiction has its own set of taxlaws and tax rates.  The income earned byour subsidiaries in each jurisdiction is taxed independently by these variousjurisdictions.   Currently, theapplicable statutory income tax rates in the jurisdictions in which we operaterange from 0% to 39%.   Therefore, theamount of income tax expense in each jurisdiction as compared to ourconsolidated income (loss) before income taxes has a significant impact on ourannual effective tax rate.

 

Theeffect of each of these items on our effective tax rate on continuingoperations is quantified in the table below:

 
| ** **                                                                                                                                     | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **September 27, 2008**     | ** ** | **September 29, 2007** | ** ** |
| U.S. Federal statutory rate                                                                                                                    |       | 35.0                            | %          | 35.0 | % |
| State income taxes                                                                                                                             |       | 0.3                             |       | (3.7 | ) |
| Mix of income in taxing jurisdictions                                                                                                          |       | (8.5                            | )          | (19.1 | ) |
| Other permanent differences and valuation  allowances                                                                                          |       | 0.2                             |       | 6.9 |   |
| Change in estimate of 2007 annualized  income as a result of the refinancing of the credit facility and purchase of  the senior discount notes |       | —                          |       | 16.1 |   |
| Impact of German tax reform legislation                                                                                                        |       | —                          |       | 20.2 |   |
| Total effective tax rate                                                                                                                       |       | 27.0                            | %          | 55.4 | % |

 

*Discontinued operations*.  In January 2008, we sold our syntheticpaper business, a component of the energy storage segment, for $4.0 million,resulting in a gain of $2.4 million, net of income taxes of $1.4 million.  The results of operations, which were notmaterial, and the gain on sale from the synthetic paper business are presentedas discontinued operations for all periods presented.

 

**Business Restructuring**

 

**The pre-tax components of restructuring activity in the nine monthsended September 27, 2008 were as follows:**

 
| **(in millions)**       | ** ** | **Balance at  December 29,  2007** | ** ** | **Restructuring  Charges** | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  September 27,  2008** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------------------------|------------|-----------------------------------------------|------------|
| 2006 Restructuring  Plan:    |       |                                         |       |                       |       |               |       |                               |       |                                          |       |
| Severance and  benefit costs |       | $                                            | 3.5        |                       | $          | —             |       | $                                  | (0.4       | )                                             | $          | — |   | $ | 3.1 |   |
| Other                        |       | 1.3                                          |       | —                     |       | (0.5               | )          | —                             |       | 0.8                                           |       |
|                         |       | 4.8                                          |       | —                     |       | (0.9               | )          | —                             |       | 3.9                                           |       |
| ** **                   | ** ** | ** **                                   | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                                    | ** ** |
| 2005  Restructuring Plan:    |       |                                         |       |                       |       |               |       |                               |       |                                          |       |
| Severance and  benefit costs |       | 0.4                                          |       | —                     |       | (0.1               | )          | —                             |       | 0.3                                           |       |
| ** **                   | ** ** | ** **                                   | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                                    | ** ** |
| Total                        |       | $                                            | 5.2        |                       | $          | —             |       | $                                  | (1.0       | )                                             | $          | — |   | $ | 4.2 |   |

 

Weexpect to make payments against the restructuring reserve of approximately$2.1 million in fiscal year 2008.

 

***2006 restructuring plan***.  In response to a significant declinein demand for cellulosic hemodialysis membranes driven by a shift in industrydemand toward synthetic membranes, our separations media segment exited theproduction of cellulosic membranes and realigned its cost structure at itsWuppertal, Germany facility.  On August 24,2006, we announced a layoff of approximately 150 employees.  Production of cellulosic hemodialysismembranes ceased on December 27, 2006 and the majority of the employeeswere laid off effective January 1, 2007. The total cost of the plan is expected to be approximately $33.8million, consisting of a $17.5 million non-cash impairment charge for buildingsand equipment used in the production of cellulosic hemodialysis membranes,$10.5 million for the employee layoffs and $5.8 million for other costs relatedto the shutdown of portions of the Wuppertal facility that will no longer beused.  The other costs included in therestructuring plan are related to local regulations surrounding complete or partialshutdowns of a facility.  We expect tocomplete these activities by the end of 2010. The timing, scope and costs of these restructuring measures are subjectto change as we proceed with our restructuring plans and further evaluate ourbusiness needs and costs.

** **

***2005 restructuring plan***.  In order to better accommodatecustomer growth and related demand for both lead-acid and lithium batteryseparators in the greater Asian market, our energy storage segment transferredcertain assets from Europe and the United States to our facilities in Thailandand China.  The total cost of therealignment plan was $9.1 million.

** **

**Liquidity and Capital Resources**

** **

*Operatingactivities*.  Net cash provided by operations was $80.1million in the nine months ended September 27, 2008, as compared to $62.2million in the nine months ended September 29, 2007.  Cash provided by operations for the ninemonths 

 

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endedSeptember 27, 2008 consisted of net income before non-cash expenses of$68.8 million and a decrease in working capital of $11.3 million, excluding theimpact of acquisitions and foreign exchange rate fluctuations.  The decrease in working capital was primarilydue to a $5.8 million decrease in accounts receivable (days sales outstandingalso decreased compared to year-end) and a $3.4 million increase in accountspayable and accrued liabilities. The increase in accounts payable and accruedliabilities is due to the timing of interest payments under our seniorsubordinated notes, which are paid semi-annually in the second and fourthquarters.

 

Netcash provided by operations was $62.2 million in the nine months ended September 29,2007 and consisted of net income before non-cash expenses of $51.7 million anda decrease in working capital of $10.5 million, excluding the impact of foreignexchange rate fluctuations.  Accountsreceivable increased from December 30, 2006 to September 29, 2007 byapproximately $2.4 million and days sales outstanding remained comparable toprior periods.  Inventories decreasedapproximately $8.3 million due to the reduction of cellulosic hemodialysismembrane inventories as we began making final shipments out of inventory to ourcustomers.  Accounts payable and accruedliabilities increased approximately $5.2 million, primarily due to accruedinterest, partially offset by restructuring payments.

 

*Investingactivities*.  Capital expenditures in the nine months endedSeptember 27, 2008 were approximately $40.1 million.  Included in this amount were expendituresrelating to the $18 million lithium capacity expansion in Charlotte, NorthCarolina and the $19 million lead-acid capacity expansion in Prachinburi,Thailand, both of which began in September 2007.  The lithium capacity expansion was completedin the current period and the lead-acid capacity expansion is expected to becompleted by the end of 2008.  Weestimate that total capital expenditures in fiscal year 2008 will beapproximately $52.0 million.

 

Cash paid for acquisitionsfor the nine months ended September 27, 2008 was $86.1 million.  On February 29, 2008, we purchased 100%of the stock of Microporous for approximately $27.3 million, repaid certainindebtedness of Microporous of $33.6 million and assumed debt of $14.2million.  On April 1, 2008, wepurchased the battery separator assets of Super-Tech Battery Components Pvt.Ltd. for approximately $2.0 million.  On May 20,2008, we purchased 100% of the capital stock of Yurie-Wide Corporation forapproximately $23.2 million.

 

Duringthe nine months ended September 29, 2007, we purchased a 60% share in alead-acid battery separator manufacturing facility in Tianjin, China forapproximately $5.5 million.  On January 1,2009 and January 1, 2012, the Company can exercise a call option and theseller can exercise a put option for the Company to purchase the seller’s 40%ownership interest for $3.6 million. After 2012, the exercise price of the call and put options will be equalto the fair market value of the shares, as determined by an independentappraiser.

 

InJanuary 2008, we sold a non-core synthetic paper business for $4.0million.

 

*Financingactivities*.  Cash provided by financing activities was$67.9 million in the nine months ended September 27, 2008, including $84.9million in proceeds from our follow-on public offering, which were used torepay outstanding borrowings under our revolving credit facility and forgeneral corporate purposes.  We also madepayments on debt of $18.6 million, including the repayment of the $14.2 millionof debt assumed in the Microporous acquisition.

 

Weintend to fund our ongoing operations through cash generated by operations andavailability under the senior secured credit facility.

 

OnJuly 3, 2007, we refinanced Polypore, Inc.’s senior secured creditfacility with a new senior secured credit facility that provides improvedfinancial flexibility and lower interest rate spreads.  The new credit facility provides for a $322.9million term loan facility ($319.7 million outstanding at September 27,2008) and a €35.0 million term loan facility ($50.5 million at September 27,2008) and a $90.0 million revolving credit facility.  Subject to certain terms and conditions, amaximum of $50.0 million of the revolving credit facility may be used forletters of credit.  At September 27,2008, we had $87.2 million of borrowings available under the revolving creditfacility ($90.0 million revolving credit facility less $2.8 million of undrawnstandby letters of credit).

 

OnJuly 31, 2007, Polypore, Inc. merged with and into PolyporeInternational, and Polypore International assumed all of Polypore, Inc.’sobligations under the new senior secured credit facility.  The term loans mature in July 2014 andthe revolving credit facility matures in July 2013.  If the 8.75% senior subordinated notes arestill outstanding as of February 2012 then the term loans and revolvingcredit facility will also mature at that time.

 

**Interestrates under the senior secured credit facility are, at our option, equal toeither an alternate base rate plus a 1.25% margin or the Eurocurrency base rateplus a 2.25% margin.  At September 27,2008, the interest rates on the U.S. dollar term loan and the Eurodollar termloan were 4.73% and 6.73%, respectively.  In January 2008, the Company entered into interest rate swapagreements that effectively fix the interest rate on $250.0 million of theCompany’s term loans.  The interest rateswap agreement that terminates on June 30, 2009 fixes the interest rate on$50.0 million of the term loans at 5.58%.  The interest rate swap agreement that terminates on December 31,2009 fixes the interest rate on $200.0 million of the term loans at 5.54%.**

 

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Whenloans are outstanding under the revolving credit facility, the credit agreementrequires us to meet a maximum senior leverage ratio based on a calculation ofAdjusted EBITDA in which certain items are added back to EBITDA.

 

AdjustedEBITDA, as defined under the senior secured credit facility, was as follows:

 
| **(in millions)**                                    | ** ** | **Last Twelve Months  Ended September 27,  2008** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Net income                                                |       | $                                                                     | 43.2       |   |
| Add/Subtract:                                             |       |                                                                  |       |
| Depreciation and amortization                             |       | 54.0                                                                  |       |
| Interest expense, net                                     |       | 63.5                                                                  |       |
| Income taxes                                              |       | 10.7                                                                  |       |
| Stock-based compensation expense                          |       | 1.1                                                                   |       |
| Foreign currency loss                                     |       | 0.1                                                                   |       |
| Loss on disposal of property, plant, and  equipment       |       | 1.0                                                                   |       |
| Business restructuring                                    |       | (1.2                                                                  | )          |
| Pro forma results for Microporous  acquisition            |       | 3.1                                                                   |       |
| Pro forma results for Yurie-Wide  Corporation acquisition |       | (1.3                                                                  | )          |
| Strike-related costs                                      |       | 6.0                                                                   |       |
| FTC-related costs                                         |       | 0.3                                                                   |       |
| Discontinued operations                                   |       | (2.4                                                                  | )          |
| Other non-cash or non-recurring charges                   |       | 1.2                                                                   |       |
| Adjusted EBITDA                                           |       | $                                                                     | 179.3      |   |

 

The calculation of the senior leverage ratio asdefined under the senior credit facility as of September 27, 2008 is asfollows:

 
| **(in millions)** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| Indebtedness (1)       |       | $          | 323.9      |   |
| Adjusted EBITDA        |       | 179.3      |       |
| Actual leverage ratio  |       | 1.81x      |       |
|                        |            |            |            |  |

 

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(1)          Calculatedas the sum of outstanding borrowings under the senior secured credit facilitiesand the capital lease obligation, less the amount of cash on hand (not toexceed $50.0 million).

 

**Whenloans are outstanding under the revolving credit facility, we are required tomaintain a ratio of indebtedness to Adjusted EBITDA at the end of the quarterof not more than 3.00 to 1.00. At September 27, 2008, we were incompliance with the senior leverage ratio and the entire amount of therevolving credit facility was available for borrowing.**

** **

**Thesenior secured credit agreement contains certain restrictive covenants which,among other things, limit capital expenditures, the incurrence of additionalindebtedness, investments, dividends, transactions with affiliates, assetsales, acquisitions, mergers and consolidations, prepayments of otherindebtedness, liens and encumbrances, and other matters customarily restrictedin such agreements. The facilities also contain certain customary events ofdefault, subject to grace periods, as appropriate. We believe that annualcapital expenditure limitations imposed by the senior credit facilities willnot significantly inhibit us from meeting our ongoing capital expenditureneeds.**

** **

Futureprincipal and interest payments on long-term debt are expected to be paid outof cash flows from operations, borrowings on our revolving credit facility andfuture refinancing of our debt.  Our cashinterest requirements for the next twelve months are estimated to beapproximately $60.7 million.

 

The8.75% senior subordinated notes ($444.2 million outstanding at September 27,2008) will mature in 2012 and are guaranteed by most of our existing and futuredomestic restricted subsidiaries, subject to certain exceptions. Except undercertain circumstances, the 8.75% senior subordinated notes do not requireprincipal payments prior to their maturity in 2012. Interest on the 8.75%senior subordinated notes is payable semi-annually in cash. The 8.75% seniorsubordinated notes contain customary covenants and events of default, includingcovenants that limit our ability to incur debt, pay dividends and makeinvestments.

 

Webelieve we have sufficient liquidity to meet our cash requirements over boththe short (next twelve months) and long term (in relation to our debtservice requirements). In evaluating the sufficiency of our liquidity for boththe shorter and longer term, we considered the expected cash flow to begenerated by our operations and the available borrowings under our senior securedcredit facility compared to our anticipated cash requirements for debt service,working capital, cash taxes and capital expenditures as well as fundingrequirements for long-term liabilities. We anticipate that our operating cashflow, together with borrowings under the revolving credit facility, will besufficient to meet our anticipated future operating expenses, capitalexpenditures and debt service obligations as they become due for at least thenext 12 months. However, our ability to make scheduled payments of 

 

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principal,to pay interest on or to refinance our indebtedness and to satisfy our otherdebt obligations will depend upon our future operating performance, which willbe affected by general economic, financial, competitive, legislative,regulatory, business and other factors beyond our control. See “Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 29,2007, Registration Statement No. 333-150754 on Form S-1 and in thisQuarterly Report on Form 10-Q.

 

Fromtime to time, we may explore additional financing methods and other means tolower our cost of capital, which could include stock issuance or debt financingand the application of the proceeds therefrom to the repayment of bank debt orother indebtedness. In addition, in connection with any future acquisitions, wemay require additional funding, which may be provided in the form of additionaldebt or equity financing or a combination thereof. There can be no assurancethat any additional financing will be available to us on acceptable terms.

 

***Foreign Operations***

 

We currently manufacture our products at 13strategically located facilities in North America, Europe and Asia.  Net sales from the foreign locations wereapproximately $298.6 million and $249.8 million for the nine months ended September 27,2008 and September 29, 2007, respectively. Typically, we sell our products in the currency of the country where themanufacturing facility that produces the product is located.  Sales to foreign customers are subject tonumerous additional risks, including the impact of foreign governmentregulations, currency fluctuations, political uncertainties and differences inbusiness practices.  There can be noassurance that foreign governments will not adopt regulations or take otheraction that would have a direct or indirect adverse impact on our business ormarket opportunities within such governments’ countries.  Furthermore, there can be no assurance thatthe political, cultural and economic climate outside the United States will befavorable to our operations and growth strategy.

 

***Seasonality***

 

Operations at our European production facilities aretraditionally subjected to shutdowns during the month of August each yearfor employee vacations.  As a result,operating income during the third quarter of the fiscal years 2008 and 2007 waslower than operating income in other quarters during the same fiscal year.  In view of the seasonal fluctuations, webelieve that comparisons to our operating results for the third quarter of anyfiscal year with those of the other quarters during the same fiscal year may beof limited relevance in predicting our future financial performance.

 

###### **Environmental matters**

###### ** **

Weaccrue for environmental obligations when such expenditures are probable andreasonably estimable. The amount of liability recorded is based on currentlyavailable information, including the progress of remedial investigations,current status of discussions with regulatory authorities regarding the methodand extent of remediation, presently enacted laws and existing technology.Accruals for estimated losses from environmental obligations are adjusted asfurther information develops or circumstances change. Costs of futureexpenditures for environmental obligations are not discounted to their presentvalue. Recoveries of environmental costs from other parties are recognized asassets when their receipt is deemed probable. Environmental reserves, which arepredominately euro-denominated, were $30.9 million and $29.2 million as of September 27,2008 and December 29, 2007, respectively.

 

**Inconnection with the acquisition of Membrana in 2002, we recorded a reserve forcosts to remediate known environmental issues and operational upgrades at theWuppertal, Germany facility.  In 2004, weidentified potential environmental contamination at our manufacturing facilityin Potenza, Italy.  We anticipate thatexpenditures will be made over the next seven to ten years.**

** **

Wehave indemnification agreements for certain environmental matters from AcordisA.G. (“Acordis”) and Akzo Nobel N.V. (“Akzo”), the prior owners ofMembrana.  Akzo originally provided broadenvironmental protections to Acordis with the right to assign such indemnitiesto Acordis’s successors. Akzo’s indemnifications relate to conditions existingprior to December 1999, which is the date that Membrana was sold toAcordis. The Akzo agreement provides indemnification of claims through December 2007,with the indemnification percentage decreasing each year during the coverageperiod. Through December 2003, Akzo pays 75% of any approved claim. Afterthat, Akzo pays 65% of claims reported through December 2006 and 50% ofclaims reported through December 2007. In addition to the Akzoindemnification, Acordis provides separate indemnification of claims incurredfrom December 1999 through February 2002, the acquisition date. At September 27,2008 and December 29, 2007, amounts receivable under the indemnificationagreements were $19.9 million and $20.0 million, respectively. The currentportion of the indemnification receivable is included in “Prepaid and other” inthe accompanying balance sheets.

 

Inconnection with the acquisition of Microporous on February 29, 2008, weidentified potential environmental contamination at the acquired manufacturingsite in Piney Flats, Tennessee. Subsequent to the acquisition, we performed additional environmentalstudies and confirmed that environmental contamination was present.  The estimated cost of remediation isapproximately $3.1 million.  As part ofthe acquisition, the seller purchased an environmental insurance policy on ourbehalf and also provided indemnification for a portion of the insurance policydeductible.  At September 27, 2008,amounts due under the insurance policy and indemnification agreement were $2.5million.  We recorded the estimated costof remediation and the related receivables from the insurance company andindemnification agreement as an adjustment to the preliminary allocation ofpurchase price during the 

 

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threemonths ended September 27, 2008. The current portion of the indemnification receivable is included in “Prepaidand other” in the accompanying balance sheets.

 

**Off-BalanceSheet Arrangements**

 

We are not a party to any off-balance sheetarrangements that have, or are reasonably likely to have, a current or futureeffect on our financial condition, revenues or expenses, results of operations,liquidity, capital expenditures or capital resources that is material toinvestors.

 

**New AccountingStandards**

 

**In March 2008,the FASB issued Statement No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities* (“FAS 161”). FAS 161requires companies with derivative instruments to disclose information abouthow and why a company uses derivative instruments, how derivative instrumentsand related hedged items are accounted for under Statement No. 133, *Accounting for Derivative Instruments and Hedging Activities*andhow derivative instruments and related hedged items affect a company’sfinancial position, financial performance and cash flows. FAS 161 is effectivefor financial statements issued for fiscal years beginning after November 15,2008.**

** **

**In May 2008,the FASB issued Statement No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles* (“FAS 162”). FAS 162 identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements.  FAS No. 162 is effective November 15,2008. We do not expect the adoption of FAS 162 will have a material impact onour consolidated financial statements.**

** **

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

We are exposed to various market risks, which arepotential losses arising from adverse changes in market rates and prices, suchas interest rates and foreign exchange fluctuations.  We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.

 

***Interest rate risk***

 

AtSeptember 27, 2008, we had fixed rate debt of approximately $444.3 millionand variable rate debt of approximately $370.2 million.  In January 2008, we entered intointerest rate swap agreements that effectively fix the interest rate on $250.0million of our variable rate debt.  Thepre-tax earnings and cash flow impact resulting from a 100 basis point changein interest rates on our variable rate debt not protected by interest rate swapagreements would be approximately $1.2 million per year.

 

***Currency risk***

 

Outsideof the United States, we maintain assets and operations in Europe and Asia. Theresults of operations and financial position of our foreign operations areprincipally measured in their respective currency and translated into U.S.dollars. As a result, exposure to foreign currency gains and losses exists. Thereported income of these subsidiaries will be higher or lower depending on aweakening or strengthening of the U.S. dollar against the respective foreigncurrency. Our subsidiaries and affiliates also purchase and sell products andservices in various currencies. As a result, we may be exposed to costincreases relative to the local currencies in the markets in which we sell.Because a different percentage of our sales are in a foreign currency than ourcosts, a change in the relative value of the U.S. dollar could have adisproportionate impact on our sales compared to our costs, which could impactour margins. A portion of our assets are based in our foreign locations and aretranslated into U.S. dollars at foreign currency exchange rates in effect as ofthe end of each period, with the effect of such translation reflected in othercomprehensive income (loss). We have a euro-denominated term loan and seniorsubordinated notes that effectively hedge our net investment in foreignsubsidiaries. Therefore, foreign currency gains and losses resulting from thetranslation of the euro-denominated debt are included in accumulated othercomprehensive income (loss). Accordingly, our consolidated shareholders’ equitywill fluctuate depending upon the weakening or strengthening of the U.S. dollaragainst the respective foreign currency, primarily the euro.

 

The dollar/euro exchange rates used in our financialstatements for the periods ended as set forth below were as follows:

 
| ** **                                      | ** ** | **September 27,  2008** | ** ** | **September 29,  2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Period end rate                                 |       | 1.4616                       |       | 1.4187                       |       |
| Period average rate for the three months  ended |       | 1.5044                       |       | 1.3728                       |       |
| Period average rate for the nine months  ended  |       | 1.5214                       |       | 1.3436                       |       |

 

Our strategy for management of currency risk reliesprimarily on conducting our operations in a country’s respective currency andmay, from time to time, involve currency derivatives.  As of September 27, 2008, we did nothave any foreign currency derivatives outstanding.

 

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**Item4.  Controls and Procedures**

 

An evaluation of theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act)was performed under the supervision, and with the participation of, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer.The Company’s disclosure controls were designed to provide a reasonableassurance that information required to be disclosed in reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the rules and forms of the Securitiesand Exchange Commission. Based upon our evaluation, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of September 27, 2008.

 

During the three months ended September 27,2008, there has been no change in our internal control over financial reporting(as defined in Rules 13a-15(f) and 15d-15(f) promulgated underthe Exchange Act) that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

OnMarch 20, 2008 we received a letter from the Federal Trade Commission (the“FTC”) requesting that the Company voluntarily provide certain documents andinformation to the FTC regarding our acquisition of Microporous, which wascompleted on February 29, 2008.  Theletter stated that the FTC was conducting an investigation to determine whetherthe Microporous acquisition will substantially lessen competition in anyrelevant market and thereby violate federal antitrust laws.  We voluntarily responded to the letter inwriting and through supplemental telephone conversations and meetings.

 

OnApril 7, 2008, we and our wholly owned subsidiary, Daramic LLC, eachreceived from the FTC a subpoena and interrogatories requesting substantiallysimilar documents and information as requested in the FTC’s initial letter, aswell as additional documents and information. We responded fully to this request and met on several occasions withvarious members of the FTC staff in an effort to answer their questions andresolve the investigation.

 

As disclosed in our CurrentReport on Form 8-K filed on September 10, 2008, on September 9,2008 the FTC issued an administrative complaint against us alleging thatour actions and the acquisition of Microporous have substantially lessenedcompetition in North American markets for lead-acid battery separators. We filed an answer to the complaint on October 15, 2008 denying thematerial allegations of the complaint. Proceedings will be held before an Administrative Law Judge of the FTCwith an initial hearing currently scheduled for April 14, 2009. The timingof a final resolution of this matter is uncertain.

 

We believe that the complaint is unfounded andthat the Microporous acquisition is and will continue to be beneficial to ourcustomers and the industry. Therefore, we intend to vigorously defend thisaction by the FTC.  It is not possible, however, to predict with certainty whether we will besuccessful in the litigation or through a judicial appellate process.  Ifthe FTC and the courts were to reach a conclusion adverse to us, the FTC couldseek remedies including divestiture of some or all of the assets acquired inthe Microporous acquisition.  We believe that a final judicial resolutionto the challenge by the FTC to the Microporous acquisition could take severalyears.

 

Webelieve that the final resolution of this matter will not have a materialadverse impact on our business, financial condition or results of operations.

 

**Item 1A. Risk Factors**

 

Therisk factors discussed below should be read in conjunction with, and update andsupplement the risk factors discussed in Polypore International’s Annual Reporton Form 10-K for the year ended December 29, 2007 and RegistrationStatement No. 333-150754 on Form S-1.

 

*Becausea majority of our employees are represented under collective bargainingagreements, any employee slowdowns, strikes or failure to renew our collectivebargaining agreements could disrupt our business.*

 

Approximately53% of our employees are represented under collective bargaining agreements. Amajority of those employees are located in Italy, France and Germany and arerepresented under industry-wide agreements that are subject to national andlocal government regulations. Many of these collective bargaining agreementsmust be renewed annually. Labor unions also represent our employees inOwensboro, Kentucky and Corydon, Indiana.

 

Thecollective bargaining agreement covering the workers at the Owensboro facilityexpired in April 2008.  On August 6,2008, the union at our lead-acid battery separator facility in Owensboro,Kentucky initiated a strike.  On September 26,2008, the Company and the union agreed to an extension of the current laborcontract for a period of 18 months through March 30, 2010. Employeesbegan returning to work on September 30, 2008.

 

Thecollective bargaining agreement covering the workers at the Corydon facilityexpires in January 2010.

 

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Wemay not be able to maintain constructive relationships with these labor unions.We may not be able to successfully negotiate new collective bargaining agreementson satisfactory terms in the future. The loss of a substantial number of theseemployees or a prolonged labor dispute could disrupt our business. Any suchdisruption could in turn reduce our sales, increase our costs to bring productsto market and result in significant losses.

 

*Ourrestructuring activities could have an adverse impact on our financialcondition.*

 

Duringthe fourth quarter of 2008, JCI rejected all recent contract proposals andoffers to renew their supply contract, and we now anticipate that we will nothave a material supply position with JCI for automotive lead-acid batteryseparators in 2009.  On October 24,2008, we approved the implementation of a plan to align lead-acid batteryseparator production capacity with demand, reduce costs and position theCompany to meet future growth opportunities.  The plan includes closingour facility in Potenza, Italy and streamlining production at our facility inOwensboro, Kentucky.  The current estimatedcost of the restructuring plan is expected to be in the range of $54.0 to $63.0million, including estimated cash charges of $24.0 to $30.0 million for siteclean-up and remediation and other costs, including severance benefits and anestimated non-cash impairment charge of $30.0 to $33.0 million primarily forbuildings and equipment that will no longer be used in Potenza, Italy.

 

Thetiming, scope and costs of any restructuring plans are subject to change. As aresult, our restructuring activities could disrupt our business and have anadverse impact on our financial condition.

 

*Legalproceedings could have an adverse impact on our financial condition.*

 

Fromtime to time, we are party to legal proceedings including matters involvingpersonnel and employment issues, personal injury, intellectual property,acquisitions and other proceedings arising in the ordinary course of business.

 

Inaddition, on September 9, 2008, the FTC issued an administrative complaintagainst us alleging that our actions and the acquisition of Microporous havesubstantially lessened competition in North American markets for lead-acidbattery separators.  We filed an answer to the complaint on October 15,2008 denying the material allegations of the complaint.  Proceedings will be held before anAdministrative Law Judge of the FTC with an initial hearing currently scheduledfor April 14, 2009.

 

Itis not possible to predict with certainty whether we will be successful in suchlegal proceedings and the impact of their resolution, whether or not they occurin the ordinary course of business.  Forinstance, if the FTC and the courts were to reach a conclusion adverse to us,the FTC could seek remedies including divestiture of some or all of the assetsacquired in the Microporous acquisition.  Accordingly, our results couldbe materially impacted by the decisions and expenses related to pending orfuture proceedings.

 

**Item 6.    Exhibits**

 
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                              |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                      |
| 31.1                 |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 31.2                 |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 32.1                 |       | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
| 32.2                 |       | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

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# **SIGNATURES**

# ** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Date: November 6, 2008 |   | **POLYPORE  INTERNATIONAL, INC.**                               |
|-----------------------------|--------|-----------------------------------------------------------------|
|                        |   | (Registrant)                                                    |
|                        |   |
|                        |   |
|                        | By:    | /s/  Robert B. Toth                                             |
|                        |   | Robert B. Toth                                                  |
|                        |   | President  and Chief Executive Officer                          |
|                        |   | (principal  executive officer)                                  |
|                        |   |
|                        |   |
|                        | By:    | /s/  Lynn Amos                                                  |
|                        |   | Lynn  Amos                                                      |
|                        |   | Chief  Financial Officer                                        |
|                        |   | (principal  financial officer and principal accounting officer) |

 

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