##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q (Mark One) þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended April 2, 2005 o Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from  to Commission file number: 333-119224 POLYPORE, INC. 
  Delaware
    
    57-1006871(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)13800 South Lakes DriveCharlotte, North Carolina
    
    28273(Address of Principal Executive Offices)
    
    (Zip Code)
 (704) 587-8409 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ The Company currently has 100 shares of common stock outstanding, all of which are owned indirectly
by Polypore International, Inc. Because no public market exists for such shares, the aggregate
market value of the common stock held by non-affiliates of the Company is not determinable.




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##### 



Polypore, Inc.
Index to Quarterly Report on Form 10-Q
For the Quarter Ended April 2, 2005 PagePART I
    
    FINANCIAL INFORMATIONItem
1.
    
    Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    19Item
3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item
4.
    
    Controls and Procedures
    
    
    28PART II
    
    OTHER INFORMATIONItem
1.
    
    Legal Proceedings
    
    
    28Item
6.
    
    Exhibits
    
    
    28SIGNATURES
 In this Quarterly Report on Form 10-Q, the words Polypore, Company, we, us and our refer
to Polypore, Inc. together with its subsidiaries unless the context indicates otherwise. 2




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##### 



Forward-looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private Securities
Litigation Reform Act of 1995. All statements other than statements of historical facts included
in this Quarterly Report on Form 10-Q that address activities, events or developments that we
expect, believe or anticipate will or may occur in the future are forward-looking statements,
including, in particular, the statements about Polypores plans, objectives, strategies and
prospects regarding, among other things, the financial condition, results of operations and
business of Polypore and its subsidiaries. We have identified some of 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 Controls and Procedures or
Managements Discussion and Analysis of Financial Condition and Results of Operations, or the
Companys financial statements or the notes thereto. These forward-looking statements are based on
current expectations about future events affecting us and are subject to uncertainties and factors
relating to our operations and business environment, all of which are difficult to predict and many
of which are beyond our control. Many factors mentioned in our discussion in this Quarterly Report
on Form 10-Q, including the risks outlined under Risk Factors set forth in Exhibit 99.1 to our
Annual Report on Form 10-K for the fiscal year ended January 1, 2005, will be important in
determining future results. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we do not know whether our expectations will prove
correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties, including with respect to Polypore, the following, among other things:  
    the highly competitive nature of the markets in which we sell our products;
    the failure to continue to develop innovative products;
    the increased use of synthetic hemodialysis filtration membranes by our customers;
    the loss of our customers;
    the vertical integration by our customers of the production of our products into
their own manufacturing process;
    increases in prices for raw materials or the loss of key supplier contracts;
    employee slowdowns, strikes or similar actions;
    product liability claims exposure;
    risks in connection with our operations outside the United Sates;
    the incurrence of substantial costs to comply with, or as a result of violations of,
or liabilities under environmental laws;
    the failure to protect our intellectual property;
    the failure to replace lost senior management;
    the incurrence of additional debt, contingent liabilities and expenses in connection
of future acquisitions;
    the failure to effectively integrate newly acquired operations; and
    the absence of expected returns from the amount of intangible assets we have recorded. Because our actual results, performance or achievements could differ materially from those
expressed in, or implied by, the forward-looking statements, we cannot give any assurance that any
of the events anticipated by the forward-looking statements will occur or, if any of them do, what
impact they will have. Additional Information We file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy statements, Current
Reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) under
the Exchange Act with the U.S. Securities and Exchange Commission (Commission or SEC). These
reports are available electronically as soon as reasonably practicable after we file such materials
with the Commission through the Internet web site maintained by the SEC at http://www.sec.gov or by
calling the SEC at its principal offices in Washington, DC at 1-
800-SEC-0330. The reports are also available in print to any shareholder who requests them by
contacting our corporate secretary at the address above for the Companys principal executive
offices. 3




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##### 



PART I  FINANCIAL INFORMATION Item 1. Financial Statements Polypore, Inc.
Condensed Consolidated Balance Sheets April 2, 2005
    
    
    January 1, 2005(in thousands)
    
    (unaudited)AssetsCurrent assets:Cash and equivalents
    
    $
    29,578
    
    
    $
    31,684Accounts receivable, net
    
    
    99,109
    
    
    
    106,296Inventories
    
    
    61,928
    
    
    
    61,789Refundable income taxes
    
    
    3,030
    
    
    
    8,238Deferred income taxes
    
    
    3,253
    
    
    
    7,954Prepaid and other
    
    
    6,989
    
    
    
    5,288Total current assets
    
    
    203,887
    
    
    
    221,249Property, plant and equipment, net
    
    
    422,136
    
    
    
    441,350Goodwill
    
    
    537,713
    
    
    
    535,844Intangibles and loan acquisition costs, net
    
    
    237,879
    
    
    
    244,256Environmental indemnification receivable
    
    
    19,281
    
    
    
    20,125Other
    
    
    1,143
    
    
    
    1,142Total assets
    
    $
    1,422,039
    
    
    $
    1,463,966Liabilities and shareholders equityCurrent liabilities:Revolving credit obligations
    
    $
    
    
    
    $
    Accounts payable
    
    
    19,743
    
    
    
    20,581Accrued liabilities
    
    
    52,775
    
    
    
    50,464Current portion of debt-optional prepayment
    
    
    
    
    
    
    25,000Current portion of debt
    
    
    1,830
    
    
    
    2,260Current portion of capital lease obligation
    
    
    1,285
    
    
    
    1,272Total current liabilities
    
    
    75,633
    
    
    
    99,577Debt, less current portion
    
    
    812,900
    
    
    
    824,939Capital lease obligations, less current portion
    
    
    7,018
    
    
    
    7,344Pension and postretirement benefits
    
    
    48,165
    
    
    
    48,652Post employment benefits
    
    
    9,307
    
    
    
    10,119Environmental reserve, less current portion
    
    
    25,241
    
    
    
    24,394Deferred income taxes
    
    
    130,447
    
    
    
    138,566Other
    
    
    2,904
    
    
    
    3,033Commitments and contingenciesShareholders equity:Common stock
    
    
    
    
    
    
    Paid-in capital
    
    
    321,516
    
    
    
    321,516Retained (deficit)
    
    
    (9,416
    )
    
    
    (14,870
    )Accumulated other comprehensive income (loss)
    
    
    (1,676
    )
    
    
    696310,424
    
    
    
    307,342Total liabilities and shareholders equity
    
    $
    1,422,039
    
    
    $
    1,463,966
 
 See notes to condensed consolidated financial statements 4




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##### 



Polypore, Inc.Condensed Consolidated Statements of Income (Unaudited) Post-Transactions
    
    
    Pre-TransactionsThree Months
    
    
    Three MonthsEnded
    
    
    Ended(in thousands)
    
    April 2, 2005
    
    
    April 3, 2004Net sales
    
    $
    112,498
    
    
    $
    140,120Cost of goods sold
    
    
    73,609
    
    
    
    86,261Gross profit
    
    
    38,889
    
    
    
    53,859Selling, general and administrative expenses
    
    
    18,390
    
    
    
    17,493Operating income
    
    
    20,499
    
    
    
    36,366Other (income) expense:Interest expense, net
    
    
    14,930
    
    
    
    4,531Foreign currency and other
    
    
    (1,571
    )
    
    
    427Unrealized gain on derivative instrument
    
    
    
    
    
    
    (13
    )13,359
    
    
    
    4,945Income before income taxes
    
    
    7,140
    
    
    
    31,421Income taxes
    
    
    1,687
    
    
    
    10,683Net income
    
    $
    5,453
    
    
    $
    20,738
 
 See notes to condensed consolidated financial statements 5




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##### 



Polypore, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited) Post-Transactions
    
    
    Pre-TransactionsThree Months
    
    
    Three MonthsEnded
    
    
    Ended(in thousands)
    
    April 2, 2005
    
    
    April 3, 2004Operating activities:Net income
    
    $
    5,453
    
    
    $
    20,738Adjustments to reconcile net income to net cash provided by operating activities:Depreciation expense
    
    
    9,856
    
    
    
    10,923Amortization expense
    
    
    4,460
    
    
    
    617Amortization of loan acquisition costs
    
    
    657
    
    
    
    464Gain on disposal of property, plant and equipment
    
    
    
    
    
    
    (1,549
    )Foreign currency and other
    
    
    (1,618
    )
    
    
    (1,375
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    4,638
    
    
    
    (12,238
    )Inventories
    
    
    (1,702
    )
    
    
    630Prepaid and other current assets
    
    
    (1,852
    )
    
    
    (1,272
    )Accounts payable and accrued liabilities
    
    
    9,195
    
    
    
    327Other, net
    
    
    133
    
    
    
    (118
    )Net cash provided by operating activities
    
    
    29,220
    
    
    
    17,147Investing activities:Purchases of property, plant and equipment
    
    
    (3,097
    )
    
    
    (4,216
    )Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    1,923Net cash used in investing activities
    
    
    (3,097
    )
    
    
    (2,293
    )Financing activities:Proceeds from debt
    
    
    
    
    
    
    610Principal payments on debt
    
    
    (26,924
    )
    
    
    (7,036
    )Loan acquisition costs
    
    
    
    
    
    
    (59
    )Net cash used in financing activities
    
    
    (26,924
    )
    
    
    (6,485
    )Effect of exchange rate changes on cash and equivalents
    
    
    (1,305
    )
    
    
    (1,164
    )Net (decrease) increase in cash and equivalents
    
    
    (2,106
    )
    
    
    7,205Cash and equivalents at beginning of period
    
    
    31,684
    
    
    
    20,063Cash and equivalents at end of the period
    
    $
    29,578
    
    
    $
    27,268
 
 See notes to condensed consolidated financial statements 6




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##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) 1. Description of Business and Transactions Description of Business Polypore, Inc. (the Company or Polypore), a wholly owned subsidiary
of Polypore International, Inc. (Parent or Polypore International), is a leading worldwide
manufacturer and marketer of microporous membranes for use in energy storage and separations
applications. The Company has a global presence in the major geographic markets of North America,
South America, Western Europe and the Asia-Pacific region. Change in Ownership On January 30, 2004, the Company and its shareholders entered into a Stock
Purchase Agreement with PP Acquisition Corporation (PP Acquisition), a subsidiary of Polypore
International. On May 13, 2004, the Company and its stockholders consummated the stock purchase
agreement with PP Acquisition, pursuant to which PP Acquisition purchased all of the outstanding
shares of the Companys capital stock (the Transactions). The aggregate purchase price,
including acquisition related costs, was approximately $1,150,073,000 in cash. In connection with
the Transactions, PP Acquisition obtained a new credit facility with initial borrowings of
approximately $414,920,000, issued 8.75% senior subordinated notes with a face amount of
$405,915,000 and received equity contributions from its shareholders of $320,385,000. PP
Acquisition used the net proceeds from the new credit facility, the issuance of senior subordinated
debt and equity contributions to pay the net purchase price to the existing shareholders, repay all
outstanding indebtedness under the Companys existing credit facility and pay transaction related
fees and expenses. At the time of closing of the acquisition, PP Acquisition merged with and into
the Company, with the Company as the surviving corporation. At the time of closing, all classes of
common stock of the Company were canceled and the common stock of PP Acquisition was converted into
100 shares of Class A common stock of the Company. The acquisition of the Company by PP Acquisition was accounted for as a purchase in conformity with
FASB Statement No. 141, Business Combinations(FAS 141) and FASB Statement No. 142, Goodwill and
Other Intangible Assets(FAS 142). The total cost of the merger of PP Acquisition with and into
the Company has been allocated as a change in basis to the tangible and intangible assets acquired
and liabilities assumed based on their respective fair values as of May 13, 2004, the date of the
merger. The purchase price allocation is based on preliminary estimates and may be adjusted based
on the finalization of certain accruals recorded in connection with the Transactions. For
accounting purposes, the Transactions were accounted for as if they occurred on the last day of the
Companys fiscal month ended May 1, 2004, which is the closest fiscal month end to May 13, 2004,
the closing date of the Transactions. The following table summarizes the purchase price allocation based upon the estimated fair value of
the assets acquired and liabilities assumed at the date of acquisition. (in thousands)Current assets
    
    $
    201,405Property, plant and equipment
    
    
    406,934Intangible assets
    
    
    253,005Goodwill
    
    
    537,713Other assets
    
    
    23,933Total assets acquired
    
    $
    1,422,990Current liabilities
    
    
    85,028Debt, less current portion
    
    
    819,790Pension, postretirement and post employment benefits
    
    
    54,027Deferred income taxes
    
    
    121,296Other
    
    
    22,464Total liabilities assumed
    
    
    1,102,605Net assets acquired
    
    $
    320,385
 
 The excess of the purchase price over the fair value of the net assets purchased, as adjusted for
the change discussed
in Note 11, was approximately $537,713,000 and was allocated to goodwill. The goodwill was assigned
to the Energy Storage and Separations Media segments in the amounts of $373,664,000 and
$164,049,000, respectively. The goodwill is not deductible for income tax purposes. 7




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##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) The following unaudited pro forma financial data summarizes the results of operations for the three
months ended April 3, 2004 as if the Transactions had occurred as of the beginning of the period.
Unaudited pro forma results below are based on historical results of operations and include
adjustments for depreciation, amortization and interest expense associated with the Transactions
and the related income tax effects of these adjustments. The pro forma amounts do not necessarily
reflect actual results that would have occurred. Three Months Ended(in thousands)
    
    April 3, 2004Net sales
    
    $
    140,120Net income
    
    $
    12,877
 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company are prepared
in accordance with U.S. generally accepted accounting principles for interim financial information.
Accordingly, the unaudited condensed consolidated financial statements and notes do not contain
certain information included in the Companys annual financial statements. In the opinion of
management, all normal and recurring adjustments that are necessary for a fair presentation have
been made. Operating results for the period ended April 2, 2005 are not necessarily indicative of
the results that may be expected for the fiscal year ended December 31, 2005. The unaudited
condensed consolidated financial statements should be read in conjunction with the annual audited
financial statements for the year ended January 1, 2005. 3. Accounting Pronouncements In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets(FAS 153),
an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions(APB 29). The
amendments made by FAS 153 are based on the principle that exchanges of nonmonetary assets should
be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have commercial substance.
Previously, APB 29 required that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive asset should be based
on the recorded amount of the asset relinquished. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of
issuance. Management does not believe there will be a significant impact as a result of adopting
this Statement. In November 2004, the FASB issued Statement No. 151, Inventory Costs(FAS 151). This statement
amends Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing, to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). FAS 151 requires that idle facility expense, excess spoilage, double freight and re-handling costs
be recognized as current-period charges regardless of whether they meet the criterion of so
abnormal. FAS 151 also requires that allocation of fixed production overhead expenses to the
costs of conversion be based on the normal capacity of the production facilities. FAS 151 is
effective for all fiscal years beginning after June 15, 2005 (2006 for the Company). Management
does not believe there will be a significant impact as a result of adopting this Statement. 4. Inventories Inventories are carried at the lower of cost or market using the first-in, first-out (FIFO)
method of accounting. 8




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Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) Inventories consist of the following: (in thousands)
    
    April 2, 2005
    
    
    January 1, 2005Raw materials
    
    $
    22,272
    
    
    $
    22,243Work-in-process
    
    
    8,340
    
    
    
    6,395Finished goods
    
    
    31,316
    
    
    
    33,151Total
    
    $
    61,928
    
    
    $
    61,789
 
 5. Debt Debt, in order of priority, consists of: (in thousands)
    
    April 2, 2005
    
    
    January 1, 2005Senior credit facilities:Revolving credit facility
    
    $
    
    
    
    $
    Term loan facilities
    
    
    389,876
    
    
    
    416,9418.75% senior subordinated notes
    
    
    420,750
    
    
    
    429,315Other
    
    
    4,104
    
    
    
    5,943814,730
    
    
    
    852,199Less optional prepayment
    
    
    
    
    
    
    25,000Less current maturities
    
    
    1,830
    
    
    
    2,260Long-term debt
    
    $
    812,900
    
    
    $
    824,939
 
 On March 1, 2005, the Company made an optional prepayment of $25,000,000 on the term loans. In
accordance with the credit agreement, the prepayment was applied first to the quarterly payments
due for the next twelve months and second, pro rata against the remaining scheduled installments of
principal. After giving effect to the prepayment, the term loans will require quarterly payments
of principal at the end of each fiscal quarter beginning on April 1, 2006. 6. Pension and Other Postretirement Benefits The Company and its subsidiaries sponsor multiple defined benefit pension plans, which are
primarily located at subsidiaries outside of the U.S., and an other postretirement benefit plan
located in the U.S. The following table provides the components of net periodic benefit cost: Pension Plans
    
    
    Other Postretirement BenefitsPost-
    
    
    
    
    
    
    Post-Transactions
    
    
    Pre-Transactions
    
    
    Transactions
    
    
    Pre-TransactionsThree Months
    
    
    Three Months
    
    
    Three Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended(in thousands)
    
    April 2, 2005
    
    
    April 3, 2004
    
    
    April 2, 2005
    
    
    April 3, 2004Service cost
    
    $
    578
    
    
    $
    453
    
    
    $
    7
    
    
    $
    7Interest cost
    
    
    759
    
    
    
    668
    
    
    
    29
    
    
    
    29Expected return on plan assets
    
    
    (213
    )
    
    
    (196
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    (12
    )Recognized net actuarial loss
    
    
    14
    
    
    
    36
    
    
    
    
    
    
    
    1Net periodic benefit cost
    
    $
    1,138
    
    
    $
    1,004
    
    
    $
    36
    
    
    $
    25
 
 9




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##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) 7. Income Taxes The income tax provision for the interim periods presented is computed at the effective rate
expected to be applicable in each respective full year using the statutory rates on a
country-by-country basis. The difference between income tax expense using statutory rates and
income tax expense reflected in the financial statements is due primarily to the effect of
permanent differences related to foreign tax credits, exclusions from taxable income related to
export sales and the mix of income between U.S. and foreign jurisdictions. The American Jobs Creation Act (the Act) was enacted on October 22, 2004. The Act contains a
temporary provision that encourages companies to repatriate foreign earnings and a deduction from
federal taxable income related to certain qualifying domestic production manufacturing activities. The Company is still in the process of evaluating the effects of the repatriation provision which
allows companies to repatriate foreign earnings to the U.S. by making certain dividends received by
a U.S. corporation from controlled foreign corporations eligible for an 85% dividends-received
deduction. This deduction would result in a 5.25% effective federal rate on repatriated earnings.
The Company is not able to estimate the impact of the repatriation provisions at this time.
However, the Company does not expect any negative impact from these provisions. The impact of the qualified production activities deduction on taxable income is currently being
evaluated. While the implications of this provision vary based on transition rules and the future
income mix, the Company expects the provision will provide a favorable impact on the Companys
effective tax rate in the future to the extent that the Company has taxable income in the U.S. 8. Segment Information The Companys operations are principally managed on a products basis and are comprised of two
reportable segments: Energy Storage and Separations Media. The Energy Storage segment produces and
markets membranes that provide the critical function of separating the cathode and anode in a
variety of battery markets, including lithium, industrial and transportation applications. The
Separations Media segment produces and markets membranes used as the high technology filtration
element in various healthcare and industrial applications. The Company evaluates the performance of segments and allocates resources to segments based on
operating income before interest, income taxes, depreciation and amortization. 10




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##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) Financial information relating to the reportable operating segments is presented below: Post-Transactions
    
    
    Pre-TransactionsThree Months
    
    
    Three MonthsEnded
    
    
    Ended(in thousands)
    
    April 2, 2005
    
    
    April 3, 2004Net sales to external customers:Energy storage
    
    $
    76,259
    
    
    $
    94,923Separations media
    
    
    36,239
    
    
    
    45,197Total net sales to external customers
    
    $
    112,498
    
    
    $
    140,120Operating income:Energy storage
    
    $
    12,914
    
    
    $
    28,453Separations media
    
    
    7,585
    
    
    
    7,913Total operating income
    
    
    20,499
    
    
    
    36,366Reconciling items:Interest expense
    
    
    14,930
    
    
    
    4,531Other
    
    
    (1,571
    )
    
    
    414Total consolidated income before income taxes
    
    $
    7,140
    
    
    $
    31,421Depreciation and amortization:Energy storage
    
    $
    8,400
    
    
    $
    5,214Separations media
    
    
    5,916
    
    
    
    6,326Total depreciation and amortization
    
    $
    14,316
    
    
    $
    11,540
 
 9. Related Party Transactions The Companys German subsidiary has an equity investment in a German patent and trademark legal
firm. The investment represents 25% ownership of the firm and is accounted for by the equity
method of accounting. The Companys equity investment account balance was $199,000 and $154,000 at
April 2, 2005 and January 1, 2005, respectively. Charges from the affiliate for work performed
were $431,000 and $264,000 for the three months ended April 2, 2005 and April 3, 2004,
respectively. Amounts due to the affiliate were approximately $88,000 and $357,000 at April 2,
2005 and January 1, 2005, respectively. The Companys corporate headquarters were housed in space leased by a former shareholder of the
Company from an affiliate of the former shareholder. A portion of the lease payments and other
expenses, primarily insurance and allocated other direct costs, were charged to the Company.
Charges from the affiliate were $28,000 and $130,000 for the three months ended April 2, 2005 and
April 3, 2004, respectively. 10. Comprehensive Income Comprehensive income is as follows: Post-Transactions
    
    
    Pre-TransactionsThree Months
    
    
    Three MonthsEnded
    
    
    Ended(in thousands)
    
    April 2, 2005
    
    
    April 3, 2004Net income
    
    $
    5,453
    
    
    $
    20,738Other comprehensive loss, primarily foreign currency translation
    
    
    (2,372
    )
    
    
    (11,693
    )Comprehensive income
    
    $
    3,081
    
    
    $
    9,045
 
 11




---



##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) 11. Environmental Matters The Company accrues for environmental obligations when such expenditures are probable and
reasonably estimable. The amount of liability recorded is based on currently available information,
including the progress of remedial investigations, current status of discussions with regulatory
authorities regarding the method and extent of remediation, presently enacted laws and existing
technology. Accruals for estimated losses from environmental obligations are adjusted as further
information develops or circumstances change. Costs of future expenditures for environmental
obligations are not discounted to their present value. Recoveries of environmental costs from other
parties are recognized as assets when their receipt is deemed probable. In connection with the Transactions, the Company identified a potential enforcement issue with the
United States Environmental Protection Agency (EPA). On April 5, 2005, the Company received a
Finding of Violation (FOV) dated March 28, 2005 from the EPA alleging a noncompliance with the
Title V Air Operating Permit at its Corydon, Indiana facility
relating to the control of fugitive emissions at the facility. When
the Company met with the EPA, the Agency indicated their intent to
request additional information. The Company is currently developing information responsive to that
request. During the three months ended April 2, 2004, the Company has recorded its best estimate
of potential penalties as an adjustment to the preliminary allocation of purchase price for the
Transactions. Although the EPA has the authority and discretion to issue substantial fines that could
be material, based upon managements analysis of the facts and circumstances, in consideration of
prior cases and the EPAs published civil penalty policies, and supported by discussions with third
party advisors, we do not believe that the maximum penalty will be assessed and that penalties, if
any, resulting from this matter will not have a material adverse effect on the business, financial
condition or results of operations of the Company. In connection with the Transactions, the Company identified potential environmental contamination
at its manufacturing facility in Potenza, Italy. Subsequent to the Transactions, additional
environmental studies were performed and an initial estimate of the liability of $1,392,000 was
recorded in the preliminary allocation of purchase price at January 1, 2005. During the three
months ended April 2, 2004, the accrual was increased by $1,869,000 through further adjustment to
the preliminary allocation of purchase price. The Company has reported the matter to the proper
authorities and the initial remediation plan is currently under review. The Company anticipates
that expenditures will be made over the next seven to ten years. In connection with the acquisition of Membrana in 2002, the Company recorded a reserve for
environmental obligations that was finalized in 2003. The reserve provides for costs to remediate
known environmental issues and operational upgrades which are required in order for the Company to
remain in compliance with local regulations. The Company anticipates that expenditures will be made
over the next seven to ten years. The initial estimate and subsequent finalization of the reserve
was included in the allocation of purchase price at the date of acquisition. The Company has indemnification agreements for certain environmental matters from Acordis A.G.
(Acordis) and Akzo Nobel (Akzo), the prior owner of Membrana. Akzo originally provided broad
environmental protections to Acordis with the right to assign such indemnities to Acordiss
successors. Akzos indemnifications relate to conditions existing prior to December 1999, which is
the date that Membrana was sold to Acordis. The Akzo agreement provides indemnification of claims
through December 2007, with the indemnification percentage decreasing each year during the coverage
period. Through December 2003, Akzo pays 75% of any approved claim. After that, Akzo pays 65% of
claims reported through December 2006 and 50% of claims reported through December 2007. Claims
indemnified through the Akzo agreement are subject to an aggregate 2,000,000 Euro deductible
($2,608,000 U.S. dollars at April 2, 2005). In addition to the Akzo indemnification, Acordis
provides separate indemnification of claims incurred from December 1999 through February 2002, the
acquisition date. At April 2, 2005, amounts receivable under the indemnification agreement were
$19,575,000. 12. Business Restructuring In connection with continued efforts to manage costs and in response to the decision of a customer
to outsource its dialyzer production, the Company is implementing a number of cost reduction
measures relating to the Separations Media segment, including employee layoffs, the relocation of
certain research and development operations
conducted in a leased facility in Europe to facilities where the related manufacturing operations
are conducted and other cost reductions. The timing and scope of these restructuring measures are
subject to change as the Company further evaluates its business needs and costs. As a first step
in these cost reduction efforts, on September 3, 2004, the Company announced a 12




---



##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) layoff of
approximately 200 employees at its Wuppertal, Germany facility. During the year ended January 1,
2005, a charge of $13,899,000 was recorded as an estimate of the costs associated with the layoff.
The Company expects to make most of the payments and realize a portion of the cost savings related
to the layoffs during fiscal 2005. In connection with a customers outsourcing of its dialyzer
production, the Company also recorded a charge for raw materials, a portion of which the Company is
obligated to purchase under an existing purchase commitment, of $1,788,000 in cost of goods sold
during the year ended January 1, 2005. Finally, in connection with the relocation of our research
and development operations, the Company expects to record a charge to earnings of approximately
$2,600,000 in the third quarter of 2005. The Company does not expect to record any impairment to
long-lived assets in connection with the relocation. The current portion of the reserve for
business restructuring costs is included in accrued liabilities and the non-current portion is
included in other non-current liabilities. The restructuring reserve is comprised of the following: ForeignBalance at
    
    
    
    
    
    
    Currency
    
    
    Balance at(in thousands)
    
    January 1, 2005
    
    
    Cash Payments
    
    
    Translation
    
    
    April 2, 2005Severance and benefit costs
    
    $
    14,944
    
    
    $
    (4,249
    )
    
    $
    (562
    )
    
    $
    10,133Raw materials
    
    
    1,256
    
    
    
    
    
    
    
    (53
    )
    
    
    1,203Total
    
    $
    16,200
    
    
    $
    (4,249
    )
    
    $
    (615
    )
    
    $
    11,336
 
 13. Financial Statements of Guarantors As noted in Note 1, on May 13, 2004, the Company and its stockholders consummated a stock purchase
agreement with PP Acquisition, pursuant to which PP Acquisition purchased all the outstanding
shares of the Companys capital stock. In connection with the acquisition, the Company obtained
borrowings under a new senior secured credit facility and through the issuance of senior
subordinated notes, the proceeds of which were used to purchase the Companys capital stock and
repay existing indebtedness under the credit agreement. Payment of the Notes is unconditionally guaranteed, jointly and severally, on a senior basis by
certain of the Companys wholly-owned subsidiaries (Guarantors). Management has determined that
separate complete financial statements of the Guarantors would not be material to users of the
financial statements. The following sets forth condensed consolidating financial statements of the Guarantors and
non-Guarantor subsidiaries. 13




---



##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) Condensed Consolidating Balance Sheet
As of April 2, 2005 CombinedCombined
    
    
    Non-
    
    
    
    
    
    
    ReclassificationsGuarantor
    
    
    Guarantor
    
    
    The
    
    
    and(in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Company
    
    
    Eliminations
    
    
    ConsolidatedAssetsCash and cash equivalents
    
    $
    86
    
    
    $
    16,096
    
    
    $
    13,396
    
    
    $
    
    
    
    $
    29,578Accounts receivable, net
    
    
    34,610
    
    
    
    64,499
    
    
    
    
    
    
    
    
    
    
    
    99,109Inventories
    
    
    18,286
    
    
    
    43,642
    
    
    
    
    
    
    
    
    
    
    
    61,928Other
    
    
    3,871
    
    
    
    6,149
    
    
    
    3,252
    
    
    
    
    
    
    
    13,272Total current assets
    
    
    56,853
    
    
    
    130,386
    
    
    
    16,648
    
    
    
    
    
    
    
    203,887Due from affiliates
    
    
    189,475
    
    
    
    227,676
    
    
    
    297,388
    
    
    
    (714,539
    )
    
    
    Investment in subsidiaries
    
    
    173,024
    
    
    
    206,645
    
    
    
    253,341
    
    
    
    (633,010
    )
    
    
    Property, plant and equipment,
net
    
    
    111,068
    
    
    
    311,068
    
    
    
    
    
    
    
    
    
    
    
    422,136Other
    
    
    939
    
    
    
    19,565
    
    
    
    775,512
    
    
    
    
    
    
    
    796,016Total assets
    
    $
    531,359
    
    
    $
    895,340
    
    
    $
    1,342,889
    
    
    $
    (1,347,549
    )
    
    $
    1,422,039Liabilities and shareholders equityAccounts payable, accrued
liabilities and other
    
    $
    10,325
    
    
    $
    47,230
    
    
    $
    14,963
    
    
    $
    
    
    
    $
    72,518Current portion of debt
    
    
    94
    
    
    
    747
    
    
    
    989
    
    
    
    
    
    
    
    1,830Current portion of capital
lease obligation
    
    
    1,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,285Total current liabilities
    
    
    11,704
    
    
    
    47,977
    
    
    
    15,952
    
    
    
    
    
    
    
    75,633Due to affiliates
    
    
    302,494
    
    
    
    255,966
    
    
    
    156,079
    
    
    
    (714,539
    )
    
    
    Debt, less current portion
    
    
    
    
    
    
    3,263
    
    
    
    809,637
    
    
    
    
    
    
    
    812,900Capital lease obligations,
less current portion
    
    
    7,018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,018Pension and postretirement
benefits
    
    
    2,228
    
    
    
    45,937
    
    
    
    
    
    
    
    
    
    
    
    48,165Post employment benefits
    
    
    
    
    
    
    9,307
    
    
    
    
    
    
    
    
    
    
    
    9,307Environmental reserve, less
current portion
    
    
    
    
    
    
    25,241
    
    
    
    
    
    
    
    
    
    
    
    25,241Deferred income taxes and other
    
    
    3,359
    
    
    
    65,270
    
    
    
    64,722
    
    
    
    
    
    
    
    133,351Shareholders equity
    
    
    204,556
    
    
    
    442,379
    
    
    
    296,499
    
    
    
    (633,010
    )
    
    
    310,424Total liabilities and
shareholders equity
    
    $
    531,359
    
    
    $
    895,340
    
    
    $
    1,342,889
    
    
    $
    (1,347,549
    )
    
    $
    1,422,039
 
 14




---



##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) 13. Financial Statements of Guarantors (continued) Condensed Consolidating Balance Sheet
As of January 1, 2005 CombinedCombined
    
    
    Non-Guarantor
    
    
    Guarantor
    
    
    The
    
    
    Reclassifications(in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Company
    
    
    and Eliminations
    
    
    ConsolidatedAssetsCash and cash equivalents
    
    $
    2,263
    
    
    $
    20,244
    
    
    $
    9,177
    
    
    $
    
    
    
    $
    31,684Accounts receivable, net
    
    
    37,237
    
    
    
    69,059
    
    
    
    
    
    
    
    
    
    
    
    106,296Inventories
    
    
    19,265
    
    
    
    42,524
    
    
    
    
    
    
    
    
    
    
    
    61,789Other
    
    
    1,561
    
    
    
    9,985
    
    
    
    9,934
    
    
    
    
    
    
    
    21,480Total current assets
    
    
    60,326
    
    
    
    141,812
    
    
    
    19,111
    
    
    
    
    
    
    
    221,249Due from affiliates
    
    
    178,805
    
    
    
    253,225
    
    
    
    300,797
    
    
    
    (732,827
    )
    
    
    Investment in subsidiaries
    
    
    172,531
    
    
    
    206,645
    
    
    
    247,400
    
    
    
    (626,576
    )
    
    
    Property, plant and equipment, net
    
    
    113,048
    
    
    
    328,302
    
    
    
    
    
    
    
    
    
    
    
    441,350Other
    
    
    879
    
    
    
    20,470
    
    
    
    780,018
    
    
    
    
    
    
    
    801,367Total assets
    
    $
    525,589
    
    
    $
    950,454
    
    
    $
    1,347,326
    
    
    $
    (1,359,403
    )
    
    $
    1,463,966Liabilities and shareholders
equityAccounts payable, accrued
liabilities and other
    
    $
    8,857
    
    
    $
    54,561
    
    
    $
    7,627
    
    
    $
    
    
    
    $
    71,045Current portion of debt
    
    
    97
    
    
    
    2,163
    
    
    
    25,000
    
    
    
    
    
    
    
    27,260Current portion of capital lease
obligation
    
    
    1,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,272Total current liabilities
    
    
    10,266
    
    
    
    56,724
    
    
    
    32,627
    
    
    
    
    
    
    
    99,577Due to affiliates
    
    
    306,530
    
    
    
    281,718
    
    
    
    144,579
    
    
    
    (732,827
    )
    
    
    Debt, less current portion
    
    
    
    
    
    
    3,683
    
    
    
    821,256
    
    
    
    
    
    
    
    824,939Capital lease obligations, less
current portion
    
    
    7,344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,344Pension and postretirement
benefits
    
    
    2,231
    
    
    
    46,421
    
    
    
    
    
    
    
    
    
    
    
    48,652Post employment benefits
    
    
    
    
    
    
    10,119
    
    
    
    
    
    
    
    
    
    
    
    10,119Environmental reserve, less
current portion
    
    
    
    
    
    
    24,394
    
    
    
    
    
    
    
    
    
    
    
    24,394Deferred income taxes and other
    
    
    3,359
    
    
    
    71,073
    
    
    
    67,167
    
    
    
    
    
    
    
    141,599Shareholders equity
    
    
    195,899
    
    
    
    456,322
    
    
    
    281,697
    
    
    
    (626,576
    )
    
    
    307,342Total liabilities and
shareholders equity
    
    $
    525,589
    
    
    $
    950,454
    
    
    $
    1,347,326
    
    
    $
    (1,359,403
    )
    
    $
    1,463,966
 
 15




---



##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) 13. Financial Statements of Guarantors (continued) Condensed Consolidating Statement of Income
For the three months ended April 2, 2005 CombinedCombined
    
    
    Non-Guarantor
    
    
    Guarantor
    
    
    The
    
    
    Reclassifications(in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Company
    
    
    and Eliminations
    
    
    ConsolidatedNet sales
    
    $
    40,392
    
    
    $
    72,106
    
    
    $
    
    
    
    $
    
    
    
    $
    112,498Cost of goods sold
    
    
    21,695
    
    
    
    51,914
    
    
    
    
    
    
    
    
    
    
    
    73,609Gross profit
    
    
    18,697
    
    
    
    20,192
    
    
    
    
    
    
    
    
    
    
    
    38,889Selling, general and
administrative expenses
    
    
    11,010
    
    
    
    7,380
    
    
    
    
    
    
    
    
    
    
    
    18,390Operating income
    
    
    7,687
    
    
    
    12,812
    
    
    
    
    
    
    
    
    
    
    
    20,499Other (income) expense, net
    
    
    (517
    )
    
    
    (59
    )
    
    
    13,935
    
    
    
    
    
    
    
    13,359Equity in earnings of subsidiaries
    
    
    
    
    
    
    
    
    
    
    (15,364
    )
    
    
    15,364
    
    
    
    Income before income taxes
    
    
    8,204
    
    
    
    12,871
    
    
    
    1,429
    
    
    
    (15,364
    )
    
    
    7,140Income taxes
    
    
    4,211
    
    
    
    1,500
    
    
    
    (4,024
    )
    
    
    
    
    
    
    1,687Net income
    
    $
    3,993
    
    
    $
    11,371
    
    
    $
    5,453
    
    
    $
    (15,364
    )
    
    $
    5,453
 Condensed Consolidating Statement of Income
For the three months ended April 3, 2004 CombinedCombined
    
    
    Non-Guarantor
    
    
    Guarantor
    
    
    The
    
    
    Reclassifications(in thousands)
    
    Subsidiaries
    
    
    Subsidiaries

    
    
    Company
    
    
    and Eliminations
    
    
    ConsolidatedNet sales
    
    $
    58,727
    
    
    $
    81,393
    
    
    $
    
    
    
    $
    
    
    
    $
    140,120Cost of goods sold
    
    
    26,951
    
    
    
    59,310
    
    
    
    
    
    
    
    
    
    
    
    86,261Gross profit
    
    
    31,776
    
    
    
    22,083
    
    
    
    
    
    
    
    
    
    
    
    53,859Selling, general and
administrative expenses
    
    
    9,864
    
    
    
    7,629
    
    
    
    
    
    
    
    
    
    
    
    17,493Operating income
    
    
    21,912
    
    
    
    14,454
    
    
    
    
    
    
    
    
    
    
    
    36,366Other (income) expense, net
    
    
    (265
    )
    
    
    813
    
    
    
    4,397
    
    
    
    
    
    
    
    4,945Equity in earnings of
subsidiaries
    
    
    
    
    
    
    
    
    
    
    (23,063
    )
    
    
    23,063
    
    
    
    Income before income taxes
    
    
    22,177
    
    
    
    13,641
    
    
    
    18,666
    
    
    
    (23,063
    )
    
    
    31,421Income taxes
    
    
    8,365
    
    
    
    4,390
    
    
    
    (2,072
    )
    
    
    
    
    
    
    10,683Net income
    
    $
    13,812
    
    
    $
    9,251
    
    
    $
    20,738
    
    
    $
    (23,063
    )
    
    $
    20,738
 16




---



##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) 13. Financial Statements of Guarantors (continued) Condensed Consolidating Statement of Cash Flows
For the three months ended April 2, 2005 CombinedCombined
    
    
    Non-Guarantor
    
    
    Guarantor
    
    
    The
    
    
    Reclassifications(in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Company
    
    
    and Eliminations
    
    
    ConsolidatedNet cash provided by
operating activities
    
    $
    12,075
    
    
    $
    18,562
    
    
    $
    
    
    
    $
    (1,417
    )
    
    $
    29,220Investing activities:Purchases of property, plant
and equipment
    
    
    (794
    )
    
    
    (2,303
    )
    
    
    
    
    
    
    
    
    
    
    (3,097
    )Net cash used in investing
activities
    
    
    (794
    )
    
    
    (2,303
    )
    
    
    
    
    
    
    
    
    
    
    (3,097
    )Financing activities:Principal payments on debt
    
    
    (313
    )
    
    
    (1,592
    )
    
    
    (25,019
    )
    
    
    
    
    
    
    (26,924
    )Intercompany transactions, net
    
    
    (13,109
    )
    
    
    (17,547
    )
    
    
    29,239
    
    
    
    1,417
    
    
    
    Net cash provided by (used)
in financing activities
    
    
    (13,422
    )
    
    
    (19,139
    )
    
    
    4,220
    
    
    
    1,417
    
    
    
    (26,924
    )Effect of exchange rate
changes on cash and
equivalents
    
    
    53
    
    
    
    (1,358
    )
    
    
    
    
    
    
    
    
    
    
    (1,305
    )Net increase (decrease) in
cash and equivalents
    
    
    (2,088
    )
    
    
    (4,238
    )
    
    
    4,220
    
    
    
    
    
    
    
    (2,106
    )Cash and equivalents at
beginning of period
    
    
    2,174
    
    
    
    20,334
    
    
    
    9,176
    
    
    
    
    
    
    
    31,684Cash and equivalents at end
of period
    
    $
    86
    
    
    $
    16,096
    
    
    $
    13,396
    
    
    $
    
    
    
    $
    29,578
 
 17




---



##### 



Polypore, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 2, 2004
(unaudited) 13. Financial Statements of Guarantors (continued) Condensed Consolidating Statement of Cash Flows
For the three months ended April 3, 2004 CombinedCombined
    
    
    Non-Guarantor
    
    
    Guarantor
    
    
    The
    
    
    Reclassifications(in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Company
    
    
    and Eliminations
    
    
    ConsolidatedNet cash provided by operating
activities
    
    $
    9,328
    
    
    $
    10,440
    
    
    $
    
    
    
    $
    (2,621
    )
    
    $
    17,147Investing activities:Purchases of property, plant
and equipment
    
    
    (2,145
    )
    
    
    (2,071
    )
    
    
    
    
    
    
    
    
    
    
    (4,216
    )Proceeds from sale of
property, plant and equipment
    
    
    
    
    
    
    1,923
    
    
    
    
    
    
    
    
    
    
    
    1,923Net cash used in investing
activities
    
    
    (2,145
    )
    
    
    (148
    )
    
    
    
    
    
    
    
    
    
    
    (2,293
    )Financing activities:Proceeds from debt
    
    
    
    
    
    
    610
    
    
    
    
    
    
    
    
    
    
    
    610Principal payments on debt
    
    
    
    
    
    
    (2,891
    )
    
    
    (4,145
    )
    
    
    
    
    
    
    (7,036
    )Loan acquisition costs
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    
    
    
    
    (59
    )Intercompany transactions, nets
    
    
    (7,467
    )
    
    
    1,297
    
    
    
    3,549
    
    
    
    2,621
    
    
    
    Net cash used in financing
activities
    
    
    (7,467
    )
    
    
    (984
    )
    
    
    (655
    )
    
    
    2,621
    
    
    
    (6,485
    )Effect of exchange rate
changes on cash and
equivalents
    
    
    238
    
    
    
    (1,402
    )
    
    
    
    
    
    
    
    
    
    
    (1,164
    )Net increase (decrease) in
cash and equivalents
    
    
    (46
    )
    
    
    7,906
    
    
    
    (655
    )
    
    
    
    
    
    
    (7,205
    )Cash and equivalents at
beginning of period
    
    
    1,531
    
    
    
    13,762
    
    
    
    4,770
    
    
    
    
    
    
    
    20,063Cash and equivalents at end of
period
    
    $
    1,485
    
    
    $
    21,668
    
    
    $
    4,115
    
    
    $
    
    
    
    $
    27,268
 
 18




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations The following discussions of our financial condition and results of operations should be read
together with our unaudited consolidated financial statements and the related notes included
elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements
and the related notes included in our Annual Report on Form 10-K for the fiscal year ended January
1, 2005. Overview We are a leading worldwide developer, manufacturer and marketer of highly specialized polymer-based
membranes used in separation and filtration processes in terms of market share. Our products and
technologies target specialized applications and markets that require the removal or separation of
various materials from liquids, with such materials ranging in size from microscopic to those
visible to the human eye. We manage our operations under two business segments: energy storage
and separations media. The energy storage segment, which accounts for approximately two-thirds of
our total sales, produces different types of membranes that function as separators in lead-acid
batteries used in transportation and industrial applications and lithium batteries used in
electronics applications. The separations media segment, which accounts for approximately
one-third of our total sales, produces membranes used in various healthcare and industrial
applications, including hemodialysis, blood oxygenation, ultrapure water filtration, degasification
and other specialty applications. We serve markets with an attractive mix of both stability and growth. Our lead-acid battery
separators serve the stable and predictable market for transportation and industrial applications,
with approximately 80% of sales for transportation applications coming from replacement batteries
in the aftermarket. This replacement market is primarily driven by the growing size of the
worldwide fleet of motor vehicles, which according to Wards Motor Vehicles Facts and Figures,has
been growing approximately 3% per year. According to industry analysts, sales in the rechargeable
lithium battery market are expected to grow at a compound annual growth rate of approximately 16%
through 2011, driven by growth in underlying markets for portable electronic products (primarily
mobile telephones and laptop computers) and the displacement of nickel-based battery technologies.
In our primary healthcare end-market, hemodialysis, industry analysts estimate that the number of
end-stage renal disease, or ESRD, patients has been growing 7% per year over the last twenty
years, while the frequent dialysis treatments required to treat the disease create a stable and
recurring demand for dialyzers and our dialyzer membranes. In our industrial and specialty
filtration markets, ever-increasing demand for higher-purity process streams is driving high growth
rates in a variety of end-markets, including semiconductor and microelectronics manufacturing, food
and beverage processing and water purification. Our markets are highly specialized, and we generally compete with only a few other companies. We
enjoy longstanding relationships and collaborative partnerships with a diverse base of customers
who are among the leaders in their respective markets. These relationships are strengthened by our
ability to develop highly technical membrane products that meet the precise and evolving needs of
customers. Most of our products require years of cooperative development with customers, extensive
testing and, in some applications, regulatory approval prior to the introduction of our customers
products to the market. Although many of our products are critical functional components in our
customers end products, they typically represent a relatively small percentage of the final
delivered cost. In many of our markets we are often selected as the customers exclusive supplier. We serve our customers globally with strategically located manufacturing facilities in the major
geographic markets of North America, Europe and Asia. Historically, our growth has been both organic and through acquisitions. In December 1999, we
acquired Celgard, Inc., the lithium battery separator and separation membrane business of Celanese
A.G., which gave us access to the fast-growing electronics and specialty filtration markets. In
February 2002, we acquired Membrana GmbH, a German corporation, from Acordis A.G., or Acordis, to
expand our presence in attractive healthcare and specialty filtration markets. Almost every
process stream has a filtration application, while many end products require materials possessing specialized filtration and separation functions. The large and extremely
fragmented filtration and separation market presents an opportunity for further consolidation into
our already diverse markets and leading platform of technologies. On May 13, 2004, Polypore and its shareholders consummated a stock purchase agreement with PP
Acquisition Corporation (PP Acquisition), a subsidiary of Polypore International, pursuant to
which PP Acquisition purchased all of the outstanding shares of the Companys capital stock. The
aggregate purchase price, including acquisition related costs, was approximately $1,150.1 million
in cash. In connection with these transactions, PP Acquisition (i) obtained a new credit facility
with initial borrowings of approximately $414.9 million, 19




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##### 



(ii) issued $225.0 million aggregate principal amount
of 8 3/4% senior subordinated dollar notes due 2012 and 150.0 million aggregate principal amount of
8 3/4% senior subordinated euro notes due 2012 (collectively, the 83/4% Notes), with an aggregate face
amount of $405.9 million, and (iii) received equity contributions from its shareholders of $320.4
million. PP Acquisition used the net proceeds from the new credit facility, the issuance of the
8 3/4% Notes and the equity contributions to pay the net purchase price to the existing shareholders,
repay all outstanding indebtedness under Polypores existing credit facility and pay transaction
related fees and expenses. At the time of closing of the acquisition, PP Acquisition merged with
and into Polypore, with Polypore as the surviving corporation (the transactions associated with the
acquisition of Polypore being, collectively, the Transactions). The acquisition of the Company by PP Acquisition was accounted for as a purchase in conformity with
FASB Statement No. 141, Business Combinations(FAS 141) and FASB Statement No. 142, Goodwill and
Other Intangible Assets(FAS 142). The total cost of the merger of PP Acquisition with and into
the Company has been allocated as a change in basis to the tangible and intangible assets acquired
and liabilities assumed based on their respective fair values as of May 13, 2004, the date of the
merger. The purchase price allocation is based on preliminary estimates and may be adjusted based
on the finalization of certain accruals recorded in connection with the Transactions. The excess
of the purchase price over the fair value of the net assets purchased was approximately $537.7
million and was allocated to goodwill. The goodwill is not deductible for income tax purposes.
For accounting purposes, the Transactions were accounted for as if they occurred on the last day of
the Companys fiscal month ended May 1, 2004, which is the closest fiscal month end to May 13,
2004, the closing date of the Transactions. Critical accounting policies Critical accounting policies are those accounting policies that can have a significant impact on
the presentation of our financial condition and results of operations, and that require the use of
complex and subjective estimates based on past experience and managements judgment. Because of
uncertainty inherent in such estimates, actual results may differ from these estimates. Below are
those policies that we believe are critical to the understanding of our operating results and
financial condition. Management has discussed the development and selection of these critical
accounting policies with the Audit Committee of our Board of Directors. For additional accounting
policies, see Note 2 of the consolidated financial statements included in our Annual Report on
Form 10-K for the fiscal year ended January 1, 2005. Allowance for doubtful accounts Accounts receivable are primarily composed of amounts owed to us through our operating activities
and are presented net of an allowance for doubtful accounts. We establish an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific customers, historical
trends and other information. We charge accounts receivables off against our allowance for
doubtful accounts when we deem them to be uncollectible on a specific identification basis. The
determination of the amount of the allowance for doubtful accounts is subject to judgment and
estimated by management. If circumstances or economic conditions deteriorate, we may need to
increase the allowance for doubtful accounts. Impairment of Intangibles and Goodwill Identified intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. In accordance with FASB
Statement No. 142, Goodwill and Other Intangible Assets(FAS 142), goodwill and indefinite-lived
intangible assets are not amortized, but are subject to an annual impairment test based on cash
flow projections and fair value estimates. The determination of undiscounted cash flows is based
on the Companys strategic plans and historical results adjusted to reflect current and anticipated
operating conditions. Estimating future cash flows requires significant judgment by us in such
areas as future economic conditions, industry-specific conditions, product pricing and necessary
capital expenditures. The use of different assumptions would increase or decrease the estimated
value of future cash flows and recognition of an impairment loss might be required. Pension and other postretirement benefits Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit
pension plans and other post retirement benefits. These assumptions include the weighted average
discount rate, rates of increase in compensation levels, expected long-term rates of return on
assets and increases or trends in healthcare costs. If actual results are less favorable than
those projected by management, we may be required to recognize additional expense and liabilities. 20




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Environmental Matters In connection with the Transactions, we identified and accrued for potential environmental
contamination at our manufacturing facility in Potenza, Italy and potential penalties that may
result from a Finding of Violation (FOV) at our manufacturing facility in Corydon, Indiana from
the U.S. Environmental Protection Agency. In connection with the acquisition of Membrana in 2002,
we recorded a reserve for environmental obligations for costs to remediate known environmental
issues and operational upgrades as a matter of good manufacturing practices or in order to remain
in compliance with local regulations. We accrue for environmental obligations when such expenditures are probable and reasonably
estimable. The amount of liability recorded is based on currently available information, including
the progress of remedial investigations, current status of discussions with regulatory authorities
regarding the method and extent of remediation, presently enacted laws and existing technology.
Accruals for estimated losses from environmental obligations are adjusted as further information
develops or circumstances change. If actual results are less favorable than those projected by
management, we may be required to recognize additional expense and liabilities. We have indemnification agreements for certain environmental matters from Acordis and Akzo Nobel,
or Akzo, the prior owners of Membrana GmbH. Recoveries of environmental costs from other parties
are recognized as assets when their receipt is deemed probable. We have recorded a receivable with
regard to the Akzo indemnification agreement. If indemnification claims cannot be enforced against
Acordis and Akzo, we may be required to reduce the amount of indemnification receivables recorded. Results of Operations The following table sets forth, for the periods indicated, certain historical operating data of
Polypore in amount and as a percentage of net sales: Three months ended(in millions)
    
    April 2, 2005
    
    
    April 3, 2004Net sales
    
    $
    112.5
    
    
    $
    140.1Gross profit
    
    
    38.9
    
    
    
    53.9Selling, general and administrative expenses
    
    
    18.4
    
    
    
    17.5Operating income
    
    
    20.5
    
    
    
    36.4Interest expense, net
    
    
    14.9
    
    
    
    4.5Foreign currency and other
    
    
    (1.6
    )
    
    
    0.5Income before income taxes
    
    
    7.2
    
    
    
    31.4Income taxes
    
    
    1.7
    
    
    
    10.7Net income
    
    $
    5.5
    
    
    $
    20.7
 
 Three months ended(in millions)
    
    April 2, 2005
    
    
    April 3, 2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %Gross profit
    
    
    34.6
    %
    
    
    38.5
    %Selling, general and administrative expenses
    
    
    16.4
    %
    
    
    12.5
    %Operating income
    
    
    18.2
    %
    
    
    25.9
    %Interest expense, net
    
    
    13.2
    %
    
    
    3.2
    %Foreign currency and other
    
    
    -1.4
    %
    
    
    0.4
    %Income before income taxes
    
    
    6.4
    %
    
    
    22.4
    %Income taxes
    
    
    1.5
    %
    
    
    7.6
    %Net income
    
    
    4.9
    %
    
    
    14.8
    %
 
 21




---



##### 



Three month period ended April 2, 2005 (Post-Transaction) with the three month period ended April
3, 2004 Net sales.Net sales for the three months ended April 2, 2005 were $112.5 million, a decrease of
$27.6 million, or 19.7%, from the three months ended April 3, 2004. For the energy storage
segment, net sales for the three months ended April 2, 2005 were $76.3 million, a decrease of $18.6
million, or 19.6%, from the three months ended April 3, 2004. The decrease in energy storage sales
was due to lower sales for both the lithium and lead-acid battery markets. Lithium battery
separator sales in the three months ended April 2, 2005 decreased from the same period in the prior
year by $15.6 million due to higher than expected growth rates, primarily in China, that occurred
during the first half of 2004. While we believe there will be continued long-term growth in the
market, the decline in ordering patterns that occurred in the second half of 2004 continued into
the first quarter of 2005. Although we are unable to predict the timing, we expect lithium battery
market conditions in China to improve in 2005. Lead-acid battery separator sales decreased by $4.0
million due primarily to timing of orders. Energy storage sales include $1.6 million from the
positive impact of the dollar/euro exchange rate. For the separations media segment, net sales for
the three months ended April 2, 2005 were $36.2 million, a decrease of $9.0 million, or 19.9%, from
the three months ended April 3, 2004. The decrease in separations media sales was primarily due to
the loss of a hemodialysis customer that made the decision to outsource the manufacturing of its
dialyzers to another company that does not currently source membranes from us. Separations media
net sales include $1.8 million from the positive impact of the dollar/euro exchange rate. Gross Profit. Gross profit for the three months ended April 2, 2005 was $38.9 million, a decrease
of $15.0 million, or 27.8%, from the three months ended April 3, 2004. Gross profit as a percent
of sales for the three months ended April 2, 2005 decreased to 34.6% from 38.5% in the prior year.
For the energy storage segment, gross profit for the three months ended April 2, 2005 was $25.7
million, a decrease of $13.2 million, or 34.0%, from the same period in the prior year. Gross
profit in the energy storage segment as a percent of sales for the three months ended April 2, 2005
decreased to 33.7% from 41.0%. The decrease was the result of the decrease in production volumes
related to the slowdown in lithium sales and a change in product mix. For the separations media
segment, gross profit for the three months ended April 2, 2005 was $13.2 million, a decrease of
$1.8 million, or 12.0%, from the same period in the prior year. Gross profit in the separations
media segment as a percent of sales for the three months ended April 2, 2005 increased to 36.5%
from 33.2% in the same period of the prior year. The increase was due to the benefits of the
business restructuring in Europe and lower depreciation expense as a result of the application of
purchase accounting. Selling, general and administrative expenses. Selling, general and administrative expenses for the
three months ended April 2, 2005 were $18.4 million, an increase of $0.9 million, or 5.1%, from the
three months ended April 3, 2004. The increase was due to a $3.8 million increase in amortization
expense as a result of the application of purchase accounting, offset somewhat by lower expenses in
connection with cost reduction measures. Business restructuring. In connection with our continued efforts to manage costs and in response
to the decision of one of our customers to outsource its dialyzer production, we are currently
implementing a number of cost reduction measures relating to our separations media segment,
including employee layoffs, the relocation of certain research and development operations conducted
in a leased facility in Europe to facilities where the related manufacturing operations are
conducted and other cost reductions. The timing and scope of these restructuring measures are
subject to change as we further evaluate our business needs and costs. As a first step in these
cost reduction efforts, on September 3, 2004, we announced a layoff of approximately 200 employees
at our Wuppertal, Germany facility. During the year ended January 1, 2005, we recorded a charge of
$13.9 million as an estimate of the costs associated with the layoff. The employee layoffs will
occur throughout 2005. We expect to make most of the payments and realize some cost savings
related to the layoffs during fiscal 2005. After completion of the layoffs, we expect to realize
annual cost savings in cost of goods sold and selling, general and administrative expenses of
approximately $10.0 million. In connection with our customers outsourcing of its dialyzer
production, we also recorded a charge for raw materials, a portion of which we are obligated to
purchase under an existing purchase commitment, of $1.8 million in cost of goods sold during the
year ended January 1, 2005. Finally, in connection with the relocation of our research and
development operations, we expect to record a charge of approximately $2.6 million to earnings in
fiscal 2005. We do not expect to record any impairment to long-lived assets in connection with the
relocation. The costs of the restructuring are expected to be funded from cash generated from
operations. Interest expense, net. Interest expense, net was $14.9 million for the three months ended April 2,
2005, an increase of $10.4 million from the three months ended April 3, 2004. The increase in
interest expense is attributable to the increase in senior debt and
issuance of the 8 3/4% Notes in
connection with the Transactions. Income taxes, net. Income tax expense as a percentage of income before income taxes for the three
months ended April 2, 2005 was 23.6%, as compared to 34.0% for the three months ended April 3,
2004. The decrease in the effective tax rate for 2005 is due primarily to lower taxable income in
the U.S. as a result of higher interest expense, which will provide a tax benefit in the current year. As U.S. taxable income decreases 22




---



##### 



and foreign taxable income relative to total
taxable income increases, our effective tax rate declines because of lower overall effective tax
rates in foreign jurisdictions. Liquidity and Capital Resources Operating activities. Net cash provided by operations was $29.2 million in the three months ended
April 2, 2005, as compared to $17.1 million in the three months ended April 3, 2004. Cash provided
by operations for the three months ended April 2, 2005 consisted of net income before non-cash
expenses and a decrease in working capital. Accounts receivable decreased approximately $7.2
million due to a 14.0% decrease in days sales in receivables and a decrease in the dollar/euro
exchange rate of $2.7 million. Inventory was consistent with the prior year, as an 8.8% increase
in inventory days was offset by a decrease in the dollar/euro exchange rate. Accounts payable and
accrued liabilities increased due to a $9.2 million increase in accrued interest related to the new
senior and subordinated debt issued in connection with the Transactions (interest for the
subordinated debt is paid semi-annually in the second and fourth quarters), offset somewhat by $4.2
million in cash payments related to the business restructuring, timing of certain payments and a
decrease in the dollar/euro exchange rate of $2.0 million. Cash provided by operations for the three months ended April 3, 2004 consisted of net income before
non-cash expenses, offset somewhat by an increase in working capital. Accounts receivable
increased due to higher sales of lithium battery separators and hemodialysis membranes during this
period. Investing activities. Capital expenditures were $3.1 million and $4.2 in the three months ended
April 2, 2005 and April 3, 2004, respectively. We expect to spend approximately $20.0 million for
capital expenditures in fiscal 2005. In the three months ended April 3, 2004, we received proceeds
of $1.9 million from the sale of undeveloped land at our French facility. Financing activities. Cash used in financing activities was $26.9 million and $6.5 million in the
three months ended April 2, 2005 and April 3, 2004, respectively. During the three months ended
April 2, 2005, we made an optional prepayment of $25.0 million on the term loans under the Credit
Facility. In accordance with the Credit Facility, the prepayment was applied first to the
quarterly payments due for the next twelve months and second, pro rata against the remaining
scheduled installments of principal. After giving effect to the prepayment, the term loans will
require quarterly payments of principal of approximately $1.0 million at the end of each fiscal
quarter beginning on April 1, 2006. We intend to fund our ongoing operations through cash generated by operations and availability
under our Credit Facility. As part of the Transactions, we incurred substantial debt under our
Credit Facility and from the issuance of the 8 3/4% Notes, with interest payments on this indebtedness
substantially increasing our liquidity requirements. Our Credit Facility is comprised of a $370.0 million term loan facility and a 36.0 million term
loan facility each due in 2011 and a $90.0 million revolving credit facility due in 2010 (all of
which remains unfunded). Our Credit Facility permits us to incur additional senior secured debt at
the option of participating lenders, subject to the satisfaction of certain conditions. Borrowings under our Credit Facility bear interest at our choice of the Eurodollar rate or adjusted
base rate, or ABR, in each case, plus an applicable margin, subject to adjustment based on a
pricing grid. As of April 2, 2005, our cash interest requirements for the next 12 months are
expected to be approximately $58.0 million. Our Credit Facility requires us to meet a minimum interest coverage ratio, a maximum leverage ratio
and a maximum capital expenditures limitation. Under our Credit Facility, compliance with the
minimum interest coverage ratio and maximum leverage ratio tests is determined based on a
calculation of adjusted EBITDA in which certain items are added back to EBITDA. 23




---



##### 



Adjusted EBITDA is calculated as follows: Twelve Months
    
    
    Three MonthsEnded
    
    
    Ended(in millions)
    
    April 2, 2005
    
    
    April 2, 2005 (1)Net income
    
    $
    (3.3
    )
    
    $
    5.5Add:Depreciation and amortization
    
    
    51.7
    
    
    
    14.3Interest expense, net
    
    
    54.3
    
    
    
    14.9Provision for income taxes
    
    
    (2.0
    )
    
    
    1.7EBITDA
    
    
    100.7
    
    
    
    36.4Add:Foreign currency (gain) loss
    
    
    1.5
    
    
    
    (1.3
    )Unrealized hedging gain (2)
    
    
    (1.3
    )
    
    
    Salary and bonus paid to former officers (3)
    
    
    (1.1
    )
    
    
    Inventory purchase accounting adjustments (4)
    
    
    19.0
    
    
    
    In-process research and development (5)
    
    
    5.3
    
    
    
    Transactions costs (6)
    
    
    1.2
    
    
    
    Operating lease payments on leases to be refinanced (7)
    
    
    3.6
    
    
    
    0.7Business restructuring (8)
    
    
    15.7
    
    
    
    Loss on disposal of property, plant, and equipment
    
    
    0.7
    
    
    
    Adjusted EBITDA
    
    $
    145.3
    
    
    $
    35.8
 
   (1)
    
    Statement of operations data presented for the twelve months ended April 2, 2005 represents
the combination of historical results for the period from April 3, 2004 through May 1, 2004
(Pre-Transaction) with the results for the period from May 2, 2004 through April 2, 2005
(Post-Transaction).(2)
    
    Represents the non-cash hedging gain for changes in the fair value of the derivative
instruments used to manage interest rate risk as required by Polypores former credit
agreement.(3)
    
    Represents the salary and bonus for former owners who are not involved with Polypore
subsequent to the Transactions.(4)
    
    Represents the write-off of the inventory purchase accounting adjustment for inventory that
was sold during the period.(5)
    
    Represents the one-time charge for purchased in-process research and development.(6)
    
    Represents non-recurring costs incurred in connection with the Transactions.(7)
    
    Represents payments under two operating lease agreements that the Company intends to
refinance. On October 29, 2004, the Company refinanced one of the operating leases through a
capital lease agreement. The Company intends to terminate the other operating lease and
purchase the equipment from the lessor.(8)
    
    Represents business restructuring costs, including estimated costs of employee layoffs and
loss on an inventory purchase commitment which is included in cost of goods sold. 24




---



##### 



The calculation of the minimum interest coverage ratio is as follows: Twelve MonthsEnded(in millions)
    
    April 2, 2005Adjusted EBITDA
    
    $
    145.3Consolidated
interest expense, as defined in the Credit Agreement
    
    
    51.7Actual interest coverage ratio
    
    
    2.81
    xPermitted minimum interest coverage ratio
    
    
    2.25
    x
 The calculation of the maximum leverage ratio is as follows: Twelve MonthsEnded(in millions)
    
    April 2, 2005Indebtedness, as
defined in the Credit Agreement
    
    $
    823.0Adjusted EBITDA
    
    
    145.3Actual leverage ratio
    
    
    5.67
    xPermitted maximum leverage ratio
    
    
    6.25
    x
 In addition, the Credit Facility contains certain restrictive covenants which, among other things,
limit the incurrence of additional indebtedness, investments, dividends, transactions with
affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other
indebtedness, liens and encumbrances and other matters customarily restricted in such agreements.
The facilities also contain certain customary events of defaults, subject to grace periods, as
appropriate. Future principal debt payments are expected to be paid out of cash flows from operations,
borrowings on our revolving credit facility and future refinancing of our debt. We believe we have sufficient liquidity to meet our cash requirements over both the short (next
twelve months) and long term (in relation to our debt service requirements). In evaluating the
sufficiency of our liquidity for both the shorter and longer term, we considered the expected cash
flow to be generated by our operations and the available borrowings under our credit facility
compared to our anticipated cash requirements for debt service, working capital, cash taxes, and
capital expenditures as well as funding requirements for long-term liabilities. However, our
ability to make scheduled payments of principal, to pay interest on or to refinance our
indebtedness and to satisfy our other debt obligations will depend upon our future operating
performance, which will be affected by general economic, financial, competitive, legislative,
regulatory, business and other factors beyond our control. See Risk factors set forth in Exhibit
99.1 to our Annual Report on Form 10-K for fiscal 2004. Our
8 3/4% Notes will mature in 2012 and are guaranteed by most of our existing and future domestic
restricted subsidiaries, subject to certain exceptions. Except under certain circumstances, such
notes do not require principal payments prior to their maturity in
2012. Interest on the 8 3/4% Notes
is payable semi-annually in cash. The 8 3/4% Notes contain customary covenants and events of default,
including covenants that limit our ability to incur debt, pay dividends and make investments. We believe that annual capital expenditure limitations imposed by our Credit Facility will not
significantly inhibit us from meeting our ongoing capital expenditure needs. We anticipate that our operating cash flow, together with borrowings under the revolving credit
facility, will be sufficient to meet our anticipated future operating expenses, capital
expenditures and debt service obligations as they become due for at least the next twelve months.
However, our ability to make scheduled payments of principal of, to pay interest on or to refinance
our indebtedness and to satisfy our other debt obligations will depend upon our future operating
performance, which will be affected by general economic, financial, competitive, legislative,
regulatory, business and other factors beyond our control. See Risk factors set forth in Exhibit
99.1 to our Annual Report on Form 10-K for fiscal 2004. 25




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From time to time, we may explore additional financing methods and other means to lower our cost of
capital, which could include stock issuance or debt financing and the application of the proceeds
therefrom to the repayment of bank debt or other indebtedness. In addition, in connection with any
future acquisitions, we may require additional funding which may be provided in the form of
additional debt or equity financing or a combination thereof. There can be no assurance that any
additional financing will be available to us on acceptable terms. Foreign Operations We manufacture our products at 11 strategically located facilities in North America, Europe and
Asia. Net sales from the foreign locations were approximately $72.2 million and $81.4 million for
the three months ended April 2, 2005 and April 3, 2004, respectively. Typically, we sell our
products in the currency of the country where the manufacturing facility that produces the product
is located. Sales to foreign customers are subject to numerous additional risks, including the
impact of foreign government regulations, currency fluctuations, political uncertainties and
differences in business practices. There can be no assurance that foreign governments will not
adopt regulations or take other action that would have a direct or indirect adverse impact on our
business or market opportunities within such governments countries. Furthermore, there can be no
assurance that the political, cultural and economic climate outside the United States will be
favorable to our operations and growth strategy. Seasonality Historically, our results of operations have not been materially affected by seasonal fluctuations.
However, operations at our European production facilities are traditionally subject to shutdown
during the month of August each year for employee vacations. As a result, revenues and net income
during the third quarter of fiscal 2005 and in any fiscal year in the future may be impacted by
these shutdowns. In view of the seasonal fluctuations, we believe that comparisons of our
operating results for the third quarter of any fiscal year with those of the other quarters during
the same fiscal year may be of limited relevance in predicting our future financial performance. Off-Balance Sheet Arrangements The Company is not a party to any off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future effect on the Companys financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors. New Accounting Standards In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets(FAS 153),
an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions(APB 29). The
amendments made by FAS 153 are based on the principle that exchanges of nonmonetary assets should
be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have commercial substance.
Previously, APB 29 required that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive asset should be based
on the recorded amount of the asset relinquished. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005 (fiscal 2006 for the Company).
Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. Management does not believe there will be a significant
impact as a result of adopting this Statement. In November 2004, the FASB issued Statement No. 151, Inventory Costs(FAS 151). This statement
amends Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing, to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). FAS 151 requires that idle facility expense, excess spoilage, double freight and
re-handling costs be recognized as current-period charges regardless of whether they meet the
criterion of so abnormal. FAS 151 also requires that allocation of fixed production overhead
expenses to the costs of conversion be based on the normal capacity of the production facilities.
FAS 151 is effective for all fiscal years beginning after June 15, 2005 (2006 for the Company).
Management does not believe there will be a significant impact as a result of adopting this
Statement. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to various market risks, which are potential losses arising from adverse changes in
market rates and prices, such as interest rates and foreign exchange fluctuations. We do not enter
into derivatives or other financial instruments for trading or speculative purposes. 26




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Interest rate risk At April 2, 2005, we had fixed rate debt of approximately $420.8 million and variable rate debt of
approximately $394.0 million. The pre-tax earnings and cash flow impact resulting from a 100 basis
point increase in interest rates on variable rate debt, holding other variables constant, would be
approximately $3.9 million per year. We currently are not a party to any interest rate hedging
arrangements. Our hedging arrangements were terminated in connection with the closing of the
Transactions. We may decide in the future to enter into interest rate hedging arrangements. Prior to the closing of the Transactions, we used an interest rate swap as required by our then
existing senior credit facility to reduce the risk of interest rate volatility. In March 2000, we
entered into an interest rate hedge agreement with a major U.S. bank. The hedge agreement
contained a collar that provided a ceiling and a floor interest rate above or below which the
interest rate on the hedged portion of the term debt would not vary. Upon adoption of FASB
Statement No. 133, as amended, Accounting for Derivatives and Hedging Activity(FAS 133), we
determined the interest rate hedge agreement did not qualify for hedge accounting as defined in FAS
133. Accordingly, the fair value of the financial instrument was recorded in the financial
statements and subsequent changes in fair value were recorded in earnings in the period of change.
At December 28, 2002, the fair value of the interest rate hedge agreement was approximately $7.6
million and was included in accrued liabilities. During 2002, the three month LIBO rate fell below
the floor rate in the collar agreement and we made payments to the bank of approximately $2.6
million. On December 31, 2002, the interest rate hedge agreement expired and the bank exercised its option
to enter into a swap agreement. The swap agreement effectively converted the variable interest
rate on $57.2 million of the term debt to a fixed rate of 6.55%. The swap agreement did not
qualify for hedge accounting treatment as defined in FAS 133. Accordingly, the fair value of the
financial instrument was recorded as liability and subsequent changes in fair value are recorded in
earnings in the period of change. At January 3, 2004, the fair value of the swap agreement was
approximately $5.4 million and was included in accrued liabilities. During 2004 (prior to the
Transaction) and fiscal year 2003, Polypore made payments to the bank of $0.9 million and $4.0
million, respectively, representing the difference between the fixed interest rate on the swap and
the variable interest rate paid on the debt. The swap agreement was terminated in connection with
the closing of the Transaction. Use of hedging contracts would allow us to reduce our overall exposure to interest rate changes,
since gains and losses on these contracts would offset losses and gains on the transactions being
hedged. We formally document all hedged transactions and hedging instruments, and assess, both at
inception of the contract and on an ongoing basis, whether the hedging instruments are effective in
offsetting changes in cash flows of the hedged transaction. The fair values of the interest rate
agreements are estimated by obtaining quotes from brokers and are the estimated amounts that we
would receive or pay to terminate the agreements at the reporting date, taking into consideration
current interest rates and the current creditworthiness of the counterparties. Currency risk Outside of the United States, we maintain assets and operations in Europe and, to a much lesser
extent, Asia. The results of operations and financial position of our foreign operations are
principally measured in their respective currency and translated into U.S. dollars. As a result,
exposure to foreign currency gains and losses exists. The reported income of these subsidiaries
will be higher or lower depending on a weakening or strengthening of the U.S. dollar against the
respective foreign currency. Our subsidiaries and affiliates also purchase and sell products and
services in various currencies. As a result, we may be exposed to cost increases relative to the
local currencies in the markets in which we sell. Because a different percentage of our revenues
are in a foreign currency other than our costs, a change in the relative value of the U.S. dollar
could have a disproportionate impact on our revenues compared to our cost, which could impact our
margins. A portion of our assets are based in our foreign locations and are translated into U.S.
dollars at foreign currency exchange rates in effect as of the end of each period, with the effect
of such translation reflected in other comprehensive income (loss). In connection with the
Transactions, we obtained euro-denominated senior secured and senior subordinated notes that
effectively hedge the Companys net investment in foreign subsidiaries. Therefore, foreign
currency gains and losses resulting from the translation of the euro-denominated debt are included
in accumulated other comprehensive income (loss). Accordingly, our consolidated shareholders
equity will fluctuate depending upon the weakening or strengthening of the U.S. dollar against the
respective foreign currency, primarily the euro. 27




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The dollar/euro exchange rates used in our financial statements for the periods ended as set forth
below were as follows: Three Months EndedApril 2, 2005
    
    
    April 3, 2004Period end rate
    
    
    1.3050
    
    
    
    1.2196Period average rate
    
    
    1.3040
    
    
    
    1.2824
 Our strategy for management of currency risk relies primarily on conducting our operations in a
countrys respective currency and may, from time to time, involve currency derivatives. As of
April 2, 2005, we did not have any foreign currency derivatives outstanding. Item 4. Controls and Procedures As of April 2, 2005, an evaluation of the effectiveness of the Companys disclosure controls and
procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) promulgated under the Exchange Act) was
performed under the supervision and with the participation of the Companys management, including
the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure
controls and procedures are effective, as of April 2, 2005, to ensure that information required to
be disclosed by the Company in its reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the SEC. During the three months ended April 2, 2005, there has been no change in the Companys internal
controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under
the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the
Companys internal controls over financial reporting. PART II  OTHER INFORMATION Item 1. Legal Proceedings We are currently a party to various claims and legal actions that arise in the ordinary course of
business. We believe such claims and legal actions, individually and in the aggregate, will not
have a material adverse effect on our business, financial condition or results of operations. On April 5, 2005, the Company received a Finding of Violation (FOV) dated March 28, 2005 from the
EPA alleging a noncompliance with the Title V Air Operating Permit at its Corydon, Indiana facility
relating to the control of fugitive emissions at the facility. When
the Company met with the EPA, the Agency
indicated their intent to request additional information. The Company is currently developing
information responsive to that request. During the three months ended April 2, 2004, the Company
has recorded its best estimate of potential penalties as an adjustment to the preliminary
allocation of purchase price for the Transactions. Although the EPA has the authority and discretion
to issue substantial fines that could be material, based upon managements analysis of the facts
and circumstances, in consideration of prior cases and the EPAs published civil penalty policies, and
supported by discussions with third party advisors, we do not believe that the maximum penalty will
be assessed and that penalties, if any, resulting from this matter
will not have a material adverse
effect on the business, financial condition or results of operations of the Company. Item 6. Exhibits Exhibit No.
    
    Exhibit Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 28




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 16, 2005
    
    
    
    POLYPORE, INC.(Registrant)By:
    
    
    
    /s/ Frank NasisiFrank NasisiPresident and Chief Executive Officer(principal executive officer)By:
    
    
    
    /s/ Lynn AmosLynn AmosChief Financial Officer(principal financial officer and principal
accounting officer)