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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended January 2, 2010o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from            to


Commission File Number 1-32266

Polypore International, Inc.(Exact Name of Registrant as Specified in Its Charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

43-2049334(IRS Employer
Identification No.)11430 North Community House Road, Suite 350
Charlotte, North Carolina(Address of Principal Executive Offices)

28277(Zip Code)


Registrant's
Telephone Number, Including Area Code (704) 587-8409

Securities
registered pursuant to Section 12(b) of the Act:

Title of each class:

Name of each exchange on which registered:Common stock, par value $0.01 per share

New York Stock Exchange


Securities
registered pursuant to Section 12(g) of the Act:None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. o Yes    ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes    ý No

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. ý Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). o Yes    o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.    ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes    ý No

The aggregate market value of the voting common stock of the registrant held by non-affiliates at July 3, 2009 was $225,968,000, as computed by
reference to the closing price of such stock on such date. For purposes of this calculation, executive officers, directors and 5% shareholders are deemed to be affiliates of the registrant.

There
were 44,428,382 shares of the registrant's common stock outstanding as of March 1, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for the 2010 Annual Meeting of Stockholders, which will be filed within 120 days of
January 2, 2010, are incorporated by reference into Part III.



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Polypore International, Inc.  Index to Annual Report on Form 10-K  For the Fiscal Year Ended January 2, 2010



PagePart IItem 1.

Business

5Item 1A.

Risk Factors

16Item 1B.

Unresolved Staff Comments

23Item 2.

Properties

24Item 3.

Legal Proceedings

24Part IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

25Item 6.

Selected Financial Data

27Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

28Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

43Item 8.

Financial Statements and Supplementary Data

45Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

87Item 9A.

Controls and Procedures

87Item 9B.

Other Information

88Part IIIItem 10.

Directors, Executive Officers and Corporate Governance

88Item 11.

Executive Compensation

88Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

88Item 13.

Certain Relationships and Related Transactions, and Director Independence

88Item 14.

Principal Accountant Fees and Services

88Part IVItem 15.

Exhibits and Financial Statement Schedules

88Signatures

92


In
this Annual Report on Form 10-K, the words "Polypore International," "Company," "we," "us" and "our" refer to Polypore International, Inc. together with its
subsidiaries, unless the context indicates otherwise. References to "fiscal year" mean the 52 or 53 week period ending on the Saturday that is closest to December 31. The fiscal year
ended January 2, 2010, or "fiscal 2009," included 52 weeks. The fiscal year ended January 3, 2009, or "fiscal 2008," included 53 weeks and the fiscal year ended
December 29, 2007, or "fiscal 2007," included 52 weeks.

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Forward-looking Statements

This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 International's plans, objectives, strategies and
prospects regarding, among other things, the financial condition, results of operations and business of Polypore International 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 entitled "Business," "Properties," "Controls and Procedures," "Management's Discussion and Analysis of Financial Condition and Results of
Operations" or "Risk Factors," the Company's financial statements or the notes thereto or elsewhere in this Annual Report on Form 10-K.

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 Annual Report on Form 10-K, including the risks outlined
under the caption below entitled "Item 1A. Risk Factors," 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 International, the following, among other things:



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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 on Polypore International's results of operations and financial condition.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We do not undertake any
obligation to update these forward-looking statements or the factors set forth in the caption below entitled "Item 1A. Risk Factors" to reflect new information, future events or otherwise,
except as may be required under federal securities laws.

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Item 1.    Business

General

Overview

Polypore International, Inc., a Delaware corporation, is a leading global high technology filtration company that develops,
manufactures and markets specialized microporous membranes used in separation and filtration processes. The microporous membranes we produce are highly engineered polymeric structures that contain
millions of pores per square inch, enabling the management of ions, gases and particles that range in size from the cellular to the nano or molecular level.

Our
products and technologies are used in two primary segments, energy storage and separations media. The energy storage segment accounted for approximately 71% of our fiscal 2009 net
sales. Primary applications for our membranes in this segment are lithium batteries and lead-acid batteries. Lithium batteries are the power source in a wide variety of electronics
applications ranging from notebook computers and mobile phones to cordless power tools, and are emerging in applications such as electric drive vehicle ("EDV") and electricity grid storage.
Lead-acid batteries are used in transportation and industrial applications. The separations media segment accounted for approximately 29% of our fiscal 2009 net sales. Primary applications
for our membranes and membrane modules in this segment are hemodialysis, blood oxygenation, plasmapheresis and various high-performance microfiltration, ultrafiltration and
gasification/degasification applications.

Information
concerning segments and geographic information appears under "Note 20Segment Information" in the Notes to Consolidated Financial Statements for the year
ended January 2, 2010 included in Item 8 of this Report which is incorporated herein by reference.

Competitive strengths



We produce a variety of separation and filtration products for end-markets with attractive growth characteristics, which in
many cases are supported by a growing recurring revenue base.



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We believe that we are well positioned in each of the markets in which we compete. For example, in terms of market share (based on
revenue and volume):



We
believe, based on the information above and other company estimates, that we are among the top three in terms of market share (based on revenue and volume) in products comprising a
total of approximately 80% of our fiscal 2009 net sales. These products include lead-acid battery membrane separators, lithium battery membrane separators, blood oxygenation membranes,
membrane contactors for gasification/degasification of liquids and plasmapheresis membranes.



We have established our leading market positions through our ability to utilize core technical expertise and broad product and process
capabilities to develop customized solutions that meet demanding requirements in specific applications. Over time, we have demonstrated a commitment to innovation, developing technical expertise and a
high level of customer service. As of January 2, 2010, our research and development effort is supported by approximately 90 engineers, scientists, PhDs and other personnel. These personnel work
closely with our manufacturing and marketing groups to commercialize innovative products that address market needs. We also maintain technical centers strategically located in Asia, Europe and North
America.

We
have leveraged our established filtration and separation technology and membrane expertise to supply a broad portfolio of membranes based on flat sheet, hollow fiber, and tubular
technology. We are able to draw upon our experiences across multiple end-markets and various membrane technologies to create innovative solutions in new niche applications in addition to
our existing markets. For example, our Liqui-Cel® Membrane Contactor product line, which combines our blood oxygenation membrane technology with patented module design
features, provides superior performance to conventional gasification/degasification methods in multiple sectors such as semiconductor and flat panel display manufacturing, pharmaceutical processing,
and power and boiler feedwater industrial applications. We believe that our capabilities in product innovation, which combine multiple technologies, a global technical infrastructure and extensive
experience in microporous membrane development and manufacturing, are difficult to replicate.



We have cultivated strong, collaborative relationships with a diverse base of customers worldwide who are among the leaders in their
respective industries. Our research and development teams, technical service staff and application development groups work closely with our customers. We often enter into joint agreements in which we
partner with our customers on product development and end-use testing. As a result, many of our products have been customized to our customers' exacting manufacturing and
end-use specifications. In addition, we are often selected as a customer's exclusive supplier for our microporous membrane products.

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As of January 2, 2010, we manufacture, market and service our products through 14 manufacturing sites and 13 sales and service
locations throughout the Americas, Europe and Asia, with sales relatively balanced across these regions. In the energy storage segment, we remain focused on growth in the Asia Pacific region and on
driving worldwide improvements in production efficiency. For example, to better serve our growing lithium battery customers in Asia, we moved some lithium battery membrane separator finishing capacity
from our Charlotte, North Carolina plant to our Shanghai, China plant in 2005, and in 2008 we acquired a South Korean lithium battery membrane separator manufacturer. Our lead-acid battery
membrane separator business has also focused on growth in the Asia Pacific region by increasing capacity at our Prachinburi, Thailand facility in 2006 and 2008, acquiring a 60% share in a
lead-acid battery membrane separator production facility in Tianjin, China in 2007 and the remaining 40% share in December 2009, and acquiring a finishing operation in Bangalore, India in
2008.

By
strategically positioning our manufacturing, sales and marketing, and technical service personnel near our customers, we can respond to their needs more effectively, provide a higher
level of service, reduce shipping costs and improve delivery and response times. In addition, our global presence enables us to participate in faster growth markets in developing regions of the world.



We believe we have state-of-the-art manufacturing facilities and capabilities. Our equipment,
manufacturing techniques and process technologies have been developed over many years with significant intellectual property, know-how and capital investments. Our wide range of
manufacturing processes enables us to produce specialized products that are difficult and costly to replicate in the market. We continually evaluate projects that will improve or enhance our global
manufacturing capabilities.



Our senior management team has significant experience leading high technology companies, driving growth through development of new
applications and technologies, and cultivating strong relationships with existing customers. Management has also demonstrated a track record of successfully leading companies larger in size and scope
than ours. The team has an average of more than 20 years of management experience.

Business strategy

We intend to:



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Products and markets

Our business segments are energy storage and separations media. The following table describes our key products and
end-markets served:

Segment

Applications

Major brands

End-marketsEnergy storage

Lead-acid batteries

Daramic®
DARAK®
FLEX-SIL®
CellForce®
ACE-SIL®

Transportation and industrial batteriesRechargeable and disposable lithium batteries

CELGARD®

Portable consumer electronics devices such as mobile phones, audio/video players, notebook computers and cameras. Also cordless
power tools and EDV's, such as bikes, scooters, cars, trucks, buses and industrial utility vehicles. Emerging use in electricity grid storageSeparations media

Hemodialysis

PUREMA®
DIAPES®

Hemodialysis dialyzers which replicate function of healthy kidneysBlood oxygenation

CELGARD®
HEXPET®
OXYPHAN®
OXYPLUS®

Heart-lung machine oxygenation unit for open-heart surgical procedures and intensive care artificial lung
applicationsPlasmapheresis

MicroPES®
PLASMAPHAN®
SYNCLEAR®
FractioPES®

Blood cell and plasma separation equipmentIndustrial and specialty filtration applications

Liqui-Flux®

Water treatment, beverage filtration, and prefiltration for reverse osmosisAccurel®

Specialty filtration applications including chemical filtration for microelectronics manufacturing, vent and process air,
industrial wastewater treatment, and pharmaceutical processingLiqui-Cel®

Liquid gasification/degasification for beverage, pharmaceutical, semiconductor and flat panel display manufacturing, and power
and boiler feedwater applicationsMicroPES®
DuraPES®

Specialty filtration applications including ultrapure water, cold sterile filtration of beverages and pharmaceutical
processingSuperPhobic®

Solvent/ink deaeration for ink jet printers, paper coating processes and semiconductor manufacturingMicroModule®
MiniModule®

Liquid degasification in laboratory, biotechnology and analytical testing equipment and ink degasification for ink jet
printersP.E.T.®

Potable water treatment, beverage filtration, prefiltration for reverse osmosis and medical applications


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In the energy storage segment, our membrane separators are a critical performance component in lithium and lead-acid
batteries, performing the core function of regulating ion exchange and thus allowing the charge and discharge process to occur between a battery's positive and negative electrodes. These membrane
separators require specialized technical engineering and must be manufactured to extremely demanding requirements and specifications including thickness, porosity, mechanical strength and chemical and
electrical resistance. For example, membrane pores must be large enough to allow ions to pass through, but small enough to prevent contamination from conductive particles that cause short circuits.
During fiscal 2009, fiscal 2008 and fiscal 2007, our energy storage businesses accounted for 71%, 74% and 71% of our net sales, respectively.

Electronics applications.We develop, manufacture and market a broad line of patented polypropylene and polyethylene monolayer and
multilayer
membrane separators for lithium batteries that are used in numerous applications such as personal electronic devices, cordless power tools, EDV's and electricity grid storage systems. According to the
Institute of Information Technology, unit sales of lithium batteries are expected to experience average annual growth of at least 10% through 2014. Lithium batteries provide critical performance
advantages relative to alternative battery technologies, such as faster charging rates, improved battery life and higher power density, which results in more compact, lightweight batteries. These
advantages create the potential for expansion by lithium batteries into additional devices. Because many new applications are incorporating large-format batteries that require much greater membrane
separator volume per battery, we believe that membrane separator growth will exceed battery unit sales growth.

We
believe, based on independent industry research, that we are one of the top three lithium battery membrane separator providers, serving the entire breadth of lithium battery
applications, and have been among the top three since the market's first development in the early 1990s. We believe the top three providers supply over 75% of the membrane separator requirements for
the global lithium battery market. Major lithium battery manufacturers include A123 Systems, AESC, Amperex Technology Limited, BYD Company Limited, China BAK Battery, Inc., Energizer
Holdings, Inc., Hitachi Maxell Limited, Hitachi Vehicle Energy, LG Chem Ltd., Panasonic CorporationEnergy Company (formerly known as Matsushita Battery Industrial Company
Limited), Saft Groupe SA, Samsung SDI Co. Ltd., Sanyo Electric Company Limited, Sony Corporation, Tianjin Lishen Battery Joint Stock Co., Ltd. and Ultralife
Batteries, Inc.

Transportation and industrial applications.We develop, manufacture and market a complete line of high-performance polymer-based
membrane
separators for lead-acid batteries. Approximately 80% of our lead-acid battery separators are used in batteries for automobiles and other motor vehicles. The remaining
approximately 20% are used in industrial battery applications such as forklifts, submarines and uninterruptible power supply systems. We believe that over 80% of lead-acid battery unit
sales for motor vehicles are aftermarket batteries. Aftermarket sales are primarily driven by the size of the worldwide vehicle fleet rather than by new motor vehicle sales. According to
WardsAuto.com, the worldwide fleet of motor vehicles has averaged 3% annual growth for over 25 years, providing us with a growing recurring revenue base. We believe another factor contributing
to market growth is the worldwide conversion from alternative separator materials to the higher performance polyethylene-based membrane separators such as those we produce. Currently, membrane
separator market growth is strongest in the Asia Pacific region due, we believe, to increasing per capita penetration of automobiles, growth in the industrial and manufacturing sectors, and a high
rate of conversion to polyethylene-based membrane separators.

We
believe we are the global market leader in the lead-acid battery separator market and the only supplier serving both the automotive and industrial segments. We supply most
of the world's major lead-acid battery manufacturers including East Penn Manufacturing Co., Inc., EnerSys, Exide Technologies, Hubei Camel Storage
Battery Co., Ltd. and Trojan Battery Company.

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In the separations media segment, our filtration membranes and modules are used in healthcare and high-performance
industrial and specialty filtration applications. These membranes perform the critical function of removing sub-micron particulates from fluids and introducing or removing gases
(gasification/degasification) within liquids. Both healthcare and specialty filtration applications require membranes with precisely controlled pore size, structure, distribution and uniformity. Our
supply relationships with customers in healthcare and certain filtration applications such as pharmaceutical manufacturing are reinforced by the rigorous testing, clinical studies and/or regulatory
approval that our membranes undergo prior to end-product commercialization. In some cases, several years of development and qualification are required. During fiscal 2009, fiscal 2008 and
fiscal 2007, our separations media business accounted for 29%, 26% and 29% of our net sales, respectively.

Healthcare Applications.We develop, manufacture and market a complete line of patented polyethersulfone membranes for the hemodialysis
market.
Hemodialysis is the artificial process that performs the function of a healthy kidney for patients with permanent kidney failure, a condition known as End Stage Renal Disease ("ESRD"). In a healthy
person, the kidney carries out certain excretory and endocrine functions, including filtering toxins from the blood and controlling blood pressure. For an ESRD patient on dialysis, the dialyzer
membrane performs these critical filtering functions. The membranes consist of thousands of fibers that resemble hollow straws slightly larger than a human hair. These fibers have nanopores in their
walls at a density of millions of pores per square inch. The size and distribution of these nanopores are designed to separate harmful toxins from the healthy blood passing through the dialyzer.
Growth in demand for dialyzers and dialyzer membranes is driven by several factors, including the aging population in developed countries, longer life-expectancy of treated ESRD patients,
improving access to treatment in developing countries and the trend in the United States towards single-use rather than multiple-use dialyzers. According to the European Renal
AssociationEuropean Dialysis and Transplant Association, the number of worldwide ESRD patients has historically grown by approximately 6% per year. We estimate that continued patient
population growth combined with conversion to single-use dialyzers and increasing treatment frequency will result in overall annual dialyzer market growth in excess of 6%.

Our
synthetic membrane, PUREMA®, is superior in performance compared to all other synthetic membranes on the market. Dialyzers containing PUREMA® have been
classified in the highest level (category 5) of Japan's dialyzer reimbursement rate system, reflecting the efficacy of our PUREMA® membrane. We believe an example of the increasing
customer acceptance of PUREMA® is our entry into several long-term supply agreements with customers in the United States, Japan and Europe. We are currently marketing
PUREMA®'s performance advantages, such as by co-branding our customers' dialyzers with the PUREMA® logo.

We
believe, based on independent industry research, that we are uniquely positioned as the leading independent supplier (i.e., not a supplier of dialyzers) of synthetic
hemodialysis membranes. Major dialyzer manufacturers include Asahi Kasei Kuraray Medical Co., Ltd., Bellco S.r.l., Fresenius Medical Care AG, Gambro AB and Nipro Corp.

We
develop, manufacture and market polypropylene and polymethylpentene membranes for the blood oxygenation market. As a component of heart-lung machines, blood oxygenators
temporarily replace the functions of the lungs during on-pump open-heart surgery. The oxygenator contains highly specialized membranes which remove carbon dioxide from the
blood while oxygen is diffused into the blood. We estimate that growth in the blood oxygenation market is modest as a result of the use of less-invasive alternative heart treatments.
However, we believe that the market could grow as the number of patients receiving on-pump open heart surgery increases due to the saturation of alternative heart treatments. Because blood
oxygenators are designed to utilize a specific membrane technology and require regulatory approval, an oxygenator manufacturer's relationship with its membrane supplier is vital and switching costs
can be substantial. We believe, based on independent industry research, that

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we
are the world's leading supplier of membranes for blood oxygenation. Major blood oxygenator producers include Maquet Cardiopulmonary AG, Medtronic, Inc., Sorin Group S.r.l. and Terumo
Medical Corp. The polymethylpentene membranes are increasingly used in intensive care applications to serve as an artificial lung for patients with severe lung trauma or lung failure following sepsis,
in multi-organ failure, or infectious diseases. Major producers of such artificial lungs are Sorin Group S.r.l., Maquet Cardiopulomnary AG, Terumo Medical Corp. and Medtronic, Inc.

We
develop, manufacture and market polypropylene and polyethersulfone membranes for the plasmapheresis market. In plasmapheresis, plasma is separated from the blood and either retained
for the production of therapeutic proteins or filtered and returned to the blood as a treatment for various autoimmune disorders. We believe that the plasmapheresis market is growing and that new
treatment methodologies based on blood filtration may lead to additional growth. We believe we are a leading supplier of extracorporeal therapeutic plasmapheresis membranes. Major manufacturers of
plasmapheresis equipment include Asahi Kasei Kuraray Medical Co., Ltd., Fresenius Medical Care AG, Gambro AB and B. Braun AG.

Industrial and specialty filtration applications.We produce a wide range of membranes and membrane-based elements for microfiltration
and
ultrafiltration as well as gasification/degasification of liquids, covering a broad range of applications in the filtration market. According to Frost & Sullivan, the U.S. microfiltration and
ultrafiltration membrane element market is approximately $1.7 billion and growing in excess of 8% annually. Market growth is being driven by several factors, including end-market
growth in various water treatment applications. Displacement of conventional filtration media by membrane filtration due to membranes' superior cost and performance attributes and increasing purity
requirements in industrial and other applications are also important to the end-market growth. We currently serve a variety of filtration end-markets, including water
treatment, food and beverage processing and pharmaceutical, semiconductor and flat panel display manufacturing, and we are working closely with current and potential customers to develop innovative
new products based on our technology and capabilities.

The
following are descriptions of certain of our industrial and specialty filtration products:



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We
believe, based on internal company estimates, that we are the world leader in membrane gasification/degasification for liquids, and, based on internal company estimates, that we are
uniquely positioned as the leading independent supplier of polyethersulfone flat sheet membranes.

New product development

We have focused our research and development efforts on developing products for new markets based on existing technologies and
developing new process technologies to enhance existing businesses and allow entry into new businesses. We spent $16.8 million (3% of our net sales), $18.2 million (3% of our net sales)
and $16.0 million (3% of our net sales) in fiscal 2009, fiscal 2008 and fiscal 2007, respectively, on research and development.

Our
energy storage research and development is performed at technical centers at our facilities in Owensboro, Kentucky; Prachinburi, Thailand; Selestat, France; Charlotte, North Carolina
and Ochang, South Korea. Our separations media research and development is performed at technical centers at our facilities in Wuppertal, Germany and Charlotte, North Carolina. All of the products
that we develop are subject to multiple levels of extensive and rigorous testing. The qualification of membrane separators for use in transportation and industrial applications, for instance, may
require one or more years of testing by our staff and battery manufacturers.

Sales and marketing

We sell our products and services to customers in both the domestic and international marketplace. We sell primarily to manufacturers
and converters that incorporate our products into their finished goods.

We
employ a direct worldwide sales force and utilize approximately 90 experienced people who manage major customer relationships. Many of our sales representatives are engineers or
similarly trained technical personnel who have advanced knowledge of our products and the applications for which they are used. Our sales representatives are active in new product development efforts
and are strategically located in the major geographic regions in which our products are sold. In certain geographic areas, we use distributors or other agents.

We
typically seek to enter into supply contracts with our major customers. These contracts typically describe the volume and selling price. In addition, these contracts reflect our close
collaborative relationships with our customers, which are driven by our customers' need to develop new separators and membranes directly with us.

In
fiscal 2009, net sales to our top five customers represented approximately 29% of our total net sales. Exide Technologies represented approximately 13% of our net sales in fiscal
2009.

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Manufacturing and operations



We have manufacturing facilities in the major geographic markets of North America, Europe and Asia. We manufacture our
lead-acid battery membrane separators at our facilities in Owensboro, Kentucky; Corydon, Indiana; Piney Flats, Tennessee; Selestat, France; Norderstedt, Germany; Feistritz, Austria;
Prachinburi, Thailand; and Tianjin, China. We also have a finishing operation at our facility in Bangalore, India. We manufacture our lithium battery membrane separators at our facility in Charlotte,
North Carolina, and have a finishing operation at our facility in Shanghai, China. In May 2008, we acquired a facility in South Korea that began production of lithium battery separators in the second
quarter of fiscal 2009. We manufacture our healthcare membranes and industrial and specialty filtration membranes and membrane modules at facilities in Wuppertal and Obernberg, Germany and Charlotte,
North Carolina.

In
fiscal 2009, fiscal 2008 and fiscal 2007, we generated net sales from customers outside the United States of approximately 77%, 77%, and 83%, respectively. We typically sell our
products in the currency of the country in which the products are manufactured rather than the local currency of our customers.

Our
manufacturing facilities in North America accounted for 34% of total sales for fiscal 2009, with facilities in Europe accounting for 46% and facilities in Asia accounting for 20%.
Our foreign operations are subject to certain risks that could materially affect our sales, profits, cash flows and financial position. These risks include fluctuations in foreign currency exchange
rates, inflation, economic or political instability, shipping delays, changes in applicable laws and regulatory policies and various trade restrictions, all of which could have a significant impact on
our ability to deliver products on a competitive and timely basis. The future imposition of, or significant increases in the level of, customs duties, import quotas or other trade restrictions could
also have a material adverse effect on our business, financial condition and results of operations.



All of our membrane manufacturing processes involve an extrusion process. To produce our flat sheet and hollow fiber membranes, we use
one of three basic membrane processes that begin with an extrusion step. These include phase separation (thermally-induced, solvent-induced, or reaction-induced), "dry stretch", and
extrusion/extraction processes. Each process, and its resulting product properties, is well suited to the various membrane requirements for our target markets. To produce
Liqui-Cel® membrane contactors and Liqui-Flux® membrane modules, hollow fibers are bonded together into a cartridge form by extruding either a
polyolefin resin or using an epoxy or polyurethane adhesive before final assembly into a finished module.

Membrane separators for batteries.We manufacture Daramic®, our principal lead-acid battery separator used in industrial and
automotive applications, using a composite extrusion/extraction process. The process stages are fully automated, although the process requires some handling as material is transferred from stage to
stage. Initially, an ultra-high molecular weight polyethylene is mixed with porous silica and oil, which are heated and extruded into a film. The film is passed through an extraction bath
to remove the excess oil from the silica pores to create the proper microporosity and film stiffness prior to drying. We manufacture our DARAK® industrial separator using a patented
manufacturing process that begins by saturating a polyester fleece with a modified phenolic resin, which is then cross-linked, washed, dried, cured and cut into single pieces in a continuous
one-step process. The reaction step produces the final microporous structure.

We
manufacture our lithium battery separators using two processes, both of which begin with an extrusion step. Membrane porosity is created either during a thermal stretching process or
during a chemical extrusion process. Some special coated and non-woven laminate products are also manufactured for specialty battery and other applications.

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Hemodialysis, blood oxygenation, plasmapheresis and filtration membranes.Membranes for hemodialysis, blood oxygenation, plasmapheresis,
 and
filtration are produced using phase separation processes. For these phase separation processes, the polymer spinning solution is prepared by dissolving the polymer in a solvent prior to extrusion. A
porous membrane is formed by separating the solvent and polymer phases using temperature (thermally-induced), or a "non-solvent" (solvent-induced), and then the solvent phase is extracted
and the porous polymer membrane is dried. For the blood oxygenation market and certain filtration markets, hollow fiber and flat sheet membranes are also produced using our "dry stretch" process. We
rely on the molecular behavior of semi-crystalline polymers (polyolefins) to create the microporous structure. By controlling the extrusion process under which the film or fiber is formed,
we create a crystalline structure that allows the formation of microvoids in a subsequent stretching step. Although we use different equipment for the flat sheet and fiber products, the operating
conditions of temperature, stress, and line speed are similar for both. After extrusion, our products can be stored or immediately processed on annealing and stretching lines that create the final
porous form.

Competition

Our markets are highly competitive. Within our energy storage segment, our primary competitors in the market for membrane separators
used in lead-acid batteries for transportation and industrial applications are Entek International LLC ("Entek") in North America and Europe and Nippon Sheet
Glass Co., Ltd. in Japan. In addition, we have a number of smaller competitors in South Korea, Indonesia, China and Taiwan. We also compete with Asahi Kasei Chemicals Corporation, Tonen
Chemical Corporation (a subsidiary of ExxonMobil), Ube Industries Limited and SK Energy (a subsidiary of SK Group) as well as a number of smaller competitors in the market for membrane separators used
in lithium batteries.

Within
our separations media segment, we compete primarily with Asahi Kasei Kuraray Medical Co., Ltd., Fresenius Medical Care, Gambro AB and Toyobo Co. Ltd.
for membranes used in dialysis. In addition, we compete primarily with Terumo Medical Corp. in the blood oxygenation market and Asahi Kasei Kuraray Medical Co., Ltd. and Fresenius
Medical Care in the plasmapheresis market. Also within our separations media segment, our industrial and specialty filtration business competes across multiple markets and applications. Principal
competitors include Dainippon Ink and Chemicals, Inc., Koch Membrane Systems (a division of Koch Industries), Norit B.V., Millipore Corporation and Pall Corporation. Product innovation
and performance, quality, service, utility and cost are the primary competitive factors, with technical support being highly valued by our customers. We believe that we are well positioned in our
end-markets for the reasons set forth under "Competitive strengths" above.

Raw materials

We employ a global purchasing strategy to achieve pricing leverage on our purchases of major raw materials. The major polyethylene and
polypropylene resins we use are specialized petroleum-based products that are less affected by commodity pricing cycles than other petroleum-based products. In the event of future price increases for
these major raw materials, we believe that we will generally be able to pass these increases on to our customers. The primary raw materials we use to manufacture most of our products are polyethylene
and polypropylene resins, silica, paper, and oil. Our major supplier of polyethylene resins is Ticona LLC and our major suppliers of polypropylene resins are Total Petrochemicals
USA, Inc., Performance Polymers, Inc. and Bamberger Polymers, Inc. Our major suppliers of silica are PPG Industries, Inc. and Evonik Degussa GmbH, while our major
suppliers of oil are Calumet Lubricants, Shell Chemical LP and Shell Company of Thailand (subsidiaries of Royal Dutch/Shell).

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We
believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on us because other manufacturers with whom we conduct
business or have conducted business in the past would be able to fulfill our requirements. However, the loss of one of our key suppliers could, in the short term, adversely affect our business until
we secure alternative supply arrangements. In addition, we cannot assure you that any new supply arrangements we enter into will have terms as favorable as those contained in current supply
arrangements. We have never experienced any significant disruptions in supply as a result of shortages in raw materials.

Employees

At January 2, 2010, we had approximately 1,900 employees worldwide. Employees at six of our 14 facilities are unionized and
account for approximately 40% of our total employees. The following summarizes those employees represented by unions as of January 2, 2010:

Location

Number of
unionized
employees

% of
total

Date of contract
renegotiationNorderstedt, Germany


50


86

AnnualObernberg, Germany


19


79

AnnualWuppertal, Germany


345


87

AnnualSelestat, France


137


78

June 2010Owensboro, Kentucky


128


71

April 2012Corydon, Indiana


83


79

August 2013Total


762


Environmental matters

We are subject to a broad range of federal, state, local and foreign environmental laws and regulations which govern, among other
things, air emissions, wastewater discharges and the handling, storage disposal and release of wastes and hazardous substances. It is our policy to comply with applicable environmental requirements at
all of our facilities. We are also subject to laws, such as the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), that may impose liability retroactively and without
fault for releases or threatened releases of hazardous substances at on-site or off-site locations. From time to time, we have identified environmental compliance issues at our
facilities.

We
have conducted some cleanup of on-site releases at some facilities and we will be conducting additional cleanups of on-site contamination at other facilities
under regulatory supervision or voluntarily. Costs for such work and related measures (such as eliminating sources of contamination) could be substantial, particularly at our Wuppertal, Germany and
Potenza, Italy facilities. The Italian facility was closed in 2008 in connection with a restructuring. We have established reserves for environmental liabilities of $45.4 million as of
January 2, 2010. However, we do not anticipate that the remediation activities will disrupt operations at our facilities or have a material adverse effect on our business, financial condition
or results of operations. In addition, we have asserted claims under an indemnity from Akzo Nobel N.V., the prior owners of Membrana. The indemnity is expected to provide indemnification of a
substantial percentage of anticipated environmental costs at Wuppertal. The amount receivable under the indemnification agreement at January 2, 2010 was $17.6 million. To date we have
not had any significant disagreement with Akzo Nobel N.V. over its environmental indemnity obligations to us.

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Intellectual property rights

We consider our patents and trademarks, in the aggregate, to be important to our business and seek to protect our tradenames,
trademarks, brandnames, proprietary technology and know-how in part through United States and foreign patents and
trademark registrations. However, no individual patent is material to our business, and the expiration or invalidation of any one patent would not have a material impact on our business. We own
approximately 130 active unique patents and patent applications relating to our separator, membrane and module technologies. In general, the term of each of our U.S. patents depends on when the patent
was filed. A patent will expire either 20 years from the date the application was filed, or 17 years from the date of issuance, whichever is longer, if it was filed prior to
June 8, 1995; or 20 years from the date the application was filed if it was filed on or after June 8, 1995.

In
general, trademarks are valid as long as they are in use and/or their registrations are properly maintained, and trademark registrations can generally be renewed indefinitely so long
as the marks are in use. Some of our registered marks include CELGARD®, Liqui-Cel®, Daramic® and PUREMA®.

In
addition, we maintain certain trade secrets for which, in order to maintain the confidentiality of such trade secrets, we have not sought patent protection. Our company policies
require our employees to assign their intellectual property rights to us and to treat all proprietary technology as our confidential information.

We
have granted security interests or liens on some of our patents to financial institutions, including to lenders under our senior secured credit facilities.

If
we fail to adequately protect our intellectual property rights, competitors may manufacture and market products similar to ours. The loss of protection for our intellectual property
could reduce the market value of our products, reduce product sales, and lower our profits or impair our financial condition. See "Item 1A. Risk Factors. If we are unable to adequately protect
our intellectual property, we could lose a significant competitive advantage."

Available Information

You may obtain free copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports, as filed with or furnished to the Securities and Exchange Commission ("SEC"), as soon as reasonably practicable after
such material is filed with, or furnished to the SEC on our website at www.polypore.net.

Item 1A.    Risk Factors

Our business faces many risks. As such, prospective investors and shareholders should carefully consider and evaluate all of the risk
factors described below. These risk factors may change from time to time and may be amended, supplemented, or superseded by updates to the risk factors contained in periodic reports on
Form 10-Q and Form 10-K that we file with the SEC in the future. These risks include the following:

Because the specialized markets in which we sell our products are highly competitive, we may have difficulty growing our business year after year.

The markets in which we sell our products are highly competitive. Many of these markets require highly specialized products that are
time and cost intensive to design and develop. In addition, innovative products, quality, service, utility, cost and technical support are the primary competitive factors in the separation and
filtration membrane industry. Some of our competitors are much larger companies that have greater financial, technological, manufacturing and marketing resources than we do. Many of these competitors
are also better established as suppliers to the markets that we serve. As

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a
result, a reduction in overall demand or increased costs to design and produce our products within these markets would likely further increase competition between us and other producers of
membranes. This increased competition could cause us to reduce our prices, which could lower our profit margins and impair our ability to grow our business year after year.

We must continue to invest significant resources in developing innovative products in order to maintain a competitive edge in the highly specialized markets in which we
operate.

Our continued success depends, in part, upon our ability to maintain our technological capabilities and to continue to identify,
develop and commercialize innovative products for the separation and filtration membrane industry. For example, products for some consumer electronics applications have a short lifecycle and require
constant development. If we fail to continue to develop products for those markets or keep pace with technological developments by our competitors generally, we may lose market share which could
result in reduced sales and impair our financial condition.

The loss of large volume customers could impact our sales and our profits.

Our products are often sold to a relatively small number of large volume customers. The loss of large volume customers could impact our
sales and our profits.

Vertical integration by our customers of the production of our products into their own manufacturing processes could reduce our sales and our profits.

Our future sales and profits will depend to a significant extent upon whether our customers choose in the future to manufacture the
separation and filtration membranes used in their products instead of purchasing these components from us. If any of our existing customers choose to vertically integrate the production of their
products in such a manner, the loss of sales to these customers could reduce our sales and our profits.

Increases in prices for raw materials or the loss of key supplier contracts could reduce our profit margins.

The primary raw materials we use in the manufacture of most of our products are polyethylene and polypropylene resins, silica, paper
and oil. In fiscal 2009, raw materials accounted for approximately 35% of our cost of sales. Although our major customer contracts generally allow us to pass increased costs on to our customers, we
may not be able to pass on all raw material price increases to our customers in each case or without delay. The loss of any of our key suppliers could disrupt our business until we secure alternative
supply arrangements. Furthermore, any new supply agreement we enter into may not have terms as favorable as those contained in our current supply arrangements.

Our substantial indebtedness could harm our ability to react to changes in our business or to market developments and prevent us from fulfilling our obligations under our
indebtedness.

We have incurred a significant amount of indebtedness. As of January 2, 2010, our consolidated indebtedness, is
$803.4 million. For fiscal 2009, our interest expense was $57.1 million.

Our
substantial level of indebtedness, as well as any additional borrowings we may make under the unused portions of the senior secured credit facilities, increases the possibility that
we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial debt could increase our vulnerability
to general economic downturns and adverse competitive and industry conditions by limiting our flexibility to plan for, or to react to, changes in our business and in the industry in which we operate.
This limitation could place us at a competitive disadvantage compared to competitors that have less debt and more cash to insulate their operations from market downturns and to finance new business
opportunities.

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Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

At January 2, 2010, we had variable rate debt of $363.7 million. An interest rate increase would result in an increase in
interest expense. Our earnings may not be sufficient to allow us to meet any such increases in interest rate expense and to pay principal and interest on our debt and meet our other obligations. If we
do not have sufficient earnings, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell more securities, none of which we can guarantee we will be
able to do.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness and to fund our operations will depend on our ability to generate
cash in the future. However, our business may not generate sufficient cash flow from operations for a variety of reasons, including those mentioned elsewhere in this "Risk factors" section. Without
sufficient cash flow, future borrowings may not be available to us under the senior secured credit facilities in amounts sufficient to enable us to service our indebtedness or to fund our other
liquidity or capital needs. If we cannot generate sufficient cash to service our debt, we will have to take such actions as reducing or delaying capital investments, selling assets, restructuring or
refinancing our debt or seeking additional equity capital. Any of these actions may not be effected on commercially reasonable terms, or at all. In addition, the indenture for the 83/4%
senior subordinated notes and the credit agreement for the senior secured credit facilities may restrict us from adopting any of these alternatives.

The terms of the senior secured credit facilities and the indenture related to the 83/4% senior subordinated notes may restrict our current and future
operations, particularly our ability to respond to market changes or to take certain actions.

The senior secured credit facilities and the indenture related to the 83/4% senior subordinated notes contain a number
of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests. For
example, the senior secured credit facilities include covenants restricting, among other things, our ability to incur, assume or permit to exist additional indebtedness or guarantees; engage in
mergers, acquisitions and other business combinations; or amend or otherwise alter terms of our indebtedness, including the 83/4% senior subordinated notes, and other material
agreements. The senior secured credit facilities also include financial covenants requiring that we maintain a maximum senior leverage ratio at all times when loans or letters of credit are
outstanding under the revolving credit facility.

The
indenture related to the 83/4% senior subordinated notes also contains numerous negative covenants including, among other things, restrictions on our ability to: incur
or guarantee additional debt; issue preferred stock of restricted subsidiaries; pay dividends or make other equity distributions; or purchase or redeem capital stock.

A
breach of any of these covenants or the inability to comply with financial covenants could result in a default under the senior secured credit facilities or the 83/4%
senior subordinated notes. If any such default occurs, the lenders and the holders of the 83/4% senior subordinated notes may elect to declare all outstanding borrowings, together with
accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders also have the right in these circumstances to terminate any commitments they have to provide
further borrowings and to proceed against all collateral granted to them to secure the debt. If collateral (such as available cash) is repossessed by the lenders or holders

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of
the 83/4% senior subordinated notes, we will be unable to access the capital and other resources necessary to operate our business, and we could incur immediate and significant
losses.

Some of our employees are represented under collective bargaining agreements. Any employee slowdowns, strikes or failure to renew our collective bargaining agreements could
disrupt our business.

Approximately 40% of our employees are represented under collective bargaining agreements. A majority of those employees are located in
France and Germany and are
represented under industry-wide agreements that are subject to national and local government regulations. Many of these collective bargaining agreements must be renewed annually. Labor
unions also represent our employees in Owensboro, Kentucky and Corydon, Indiana.

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

We generate most of our sales from manufacturing products that are used in a wide variety of industries and the potential for product liability exposure for our products
could be significant.

We manufacture a wide variety of products that are used in healthcare and consumer applications. Several of these products are used in
medical devices that some consumers require in order to sustain their lives. As a result, we may face exposure to product liability claims in the event that the failure of our products results, or is
alleged to result, in bodily injury and/or death. In addition, if any of our products are, or are alleged to be, defective, we may be required to make warranty payments or to participate in a recall
involving those products.

Consequently,
end-users of our products may look to us for contribution when faced with product recalls, product liability or warranty claims. The future costs associated
with defending product liability claims or providing product warranties could be material and we may experience material losses in the future as a result. A successful product liability claim brought
against us in excess of available insurance coverage or a requirement to participate in any product recall could substantially reduce our available cash from operations. Reduced cash could in turn
reduce our profits or impair our financial condition.

Our operations outside the United States pose risks to our business that are not present with our domestic business.

Our manufacturing facilities in North America accounted for 34% of total net sales for fiscal 2009, with facilities in Europe
accounting for 46% and facilities in Asia accounting for 20%. Typically, we sell our products in the currency of the country where the manufacturing facility that produced the products is located. In
addition, as part of our growth and acquisition strategy, we may expand our operations in these or other foreign countries. Our foreign operations are, and any future foreign operations will be,
subject to certain risks that are unique to doing business in foreign countries. These risks include fluctuations in foreign currency exchange rates, inflation, economic or political instability,
shipping delays, changes in applicable laws and regulatory policies and various trade restrictions. All of these risks could have a negative impact on our ability to deliver products to customers on a
competitive and timely basis. This could reduce or impair our sales, profits, cash flows and financial position. The future imposition of, or significant increases in the level of, customs duties,
import quotas or other trade restrictions could also increase our costs and reduce our profits.

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We could incur substantial costs to comply with environmental laws and violations of such laws may increase our costs or require us to change certain business practices.

We use and generate a variety of chemicals and other hazardous by-products in our manufacturing operations. As a result, we
are subject to a broad range of federal, state, local and foreign environmental laws and regulations. These environmental laws govern, among other things, air emissions, wastewater discharges and the
handling, storage and release of wastes and hazardous substances. Such laws and regulations can be complex and change often. We regularly incur costs to comply with environmental requirements, and
such costs could increase significantly with changes in legal requirements or their interpretation or enforcement. Some of our manufacturing facilities have been the subject of actions to enforce
environmental requirements. We could incur substantial costs, including clean-up costs, fines and sanctions and third-party property damage or personal injury claims, as a result of
violations of environmental laws. Failure to comply with environmental requirements could also result in enforcement actions that materially limit or otherwise affect the operations of the facilities
involved.

Under
certain environmental laws, a current or previous owner or operator of an environmentally contaminated site may be held liable for the entire cost of investigation, removal or
remediation of hazardous materials at such property. This liability could result whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials.

Contaminants
have been detected at some of our present facilities, principally in connection with historical operations. Investigations and/or clean-ups of these contaminants
have been undertaken by us or by former owners of the sites. The costs of investigating and remediating environmental conditions at some of our facilities may be substantial. Although we believe we
are entitled to contractual indemnification for a portion of these costs, if we do not receive expected indemnification payments, or if our remediation costs are higher than expected, our exposure to
these costs would increase. This exposure could reduce our cash available for operations, consume valuable management time, and reduce our profits or impair our financial condition.

We
anticipate additional investigations and clean-ups of on-site contamination under regulatory supervision or voluntarily at some of our sites. In addition, the
imposition of more stringent clean-up requirements, the discovery of additional contaminants or the discovery of off-site contamination at or from one or more of our facilities
could result in significant additional costs to us.

If we are unable to adequately protect our intellectual property, we could lose a significant competitive advantage.

Our success with our products depends, in part, on our ability to protect our unique technologies and products against competitive
pressure and to defend our intellectual property rights. If we fail to adequately protect our intellectual property rights, competitors may manufacture and market products similar to ours.

Even
though we have filed patent applications, we may not be granted patents for those applications. Moreover, even if we are granted a patent, that does not prove conclusively that the
patent is valid and enforceable. Our existing or future patents that we receive or license may not provide competitive advantages for our products. Our competitors may invalidate, narrow or avoid the
scope of any existing or future patents, trademarks, or other intellectual property rights that we receive or license. In addition, patent rights may not prevent our competitors from developing, using
or selling products that are similar or functionally equivalent to our products. Patent rights are territorial; thus, the patent protection we do have will only extend to those countries in which we
have issued patents. Even so, the laws of certain countries do not protect our intellectual property rights to the same extent as do the laws of the United States and various European countries. The
loss of protection for our

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intellectual
property could reduce the market value of our products, reduce product sales, and lower our profits or impair our financial condition.

We
intend to enforce our intellectual property rights vigorously, and from time to time we may initiate claims against third parties that we believe are infringing our intellectual
property rights if we are
unable to resolve matters satisfactorily through negotiation or we may be required to participate in other administrative proceedings. Lawsuits brought to protect and enforce our intellectual property
rights could be expensive, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Our failure to secure, protect
and enforce our intellectual property rights could seriously harm our business.

Security
interests or liens have been granted to financial institutions on some of our patents. If we fail to satisfy our obligations, the financial institutions have rights to those
patents.

Due to the unique products that we produce and the particular industry in which we operate, the loss of our senior management could disrupt our business.

Our senior management is important to the success of our business. There is significant competition for executive personnel with unique
experience in the separation and filtration membrane industry. As a result of this unique need and the competition for a limited pool of industry-based executive experience, we may not be able to
retain our existing senior management. In addition, we may not be able to fill new positions or vacancies created by expansion or turnover or attract additional senior management personnel. All of our
executive officers are free to pursue other business opportunities (other than our chief executive officer, who is bound by a non-compete provision of his employment agreement), including
those that may compete with us. The loss of any member of our senior management without retaining a suitable replacement (either from inside or outside our existing management team) could disrupt our
business.

We may pursue future acquisitions. If we incur contingent liabilities and expenses or additional debt in connection with future acquisitions or if we cannot effectively
integrate newly acquired operations, our business could be disrupted.

Acquisitions involve risks that the businesses acquired will not perform in accordance with expectations and that business judgments
concerning the value, strengths and weaknesses of businesses acquired will prove incorrect. Future acquisitions would likely result in the incurrence of debt and contingent liabilities. Such
acquisitions could also increase our interest and amortization expenses as well as periodic impairment charges related to goodwill and other intangible assets. Acquisitions could also result in
significant charges relating to integration costs. We may not be able to integrate successfully any business we acquire into our existing business. Any acquired businesses may not be profitable or as
profitable as we had expected. The successful integration of new businesses depends on our ability to manage these new businesses and cut excess costs. The successful integration of future
acquisitions may also require substantial attention from our senior management and the management of the acquired business. This could decrease the time that they have to service and attract customers
and develop new products and services. In addition, because we may actively pursue a number of opportunities simultaneously, we may encounter unforeseen expenses, complications and delays. Such
expenses and delays could include difficulties in employing sufficient staff and maintaining operational and management oversight. Our inability to complete the integration
of new businesses in a timely and orderly manner could increase costs, reduce our profits and ultimately disrupt our business.

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Our restructuring activities could have an adverse impact on our financial condition.

In 2009 and 2008, we implemented restructuring plans in our energy storage segment to align lead-acid battery separator
production capacity with demand, reduce costs and position ourselves to meet future growth opportunities We cannot guarantee that we will achieve or sustain the targeted benefits under these
restructuring plans. The timing, scope and costs of these restructuring plans are subject to change. As a result, our restructuring activities could disrupt our business and have an adverse impact on
our financial condition.

We have recorded a significant amount of intangible assets, which may never generate the returns we expect.

Our net identifiable intangible assets at January 2, 2010 were approximately 12% of our total assets. Such assets include
trademarks and trade names, license agreements and technology acquired in acquisitions. Goodwill, which relates to the excess of cost over the fair value of the net assets of the businesses acquired,
was approximately 35% of our total assets at January 2, 2010. Goodwill and identifiable intangible assets are recorded at fair value on the date of
acquisition and are reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, and
adverse changes in applicable laws or regulations. We may never realize the full value of our intangible assets. Any future determination requiring the write-off of a significant portion
of intangible assets would reduce our profits for the fiscal period in which the write-off occurs. During the fourth quarter, we performed our annual goodwill impairment assessment as of
the first day of the fourth quarter and determined that the implied fair value of the lead-acid reporting unit's goodwill exceeded its carrying value. As a result, we recorded a
non-cash impairment charge to goodwill of $131.5 million in the fourth quarter.

Legal proceedings could have an adverse impact on our financial condition.

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

On
September 9, 2008, the United States Federal Trade Commission ("FTC") issued an administrative complaint against us alleging that our actions and the acquisition of Microporous
Holding Corporation, the parent company of Microporous Products L.P. ("Microporous") have substantially lessened competition in North American markets for lead-acid battery
separators. We filed an answer to the complaint on October 15, 2008 denying the material allegations of the complaint. The matter was presented before an Administrative Law Judge ("ALJ") of the
FTC and the hearing concluded on June 12, 2009. In October 2009, the ALJ granted our request to re-open the record to take additional evidence. On February 22, 2010, the
FTC's ALJ issued an initial decision in which he recommended to the Commission that it order us to divest substantially all of the acquired Microporous assets, which includes the manufacturing
facilities located in Piney Flats, Tennessee and Feistritz, Austria and restore the competitive environment to that which existed prior to the acquisition.

We
believe that the initial decision is inconsistent with the law and the facts presented at the hearing and, therefore, intend to appeal this decision.

It
is not possible, however, to predict with certainty whether we will be successful in the appellate process. If the FTC and the courts affirm the ALJ's initial decision, then we may be
required to divest some or all of the assets acquired in the Microporous acquisition and we may be subject to some prospective restrictions on our future conduct. We believe that a final judicial
resolution to the challenge by the FTC to the Microporous acquisition could take several years.

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Our operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts and other events beyond our control, which could adversely affect
our business.

Our operations may be subject to significant interruption if any of our facilities is damaged or destroyed. For example, certain of our
products are manufactured at a single facility location for which we do not maintain a backup manufacturing facility. A natural or other disaster, such as a fire or flood, could significantly disrupt
our operations, delay or prevent product manufacture and shipment for the time required to repair, rebuild or replace our manufacturing facilities, which could be lengthy, and result in large expenses
to repair or replace the facilities. In addition, concerns about terrorism or an outbreak of epidemic diseases such as avian influenza or severe acute respiratory syndrome, especially in our major
markets of North America, Europe and Asia could have a negative effect on travel and our business operations, and result in adverse consequences on our sales and financial performance.

The economic uncertainty and current crisis in global credit and financial markets could materially and adversely affect our business and results of operations.

As has been widely reported, global credit and financial markets have been experiencing extreme disruptions in recent months, including
severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. There
can be no assurance that there will not be further deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties affect our business in a number of
ways, making it difficult to accurately forecast and plan our future business activities. The current tightening of credit in financial markets and the general economic downturn has led consumers and
businesses to postpone spending, which has caused our customers to delay orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product
delays, increased accounts receivable defaults and challenges associated with inventory management. We are unable to predict the likely duration and severity of the current disruptions in the credit
and financial markets and adverse global economic conditions, and if the current uncertain economic conditions continue or further deteriorate, our business and results of operations could be
materially and adversely affected.

Item 1B.    Unresolved Staff Comments

None.

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Item 2.    Properties

Our corporate headquarters are located in leased office space in Charlotte, North Carolina. Our manufacturing facilities are
strategically located to serve our customers globally:

Location(1)

Floor area
(sq. ft.)

Business segment

CertificationOwensboro, Kentucky(2)(4)


277,000

Energy Storage

ISO 14001, ISO 9001Prachinburi, Thailand


166,000

Energy Storage

ISO 14001, ISO 9001Corydon, Indiana(2)


161,000

Energy Storage

ISO 14001, ISO 9001Selestat, France


153,000

Energy Storage

ISO 14001, ISO 9001Norderstedt, Germany


124,000

Energy Storage

ISO 14001, ISO 9001Piney Flats, Tennessee(2)


121,000

Energy Storage

ISO 9001Ochang, South Korea


105,000

Energy Storage

ISO 9001Feistritz, Austria


52,000

Energy Storage

ISO 9001Tianjin, China


47,000

Energy Storage

ISO 14001, ISO 9001Shanghai, China(3)


40,000

Energy Storage

ISO 9001Bangalore, India(3)


10,000

Energy Storage

ISO 14001, ISO 9001, OSHA 18001Charlotte, North Carolina(2)


350,000

Energy Storage and Separations Media

ISO 14001, ISO 9001Wuppertal, Germany


1,503,000

Separations Media

ISO 14001, ISO 9001Obernberg, Germany(3)


23,000

Separations Media

ISO 9001


(1)Excludes
leased sales offices in Shenzhen, China; Tokyo, Japan; and Sao Paulo, Brazil.(2)These
domestic facilities serve as collateral under the senior secured credit facilities.(3)Polypore
owns the equipment and leases the facility.(4)In
October 2009, we implemented a restructuring plan which will idle production capacity at this facility in 2010.


Item 3.    Legal Proceedings

On March 20, 2008, we received a letter from the United States Federal Trade Commission (the "FTC") requesting that we
voluntarily provide certain documents and information to the FTC regarding our acquisition of Microporous Holding Corporation, the parent company of Microporous Products L.P. ("Microporous"), which
was completed on February 29, 2008. The letter stated that the FTC was conducting an investigation to determine whether the Microporous acquisition will substantially lessen competition in any
relevant market and thereby violate federal antitrust laws. We voluntarily responded to the letter in writing and through supplemental telephone conversations and meetings.

On
April 7, 2008, we and our wholly-owned subsidiary, Daramic LLC, each received from the FTC a subpoena and interrogatories requesting substantially similar documents and
information as requested in the FTC's initial letter, as well as additional documents and information. We responded fully to this request and met on several occasions with various members of the FTC
staff and Commissioners in an effort to answer their questions and resolve the investigation.

On
September 9, 2008, the FTC issued an administrative complaint against us alleging that our actions and the acquisition of Microporous have substantially lessened competition in
North American markets for lead-acid battery separators. We filed an answer to the complaint on October 15, 2008 denying the material allegations of the complaint. The matter was
presented before an Administrative Law Judge ("ALJ") of the FTC and the hearing concluded on June 12, 2009. In October 2009, the ALJ granted our request to re-open the record to
take additional evidence. On February 22, 2010, the FTC's ALJ issued an initial decision in which he recommended to the Commission that it order us to

24

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Table of Contents

divest
substantially all of the acquired Microporous assets, which includes the manufacturing facilities located in Piney Flats, Tennessee and Feistritz, Austria and restore the competitive
environment to that which existed prior to the acquisition.

We
believe that the initial decision is inconsistent with the law and the facts presented at the hearing and that the Microporous acquisition is and will continue to be beneficial to our
customers and the industry. Therefore, we intend to continue to vigorously defend our position and to appeal the decision. It is not possible, however, to predict with certainty whether we will be
successful in the appellate process. If the FTC and the courts affirm the ALJ's initial decision, then we may be required to divest some or all of the assets acquired in the Microporous acquisition
and we may be subject to some prospective restrictions on our future conduct. We believe that a final judicial resolution to the challenge by the FTC to the Microporous acquisition could take several
years.

We
believe that the final resolution of this matter will not have a material adverse impact on our business, financial condition or results of operations.

Part II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "PPO" and has been traded on the NYSE since our
initial public offering on June 28,
2007. Warburg Pincus, directly or indirectly, owns 47.7% of our common stock. As of February 16, 2010, there were approximately 3,950 holders of our common stock, representing primarily persons
whose stock is held in nominee or "street name" accounts through brokers.

We
did not declare or pay any dividends on our common stock in fiscal 2009 or 2008, and we do not expect to pay any such dividends in fiscal 2010. The indenture relating to our
83/4% senior subordinated notes and our senior secured credit facility restrict or limit our ability to, among other things, declare dividends and make payments on or redeem or
repurchase capital stock.

The
low and high sales prices for the Company's common stock for each full quarterly period within the two most recent fiscal years were as follows:

Fiscal 2009

Fiscal 2008First Quarter

$2.38 - $10.08

$15.01 - $22.33Second Quarter

$4.93 - $11.98

$19.90 - $27.24Third Quarter

$9.16 - $13.69

$17.27 - $29.26Fourth Quarter

$10.17 - $14.10

$3.59 - $23.67


25

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Table of Contents

The
following table summarizes information about the options under our equity compensation plans as of January 2, 2010.

Plan Category

Number of
securities to be
issued upon
exercise of
outstanding
options
(a)

Weighted-
average
exercise price
of outstanding
options
(b)

Number of securities
remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column(a))
(c)Equity compensation plans approved by security holders








Equity compensation plans not approved by security holders(1)


3,376,377

$
8.12


116,307


(1)Includes
options to purchase shares of our common stock under our 2006 Stock Option Plan and 2007 Stock Incentive Plan, both of which were adopted prior to
our initial public offering and were approved by our Board of Directors. A description of the equity compensation plans appears under "Note 18Stock-Based Compensation Plans" in the
Notes to the Consolidated Financial Statements for the year ended January 2, 2010 included in Item 8 of this Report.


Performance Graph

The following graph compares the total shareholder return of our common stock for the periods indicated with the total return of the
Russell 2000 Index and the Standard & Poor's Index of Industrial Machinery Companies ("S&P Industrial Machinery Index"). The graph assumes $100 invested on June 28, 2007 (the date of our
initial public offering) in the Company, the Russell 2000 Index and the S&P Industrial Machinery Index. Total return represents stock price changes and assumes the reinvestment of dividends.

GRAPHIC

Jun-07

Dec-07

Dec-08

Dec-09Polypore International


100.00


97.06


41.93


66.00Russell 2000


100.00


91.12


60.33


76.73S&P Industrial Machinery


100.00


103.17


61.86


86.42


26

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Table of Contents

Item 6.    Selected Financial Data

The following table presents selected historical consolidated financial data of Polypore International for the fiscal years ended
January 2, 2010, January 3, 2009, December 29, 2007, December 30, 2006 and December 31, 2005. The selected historical consolidated financial data has been derived
from Polypore International's audited consolidated financial statements.

The
information presented below should be read together with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes thereto included in "Item 8. Financial Statements and Supplementary Data."

Statement of operations data
(in millions, except share data):

Fiscal
2009

Fiscal
2008

Fiscal
2007

Fiscal
2006

Fiscal
2005Net sales

$
516.9

$
610.5

$
534.7

$
478.2

$
431.1Gross profit


195.8


215.7


197.0


164.9


150.5Selling, general and administrative expenses


100.4


108.3


93.6


87.5


75.1Business restructuring


21.3


59.9


(0.9
)

37.0


8.7Goodwill impairment


131.5











Change in accounting principle related to postemployment benefits











(2.6
)

Operating income (loss)


(57.4
)

47.5


104.3


43.0


66.7Interest expense, net


57.1


60.7


81.0


92.3


82.0Foreign currency and other


(0.7
)

(2.5
)

1.6


3.2


(4.5
)Costs related to purchase of 10.5% senior discount notes








30.1





Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities








7.2





Income (loss) from continuing operations before income taxes


(113.8
)

(10.7
)

(15.6
)

(52.5
)

(10.8
)Income taxes


3.5


6.8


(16.0
)

(22.9
)

(8.3
)Income (loss) from continuing operations


(117.3
)

(17.5
)

0.4


(29.6
)

(2.5
)Income (loss) from discontinued operations, net of income taxes





2.3


0.1


(0.2
)

(0.4
)Income (loss) before the cumulative effect of a change in accounting principle


(117.3
)

(15.2
)

0.5


(29.8
)

(2.9
)Cumulative effect of change in accounting principle, net of income taxes











0.2


Net income (loss)

$
(117.3
)
$
(15.2
)
$
0.5

$
(29.6
)
$
(2.9
)Net income (loss) per common sharebasic and diluted:(1)Continuing operations

$
(2.64
)
$
(0.41
)
$
0.02

$
(1.17
)
$
(0.10
)Discontinued operations





0.06





(0.01
)

(0.02
)Cumulative effect of change in accounting principle, net of income taxes











0.01


Net income (loss) per share

$
(2.64
)
$
(0.36
)
$
0.02

$
(1.17
)
$
(0.12
)Weighted average shares outstanding:Basic(1)


44,385,552


42,777,531


32,942,214


25,313,130


25,271,252Diluted(1)


44,385,552


42,777,531


33,237,230


25,313,130


25,271,252


(1)The
weighted average shares outstanding for fiscal years 2006 and 2005 have been adjusted to give effect for the stock split of
147.422-for-one on June 25, 2007.


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Table of Contents

Balance sheet data
(at end of period) (in millions):

Fiscal
2009

Fiscal
2008

Fiscal
2007

Fiscal
2006

Fiscal
2005Total assets

$
1,352.6

$
1,498.9

$
1,429.0

$
1,389.9

$
1,364.6Total debt and capital lease obligation, including current portion


803.4


803.3


822.8


1,048.9


1,002.8Shareholders' equity


284.3


395.8


338.3


69.7


93.3




Other financial data
(in millions):

Fiscal
2009

Fiscal
2008

Fiscal
2007

Fiscal
2006

Fiscal
2005Depreciation and amortization

$
51.4

$
55.1

$
48.9

$
60.2

$
54.1Capital expenditures


16.3


48.0


29.8


24.0


13.0Net cash provided by (used in):Operating activities


53.2


94.7


69.3


50.0


64.2Investing activities


(19.9
)

(129.8
)

(35.3
)

(23.9
)

(13.0
)Financing activities


(6.8
)

65.7


(40.4
)

(3.0
)

(52.8
)


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in
"Item 8. Financial Statements and Supplementary Data." Some of the information contained in this discussion and analysis or included elsewhere in this report, including information with respect
to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Please see "Forward-looking statements" for more information. You should review
the "Risk factors" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements.

Overview

We are a leading global high technology filtration company that develops, manufactures and markets specialized microporous membranes
used in separation and filtration processes. In fiscal 2009, we generated total net sales of $516.9 million. We operate in two business segments: (i) the energy storage segment, which
accounted for approximately 71% of our fiscal 2009 net sales; and (ii) the separations media segment, which accounted for approximately 29% of our fiscal 2009 net sales. We manufacture our
products at facilities in North America, Europe and Asia. Net sales from foreign locations were $351.5 million for fiscal 2009.



In the energy storage segment, our membrane separators are a critical performance component in lithium batteries, which are primarily
used in consumer electronics and electric drive vehicle ("EDV") applications, and lead-acid batteries, which are used globally in transportation and numerous industrial applications. We
believe the global economic recession adversely impacted sales in 2009 and may continue to have an adverse impact in the near future. Although the short-term economic outlook is uncertain,
we believe that the long-term growth drivers for the energy storage businessgrowth in Asia, increasing demand for consumer electronics and the emergence of EDV
applicationsremain intact. We have and will continue to position ourselves to capitalize on these future growth opportunities.

Lithium
batteries are the power source in a wide variety of electronics applications ranging from notebook computers and mobile phones to cordless power tools. In addition to consumer
electronics applications, development and investment in lithium batteries for use in EDV applications is accelerating. In late 2008, we completed a lithium battery separator capacity expansion at our
Charlotte, NC facility. In late 2009, we initiated a $102.0 million expansion aimed at enhancing our

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position
as a market leader in supplying lithium separators for EDV applications. The expansion will be partially funded by a $49.2 million grant from the U.S. Department of Energy ("DOE") and
includes the existing Charlotte, NC facility and construction of a new manufacturing facility in Concord, NC, which is expected to begin in the second half of 2010. In 2008, we acquired a lithium
battery separator company in South Korea which was subsequently renamed Celgard Korea, Inc. In early 2010, we initiated a $30.0 million capacity expansion at this facility to serve
growth in consumer electronics applications in Asia.

In
the lead-acid battery market, the high proportion of aftermarket replacement sales and the steady growth of the worldwide fleet of motor vehicles provide us with a growing
recurring revenue base in lead-acid battery separators. Worldwide demand for lead-acid battery separators is expected to continue to grow at slightly more than annual economic
growth. The Asia-Pacific region is the fastest growing market for lead-acid battery separators. Growth in this region is driven by the increasing penetration of automobile
ownership, growth in industrial and manufacturing sectors, export incentives and ongoing conversion to the polyethylene-based membrane separators we produce. We have positioned ourselves to benefit
from growth in Asia by expanding capacity at our Prachinburi, Thailand facility, acquiring the remaining 40% minority interest in our production facility in Tianjin, China and establishing an Asian
Technical Center in Thailand. In addition, on April 1, 2008, we acquired the battery separator manufacturing assets of Super-Tech Battery Components Pvt. Ltd.,
located in Bangalore, India. In 2010, we will expand out operations in India. We will continue to focus our resources and assets to capitalize on growth in this important region.

The
North American market for lead-acid battery separators is characterized by relatively low growth and excess capacity. As a result of these factors and management
estimates of future demand, we implemented a restructuring plan to idle capacity at our manufacturing facility in Owensboro, Kentucky.

A
supply agreement for lead-acid battery separators with Exide Technologies ("Exide"), a customer of our energy storage segment, expired on December 31, 2009. On
January 19, 2010, we announced a new multi-year supply agreement with Exide where we will supply the majority of Exide's lead-acid separators on a global basis.

In
February 2008, we purchased 100% of the stock of Microporous Holding Corporation, the parent company of Microporous Products L.P. ("Microporous"). The acquisition of
Microporous adds rubber-based battery separator technology to our product line.



In the separations media segment, our filtration membranes and modules are used in healthcare and high-performance
filtration and specialty applications. The healthcare business and a portion of the filtration and specialty business have historically been relatively unaffected by the economy, and we believe that
the separations media segment will continue to benefit from continued growth in demand for higher levels of purity in a growing number of applications.

Healthcare
applications include hemodialysis, blood oxygenation, and plasmapheresis. Growth in demand for hemodialysis membranes is driven by the increasing worldwide population of
end-stage renal disease patients. We estimate that conversion to single-use dialyzers and increasing treatment frequency will result in additional dialyzer market growth.

We
produce a wide range of membranes and membrane-based elements for micro-, ultra- and nanofiltration and gasification/degasification of liquids. Micro-, ultra- and nanofiltration
membrane element market growth is being driven by several factors, including end-market growth in applications such as water treatment and pharmaceutical processing, displacement of
conventional filtration media

29

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Table of Contents

by
membrane filtration due to membranes' superior cost and performance attributes and increasing purity requirements in industrial and other applications.

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 "Item 8. Financial Statements and Supplementary Data."



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.



Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing unless circumstances dictate more frequent assessments. We
perform our annual impairment assessment for goodwill and indefinite-lived intangibles as of the first day of the fourth quarter of each fiscal year and more frequently whenever events or changes in
circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing is a two-step process performed at the reporting unit level. Our
reporting units are at the operating segment level. Step one compares the fair value of our reporting units to their carrying amount. The fair value of the reporting unit is determined using the
income approach, corroborated by comparison to market capitalization and key multiples of comparable companies. Under the income approach, we determine fair value based on estimated future cash flows
of each reporting unit, discounted by an estimated weighted-average cost of capital. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the
reporting unit's carrying amount exceeds its fair value, then the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by
deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one. In this step, the fair value of the
reporting unit is allocated to all of the reporting unit's assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If the carrying
amount of goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to the excess.

Determining
the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans and
future market conditions, among others. There can be no assurance that our estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the
future. If our assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not

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achieved
or changes in strategy or market conditions occur, the Company may be required to record goodwill impairment charges in future periods. It is not possible at this time to determine if any
such future impairment charge would result or, if it does, whether such charge would be material.

We
completed our annual impairment test as of the first day of the fourth quarter and recognized a goodwill impairment charge of $131.5 million for our lead-acid
reporting unit of the energy storage segment. At the date of our annual impairment test, a 5% and 10% decrease in the estimated free cash flow assumptions for the lead-acid reporting unit
would have increased the impairment charge by $22.1 million and $43.9 million, respectively. A 1% increase in the discount rate would have increased the impairment charge by
$46.0 million.

We
determined that the estimated fair value of our other reporting units significantly exceeded their carrying amounts, and a 10% decrease in fair value for each of these reporting units
would not have resulted in a goodwill impairment charge.



Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit pension plans and other
postretirement benefits. Two critical assumptions, discount rate and expected return on assets, are important elements of plan expense and/or liability measurement and differences between actual
results and these two actuarial assumptions can materially affect our projected benefit obligation or the valuation of our plan assets. Other assumptions involve demographic factors such as
retirement, expected increases in compensation, mortality and turnover. The discount rate enables us to state expected future cash flows at a present value on the measurement date. The discount rate
assumptions are based on the market rate for high quality fixed income investments, and are thus subject to change each year. At January 2, 2010, a 1% decrease in the discount rate would
increase our projected benefit obligations and the unfunded status of our pension plans by $13.0 million. The expected rates of return on our pension plans' assets are based on the asset
allocation of each plan and the long-term projected return of those assets. For 2009, if the expected rate of return on pension plan assets were reduced by 1%, the result would have
increased our net periodic benefit expense for fiscal 2009 by $0.2 million. At January 2, 2010, if the actual plan assets were reduced by 1%, the unfunded status of our pension plans
would increase by $0.2 million.



Environmental obligations are accrued 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. We do not currently
anticipate any material loss in excess of the amounts accrued. Future remediation expenses may be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the
extent and method of remediation, the evolving nature of environmental regulations, and the availability and application of technology. If actual results are less favorable than those projected by
management, we may be required to recognize additional expense and liabilities.

In
connection with the acquisition of Membrana GmbH ("Membrana") in 2002, we recorded a reserve for costs to remediate known environmental issues and operational upgrades at the
Wuppertal, Germany facility. In 2004, we identified and accrued for potential environmental contamination at our manufacturing facility in Potenza, Italy. In December 2008, we implemented a
restructuring plan which included the closure of this manufacturing facility and increased the environmental reserve for the

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estimated
additional costs of environmental remediation and monitoring activities that will be required after closing the facility.

We
have indemnification agreements for certain environmental matters from Acordis A.G. ("Acordis") and Akzo Nobel N.V. ("Akzo"), the prior owners of Membrana. 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 receivable recorded.

Results of operations

The following table sets forth, for the fiscal years indicated, certain historical operating data of Polypore International in amount
and as a percentage of net sales (in millions):

Fiscal Year(in millions)

2009

2008

2007Net sales

$
516.9

$
610.5

$
534.7Gross profit


195.8


215.7


197.0Selling, general and administrative expenses


100.4


108.3


93.6Business restructuring


21.3


59.9


(0.9
)Goodwill impairment


131.5





Operating income (loss)


(57.4
)

47.5


104.3Interest expense, net


57.1


60.7


81.0Costs related to purchase of 10.50% senior discount notes








30.1Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities








7.2Foreign currency and other


(0.7
)

(2.5
)

1.6Loss from continuing operations before income taxes


(113.8
)

(10.7
)

(15.6
)Income taxes


3.5


6.8


(16.0
)Income (loss) from continuing operations

$
(117.3
)
$
(17.5
)
$
0.4




Fiscal Year(percent of sales)

2009

2008

2007Net sales


100.0
%

100.0
%

100.0
%Gross profit


37.9


35.3


36.8Selling, general and administrative expenses


19.4


17.7


17.5Business restructuring


4.1


9.8


(0.1
)Goodwill impairment


25.5





Operating income (loss)


(11.1
)

7.8


19.4Interest expense, net


11.0


9.9


15.1Costs related to purchase of 10.50% senior discount notes








5.6Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities








1.3Foreign currency and other


(0.1
)

(0.4
)

0.3Loss from continuing operations before income taxes


(22.0
)

(1.8
)

(2.9
)Income taxes


0.7


1.1


(3.0
)Income (loss) from continuing operations


(22.7
)%

(2.9
)%

0.1
%


32

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Table of Contents



Net sales.Net sales for fiscal 2009 were $516.9 million, a decrease of $93.6 million, or 15.3%, from fiscal 2008. Energy
storage sales
for fiscal 2009 were $367.6 million, a decrease of $82.6 million, or 18.3%. Lithium battery separator sales decreased by 15.6% due to the impact of the weak economic environment on
consumer electronics purchases. Lead-acid battery separator sales decreased by 19.2%, including the negative impact of dollar/euro exchange rate fluctuations of $5.5 million. The
primary reason for the decline in lead-acid battery separator sales in fiscal 2009 was the loss of a customer at the end of fiscal 2008. Sales to this customer in fiscal 2008 were
$52.4 million. In addition, demand for the Company's lead-acid battery separators were negatively impacted by the recent economic environment, particularly in North America and
Europe. Sales to our largest customer decreased approximately $18.0 million in 2009. In the third and fourth quarters of 2009, we estimate that we shipped slightly more than
$10.0 million of advance orders to this customer for 2010 usage and demand. We believe these advance orders will negatively impact our lead-acid battery separator sales in 2010.
Demand in Asia, which is the fastest growing market for lead-acid separators, continues to be strong as sales in this region increased 23.9% in fiscal 2009.

Separations
media sales for fiscal 2009 were $149.3 million, a decrease of $11.0 million, or 6.9%, from fiscal 2008, including the negative impact of dollar/euro exchange
rate fluctuations of $6.5 million. Healthcare sales remained relatively consistent with the prior year as the impact of higher sales volumes of synthetic hemodialysis membranes was offset by
the negative impact of dollar/euro exchange rate fluctuations. Filtration and specialty product sales decreased by 17.6% due to current macro-economic conditions and the negative impact of dollar/euro
exchange rate fluctuations.

Gross Profit.Gross profit as a percent of net sales was 37.9% for fiscal 2009 as compared to 35.3% for fiscal 2008. Energy storage
gross profit as a
percent of net sales was 36.9% as compared to 35.1% for fiscal 2008, which included incremental costs associated with a strike at the Owensboro, Kentucky lead-acid battery separator
facility. Excluding the 2008 strike-related costs, gross profit as a percent of sales in 2009 remained relatively consistent with the prior year. Separations media gross profit as a percent of net
sales increased to 40.3% for fiscal 2009 from 36.5% for fiscal 2008. The increase was due primarily to production efficiencies and decreased energy costs.

Selling, general and administrative expenses.Selling, general and administrative expenses decreased by $7.9 million for fiscal
2009.
Excluding the impact of dollar/euro exchange rate fluctuations, the decrease
was $5.9 million, consisting primarily of reduced discretionary spending and cost savings from the 2008 restructuring plan, partially offset by $2.6 million of increased costs associated
with the FTC litigation.

Interest expense.Interest expense for fiscal 2009 decreased by $3.6 million from fiscal 2008. The decrease in interest expense
was primarily
due to the lower interest rates under our senior credit facilities and positive impact of dollar/euro exchange rate fluctuations on our euro-denominated debt.

Income taxes.Income taxes as a percentage of pre-tax income from continuing operations for fiscal 2009 were (3.1)% as compared to
(63.6)% for fiscal 2008. The income tax expense recorded in the financial statements fluctuates between years due to a variety of factors, including state income taxes, the mix of income between U.S.
and foreign jurisdictions taxed at varying rates, changes in estimates of permanent differences and valuation allowances and the relative size of our consolidated income (loss) before income taxes.

The
mix of earnings between the tax jurisdictions has a significant impact on our effective tax rate. Each tax jurisdiction has its own set of tax laws and tax rates and income earned by
our subsidiaries is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the jurisdictions in which we operate range from 0% to 39%. Therefore,
the amount of income tax

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expense
in each jurisdiction as compared to our consolidated income (loss) before income taxes has a significant impact on our annual effective tax rate.

In
fiscal 2009, the effective tax rate was also impacted by the goodwill impairment charge, which decreased pre-tax income with no material corresponding income tax benefit.

The
effect of each of these items on our effective tax rate on continuing operations is quantified in the table below:

Fiscal 2009

Fiscal 2008U.S. federal statutory rate


35.0
%

35.0
%State income taxes


(0.8
)

0.7Mix of income in taxing jurisdictions


(13.4
)

(7.1
)Other permanent differences and valuation allowances


2.5


0.1Impact of goodwill impairment


(30.0
)

Impact of 2008 restructuring





(91.0
)Other


3.6


(1.3
)Total effective tax rate on continuing operations


(3.1
)%

(63.6
)%




Net sales.Net sales for fiscal 2008 were $610.5 million, an increase of $75.8 million, or 14.2%, from fiscal 2007. Energy
storage
sales for fiscal 2008 were $450.2 million, an increase of $70.8 million, or 18.7%. The increase in energy storage sales was due to higher lead-acid and lithium battery
separator sales and the positive impact of dollar/euro exchange rate fluctuations of $11.8 million. Lead-acid battery separator sales increased by 19.5%, due primarily to the
acquisition of Microporous, as well as the positive impact of dollar/euro exchange rate fluctuations and price increases earlier in 2008 to partially offset the escalation in raw material and energy
costs. The expiration of a lead-acid separator supply contract with a customer will impact our sales for fiscal 2009. Sales of automotive lead-acid battery separators covered
by the expired contract were approximately 9.0% of fiscal 2008 consolidated net sales. In response, we implemented a restructuring plan to align lead-acid battery separator production
capacity with demand, reduce costs and position us to meet future growth opportunities. Lithium battery separator sales increased by 16.0% due to increasing demand for mobile power and the penetration
of lithium-ion batteries in an increasing number of electronic devices and into new applications for large format cells.

Separations
media sales for fiscal 2008 were $160.3 million, an increase of $5.0 million, or 3.2%, from fiscal 2007. The increase in separations media sales was due to
higher sales of industrial and filtration specialty products and the positive impact of dollar/euro exchange rate fluctuations of $8.7 million. Healthcare sales were consistent with the prior
year as growth in sales of synthetic hemodialysis membranes and the positive impact of dollar/euro exchange rate fluctuations offset the impact of discontinued sales of cellulosic membranes.
Industrial and filtration specialty product sales increased by 9.9%, driven by continued demand for high performance filtration applications and the positive impact of dollar/euro exchange rate
fluctuations.

Gross Profit.Gross profit as a percent of net sales was 35.3% for fiscal 2008 as compared to 36.8% for fiscal 2007. Energy storage
gross profit as a
percent of net sales was 35.1% as compared to 38.8% for fiscal 2007. The decline was primarily attributable to the acquisition of Microporous, which has lower gross profit margins than our other
lead-acid battery separator production facilities, increased raw material and energy costs, and costs associated with the strike at our Owensboro, Kentucky facility. Separations media
gross profit as a percent of net sales increased to 36.5% for fiscal 2008 from 32.1% for fiscal 2007. The increase was due primarily to increased hemodialysis membrane production volumes and
investments to enhance production efficiencies.

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Selling, general and administrative expenses.Selling, general and administrative expenses as a percent of net sales were 17.7% for
fiscal 2008,
which is comparable to 17.5% for fiscal 2007.

Interest expense.Interest expense for fiscal 2008 decreased by $20.3 million from fiscal 2007. The decrease in interest expense
was primarily
driven by the purchase of our 10.50% senior discount notes in July 2007 and lower interest rates under our senior credit facilities.

Income taxes.Income taxes as a percentage of pre-tax income from continuing operations for fiscal 2008 were (63.6)% as compared to
102.9% for fiscal 2007. The income tax expense recorded in the financial statements fluctuates between years due to a variety of factors, including state income taxes, the mix of income between U.S.
and foreign jurisdictions taxed at varying rates, changes in estimates of permanent differences and valuation allowances and the relative size of our consolidated income before income taxes.

The
mix of earnings between the tax jurisdictions has a significant impact on our effective tax rate. Each tax jurisdiction has its own set of tax laws and tax rates and income earned by
our subsidiaries is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the jurisdictions in which we operate range from 0% to 39%. Therefore,
the amount of income tax expense in each jurisdiction as compared to our consolidated income (loss) before income taxes has a significant impact on our annual effective tax rate.

In
fiscal 2008, the effective tax rate was also impacted by the restructuring charge in Potenza, Italy. Net operating losses generated in Italy as a result of the restructuring charge
were offset by a valuation allowance because the benefit of these net operating losses may never be realized since the Company will no longer have operations in Italy.

The
effect of each of these items on our effective tax rate on continuing operations is quantified in the table below:

Fiscal 2008

Fiscal 2007U.S. federal statutory rate


35.0
%

35.0
%State income taxes


0.7


(2.5
)Mix of income in taxing jurisdictions


(7.1
)

(20.0
)Other permanent differences and valuation allowances


0.1


7.7Purchase of 10.50% senior discount notes and write-off of loan acquisition costs associated with refinancing of senior secured credit
facility





27.7Impact of 2008 restructuring


(91.0
)

Other


(1.3
)

Impact of Italian tax reform legislation





10.0Impact of German tax reform legislation





45.0Total effective tax rate on continuing operations


(63.6
)%

102.9
%


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The components of restructuring activity in 2009 were as follows:

(in millions)

Balance at
January 3,
2009

Restructuring
Charges

Asset
Writedown

Cash
Payments

Foreign
Currency
Translation

Balance at
January 2,
20102009 Restructuring Plan:Severance and benefits

$


$
0.1

$


$


$


$
0.1Impairment





19.9


(19.9
)







Other





0.1





(0.1
)







20.1


(19.9
)

(0.1
)




0.12008 Restructuring Plan:Severance and benefits


9.9


(0.8
)




(1.9
)

0.1


7.3Other


0.8


2.0





(2.3
)

0.1


0.610.7


1.2





(4.2
)

0.2


7.92006 Restructuring Plan:Severance and benefits


2.9








(0.2
)




2.7Other


0.5








(0.5
)




3.4








(0.7
)




2.7Total

$
14.1

$
21.3

$
(19.9
)
$
(5.0
)
$
0.2

$
10.7


The
business restructuring activity in 2008 was as follows:

(in millions)

Balance at
December 29,
2007

Restructuring
Charges

Asset
Writedown

Cash
Payments

Foreign
Currency
Translation

Balance at
January 3,
20092008 Restructuring Plan:Severance and benefits

$


$
10.4

$


$
(1.4
)
$
0.9

$
9.9Impairment





28.9


(28.9
)







Other





2.0





(1.3
)

0.1


0.8


41.3


(28.9
)

(2.7
)

1.0


10.72006 Restructuring Plan:Severance and benefits


3.5








(0.5
)

(0.1
)

2.9Other


1.3








(0.8
)




0.54.8








(1.3
)

(0.1
)

3.42005 Restructuring Plan:Severance and benefits


0.4








(0.3
)

(0.1
)

Total

$
5.2

$
41.3

$
(28.9
)
$
(4.3
)
$
0.8

$
14.1


In
addition to the amounts in the table above, the 2008 restructuring charge included $18.6 million in environmental costs.

All
restructuring charges, except for the asset impairments, will result in cash outflows which will be funded by cash from operations. We expect to make restructuring payments of
$13.0 million in fiscal 2010.

2009 restructuring plan.The North American market for lead-acid battery separators has significant excess capacity and a highly
consolidated customer base. In addition, demand for lead-acid battery separators has continued to be negatively impacted by the recent economic environment. As a result of these factors
and our estimates based on recent discussions with customers about future

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demand
requirements in North America, we implemented a restructuring plan to better align lead-acid battery separator production capacity with demand in North America.

The
restructuring plan includes idling capacity and reducing headcount at our manufacturing facility in Owensboro, Kentucky. The total estimated cost of the plan is expected to be
approximately $26.2 million, including estimated cash charges of $6.3 million for severance and other costs and a non-cash impairment charge of $19.9 million for
buildings and equipment. The restructuring plan includes severance costs of approximately $0.4 million, of which $0.1 million was recognized in 2009 and the remainder will be recognized
in 2010. We estimate that other exit costs, consisting of costs associated with idling the Owensboro facility, are expected to be $5.9 million, of which $0.1 million has been recognized
in 2009 and the remainder will be recognized over the next three years. We began implementing the plan in the fourth quarter of 2009 and recorded a restructuring charge of $20.1 million. Cash
payments for severance and other exit costs are expected to be paid over the next three years. The timing, scope and costs of the restructuring plan are subject to change as we implement the plan and
continue to evaluate our business needs and costs.

2008 restructuring plan.A supply contract between our lead-acid battery separator business and a large customer expired on
December 31, 2008 and was not renewed. In response, we implemented a restructuring plan in the fourth quarter of 2008 for our energy storage segment to align lead-acid battery
separator production capacity with demand, reduce costs and position ourselves to meet future growth opportunities.

The
plan included closing our facility in Potenza, Italy, streamlining production at our facility in Owensboro, Kentucky and reducing selling, general and administrative resources
associated with the lead-acid battery separator business. The total cost of the restructuring plan, including environmental costs recorded in the environmental reserve of
$18.6 million, is expected to be approximately $62.5 million, of which $61.2 million has been recognized. The restructuring plan included the termination of production employees
at Potenza, Italy and Owensboro, Kentucky and certain selling, general and administrative employees. During 2009, we reduced the estimated cost of severance and benefits and related accrual by
$0.8 million to reflect actual costs expected to be incurred. After this adjustment, the total cost of severance and benefits is expected to be approximately $9.6 million. We estimate
that other costs, consisting primarily of costs associated with closing the Potenza, Italy facility, are expected to be approximately $5.4 million, of which $4.1 million has been
recognized through fiscal 2009 and the remainder will be recognized over the next two years. The restructuring included a non-cash impairment charge of $28.9 million for buildings
and machinery and equipment in Potenza, Italy. Cash payments for severance and other exit costs are expected to be paid over the next two years. The timing, scope and costs of these restructuring
measures are subject to change as we implement the plan and continue to evaluate our business needs and costs.

2006 restructuring plan.In December 2006, our separations media segment exited the production of cellulosic membranes and we realigned
the cost
structure at our Wuppertal, Germany facility. The total cost of the plan, all of which has been incurred, was $33.8 million, consisting of a $17.5 million non-cash impairment
charge for buildings and equipment, $10.5 million for employee layoffs and $5.8 million for other costs related to the shutdown of portions of the Wuppertal facility.



At January 2, 2010, we manufacture our products at 14 strategically located facilities in North America, Europe and Asia. Net
sales from the foreign locations were $351.5 million for fiscal 2009, $388.4 million for fiscal 2008 and $349.4 million for fiscal 2007. 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

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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.



Operations at our European production facilities are traditionally subject to shutdowns for approximately one month during the third
quarter of each year for employee vacations. As a result, operating income during the third quarter of fiscal years 2009, 2008 and 2007 were, and during the third quarter of any fiscal year in the
future may be, lower than operating income in other quarters during the same fiscal year. 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.

Liquidity and capital resources

Cash and cash equivalents increased to $115.0 million at January 2, 2010 from $83.0 million at January 3,
2009. The $32.0 million increase consists of cash flow from operations of $53.2 million, cash used in investing activities of $19.9 million, cash used in financing activities of
$6.8 million and the positive impact of exchange rate changes on cash and cash equivalents of $5.5 million.

Operating activities.Net cash provided by operating activities was $53.2 million in fiscal 2009, as compared to $94.7 million
in
fiscal 2008. Cash provided by operating activities in fiscal 2009 consisted of cash flows from operations partially offset by an increase in working capital of $27.8 million. Accounts
receivable increased due to fourth quarter sales levels. Days sales outstanding were comparable to the prior year. We have not experienced significant changes in accounts receivable aging or customer
payment terms and believe that we have adequately provided for potential bad debts. Inventory and inventory days are comparable to the prior year. We believe that inventory is consistent with expected
future demand. Our inventory is generally not subject to obsolescence and does not have a shelf life and we do not believe there is a significant risk of inventory impairment. Accounts payable and
accrued liabilities decreased primarily due to the timing of payments.

Net
cash provided by operating activities was $94.7 million in fiscal 2008, as compared to $69.3 million in fiscal 2007. Cash provided by operating activities in fiscal
2008 consisted of cash flows from operations partially offset by an increase in working capital of $1.3 million. Accounts receivable decreased from 2007 fiscal year-end due to
fourth quarter sales levels and days sales outstanding were comparable to the prior year. Inventories increased due to timing of sales and production. Accounts payable and accrued liabilities
decreased primarily due to timing of payments on accounts payable and accrued liabilities.

Investing activities.2009 capital expenditures were $16.3 million, consisting primarily of normal maintenance on our existing
facilities. In
late 2009, we initiated a $102.0 million expansion for lithium battery separators at our existing Charlotte, NC facility and construction of a new manufacturing facility in Concord, NC. The
expansion will be partially funded by a $49.2 million grant from the DOE. In early 2010, we approved a $30.0 million capacity expansion at our lithium battery production facility in
South Korea. We have currently approved 2010 capital spending of approximately $60.0 million, net of the DOE grant award for these expansions and normal maintenance activities, and will
continue to evaluate investment opportunities as they arise.

Financing activities.During fiscal 2009, we made payments of $4.7 million on debt and $2.3 million for the early buyout of a
capital
lease. Under the terms of our credit agreement, we are required to make a mandatory prepayment of term loans within ninety days of our fiscal year-end

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based
on a specified percentage of excess cash flow, as defined in the credit agreement. For fiscal 2009, we are required to make an excess cash flow payment of $7.1 million by April 2,
2010.

We
intend to fund our ongoing operations with cash on hand, cash generated by operations and availability under the senior secured credit facility.

Our
senior secured credit facility provides for a $322.9 million term loan facility ($314.8 million outstanding at January 2, 2010) and a
€35.0 million term loan facility ($48.9 million at January 2, 2010) and a $90.0 million revolving credit facility. At January 2, 2010, we had
$87.2 million of borrowings available under the revolving credit facility ($90.0 million revolving credit facility less $2.8 million of undrawn standby letters of credit). The
term loans mature in July 2014 and the revolving credit facility matures in July 2013. Interest rates under the senior secured credit facility are, at our option, equal to either an alternate base
rate plus a 1.25% margin or the Eurocurrency base rate plus a 2.25% margin. At January 2, 2010, the interest rates on the U.S. dollar term loan and Eurodollar term loan were 2.49% and 2.68%,
respectively.

When
loans are outstanding under the revolving credit facility, we are required to maintain a senior leverage ratio of indebtedness to Adjusted EBITDA of less than 3.00 to 1.00. At
January 2, 2010, our senior leverage ratio was 2.05, and the entire amount of the revolving credit facility was available for borrowing.

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

(in millions)

Fiscal 2009Net loss

$
(117.3
)Add/Subtract:Depreciation and amortization


51.4Interest expense, net


57.1Income taxes


3.5Stock-based compensation expense


2.3Foreign currency gain


(0.7
)Loss on disposal of property, plant, and equipment


0.3Business restructuring


21.3Goodwill impairment


131.5Costs related to the FTC complaint


3.7Other non-cash or non-recurring charges


(0.2
)Adjusted EBITDA

$
152.9


The
calculation of the senior leverage ratio as defined under the senior credit facility as of January 2, 2010 is as follows:

(in millions)

Fiscal 2009Indebtedness(1)

$
313.7Adjusted EBITDA


152.9Actual leverage ratio


2.05x


(1)Calculated
as the sum of outstanding borrowings under the term loan facility, less the amount of cash on hand (not to exceed $50.0 million).


The
senior secured credit agreement contains certain restrictive covenants which, among other things, limit capital spending, 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 default, subject to grace periods, as appropriate. We believe that annual capital expenditure limitations imposed by the senior
credit facilities will not significantly inhibit us from meeting our ongoing capital expenditure needs.

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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. Our cash interest requirements for the next twelve months are estimated to be $48.3 million.

The
83/4% senior subordinated notes ($439.7 million outstanding at January 2, 2010) will mature in May 2012 and are guaranteed by most of our existing and
future domestic restricted subsidiaries, subject to certain exceptions. Except under certain circumstances, the 83/4% senior subordinated notes do not require principal payments prior
to their maturity in 2012. Interest on the 83/4% senior subordinated notes is payable semi-annually in cash. The 83/4% senior subordinated notes contain
customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends and make investments.

As
stated in the credit agreement, the term loans mature in July 2014 and the revolving credit facility matures in July 2013. The 83/4% senior subordinated notes mature on
May 15, 2012. Because the senior subordinated notes are subordinated to the senior secured credit facility, if any amounts are outstanding under the senior subordinated notes at
February 1, 2012, the maturity date for the term loans and the revolving credit facility will be accelerated to February 1, 2012.

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 cash on hand, the expected cash flow to be generated by our operations and the available borrowings under our senior secured credit
facility compared to our anticipated cash requirements for debt service, working capital, cash taxes and capital expenditures and funding requirements for long-term liabilities. We
anticipate that our cash on hand and 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, 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 "Item 1A. Risk Factors" in this Annual Report on Form 10-K.

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.



Environmental obligations are accrued 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. We do not currently anticipate any material loss in excess of the amounts accrued. However, future remediation
expenses may be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the extent and method of remediation, the evolving nature of environmental
regulations, and the availability and application of technology. We do not expect the resolution of such uncertainties to have a material adverse effect on our consolidated financial position or
liquidity. Recoveries of environmental costs from other parties are recognized as assets when their

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receipt
is deemed probable. At January 2, 2010, environmental reserves, which are predominately euro-denominated, were $45.4 million.

In
connection with the acquisition of Membrana in 2002, we recorded a reserve for environmental obligations. The reserve provides for costs to remediate known environmental issues and
operational
upgrades which are required in order for us to remain in compliance with local regulations. The initial estimate and subsequent finalization of the reserve was included in the allocation of purchase
price at the date of acquisition. At January 2, 2010, the environmental reserve for the Membrana facility was $19.9 million. We anticipate that expenditures will be made over the next
seven to ten years.

We
have indemnification agreements for certain environmental matters from Acordis A.G. ("Acordis") and Akzo Nobel N.V. ("Akzo"), the prior owners 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. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through February 2002, the
acquisition date. We will receive indemnification payments under the indemnification agreements as expenditures are made against approved claims. At January 2, 2010 amounts receivable under the
indemnification agreements were $17.6 million.

In
2004, we identified potential environmental contamination at our manufacturing facility in Potenza, Italy. Based on environmental studies and the initial remediation plan presented to
local authorities, we recorded a reserve for environmental obligations. In 2006, we further refined the remediation plan after consultations with local authorities. In December 2008, we implemented a
restructuring plan which included the closure of this manufacturing facility. Based on discussions with local authorities, environmental consultants and internal personnel, we increased the
environmental reserve at Potenza by $18.6 million for the estimated additional costs of environmental remediation and monitoring activities that will be required after closing the facility.
Discussions with the local authorities regarding the required level of remediation are ongoing. At January 2, 2010, the environmental reserve for the Potenza, Italy facility was
$23.6 million. It is reasonably possible that there is exposure to loss in excess of the amount accrued. We cannot estimate the amount of possible liability in excess of the amount accrued due
to a number of factors, including the lack of local regulations, effectiveness of existing remediation technology and the amount of time local authorities may require monitoring procedures. We believe
that additional costs related to this matter, if any, will not have a material effect on our financial condition. We anticipate that expenditures will be made over the next seven to ten years.

In
connection with the acquisition of Microporous, we identified potential environmental contamination at the manufacturing site in Piney Flats, Tennessee. As part of the acquisition,
the seller purchased an environmental insurance policy on behalf of us and also provided indemnification for a portion of the insurance policy deductible. Subsequent to the acquisition, we performed
additional environmental studies and confirmed that environmental contamination was present. At January 2, 2010, the environmental reserve for the Piney Flats, Tennessee facility was
$1.9 million. We recorded the estimated cost of remediation and the related receivables from the insurance company and the seller in applying purchase accounting for the acquisition. We reached
an agreement with the seller in July 2009 which, among other things, released the seller from its obligation to provide indemnification for a portion of the insurance policy deductible. Accordingly,
we reduced the receivable related to this environmental matter by $0.2 million at July 4, 2009. The receivable balance at January 2, 2010 was $1.4 million.

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Contractual Obligations

The following table sets forth our contractual obligations at January 2, 2010. Some of the amounts included in this table are
based on management's estimates and assumptions about these obligations, including their duration, anticipated actions by third parties and other actions. Because these estimates and assumptions are
necessarily subjective, the timing and amount of payments under these obligations may vary from those reflected in this table. For more information on these obligations, see the notes to consolidated
financial statements included in "Item 8. Financial Statements and Supplementary Data."

Payment due by Period(in millions)

Total

2010

2011-2012

2013-2014

ThereafterLong-term debt(1)

$
363.7

$
10.9

$
7.5

$
345.3

$
83/4% senior subordinated notes(2)


439.7





439.7





Cash interest payments(3)


138.9


48.3


77.0


13.6


Operating lease obligations(4)


8.5


1.7


2.8


1.3


2.7Business restructuring(5)


18.2


13.0


3.6


1.2


0.4$
969.0

$
73.9

$
530.6

$
361.4

$
3.1


(1)The
term loan facilities include euro-denominated debt held by one of our foreign subsidiaries. The table assumes that the dollar/euro exchange
rate is the rate at January 2, 2010 for all periods presented and that the debt is held to its stated maturity.(2)The
83/4% senior subordinated notes are due 2012. This senior subordinated debt includes €150.0 million euro denominated debt
held in the U.S. The table assumes that the dollar/euro exchange rate is the rate at January 2, 2010 for all periods presented and that the debt is held to maturity.(3)Includes
cash interest requirements on long-term debt and the 83/4% senior subordinated notes. Interest rates under the term loan
facilities are variable and the table assumes that these rates are the same rates that were in effect at January 2, 2010. For the euro-denominated debt, the table assumes that the
dollar/euro exchange rate is the rate at January 2, 2010 for all periods presented.(4)We
lease certain equipment and facilities under operating leases. Some lease agreements provide us with the option to renew the lease agreement. Our future
operating lease obligations would change if we exercised these renewal options. For euro-denominated leases, the table assumes that the dollar/euro exchange rate is the period average rate
for 2009 for all periods presented.(5)Includes
accrued restructuring costs at January 2, 2010 and other restructuring costs that will be expensed and paid as incurred.(6)As
discussed in the notes to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data," we have
long-term liabilities for pension and postretirement benefits of $70.4 million as of January 2, 2010. Our contributions for these benefit plans are not included in the table
above since the timing and amount of payments are dependent upon many factors, including when an employee retires or leaves the Company, certain benefit elections by employees, return on plan assets,
minimum funding requirements and foreign currency exchange rates. We estimate that contributions to the pension and postretirement plans in fiscal 2010 will be $4.2 million.(7)As
discussed in the notes to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data," we have
environmental obligations and related indemnification receivables. Payments related to these obligations and the related amounts to be indemnified under indemnification agreements are not included in
the table above since the timing of payments and indemnifications is not known. We estimate that we will make payments, net of


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indemnification
amounts, of $10.6 million in fiscal 2010. Payments against environmental obligations in fiscal 2009 were $3.5 million, net of indemnification receipts of
$0.7 million. We expect payments for environmental obligations and amounts received under indemnification agreements will occur over the next seven to ten years. (8)As
discussed in the notes to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data," we have
recorded a liability of $7.6 million for uncertain tax positions. Payments related to this liability are not included in the table above since the timing of the payments is not known.


Off Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future
effect on our financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

New Accounting Standards

See notes to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" for information
related to new accounting standards.

Item 7A.    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.



At January 2, 2010, we had fixed rate debt of $439.7 million and variable rate debt of $363.7 million. To reduce the
interest rate risk inherent in the Company's variable rate debt, the Company may utilize interest rate swap agreements to convert all or a portion of the variable rate debt to a fixed rate obligation.
As of January 2, 2010, there were no outstanding interest rate swap agreements. The pre-tax earnings and cash flow impact resulting from a 100 basis point increase in interest rates
on our variable rate debt, holding other variables constant, would be $3.6 million per year.



Outside of the United States, we maintain assets and operations in Europe and 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
sales are in a foreign currency than our costs, a change in the relative value of the U.S. dollar could have a disproportionate impact on our sales compared to our costs, 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). We have a euro-denominated term loan and senior subordinated notes that effectively hedge our 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,

43

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Table of Contents

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.

The
dollar/euro exchange rates used in our financial statements for the fiscal years ended as set forth below were as follows:

2009

2008

2007Period end rate


1.4317


1.3925


1.4655Period average rate


1.3939


1.4715


1.3694


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 foreign currency
derivatives. As of January 2, 2010, we did not have any foreign currency derivatives outstanding.

44

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Table of Contents

Item 8.    Financial Statements and Supplementary Data

The Company's report of independent registered public accounting firm and consolidated financial statements and related notes appear on
the following pages of this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
of Polypore International, Inc.

We
have audited the accompanying consolidated balance sheets of Polypore International, Inc. as of January 2, 2010 and January 3, 2009 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended January 2, 2010. Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Polypore International, Inc. at
January 2, 2010 and January 3, 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 2, 2010, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Polypore International, Inc.'s internal control over
financial reporting as of January 2, 2010 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 8, 2010 expressed an unqualified opinion thereon.

/s/ERNST & YOUNG LLPCharlotte, North Carolina
March 8, 2010


45

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
of Polypore International, Inc.

We
have audited Polypore International, Inc.'s internal control over financial reporting as of January 2, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Polypore International, Inc.'s management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, Polypore International, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 2, 2010, based on the
COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Polypore
International, Inc. as of January 2, 2010 and January 3, 2009, and the related consolidated statement of operations, shareholders' equity, and cash flows for each of the three
years in the period ended January 2, 2010, and our report issued March 8, 2010 issued an unqualified opinion thereon.

/s/ERNST & YOUNG LLPCharlotte, North Carolina
March 8, 2010


46

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Table of Contents

Polypore International, Inc.        Consolidated balance sheets

(in thousands, except share data)

January 2, 2010

January 3, 2009AssetsCurrent assets:Cash and cash equivalents

$
114,975

$
83,021Accounts receivable, net


107,122


100,409Inventories


72,498


70,398Refundable income taxes





6,277Deferred income taxes


1,791


1,222Prepaid and other


15,373


14,275Total current assets


311,759


275,602Property, plant and equipment, net


388,036


416,796Goodwill


469,319


601,564Intangibles and loan acquisition costs, net


165,971


184,854Environmental indemnification receivable


14,667


17,389Other


2,841


2,649Total assets

$
1,352,593

$
1,498,854Liabilities and shareholders' equityCurrent liabilities:Accounts payable

$
17,570

$
23,806Accrued liabilities


59,835


58,777Income taxes payable


608


Current portion of debt


10,860


3,780Current portion of capital lease obligation





1,495Fair value of interest rate swap agreements





5,477Total current liabilities


88,873


93,335Debt, less current portion


792,573


796,216Capital lease obligation, less current portion





1,824Pension and postretirement benefits, less current portion


66,269


66,266Environmental reserve, less current portion


30,412


40,484Deferred income taxes


74,160


78,815Other


15,961


26,101Commitments and contingenciesShareholders' equity:Preferred stock15,000,000 shares authorized, no shares issued and outstanding





Common stock, $.01 par value200,000,000 shares authorized, 44,417,326 and 44,377,560 issued and outstanding at January 2, 2010 and
January 3, 2009


444


444Paid-in capital


481,248


479,442Retained deficit


(183,998
)

(66,671
)Accumulated other comprehensive loss


(13,349
)

(20,352
)Total Polypore shareholders' equity


284,345


392,863Noncontrolling interest





2,950Total shareholders' equity


284,345


395,813Total liabilities and shareholders' equity

$
1,352,593

$
1,498,854


See notes to consolidated financial statements

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Table of Contents

Polypore International, Inc.        Consolidated statements of operations

(in thousands, except per share data)

Year ended
January 2, 2010

Year ended
January 3, 2009

Year ended
December 29, 2007Net sales

$
516,855

$
610,530

$
534,667Cost of goods sold


321,056


397,210


337,682Business interruption insurance recovery





(2,400
)

Gross profit


195,799


215,720


196,985Selling, general and administrative expenses


100,411


108,304


93,624Business restructuring


21,324


59,887


(886
)Goodwill impairment


131,450





Operating income (loss)


(57,386
)

47,529


104,247Other (income) expense:Interest expense, net


57,097


60,740


80,998Foreign currency and other


(704
)

(2,484
)

1,621Costs related to purchase of 10.5% senior discount notes








30,057Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities








7,17356,393


58,256


119,849Loss from continuing operations before income taxes


(113,779
)

(10,727
)

(15,602
)Income taxes


3,548


6,820


(16,049
)Income (loss) from continuing operations


(117,327
)

(17,547
)

447Income from discontinued operations, net of income taxes





2,360


99Net income (loss)

$
(117,327
)
$
(15,187
)
$
546Net income (loss) per sharebasic and diluted:Continuing operations

$
(2.64
)
$
(0.41
)
$
0.02Discontinued operations





0.06


Net income (loss) per share

$
(2.64
)
$
(0.36
)
$
0.02Weighted average shares outstandingbasic


44,385,552


42,777,531


32,942,214Weighted average shares outstandingdiluted


44,385,552


42,777,531


33,237,230


See
notes to consolidated financial statements

48

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Table of Contents

Polypore International, Inc.        Consolidated statements of shareholders' equity

(in thousands,
except share data)

Shares of
Common
Stock

Common
Stock

Paid-in
Capital

Retained
Deficit

Accumulated
Other
Comprehensive
Loss

Noncontrolling
Interest

Total

Comprehensive
Income (Loss)Balance at December 30, 2006


25,347,470

$
253

$
125,234

$
(51,776
)
$
(4,049
)
$


$
69,662Net income for the year ended December 29, 2007











546








546

$
546Initial public offering, net of offering costs


15,000,000


150


264,687











264,837


Stock-based compensation








706











706


Repurchases of common stock, net of issuances


(20,933
)




(290
)










(290
)

Cumulative effect of adjustments from the adoption of FIN 48











(254
)







(254
)

Adjustment to apply FAS 158, net of income tax benefit of $1,260














(2,920
)




(2,920
)

Purchase of 60% share of DNPET

















2,950


2,950


Additional minimum pension liability, net of income tax expense of $2,954














4,197





4,197


4,197Foreign currency translation adjustment, net of income tax expense of $6,910














(1,153
)




(1,153
)

(1,153
)Balance at December 29, 2007


40,326,537


403


390,337


(51,484
)

(3,925
)

2,950


338,281Comprehensive income for the year ended December 29, 2007






















$
3,590Net loss for the year ended January 3, 2009











(15,187
)







(15,187
)
$
(15,187
)Follow-on offering, net of offering costs


3,750,000


38


84,809











84,847


Stock-based compensation








1,264











1,264


Stock option exercises, net of shares required to satisfy employee tax withholding obligations


299,379


3


1,537











1,540


Tax benefit of stock option exercises








1,495











1,495


Restricted stock grants


1,644




















Unrealized loss on interest rate swap agreements, net of income tax benefit of $2,035














(3,442
)




(3,442
)

(3,442
)Change in net actuarial loss and prior service credit, net of income tax benefit of $330














(663
)




(663
)

(663
)Foreign currency translation adjustment, net of income tax benefit of $3,265














(12,322
)




(12,322
)

(12,322
)Balance at January 3, 2009


44,377,560


444


479,442


(66,671
)

(20,352
)

2,950


395,813Comprehensive loss for the year ended January 3, 2009






















$
(31,614
)Net loss for the year ended January 2, 2010











(117,327
)







(117,327
)
$
(117,327
)Stock-based compensation








2,265











2,265


Stock option exercises, net of shares required to satisfy employee tax withholding obligations


36,602





191











191


Restricted stock grants


3,164




















Acquisition of noncontrolling interest








(650
)







(2,950
)

(3,600
)

Reversal of unrealized loss on interest rate swap agreements, net of income tax expense of $2,035














3,442





3,442


3,442Change in net actuarial loss and prior service credit, net of income tax expense of $1,398














3,197





3,197


3,197Foreign currency translation adjustment, net of income tax expense of $978














364





364


364Balance at January 2, 2010


44,417,326

$
444

$
481,248

$
(183,998
)
$
(13,349
)
$


$
284,345Comprehensive loss for the year ended January 2, 2010






















$
(110,324
)


See notes to consolidated financial statements

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Table of Contents

Polypore International, Inc.        Consolidated statements of cash flows

(in thousands)

Year ended
January 2, 2010

Year ended
January 3, 2009

Year ended
December 29, 2007Operating activities:Net income (loss)

$
(117,327
)
$
(15,187
)
$
546Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation expense


34,616


36,459


31,344Amortization expense


16,779


18,585


17,509Amortization of loan acquisition costs


2,588


2,587


2,793Amortization of debt discount








13,297Stock-based compensation


2,265


1,264


706Loss on disposal of property, plant and equipment


341


1,725


1,236Foreign currency (gain) loss


(747
)

(1,859
)

189Deferred income taxes


(10,406
)

(3,646
)

(32,236
)Business restructuring


21,324


59,887


(886
)Goodwill impairment


131,450





Gain on sale of synthetic paper business





(3,774
)

Costs related to purchase of 10.50% senior discount notes








30,057Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities








7,173Changes in operating assets and liabilities, net of acquisitions:Accounts receivable


(6,174
)

20,065


(7,010
)Inventories


(1,148
)

(5,361
)

8,282Prepaid and other current assets


538


(556
)

1,153Accounts payable and accrued liabilities


(20,156
)

(18,562
)

(13,895
)Income taxes payable


6,919


(885
)

1,901Other, net


(7,731
)

3,944


7,147Net cash provided by operating activities


53,131


94,686


69,306Investing activities:Purchases of property, plant and equipment, net


(16,265
)

(48,013
)

(29,775
)Acquisitions, net of cash acquired


(3,600
)

(85,795
)

(5,475
)Proceeds from sale of synthetic paper business





4,000


Net cash used in investing activities


(19,865
)

(129,808
)

(35,250
)Financing activities:Principal payments on debt and capital lease


(7,041
)

(20,670
)

(372,611
)Proceeds from revolving credit facility





46,000


Payments on revolving credit facility





(46,000
)

Proceeds from stock option exercises


191


1,540


Proceeds from issuance of common stock, net of underwriting fees and other offering related costs





84,847


264,837Proceeds from the senior secured credit facility








370,000Purchase of the 10.50% senior discount notes








(293,666
)Loan acquisition costs








(8,672
)Repurchase of common stock








(320
)Issuance of common stock








30Net cash provided by (used in) financing activities


(6,850
)

65,717


(40,402
)Effect of exchange rate changes on cash and cash equivalents


5,538


(2,508
)

6,568Net increase in cash and cash equivalents


31,954


28,087


222Cash and cash equivalents at beginning of year


83,021


54,934


54,712Cash and cash equivalents at end of year

$
114,975

$
83,021

$
54,934Supplemental cash flow informationCash paid for interest

$
55,573

$
62,380

$
65,444Cash paid for income taxes, net of refunds


7,035


12,585


13,762AcquisitionsFair value of assets acquired

$


$
125,368

$
8,972Liabilities assumed and incurred





39,573


3,497Cash paid





85,795


5,475


See notes to consolidated financial statements

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Table of Contents

Polypore International, Inc.        Notes to consolidated financial statements

1. Description of Business

Polypore International, Inc. (the "Company") is a leading global high technology filtration company that develops, manufactures and markets specialized microporous membranes used
in separation and filtration processes. The Company has a global presence in the major geographic markets of North America, South America, Europe and Asia.

2. Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting
principles and include the accounts of the Company and its subsidiaries. All material intercompany accounts are eliminated in consolidation. Certain amounts previously presented in the consolidated
financial statements for prior periods have been reclassified to conform to current classifications. The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from
those estimates.

Accounting Period

The Company's fiscal year is the 52 or 53-week period ending the Saturday nearest to December 31. The fiscal years
ended January 2, 2010, January 3, 2009 and December 29, 2007 included 52 , 53 and 52 weeks, respectively.

Revenue Recognition

Revenue from product sales is recognized when a firm sales agreement is in place, delivery of the product has occurred and
collectibility of the fixed and determinable sales price is reasonably assured. Amounts billed to customers for shipping and handling are recorded in "Net sales" in the accompanying consolidated
statements of operations. Shipping and handling costs incurred by the Company for the delivery of goods to customers are included in "Cost of goods sold" in the accompanying consolidated statements of
operations. Estimates for sales returns and allowances and product returns are recognized in the period in which the revenue is recorded. Product returns and warranty expenses were not material for
all periods presented.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

51

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

Inventories

Inventories are carried at the lower of cost or market using the first-in, first-out method of accounting and
consist of:

(in thousands)

January 2,
2010

January 3,
2009Raw materials

$
30,466

$
29,266Work-in-process


15,909


12,100Finished goods


26,123


29,032$
72,498

$
70,398


Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed for financial reporting purposes on the
straight-line method over the estimated useful lives of the related assets. The estimated useful lives for buildings and land improvements range from 20 to 40 years and the
estimated useful lives for machinery and equipment range from 5 to 15 years.

Property,
plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group
of assets.

Goodwill, Intangible Assets and Loan Acquisition Costs

Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing unless circumstances
dictate more frequent assessments. The Company performs its annual impairment assessment as of the first day of the fourth quarter of each fiscal year and more frequently whenever events or changes in
circumstances indicate that the fair value of the asset may be less than the carrying amount.

Goodwill
impairment testing is a two-step process performed at the reporting unit level. The Company's reporting units are at the operating segment level. Step one compares
the fair value of the Company's reporting units to their carrying amount. The fair value of the reporting unit is determined using the income approach, corroborated by comparison to market
capitalization and key multiples of comparable companies. Under the income approach, the Company determines fair value based on estimated future cash flows of each reporting unit, discounted by an
estimated weighted-average cost of capital. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including projected
cash flows, discount rates, strategic plans and future market conditions, among others. If assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not achieved
or changes in strategy or market conditions occur, the fair value of the reporting units could change significantly. If the fair value of the reporting unit is greater than its carrying amount, there
is no impairment. If the reporting unit's carrying amount exceeds its fair value, the second step must be completed to measure the amount of impairment, if any. Step two of the goodwill impairment
test compares the implied fair value of the reporting unit's

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

goodwill
with the carrying value of its goodwill. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to the excess.

For
indefinite-lived intangible assets, the fair value of the assets is compared to the carrying value and if the carrying value is greater, an impairment loss is recognized for the
difference.

Intangible
assets with finite lives are amortized over their respective estimated useful lives using the straight-line method. The useful life of customer relationships is
based upon historical customer attrition rates and represents the estimated economic life of those relationships. Loan acquisition costs are amortized over the term of the related debt. Amortization
expense for loan acquisition costs is classified as interest expense. Intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount
may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and
carrying value of the intangible asset.

Research and Development

The cost of research and development is charged to expense as incurred and is included in "Selling, general and administrative
expenses" in the accompanying consolidated statements of operations. Research and development expense was $16,789,000, $18,167,000 and $16,048,000 in 2009, 2008 and 2007, respectively.

Stock-Based Compensation

The Company records stock-based compensation based on the fair value of the award at the grant date. Stock-based compensation expense
is recorded over the requisite service period using the straight-line method for service based awards and in the service period corresponding to the performance target for performance
based awards.

Income Taxes

Deferred tax assets and liabilities are based on temporary differences between the basis of certain assets and liabilities for income
tax and financial reporting purposes. A valuation allowance is recognized if it is more likely than not that a portion of the deferred tax assets will not be realized in the future. The tax effects
from uncertain tax positions are recognized in the financial statements if the position is more likely than not to be sustained upon audit, based on the technical merits of the position. The Company
adopted authoritative guidance for uncertain tax positions on the first day of fiscal 2007 and recognized the cumulative effect of adoption by increasing the existing reserve for uncertain tax
positions by $854,000, recording a deferred tax asset of $643,000, decreasing goodwill by $43,000 and decreasing retained earnings by $254,000.

Foreign Currency Translation

The local currencies of the Company's foreign subsidiaries are the functional currencies. Assets and liabilities of the Company's
foreign subsidiaries are translated into United States dollars at current exchange rates and resulting translation adjustments are reported in "Accumulated other comprehensive loss." Income statement
amounts are translated at weighted average exchange rates prevailing during the period. Transaction gains and losses are included in the determination of net income.

53

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

Net Income (Loss) Per Share

Basic net income (loss) per common share is based on the weighted-average number of common shares outstanding in each year. Diluted net
income (loss) per common share considers the impact of dilution from stock options and unvested restricted stock shares as measured under the treasury stock method. Potential common shares that would
increase net income per share amounts or decrease net loss per share amounts are antidilutive and excluded from the diluted net income (loss) per common share computation. For 2009 and 2008, no stock
options or restricted stock shares were included in the computation of diluted loss per common share because the Company reported net losses.

Accounts Receivable and Concentrations of Credit Risk

Accounts receivable potentially expose the Company to concentrations of credit risk. The Company provides credit in the normal course
of business and performs ongoing credit evaluations on certain of its customers' financial condition, but generally does not require collateral to support such receivables. Accounts receivable, net of
allowance for doubtful accounts, are carried at cost which approximates fair value. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information. The allowance for doubtful accounts was $7,179,000 and $7,742,000 at January 2, 2010 and January 3, 2009, respectively. The
Company believes that the allowance for doubtful accounts is adequate to provide for potential losses resulting from uncollectible accounts. The Company charges accounts receivables off against the
allowance for doubtful accounts when it deems them to be uncollectible on a specific identification basis. Exide Technologies, a customer of the Company's energy storage segment, accounted for
approximately 13%, 14% and 15% of the Company's sales in 2009, 2008 and 2007, respectively.

Fair Value of Financial Instruments

The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and
long-term debt. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates their fair value due to the
short-term maturities of these assets and liabilities. The carrying amount of borrowings under the senior secured credit facilities approximates fair value because the interest rate
adjusts to market interest rates. The fair value of the 8.75% senior subordinated notes, based on a quoted market price, was $434,872,000 at January 2, 2010.

Fair Value Measurements

Authoritative guidance establishes the following hierarchy that prioritizes the inputs to valuation methodologies used to measure fair
value:



54

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

As
of January 2, 2010, the Company did not have any financial assets and liabilities required to be measured at fair value on a recurring basis. See Note 13 for pension
assets measured at fair value on a recurring basis. See Note 7 for goodwill measured at fair value on a nonrecurring basis.

Derivatives

Derivative instruments are recorded at fair value on the balance sheet and changes in fair value are recorded to earnings or to
shareholders' equity through other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. Ineffective portions of
hedges, if any, are recognized in current earnings. From time to time, the Company uses derivative financial instruments to manage interest rate risk and does not
use derivatives for trading or speculative purposes. The Company enters into derivative instruments with high credit quality counterparties and has not experienced any credit losses on derivatives.

Recent Accounting Pronouncements

In September 2006, the FASB issued fair value measurement guidance, which clarifies the definition of fair value, establishes a
framework for measuring the fair value of assets and liabilities under generally accepted accounting principles and expands disclosure about fair value measurements. The provisions relating to
financial assets were adopted in the first quarter of fiscal 2008 and did not have a material impact on the Company's consolidated financial statements. The provisions relating to nonfinancial assets
and nonfinancial liabilities recognized or disclosed at fair value on a nonrecurring basis were adopted as of January 4, 2009, the first day of the Company's 2009 fiscal year and the adoption
of this guidance did not have a material impact on the Company's accompanying consolidated financial statements.

In
December 2007, the FASB issued business combinations guidance, which provides revised standards requiring the acquirer to recognize and measure, at fair value on the acquisition date,
identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. Transaction and restructuring costs generally will be expensed as
incurred. This guidance also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The adoption of this
guidance on January 4, 2009 did not impact the Company's accompanying consolidated financial statements.

In
December 2007, the FASB issued guidance on noncontrolling interests in consolidated financial statements, which establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and
the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Company adopted this guidance on January 4, 2009 and reclassified noncontrolling interests
of $2,950,000 from "Other" non-current liabilities to shareholders' equity.

In
March 2008, the FASB issued guidance on disclosures about derivative instruments and hedging activities, which requires companies with derivative instruments to disclose information
about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect a
company's financial position, financial performance and cash flows. The adoption of this guidance in the first quarter of 2009 did not have a material impact on the Company's consolidated financial
statements.

55

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

In
May 2009, the FASB issued guidance on subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. The adoption did not have a material impact on the Company's consolidated financial statements.

3. Issuance of Common Stock

On June 27, 2007, the Company priced its initial public offering of common stock and signed an underwriting agreement, pursuant to which the underwriters agreed to purchase
15,000,000 shares of its common stock on a firm commitment basis at a price of $19.00 per share. Public trading of the Company's common stock commenced on June 28, 2007. The Company received
net proceeds from the offering of $264,837,000, net of underwriting fees of $17,100,000 and other offering related costs. The net proceeds from the offering and cash on hand were used to purchase and
retire the 10.50% senior discount notes that were outstanding at that time.

In
May 2008, the Company completed a follow-on public offering of 8,031,000 shares of common stock at $24.00 per share, pursuant to which 3,750,000 shares were sold by the
Company and 4,281,000 shares were sold by certain selling shareholders, including certain of the Company's executive officers. The Company received net proceeds from the offering of $84,847,000, net
of underwriting fees of $4,275,000 and other offering related costs. The net proceeds were used to repay outstanding borrowings under the Company's revolving credit facility and for general corporate
purposes.

4. Acquisitions

In December 2009, the Company acquired the remaining 40% noncontrolling interest in Daramic NSG Tianjin PE Separator Co., LTD ("DNPET") for $3,600,000. DNPET is a
lead-acid battery separator manufacturing facility located in Tianjin, China. The purchase price in excess of the carrying amount of the noncontrolling interest was recorded as additional
paid-in capital.

On
February 29, 2008, the Company purchased 100% of the capital stock of Microporous Holding Corporation ("Microporous"). The acquisition broadened the Company's participation in
the deep-cycle industrial battery market, added to its membrane technology portfolio and product breadth, enhanced service to common customers and added cost-effective
production capacity. The purchase price for Microporous stock, including acquisition-related costs, was $26,980,000. The Company also repaid $33,643,000 in indebtedness of Microporous and assumed
$14,235,000 of debt. The assumed debt was repaid subsequent to the acquisition. The purchase agreement provided for additional cash payments to the seller for the three years following the acquisition
contingent upon the acquired business meeting defined earn-out provisions. At January 3, 2009, the Company estimated that the additional purchase price for the fiscal 2008
earn-out was $1,062,000 and allocated this amount to goodwill. In July 2009, the Company reached an agreement with the seller that effectively eliminated the Company's current and future
obligations under the earn-out provision in exchange for releasing the seller from all claims under the original purchase agreement, including its environmental indemnification
obligations. The impact of this agreement on amounts previously recognized in purchase accounting was a net reduction in future cash payments of $795,000. These amounts were reversed through purchase
accounting with a corresponding decrease to goodwill. In addition to the amounts previously recognized, the Company will not have to make earn-out payments that would have been due under
the original agreement for 2009 and 2010.

56

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

4. Acquisitions (Continued)

On
April 1, 2008, the Company acquired the lead-acid battery separator manufacturing assets of Super-Tech Battery Components Pvt. Ltd.,
("Super-Tech") located in Bangalore, India for $1,949,000.

On
May 20, 2008, the Company purchased 100% of the capital stock of Yurie-Wide Corporation ("Yurie-Wide"), a South Korean company, for $23,223,000,
including acquisition-related costs. The acquisition broadened the Company's participation in the lithium battery separator market, added to its membrane technology portfolio and product breadth and
added cost-effective production capacity.

The
results of operations from the 2008 acquisitions described above are included in the Company's energy storage segment from the date of acquisition. The following table summarizes the
aggregate purchase price allocations for these acquisitions based upon the fair values of the assets acquired and liabilities assumed at the date of acquisition.

(in thousands)Current assets

$
16,157Property, plant and equipment


58,807Intangible assets


19,194Goodwill


31,210Total assets acquired


125,368Current liabilities


8,767Debt assumed


14,235Deferred taxes and other liabilities


16,571Total liabilities assumed


39,573Net assets acquired

$
85,795


The
excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill. The goodwill is not deductible for income tax purposes.

Pro
forma information is not presented because the impact of these acquisitions, either individually or in the aggregate, on the Company's consolidated results of operations for the year
ended January 3, 2009 is not considered to be significant.

5. Property, Plant and Equipment

Property, plant and equipment consist of:

(in thousands)

January 2,
2010

January 3,
2009Land

$
19,182

$
18,689Buildings and land improvements


131,722


123,799Machinery and equipment


398,984


402,677Construction in progress


11,891


14,733561,779


559,898Less accumulated depreciation


173,743


143,102$
388,036

$
416,796


57

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

6. Intangibles, Loan Acquisition and Other Costs

Intangibles, loan acquisition and other costs consist of:

January 2, 2010

January 3, 2009(in thousands)

Weighted
Average
Life (years)

Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
AmortizationIntangible and other assets subject to amortization:Customer relationships


18

$
194,479

$
63,903

$
194,187

$
52,220Technology and patents


9


42,831


28,107


42,371


22,798Loan acquisition costs


7


19,087


10,721


19,087


8,133Supply agreement


5








9,070


8,869Trade names


15


400


49


400


22Intangible assets not subject to amortization:Trade names


Indefinite


11,954





11,781


$
268,751

$
102,780

$
276,896

$
92,042


The
supply agreement expired on December 31, 2009.

Amortization
expense, including amortization of loan acquisition costs classified as interest expense, was $19,367,000 in 2009, $21,172,000 in 2008 and $20,302,000 in 2007. The Company's
estimate of amortization expense for the five succeeding years is as follows:

(in thousands)2010

$
19,1852011


19,0602012


14,9122013


13,1512014


12,848


58

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

7. Goodwill

The changes in carrying amount of goodwill were as follows:

(in thousands)

Energy
Storage

Separations
Media

TotalGoodwill

$
357,370

$
211,414

$
568,784Accumulated impairment charges








Balance as of December 29, 2007


357,370


211,414


568,784Acquisitions


32,005





32,005Income tax adjustments


(90
)

865


775Balance as of January 3, 2009


389,285


212,279


601,564Purchase accounting adjustment related to Microporous acquisition


(795
)




(795
)Goodwill impairment


(131,450
)




(131,450
)Balance as of January 2, 2010

$
257,040

$
212,279

$
469,319Goodwill

$
388,490

$
212,279

$
600,769Accumulated impairment charges


(131,450
)




(131,450
)Balance as of January 2, 2010

$
257,040

$
212,279

$
469,319


The
Company completed its annual goodwill impairment assessment as of the first day of the fourth quarter. Step one of the goodwill impairment test indicated that the carrying value of
the lead-acid reporting unit of the energy storage segment exceeded its fair value. The fair value of the lead-acid reporting unit was estimated using the expected present
value of future cash flows, which have declined due to the recent economic environment and lower estimated future lead-acid battery separator demand in North America. Step two of the goodwill
impairment test requires the Company to allocate the fair value of the lead-acid reporting unit to all of its assets and liabilities. The remaining fair value after this allocation
represents the implied fair value of goodwill for the reporting unit. The Company determined that the carrying value of the lead-acid reporting unit's goodwill exceeded its implied fair
value and recorded a goodwill impairment charge of $131,450,000. Goodwill impairment was measured on a nonrecurring basis using the income approach, which utilizes inputs classified as level three in
the fair value hierarchy.

8. Accrued Liabilities

Accrued liabilities consist of:

(in thousands)

January 2,
2010

January 3,
2009Compensation expense and other fringe benefits

$
16,104

$
21,447Current portion of environmental reserve


14,985


8,736Accrued interest


5,092


5,291Current portion of business restructuring


7,540


3,932Taxes other than income


1,684


2,374Other


14,430


16,997$
59,835

$
58,777


59

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

9. Debt

Debt, in order of priority, consists of:

(in thousands)

January 2,
2010

January 3,
2009Senior credit facilities:Revolving credit facility

$


$
Term loan facilities


363,678


366,0578.75% senior subordinated notes


439,755


433,875Other





64803,433


799,996Less current maturities


10,860


3,780Long-term debt

$
792,573

$
796,216


On
July 3, 2007, the Company refinanced the senior secured credit facility with a new senior secured credit facility. The senior secured credit facility provides for a
$322,894,000 term loan facility, a €35,000,000 term loan facility and a $90,000,000 revolving credit facility. At January 2, 2010, the Company had $87,151,000 of borrowings
available under the revolving credit facility ($90,000,000 revolving credit facility less $2,849,000 of undrawn standby letters of credit). Interest rates under the senior secured credit facilities
are, at the Company's option, equal to either an alternate base rate plus a 1.25% margin or the Eurocurrency base rate plus a 2.25% margin. The senior secured credit facility is subject to limitations
on capital spending and, when loans are outstanding under the revolving credit facility, a maximum net senior leverage ratio. The Company capitalized loan acquisition costs of $8,672,000 in connection
with the refinancing and wrote-off loan acquisition costs of $7,173,000 associated with the previous senior secured credit facility.

Under
the terms of the credit agreement, the Company is required to make a mandatory prepayment of term loans within ninety days of its fiscal year-end based on a specified
percentage of excess cash flow, as defined in the credit agreement. As of January 2, 2010, the Company is required to make an excess cash flow payment of $7,130,000 by April 2, 2010.
This amount has been included in the current portion of debt in the accompanying consolidated balance sheets.

The
Company's domestic subsidiaries guarantee indebtedness under the credit agreement. Substantially all assets of the Company and its domestic subsidiaries and a first priority pledge
of 66% of the voting capital stock of its foreign subsidiaries secure indebtedness under the credit agreement. The Company's ability to pay dividends on its common stock is limited under the terms of
the credit agreement.

In
2004, the Company issued $225,000,000 8.75% senior subordinated dollar notes due 2012 and €150,000,000 8.75% senior subordinated euro notes due 2012. Interest is
payable semi-annually on May 15 and November 15. The notes are subordinated to all of the Company's existing and future senior debt and will rank senior to any future
subordinated debt. The Company's domestic subsidiaries, subject to certain exceptions, guarantee the notes.

In
2004, the Company issued 10.5% senior discount notes due 2012. In July 2007, the Company used the proceeds from the initial public offering and cash on hand to purchase and retire the
10.5% senior discount notes. The purchase of the notes was accomplished by a tender offer and subsequent redemption of the notes not tendered. The total purchase price for the notes was $293,666,000,

60

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

9. Debt (Continued)

consisting
of principal of $264,144,000 and tender and redemption premiums of $29,522,000. As a result of the purchase of the notes, the Company incurred a $30,057,000 charge to income, consisting of
redemption and tender premiums of $29,522,000 and the write-off of unamortized loan acquisition costs of $535,000.

Minimum
scheduled principal repayments of debt are as follows:

(in thousands)2010

$
10,8602011


3,7302012


443,4852013


3,7302014


341,628$
803,433


As
stated in the credit agreement, the term loans mature in July 2014 and the revolving credit facility matures in July 2013. The 8.75% senior subordinated notes mature on May 15,
2012. Because the senior subordinated notes are subordinated to the senior secured credit facility, if any amounts are outstanding under the senior subordinated notes at February 1, 2012, the
maturity dates for the term loans and the revolving credit facility will be accelerated to February 1, 2012.

10. Derivatives and Hedging Transactions

To reduce the interest rate risk inherent in the Company's variable rate debt, the Company may utilize interest rate swap agreements to convert all or a portion of the variable rate debt
to a fixed rate obligation. In January 2008, the Company entered into two interest rate swap agreements to effectively fix the interest rate on a portion of its term debt. The interest rate swap
agreements had notional amounts of $50,000,000 and $200,000,000 and expired on June 30, 2009 and December 31, 2009, respectively. The Company designated these swap agreements as cash
flow hedges with changes in fair value, net of income taxes, recorded to "Accumulated other comprehensive loss" in the accompanying consolidated balance sheets.

The
Company has euro-denominated senior subordinated notes (€150,000,000, or $214,755,000, at January 2, 2010) held in the U.S. that effectively hedge
a portion of the Company's net investment in its European subsidiaries. The translation of the euro-denominated notes held in the U.S. results in foreign currency gains or losses that are
included in "Accumulated other comprehensive loss" in the accompanying consolidated balance sheets.

The
impact of changes in the fair value of the interest rate swap agreements and the translation of euro-denominated senior subordinated notes on other comprehensive income
is as follows:

Gain (Loss) Recognized in Other
Comprehensive IncomeTwelve Months Ended(in thousands)

January 2, 2010

January 3, 2009Interest rate swap agreements

$
3,442

$
(3,442
)Euro-denominated senior subordinated notes


(5,880
)

10,950


61

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

10. Derivatives and Hedging Transactions (Continued)

For
the interest rate swap agreements, the Company recognized the difference between the fixed interest rate on the swap agreements and the variable interest rate on the term debt as
interest expense. The impact of the interest rate swap agreements on interest expense is as follows:

Gain (Loss) Recognized in IncomeTwelve Months Ended(in thousands)

January 2, 2010

January 3, 2009Interest rate swap agreements

$
(6,683
)
$
(1,015
)


11. Commitments and Contingencies

Leases

The Company leases certain equipment and facilities under operating leases. Rent expense was $1,508,000, $1,534,000 and $1,262,000 in
2009, 2008 and 2007, respectively.

Future
minimum operating lease payments at January 2, 2010 are:

(in thousands)2010

$
1,6732011


1,5732012


1,2202013


7102014


543$
5,719


In
October 2009, the Company exercised an early buyout option for certain machinery and equipment under a capital lease for $3,904,000.

Raw Materials

The Company employs a global purchasing strategy to achieve pricing leverage on its purchases of major raw materials. Accordingly, the
Company purchases the majority of each type of raw material from one primary supplier with additional suppliers having been qualified to supply the Company if an interruption in supply were to occur.
The Company believes that alternative sources of raw materials are readily available and the loss of any particular supplier would not have a material impact on the results of operations. However, the
loss of raw material supply sources could, in
the short term, adversely affect the Company's business until alternative supply arrangements were secured.

Collective Bargaining Agreements

On January 2, 2010, approximately 40% of the Company's employees are represented under collective bargaining agreements. A
majority of those employees are located in Germany and France and are represented under industry-wide agreements that are subject to national and local government regulations. Labor unions
also represent our employees in Owensboro, Kentucky and Corydon, Indiana.

62

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

11. Commitments and Contingencies (Continued)

FTC Complaint

On September 9, 2008, the United States Federal Trade Commission ("FTC") issued an administrative complaint against the Company
alleging that its actions and the acquisition of Microporous have substantially lessened competition in North American markets for lead-acid battery separators. The Company filed an answer
to the complaint on October 15, 2008 denying the material allegations of the complaint. The matter was presented before an Administrative Law Judge ("ALJ") of the FTC and the hearing concluded
on June 12, 2009. In October 2009, the ALJ granted the Company's request to re-open the record to take additional evidence. On February 22, 2010, the FTC's ALJ issued an
initial decision recommending to the Commission that it order the Company to divest substantially all of the acquired Microporous assets, which includes the manufacturing facilities located in Piney
Flats, Tennessee and Feistritz, Austria and restore the competitive environment to that which existed prior to the acquisition.

The
Company believes that the initial decision is inconsistent with the law and the facts presented at the hearing and that the Microporous acquisition is and will continue to be
beneficial to its customers and the industry. Therefore, the Company intends to continue to vigorously defend its position and to appeal the decision. It is not possible, however, to predict with
certainty whether the Company will be successful in the appellate process. If the FTC and the courts affirm the ALJ's initial decision, then the Company may be required to divest some or all of the
assets acquired in the Microporous acquisition and may be subject to some prospective restrictions on its future conduct. The Company believes that a
final judicial resolution to the challenge by the FTC to the Microporous acquisition could take several years.

The
Company believes that the final resolution of this matter will not have a material adverse impact on its business, financial condition or results of operations.

Other

The Company is from time to time subject to various claims and other matters arising out of the normal conduct of business. The amount
recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional information that becomes available. Actual costs to
be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures. Subject to the imprecision in estimating future contingent liability costs,
the Company believes that based on present information, it is unlikely that a liability, if any, exists that would have a materially adverse effect on the consolidated operating results, financial
position or cash flows of the Company.

63

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

12. Income Taxes

Significant components of deferred tax assets and liabilities consist of:

(in thousands)

January 2,
2010

January 3,
2009Deferred tax assets:Pension and postretirement benefits

$
18,074

$
18,414Foreign tax credits


1,850


1,850State tax credits


1,178


1,642Net operating loss carryforwards


43,987


41,171Environmental reserve


9,588


7,856Other


7,061


9,753Total deferred tax assets


81,738


80,686Valuation allowance


(16,826
)

(15,423
)Net deferred tax assets


64,912


65,263Deferred tax liabilities:Property, plant and equipment


(75,569
)

(75,849
)Goodwill and intangibles


(56,009
)

(61,983
)Other


(5,703
)

(5,024
)Total deferred tax liabilities


(137,281
)

(142,856
)Net deferred taxes

$
(72,369
)
$
(77,593
)


In
2009, the valuation allowance increased by $1,403,000 due to increased net operating losses in foreign countries.

The
Company had the following uncertain tax positions:

(in thousands)

January 2,
2010

January 3,
2009Balance at beginning of the year

$
8,040

$
11,308Increase related to current year positions





2,533Increase related to prior year positions


62


97Decrease related to settlements with taxing authorities


(474
)

(5,797
)Other





(101
)Balance at end of the year

$
7,628

$
8,040


The
Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense in its financial statements. As of January 2, 2010
and January 3, 2009, the Company had accrued for potential payment of penalties and interest of $398,000 and $336,000, respectively.

The
Company has operations in North America, Europe and Asia and files tax returns in numerous tax jurisdictions. The Company is not subject to income tax adjustments in the U.S. for tax
years before 2005 and in foreign jurisdictions for tax years prior to 2000.

64

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

12. Income Taxes (Continued)

In
2008, the U.S. tax authority substantially completed its audit of the Company's Federal income tax returns for tax years 2003 and 2004. In 2008, the Company reclassified $5,484,000
from its reserve for uncertain tax positions (included in "Other" non-current liabilities in the accompanying balance sheet) to non-current deferred income tax liabilities to
reflect the effective settlement of tax issues in these tax years. In 2009, the Company collected refunds of approximately $5,430,000 in final settlement of the U.S. audit and approximately $1,311,000
in final settlement of an audit in Austria relating to the 2005 tax year.

Although
the outcome of tax audits is uncertain, management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such matters.
Because audit outcomes and the timing of audit settlements are subject to significant uncertainty, the Company cannot make a reasonable estimate of the impact on earnings in the next twelve months
from these audits. Management is not aware of any issues for open tax years that upon final resolution will have a material adverse effect on the Company's financial position, cash flows or
consolidated operating results. The Company has been notified that tax audits will be conducted on one of its German subsidiaries for the tax years 2001, 2002 and 2003 and its Italian subsidiary for
tax year 2006.

At
January 2, 2010, the Company has net operating loss carryforwards in the United States of $101,084,000 that expire beginning in 2026. The Company also has foreign net operating
loses of $27,082,000 million that expire at various dates beginning in 2015. The Company utilized approximately $20,515,000 of its foreign net operating losses during 2009.

Deferred
taxes are reflected in the consolidated balance sheet as follows:

(in thousands)

January 2,
2010

January 3,
2009Current deferred tax asset

$
1,791

$
1,222Non-current deferred tax liability


(74,160
)

(78,815
)Net deferred taxes

$
(72,369
)
$
(77,593
)


Loss
from continuing operations before income taxes includes the following components:

Year Ended(in thousands)

January 2,
2010

January 3,
2009

December 29,
2007United States

$
(168,493
)
$
4,610

$
(59,902
)Foreign


54,714


(15,337
)

44,300$
(113,779
)
$
(10,727
)
$
(15,602
)


65

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

12. Income Taxes (Continued)

Income
tax expense (benefit) from continuing operations consists of:

Year Ended(in thousands)

January 2,
2010

January 3,
2009

December 29,
2007Current:U.S. taxes on domestic income

$
501

$
850

$
2,592Foreign taxes


13,453


11,010


13,615Total current


13,954


11,860


16,207Deferred:U.S. taxes on domestic income


(14,158
)

1,813


(22,232
)Foreign taxes


3,752


(6,853
)

(10,024
)Total deferred


(10,406
)

(5,040
)

(32,256
)$
3,548

$
6,820

$
(16,049
)


Income
taxes on continuing operations at the Company's effective tax rate differed from income taxes at the statutory rate as follows:

Year Ended(in thousands)

January 2,
2010

January 3,
2009

December 29,
2007Computed income taxes at the expected statutory rate

$
(39,823
)
$
(3,754
)
$
(5,465
)State and local taxes


(569
)

182


(1,337
)Foreign taxes


(2,931
)

(2,081
)

(3,439
)Changes in tax laws








(8,529
)Valuation allowance


829


9,866


(150
)Goodwill impairment


44,808





Provision for uncertain tax positions


61


2,407


2,605Other


1,173


200


266Income tax expense (benefit)

$
3,548

$
6,820

$
(16,049
)


Taxes
have been provided on earnings distributed and expected to be distributed by the Company's foreign subsidiaries. All other foreign earnings are undistributed and
considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income
tax liability is not practicable because of the complexities associated with its hypothetical calculations; however, unrecognized foreign tax credit carryforwards would be available to reduce some
portion of the U.S. liability.

The
Company has entered into an agreement with the Board of Investment in Thailand under which the Company's Thailand subsidiary is exempt from that country's corporate income tax on
income derived from manufacturing activities. Subject to certain limitations, this agreement provides for 100% of the Company's income from manufacturing activities in Thailand to be
tax-free through 2010

66

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

12. Income Taxes (Continued)

and
portions of income to be tax-free for another five years. The income tax benefits recognized from this tax holiday were $2,094,000, $1,969,000 and $1,700,000 in 2009, 2008 and 2007,
respectively.

13. Employee Benefit Plans

Pension and Other Postretirement Benefits

The Company and its subsidiaries sponsor multiple defined benefit pension plans and an other postretirement benefit plan. The Company's
pension plans are based in subsidiaries located outside of the United States. The following table sets forth the funded status of the defined benefit pension plans and the postretirement plan.

Pension Plans

Other Postretirement
Benefits(in thousands)

January 2,
2010

January 3,
2009

January 2,
2010

January 3,
2009Change in Benefit ObligationBenefit obligation at beginning of year

$
(88,834
)
$
(88,743
)
$
(2,181
)
$
(2,162
)Service cost


(1,669
)

(2,344
)

(13
)

(15
)Interest cost


(4,845
)

(4,433
)

(131
)

(119
)Participant contributions








(29
)

(37
)Actuarial gain (loss)


4,029


1,672


(263
)

(121
)Benefit payments


3,309


2,941


116


222Plan amendments





(550
)




Foreign currency translation and other


(2,449
)

2,623





51Benefit obligation at end of year


(90,459
)

(88,834
)

(2,501
)

(2,181
)Change in Plan AssetsFair value of plan assets at beginning of year


21,170


23,915





Actual return on plan assets


2,047


(1,817
)




Company contributions


2,066


2,278


87


185Participant contributions








29


37Benefit payments


(3,309
)

(2,941
)

(116
)

(222
)Foreign currency translation and other


617


(265
)




Fair value of plan assets at end of year


22,591


21,170





Funded status at end of year

$
(67,868
)
$
(67,664
)
$
(2,501
)
$
(2,181
)Amounts recognized in the consolidated balance sheet consist of:Accrued liabilities

$
(3,922
)
$
(3,388
)
$
(178
)
$
(191
)Pension and postretirement benefits liabilities


(63,946
)

(64,276
)

(2,323
)

(1,990
)Net amount recognized

$
(67,868
)
$
(67,664
)
$
(2,501
)
$
(2,181
)Amounts recognized in accumulated other comprehensive loss (pre-tax) consist of:Net actuarial loss

$
1,548

$
6,450

$
405

$
142Prior service credit


(365
)

(409
)




Net amount recognized

$
1,183

$
6,041

$
405

$
142


67

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

13. Employee Benefit Plans (Continued)

The
accumulated benefit obligation for all defined benefit pension plans was $84,899,000 and $82,849,000 at January 2, 2010 and January 3, 2009,
respectively. Each of the Company's defined benefit pension plans had accumulated benefit obligations in excess of plan assets at January 2, 2010.

The
following table provides the components of net periodic benefit cost:

Pension PlansYear ended(in thousands)

January 2,
2010

January 3,
2009

December 29,
2007Service cost

$
1,669

$
2,344

$
2,171Interest cost


4,845


4,433


3,865Expected return on plan assets


(1,077
)

(993
)

(1,033
)Amortization of prior service cost


(55
)

(82
)

(76
)Recognized net actuarial (gain)/loss


(50
)

851


404Settlement gain, net








(59
)Curtailment gain








(461
)Net periodic benefit cost

$
5,332

$
6,553

$
4,811




Other Postretirement BenefitsYear ended(in thousands)

January 2,
2010

January 3,
2009

December 29,
2007Service cost

$
13

$
15

$
67Interest cost


131


119


135Recognized net actuarial loss








18Net periodic benefit cost

$
144

$
134

$
220


Weighted
average assumptions used to determine the benefit obligation and net periodic benefit costs consist of:

Pension Plans

Other Postretirement
BenefitsWeighted average assumptions as of the end of year

January 2,
2010

January 3,
2009

January 2,
2010

January 3,
2009Discount rate used to determine the benefit obligation


6.00
%

5.70
%

5.75
%

6.25
%Discount rate used to determine the net periodic benefit costs


5.70
%

5.26
%

6.25
%

6.00
%Expected return on plan assets


4.99
%

4.97
%

N/A


N/ARate of compensation increase


2.52
%

2.52
%

N/A


N/A


The
Company's pension plan assets are invested to obtain a reasonable long-term rate of return at an acceptable level of investment risk. Risk tolerance is established
through consideration of plan liabilities, plan funded status and corporate financial condition. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio
reviews, liability measurements and asset/liability studies. The Company's expected return on plan assets is based on historical market

68

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

13. Employee Benefit Plans (Continued)

data
for each asset class. The assets in the pension plans are diversified across equity and fixed income investments, except for certain pension plans funded by insurance contracts. The investment
portfolio has target allocations of approximately 23% equity and 77% fixed income. At January 2, 2010, the actual portfolio allocation was 8% equity, 64% bonds and 28% insurance contracts. The
equity securities are considered level one securities and primarily include investments in European companies. The bonds, which are primarily investment grade European bonds, and insurance contracts
are level two securities.

The
estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit costs during 2010 are as follows:

(in thousands)

Pension PlansNet actuarial gain

$
(25
)Prior service credit


(56
)$
(81
)


The
weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate for the medical plan) is 8.5% for 2010, and is
assumed to trend down to 4.8% by 2026 and thereafter. A one-percentage-point change in the health care trend rates would not have a material effect on the post-retirement
benefit obligation.

In
2010, the Company expects to contribute $3,988,000 and $178,000 to its pension and postretirement benefit plans, respectively.

The
estimated future benefit payments expected to be paid for each of the next five years and the sum of payments expected for the next five years thereafter are:

(in thousands)

Pension Plans

Other
Postretirement
Benefits2010

$
5,552

$
1782011


4,707


1552012


3,773


1472013


3,964


1342014


4,078


1472015 - 2019


24,877


792


401(k) Plans

The Company sponsors a 401(k) plan for U.S. salaried employees. Salaried employees are eligible to participate in the plan on
January 1, April 1, July 1 or October 1 after their date of employment. Under the plan, employer contributions are defined as 5% of a participant's base salary plus a
matching of employee contributions allowing for a maximum matching contribution of 3% of a participant's earnings. The cost of the plan recognized as expense was $2,661,000, $2,545,000 and $2,273,000
in 2009, 2008 and 2007, respectively.

The
Company sponsors a 401(k) plan for U.S. hourly employees subject to collective bargaining agreements. Depending on the applicable collective bargaining agreement, employer basic
contributions

69

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

13. Employee Benefit Plans (Continued)

are
defined as 3.00% or 3.50% of a participant's base earnings plus a matching of employee contributions allowing for a maximum matching contribution of 3.80% or 3.40% of a participant's earnings. The
Company also makes a separate contribution for employees hired prior to January 1, 2000 and who are not eligible for the postretirement benefit plan. The cost of the plan recognized as expense
was $503,000, $546,000 and $707,000 in 2009, 2008 and 2007, respectively.

14. Environmental Matters

Environmental obligations are accrued 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. The Company does not currently anticipate any material loss in excess of the amounts accrued. However, the Company's future remediation expenses
may be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the extent and method of remediation, the evolving nature of environmental regulations, and the
availability and application of technology. The Company does not expect the resolution of such uncertainties to have a material adverse effect on its consolidated financial position or liquidity.
Recoveries of environmental costs from other parties are recognized as assets when their receipt is deemed probable. Environmental reserves, which are predominately euro-denominated, were
$45,397,000 and $49,220,000 as of January 2, 2010 and January 3, 2009, respectively.

In
connection with the acquisition of Membrana GmbH ("Membrana") in 2002, the Company recorded a reserve for environmental obligations. 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 initial estimate and subsequent finalization of the
reserve was included in the allocation of purchase price at the date of acquisition. The environmental reserve for the Membrana facility was $19,852,000 and $22,627,000 at January 2, 2010 and
January 3, 2009, respectively. The Company anticipates that expenditures will be made over the next seven to ten years.

The
Company has indemnification agreements for certain environmental matters from Acordis A.G. ("Acordis") and Akzo Nobel N.V. ("Akzo"), the prior owners 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. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through
February 2002, the acquisition date. The Company will receive indemnification payments under the indemnification agreements as expenditures are made against approved claims. At January 2, 2010
and January 3, 2009, amounts receivable under the indemnification agreements were $17,618,000 and $17,867,000, respectively. The current portion of the indemnification receivable is included in
"Prepaid and other" in the accompanying consolidated balance sheets.

70

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

14. Environmental Matters (Continued)

In 2004, the Company identified potential environmental contamination at its manufacturing facility in Potenza, Italy. Based on environmental studies and the initial remediation plan
presented to local authorities, the Company recorded a reserve for environmental obligations. In 2006, the Company further refined the remediation plan after consultations with local authorities. In
December 2008, the Company implemented a restructuring plan which included the closure of this manufacturing facility. Based on discussions with local authorities, environmental consultants and
internal personnel, the Company increased the environmental reserve at Potenza as part of a restructuring charge by $18,560,000 for the estimated additional costs of environmental remediation and
monitoring activities that will be required after closing the facility. The increase in the environmental reserve was included
in the 2008 "Business restructuring" charge in the accompanying consolidated statements of operations. Discussions with the local authorities regarding the required level of remediation are ongoing.
The environmental reserve for the Potenza, Italy facility was $23,596,000 and $23,502,000 at January 2, 2010 and January 3, 2009, respectively. It is reasonably possible that there is
exposure to loss in excess of the amount accrued. The Company cannot estimate the amount of possible liability in excess of the amount accrued due to a number of factors, including the lack of local
regulations, effectiveness of existing remediation technology and the amount of time local authorities may require monitoring procedures. The Company believes that additional costs related to this
matter, if any, will not have a material adverse effect on the financial condition of the Company. The Company anticipates that expenditures will be made over the next seven to ten years.

In
connection with the acquisition of Microporous, the Company identified potential environmental contamination at the manufacturing site in Piney Flats, Tennessee. As part of the
acquisition, the seller purchased an environmental insurance policy on behalf of the Company and also provided indemnification for a portion of the insurance policy deductible. Subsequent to the
acquisition, the Company performed additional environmental studies and confirmed that environmental contamination was present. The environmental reserve for the Piney Flats, Tennessee facility was
$1,949,000 and $3,076,000 at January 2, 2010 and January 3, 2009, respectively. The Company recorded the estimated cost of remediation and the related receivables from the insurance
company and the seller in applying purchase accounting for the acquisition. As discussed in more detail in Note 4, the Company reached an agreement with the seller in July 2009 which, among
other things, releases the seller from its obligation to provide indemnification for a portion of the insurance policy deductible. Accordingly, the Company reduced the receivable related to this
environmental matter by $219,000. The receivable balance at January 2, 2010 and January 3, 2009 was $1,449,000 and $2,522,000, respectively. The current portion of the receivable is
included in "Prepaid and other" in the accompanying consolidated balance sheets.

15. Business Restructuring

2009 Restructuring Plan

The North American market for lead-acid battery separators has significant excess capacity and a highly consolidated
customer base. In addition, demand for lead-acid battery separators has continued to be negatively impacted by the recent economic environment. As a result of these factors and management
estimates based on recent discussions with customers about future demand requirements in North America, the Company implemented a restructuring plan in its energy storage segment to better align
lead-acid battery separator production capacity with demand in North America.

71

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

15. Business Restructuring (Continued)

The
restructuring plan includes idling capacity and reducing headcount at the Company's manufacturing facility in Owensboro, Kentucky. The total estimated cost of the plan is expected to
be approximately $26,233,000, including estimated cash charges of $6,337,000 for severance and other exit costs and a non-cash impairment charge of $19,896,000 for buildings and equipment.
The Company began implementing the plan in the fourth quarter of 2009 and recorded a restructuring charge of $20,101,000. The restructuring plan includes severance costs of approximately $442,000, of
which $132,000 was recognized in 2009 and the remainder will be recognized in 2010. The Company estimates that other exit costs, consisting of costs associated with idling the Owensboro facility, are
expected to be $5,895,000, of which $73,000 has been recognized in 2009 and the remainder will be recognized over the next three years. The timing, scope and costs of the restructuring plan are
subject to change as the Company implements the plan and continues to evaluate its business needs and costs.

2008 Restructuring Plan

A supply contract between the Company's lead-acid battery separator business and a large customer expired on
December 31, 2008 and was not renewed. In response, the Company implemented a restructuring plan in the fourth quarter of 2008 for its energy storage segment to align lead-acid
battery separator production capacity with demand, reduce costs and position the Company to meet future growth opportunities.

The
plan included closing the Company's facility in Potenza, Italy, streamlining production at the Company's facility in Owensboro, Kentucky and reducing selling, general and
administrative resources associated with the lead-acid battery separator business. The total cost of the
restructuring plan, including environmental costs recorded in the environmental reserve of $18,560,000, is expected to be approximately $62,456,000, of which $61,165,000 has been recognized. The
restructuring plan included the termination of production employees at Potenza, Italy and Owensboro, Kentucky and certain selling, general and administrative employees. During 2009, the Company
reduced the estimated cost of severance and benefits and related accrual by $826,000 to reflect actual costs expected to be incurred. After this adjustment, the total cost of severance and benefits is
expected to be approximately $9,581,000. The Company estimates that other costs, consisting primarily of costs associated with closing the Potenza, Italy facility, are expected to be approximately
$5,386,000, of which $4,095,000 has been recognized through fiscal 2009 and the remainder will be recognized over the next two years. The restructuring charge also included a non-cash
impairment charge of $28,929,000 for buildings and machinery and equipment that will no longer be used in Potenza, Italy. The timing, scope and costs of these restructuring actions are subject to
change as the Company implements the plan and continues to evaluate its business needs and costs.

2006 Restructuring Plan

In December 2006, the Company's separations media segment exited the production of cellulosic membranes and realigned the cost
structure at its Wuppertal, Germany facility. The total cost of the plan, all of which has been incurred, was $33,753,000, consisting of a $17,492,000 non-cash impairment charge for
buildings and equipment, $10,466,000 for employee layoffs and $5,795,000 for other costs related to the shutdown of portions of the Wuppertal facility.

72

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

15. Business Restructuring (Continued)

Restructuring
reserve activity during 2009 consists of:

(in thousands)

Balance at
January 3,
2009

Restructuring
Charges

Non-Cash
Charges

Cash
Payments

Foreign
Currency
Translation

Balance at
January 2,
20102009 Restructuring Plan:Severance and benefits

$


$
132

$


$


$


$
132Impairment





19,896


(19,896
)







Other





73





(73
)







20,101


(19,896
)

(73
)




1322008 Restructuring Plan:Severance and benefits


9,847


(826
)




(1,899
)

190


7,312Other


829


2,049





(2,245
)

(16
)

61710,676


1,223





(4,144
)

174


7,9292006 Restructuring Plan:Severance and benefits


2,884








(284
)

74


2,674Other


492








(472
)

(20
)

3,376








(756
)

54


2,674Total

$
14,052

$
21,324

$
(19,896
)
$
(4,973
)
$
228

$
10,735


Restructuring
reserve activity during 2008, excluding restructuring charges for environmental costs, consists of:

(in thousands)

Balance at
December 29,
2007

Restructuring
Charges

Non-Cash
Charges

Cash
Payments

Foreign
Currency
Translation

Balance at
January 3,
20092008 Restructuring Plan:Severance and benefits

$


$
10,406

$


$
(1,430
)
$
871

$
9,847Impairment





28,929


(28,929
)







Other





2,047





(1,255
)

37


829


41,382


(28,929
)

(2,685
)

908


10,6762006 Restructuring Plan:Severance and benefits


3,548








(520
)

(144
)

2,884Other


1,288








(761
)

(35
)

4924,836








(1,281
)

(179
)

3,3762005 Restructuring Plan:Severance and benefits


404


(55
)




(334
)

(15
)

Total

$
5,240

$
41,327

$
(28,929
)
$
(4,300
)
$
714

$
14,052


In
the accompanying consolidated balance sheets, the current portion of the reserve for business restructuring costs is recorded in "Accrued liabilities" and the non-current
portion is recorded in "Other" non-current liabilities.

73

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

16. Business Interruption Insurance Recovery

On September 30, 2007, a customer in the Company's energy storage segment experienced a fire at one of their facilities. The Company filed a business interruption insurance claim
with its insurance provider and recovered $2,400,000 in 2008 related to this claim.

17. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows:

(in thousands)

January 2,
2010

January 3,
2009Foreign currency translation adjustment

$
(12,259
)
$
(12,623
)Net actuarial loss and prior service credit


(1,090
)

(4,287
)Unrealized loss on interest rate swap agreements





(3,442
)Accumulated other comprehensive loss

$
(13,349
)
$
(20,352
)


18. Stock-Based Compensation Plans

The Company offers stock option plans to attract, retain, motivate and reward key officers, non-employee directors and employees. The 2007 Stock Incentive Plan ("2007 Plan")
allows for the grant of stock options, restricted stock and other instruments for up to a total of 1,751,963 shares of common stock. Stock options granted under the 2007 Plan have 10-year
terms and are issued with an exercise price not less than the fair market value of the Company's stock on the grant date. Stock options granted under the 2007 Plan may vest based on satisfaction of
certain annual performance criteria or may vest over time. Options granted under the 2006 Stock Option Plan ("2006 Plan") have a 10-year term and are fully vested as of January 2,
2010.

Stock
option compensation expense was $2,265,000, $1,264,000 and $706,000 in 2009, 2008 and 2007, respectively, and was included in "Selling, general and administrative expenses" in the
accompanying consolidated statements of operations. As of January 2, 2010, the Company had $5,316,000 of total unrecognized stock option compensation expense, net of estimated forfeitures,
which is expected to be recognized over a weighted average period of 1.7 years.

A
summary of the status of the Company's stock option plans is as follows:

Options

Weighted-
average
exercise
price

Weighted
average
remaining
contractual
term (years)

Aggregate
intrinsic
value
(in thousands)Outstanding at January 3, 2009


2,136,979

$
7.05Granted


1,311,000


9.94Exercised


(36,602
)

5.22Forfeited


(35,000
)

14.36Outstanding at January 2, 2010


3,376,377


8.12


7.7

$
12,778Vested and exercisable at January 2, 2010


1,895,232


6.22


6.6


10,760Expected to vest


1,481,145


10.54


9.2


2,018


74

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

18. Stock-Based Compensation Plans (Continued)

Exercise
prices for options outstanding at January 2, 2010 ranged from $5.24 to $17.76. The total intrinsic value of options exercised during 2009 and 2008 amounted to $193,000
and $5,540,000, respectively.

The
total fair values of options vested during 2009, 2008 and 2007 were $2,038,000, $634,000 and $374,000, respectively.

The
Company is required to estimate the fair value of stock options on the grant date using an option-pricing model. The weighted average grant-date fair value of options
granted during 2009, 2008 and 2007 amounted to $4.03, $1.89 and $6.91 per share, respectively. The fair value of each stock option granted was estimated on the date of grant based on the Black-Scholes
option pricing model with the following weighted-average assumptions:

Weighted average assumptions2009

2008

2007Weighted-average expected life (years)


4.0


4.0

6.3Risk-free interest rate


1.9
%

1.3
%
3.6% - 4.5%Expected volatility


49.9
%

40.9
%
23.0% - 34.9%Dividend yield










The
potential expected life of the stock options range from the vesting period of the options (three years to four years) to the contractual life of the options of ten years. During
2009, 2008 and 2007, the Company determined the expected life of the options based primarily on the Company's historical experience, the vesting periods, the structure of the option plans and the
contractual lives of the options.

The
Company's risk-free interest rate is based on the interest rate of U.S. Treasury bills with a term approximating the expected life of the option and is measured at the
date of the stock option grant. Since the Company's common stock has only been publicly traded since June 28, 2007, the expected volatility was estimated based on a mix of the historical
volatility of certain publicly-traded peer companies and the Company's historical volatility since its initial public offering. The Company does not anticipate paying dividends.

Under
the 2007 Plan, the Company awarded 3,164 and 1,644 restricted shares in 2009 and 2008, respectively, to members of its Board of Directors for service to the Company. The cost
associated with these restricted stock grants, which vest over three years, was $29,000 and $16,000 for fiscal 2009 and 2008, respectively, and was included in "Selling, general and administrative
expenses" in the accompanying consolidated statements of operations.

75

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

18. Stock-Based Compensation Plans (Continued)

A
summary of the status of the Company's unvested restricted stock grants is as follows:

Restricted
stock

Weighted-
average
grant-date
fair valueUnvested at January 3, 2009


2,876

$
20.85Granted


3,164


12.65Vested


(1,164
)

20.03Unvested at January 2, 2010


4,876


15.73


19. Related Party Transactions

The Company's German subsidiary has equity investments in two companies that provide patent, trademark and research services for the Company. The investments represent approximately 25%
ownership in each of the firms and are accounted for by the equity method of accounting. The Company's equity investment account balance was $434,000 and $413,000 at January 2, 2010 and
January 3, 2009, respectively. Charges from the affiliates for work performed were $1,250,000, $1,550,000 and $1,266,000 in 2009, 2008 and 2007, respectively. The Company has amounts due to the
affiliates of $123,000 and $98,000 at January 2, 2010 and January 3, 2009, respectively.

20. Segment Information

The Company's operations are principally managed on a products basis and are comprised of three operating segments that have been aggregated into 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 medical 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. In addition,
it evaluates business segment performance before business restructuring charges, goodwill impairment charges and the impact of certain non-recurring costs including strike and costs
associated with the FTC complaint. The accounting policies of the reportable segments are the same as those described in

76

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

20. Segment Information (Continued)

the
summary of significant accounting policies. Financial information relating to the reportable operating segments is presented below:

Year ended(in thousands)

January 2,
2010

January 3,
2009

December 29,
2007Net sales to external customers (by major product group):Lead-acid battery separators

$
281,456

$
348,240

$
291,473Lithium battery separators


86,136


101,964


87,884Energy storage


367,592


450,204


379,357Healthcare


102,088


103,029


103,151Filtration and specialty


47,175


57,297


52,159Separations media


149,263


160,326


155,310Total net sales to external customers


516,855

$
610,530

$
534,667Operating income:Energy storage

$
70,204

$
89,737

$
81,427Separations media


31,134


27,251


22,205Corporate


(2,265
)

(1,009
)

(271
)Segment operating income


99,073


115,979


103,361Business restructuring


21,324


59,887


(886
)Goodwill impairment


131,450





Non-recurring costs


3,685


8,563


Total operating income (loss)


(57,386
)

47,529


104,247Reconciling items:Interest expense


57,097


60,740


80,998Costs related to purchase of 10.50% senior discount notes








30,057Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities








7,173Foreign currency and other


(704
)

(2,484
)

1,621Loss from continuing operations before income taxes

$
(113,779
)
$
(10,727
)
$
(15,602
)Depreciation and amortization:Energy storage

$
35,253

$
37,121

$
32,334Separations media


16,142


17,923


16,519Total depreciation and amortization

$
51,395

$
55,044

$
48,853Capital expenditures:Energy storage

$
12,459

$
38,742

$
18,219Separations media


3,806


9,271


11,556Total capital expenditures

$
16,265

$
48,013

$
29,775


77

---





Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

20. Segment Information (Continued)

(in thousands)

January 2,
2010

January 3,
2009Assets:Energy storage

$
786,677

$
938,400Separations media


485,515


484,108Corporate assets


80,401


76,346Total assets

$
1,352,593

$
1,498,854


Net
sales by geographic location, based on the country from which the product is shipped, were as follows:

Year ended(in thousands)

January 2,
2010

January 3,
2009

December 29,
2007Net sales to unaffiliated customers:United States

$
165,357

$
222,146

$
185,315Germany


148,500


152,754


150,461France


70,250


86,409


80,259China


56,299


50,971


34,501Other


76,449


98,250


84,131Total

$
516,855

$
610,530

$
534,667


Property,
plant and equipment by geographic location were as follows:

(in thousands)

January 2,
2010

January 3,
2009United States

$
117,859

$
142,350Germany


158,335


163,617Thailand


47,428


48,348Other


64,414


62,481Total

$
388,036

$
416,796


78

---



Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

21. Quarterly Results of Operations (Unaudited)

(in thousands, except per share data)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterFiscal year ended January 2, 2010:Net sales

$
108,910

$
118,179

$
137,737

$
152,029Gross profit


43,403


46,578


47,960


57,858Net income (loss)


2,961


4,210


6,461


(130,959
)Net income (loss) per common sharebasic

$
0.07

$
0.09

$
0.15

$
(2.95
)Net income (loss) per common sharediluted

$
0.07

$
0.09

$
0.14

$
(2.95
)Fiscal year ended January 3, 2009:Net sales

$
145,329

$
164,665

$
154,923

$
145,613Gross profit


55,460


61,095


46,868


52,297Income (loss) from continuing operations


10,552


11,174


5,088


(44,361
)Income from discontinued operations, net of income taxes


2,360








Net income (loss)


12,912


11,174


5,088


(44,361
)Net income (loss) per common sharebasic and dilutedContinuing operations

$
0.26

$
0.26

$
0.11

$
(1.00
)Discontinued operations


0.06








Net income (loss) per common share

$
0.32

$
0.26

$
0.11

$
(1.00
)


During
the fourth quarter of fiscal 2009, the Company recorded total restructuring charges of $21,324,000 and a goodwill impairment charge of $131,450,000.

During
the fourth quarter of fiscal 2008, the Company implemented a restructuring plan and recorded total restructuring charges of $59,887,000.

22. Discontinued Operations

In January 2008, the Company sold a non-core synthetic paper business, a component of the energy storage segment, for $4,000,000, resulting in a gain on sale of $2,372,000,
net of income taxes of $1,402,000. The results of operations and the gain on sale from the synthetic paper business are presented as discontinued operations for all periods presented in the Company's
accompanying consolidated statements of operations.

23. Financial Statements of Guarantors

The Company's senior subordinated notes are unconditionally guaranteed, jointly and severally, on a senior basis by certain of the Company's 100% owned subsidiaries ("Guarantors").
Management has determined that separate complete financial statements of the Guarantors would not be material to users of the financial statements.

79

---



Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

The
following sets forth condensed consolidating financial statements of the Guarantors and non-Guarantor subsidiaries.

Condensed Consolidating Balance Sheet  As of January 2, 2010

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Reclassifications
and Eliminations

ConsolidatedAssetsCash and cash equivalents

$


$
45,585

$
69,390

$


$
114,975Accounts receivable, net


40,965


66,157








107,122Inventories


27,094


45,404








72,498Deferred income taxes


2,369


(578
)







1,791Prepaid and other


5,180


10,131


62





15,373Total current assets


75,608


166,699


69,452





311,759Due from affiliates


348,934


326,033


293,841


(968,808
)

Investment in subsidiaries


186,148


308,965


366,661


(861,774
)

Property, plant and equipment, net


133,738


254,298








388,036Goodwill








469,319





469,319Intangibles and loan acquisition costs, net


18





165,953





165,971Other


2,283


15,225








17,508Total assets

$
746,729

$
1,071,220

$
1,365,226

$
(1,830,582
)
$
1,352,593Liabilities and shareholders' equityAccounts payable and accrued liabilities

$
17,547

$
54,754

$
5,104

$


$
77,405Income taxes payable





287


321





608Current portion of debt





501


10,359





10,860Total current liabilities


17,547


55,542


15,784





88,873Due to affiliates


380,397


279,283


309,128


(968,808
)

Debt, less current portion





48,356


744,217





792,573Pension and postretirement benefits, less current portion


3,026


63,243








66,269Environmental reserve, less current portion


1,101


29,311








30,412Deferred income taxes and other


35,630


42,739


11,752





90,121Shareholder's equity


309,028


552,746


284,345


(861,774
)

284,345Total liabilities and shareholders' equity

$
746,729

$
1,071,220

$
1,365,226

$
(1,830,582
)
$
1,352,593


80

---



Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Balance Sheet  As of January 3, 2009

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Reclassifications
and Eliminations

ConsolidatedAssetsCash and cash equivalents

$


$
25,657

$
57,364

$


$
83,021Accounts receivable, net


36,383


64,026








100,409Inventories


25,444


44,954








70,398Refundable Income Taxes


617


14,492


(8,832
)




6,277Deferred income taxes








1,222





1,222Prepaid and other


3,831


10,541


(97
)




14,275Total current assets


66,275


159,670


49,657





275,602Due from affiliates


314,895


358,691


294,702


(968,288
)

Investment in subsidiaries


250,996


282,531


297,196


(830,723
)

Property, plant and equipment, net


155,444


261,352








416,796Goodwill








601,564





601,564Intangibles and loan acquisition costs, net


31





184,823





184,854Other


3,260


16,778








20,038Total assets

$
790,901

$
1,079,022

$
1,427,942

$
(1,799,011
)
$
1,498,854Liabilities and shareholders' equityAccounts payable and accrued liabilities

$
31,577

$
44,620

$
6,386

$


$
82,583Current portion of debt





550


3,230





3,780Current portion of capital lease obligation


1,495











1,495Fair value of interest rate swap agreements








5,477





5,477Total current liabilities


33,072


45,170


15,093





93,335Due to affiliates


368,754


326,642


272,892


(968,288
)

Debt, less current portion





47,520


748,696





796,216Capital lease obligation, less current portion


1,824











1,824Pension and postretirement benefits, less current portion


2,797


63,469








66,266Environmental reserve, less current portion


2,061


38,423








40,484Deferred income taxes and other


67,749


41,719


(1,602
)




107,866Polypore Shareholder's equity


314,644


516,079


392,863


(830,723
)

392,863Total liabilities and shareholders' equity

$
790,901

$
1,079,022

$
1,427,942

$
(1,799,011
)
$
1,498,854


81

---





Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Operations  For the year ended January 2, 2010

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Reclassifications
and Eliminations

ConsolidatedNet sales

$
171,736

$
345,119

$


$


$
516,855Cost of goods sold


79,977


241,079








321,056Gross profit


91,759


104,040








195,799Selling, general and administrative expenses


63,590


34,988


1,833





100,411Business restructuring


20,101


1,223








21,324Goodwill Impairment








131,450





131,450Operating income (loss)


8,068


67,829


(133,283
)




(57,386
)Interest expense and other


(4,800
)

7,291


53,902





56,393Equity in earnings of subsidiaries








(43,700
)

43,700


Income (loss) before income taxes


12,868


60,538


(143,485
)

(43,700
)

(113,779
)Income taxes


11,455


18,251


(26,158
)




3,548Income (loss) from continuing operations

$
1,413

$
42,287

$
(117,327
)
$
(43,700
)
$
(117,327
)


Condensed Consolidating Statement of Operations  For the year ended January 3, 2009

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Reclassifications
and Eliminations

ConsolidatedNet sales

$
230,838

$
379,692

$


$


$
610,530Cost of goods sold


115,626


281,584








397,210Business interruption insurance recovery


(2,400
)










(2,400
)Gross profit


117,612


98,108








215,720Selling, general and administrative expenses


69,656


37,637


1,011





108,304Business restructuring





59,887








59,887Operating income (loss)


47,956


584


(1,011
)




47,529Interest expense and other


(7,872
)

11,689


54,439





58,256Equity in earnings of subsidiaries








(10,275
)

10,275


Income (loss) before income taxes


55,828


(11,105
)

(45,175
)

(10,275
)

(10,727
)Income taxes


28,695


5,753


(27,628
)




6,820Income from continuing operations

$
27,133

$
(16,858
)
$
(17,547
)
$
(10,275
)
$
(17,547
)


82

---



Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Operations  For the year ended December 29, 2007

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Reclassifications
and Eliminations

ConsolidatedNet sales

$
185,315

$
349,352

$


$


$
534,667Cost of goods sold


80,013


257,669








337,682Gross profit


105,302


91,683








196,985Selling, general and administrative expenses


58,955


34,119


550





93,624Business restructuring





(886
)







(886
)Operating income (loss)


46,347


58,450


(550
)




104,247Costs related to the purchase of 10.5% senior discount notes








30,057





30,057Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities








7,173





7,173Interest expense and other


(7,276
)

10,357


79,538





82,619Equity in earnings of subsidiaries








(64,151
)

64,151


Income (loss) before income taxes


53,623


48,093


(53,167
)

(64,151
)

(15,602
)Income taxes


29,432


8,133


(53,614
)




(16,049
)Income (loss) from continuing operations

$
24,191

$
39,960

$
447

$
(64,151
)
$
447


83

---



Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Cash Flows  For the year ended January 2, 2010

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Reclassifications
and Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
36,801

$
54,855

$
(27,176
)
$
(11,349
)
$
53,131Investing activities:Purchases of property, plant and equipment, net


(9,382
)

(6,883
)







(16,265
)Acquisitions








(3,600
)




(3,600
)Net cash used in investing activities


(9,382
)

(6,883
)

(3,600
)




(19,865
)Financing activities:Principal payments on debt and capital lease


(3,319
)

(496
)

(3,226
)




(7,041
)Proceeds from stock option exercises








191





191Intercompany transactions, net


(24,474
)

(32,712
)

45,837


11,349


Net cash provided by (used in) financing activities


(27,793
)

(33,208
)

42,802


11,349


(6,850
)Effect of exchange rate changes on cash and cash equivalents


374


5,164








5,538Net increase in cash and cash equivalents





19,928


12,026





31,954Cash and cash equivalents at beginning of year





25,657


57,364





83,021Cash and cash equivalents at end of year

$


$
45,585

$
69,390

$


$
114,975


84

---





Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Cash Flows  For the year ended January 3, 2009

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Reclassifications
and Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
60,565

$
65,313

$
(37,076
)
$
5,884

$
94,686Investing activities:Purchases of property, plant and equipment, net


(23,128
)

(24,885
)







(48,013
)Acquisitions, net of cash acquired








(85,795
)




(85,795
)Proceeds from sale of synthetic paper business


4,000











4,000Net cash used in investing activities


(19,128
)

(24,885
)

(85,795
)




(129,808
)Financing activities:Principal payments on debt and capital lease


(6,248
)

(10,391
)

(4,031
)




(20,670
)Proceeds from stock option exercises








1,540





1,540Proceeds from issuance of common stock, net of underwriting fees and other offering related costs








84,847





84,847Intercompany transactions, net


(35,663
)

(41,453
)

83,000


(5,884
)

Net cash provided by (used in) financing activities


(41,911
)

(51,844
)

165,356


(5,884
)

65,717Effect of exchange rate changes on cash and cash equivalents


474


(2,982
)







(2,508
)Net increase (decrease) in cash and cash equivalents





(14,398
)

42,485





28,807Cash and cash equivalents at beginning of year





40,055


14,879





54,934Cash and cash equivalents at end of year

$


$
25,657

$
57,364

$


$
83,021


85

---



Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Cash Flows  For the year ended December 29, 2007

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Reclassifications
and Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
50,592

$
51,275

$
(36,215
)
$
3,654

$
69,306Investing activities:Purchases of property, plant and equipment


(12,470
)

(17,305
)







(29,775
)Acquisitions net of cash acquired





(5,475
)







(5,475
)Net cash used in investing activities


(12,470
)

(22,780
)







(35,250
)Financing activities:Principal payments on debt and capital lease


(1,377
)

(95
)

(371,139
)




(372,611
)Proceeds from issuance of common stock, net of underwriting fees and other offering related costs








264,837





264,837Proceeds from senior secured credit facility





42,551


327,449





370,000Purchase of 10.50% senior discount notes








(293,666
)




(293,666
)Loan acquisition costs








(8,672
)




(8,672
)Repurchase of common stock








(320
)




(320
)Issuance of common stock








30





30Intercompany transactions, net


(36,796
)

(68,220
)

108,670


(3,654
)

Net cash provided by (used in) financing activities


(38,173
)

(25,764
)

27,189


(3,654
)

(40,402
)Effect of exchange rate changes on cash and cash equivalents


51


6,517








6,568Net increase (decrease) in cash and cash equivalents





9,248


(9,026
)




222Cash and cash equivalents at beginning of year





30,807


23,905





54,712Cash and cash equivalents at end of year

$


$
40,055

$
14,879

$


$
54,934


86

---





Table of Contents

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
or 15d-15(e) promulgated under the Exchange Act) was performed under the supervision, and with the participation of, the Company's management, including the Chief Executive Officer and
Chief Financial Officer. The Company's disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon our evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of January 2, 2010 to provide reasonable assurance that information
required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.

Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management has conducted
an assessment of the effectiveness of the Company's internal control over financial reporting using the criteria inInternal ControlIntegrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in
the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Based
on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of January 2, 2010, based on criteria in Internal ControlIntegrated
Frameworkissued by the COSO.

The
effectiveness of the Company's internal control over financial reporting as of January 2, 2010 has been audited by Ernst & Young LLP, an independent registered
public accounting firm. Ernst & Young LLP has issued an attestation report to the Company's internal control over financial reporting,
which appears in Item 8 of Part II of this Annual Report on Form 10-K under the heading "Report of Independent Registered Public Accounting Firm."

Changes in Internal Control over Financial Reporting

During the Company's fourth fiscal quarter of fiscal year 2009, there has been no change in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act) that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.

87

---



Table of Contents

Item 9B.    Other Information

None.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2010 Annual Meeting of Stockholders to be held on May 13, 2010.

Members
of our Board of Directors and all of our employees, including our Chief Executive Officer and Chief Financial Officer, are required to abide by our Code of Business Conduct and
Ethics to ensure that our business is conducted in a consistently legal and ethical manner. The full text of the Code of Business Conduct and Ethics is published on our website at http://investor.polypore.net/governance.cfm. We will disclose any future amendments to, or waivers from, these ethical policies and standards for senior
officers and directors on our website within four business days following the date of such amendment or waiver.

Item 11.    Executive Compensation

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2010 Annual Meeting of Stockholders to be held on May 13, 2010.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2010 Annual Meeting of Stockholders to be held on May 13, 2010.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2010 Annual Meeting of Stockholders to be held on May 13, 2010.

Item 14.    Principal Accountant Fees and Services

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2010 Annual Meeting of Stockholders to be held on May 13, 2010.

PART IV

Item 15.    Exhibits and Financial Statement Schedules

1.Financial Statements.The following items, including Consolidated Financial Statements of the Company, are
set forth in Item 8 of this Annual Report on Form 10-K:



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2.Financial Statement Schedules.The following schedule is set forth on page S-1 of this
Annual Report on Form 10-K.



Information
required by other schedules has either been incorporated in the consolidated financial statements and accompanying notes or is not applicable to us.

3.Exhibits.

Exhibit
Number

Exhibit Description3.1

Form of Amended and Restated Certificate of Incorporation of Polypore International, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Company's Registration Statement on
Form S-1 (Registration No. 333-141273), filed with the SEC on June 15, 2007)3.2

Form of Amended and Restated Bylaws of Polypore International, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed with the SEC on October 29,
2008)3.3

Certificate of Amendment to the Certificate of Incorporation of Polypore International, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed on June 29,
2007)4.1

Registration Rights Agreement, dated as of May 13, 2004, by and among Warburg Pincus Private Equity VIII, L.P., Warburg Pincus International Partners, L.P., PP Holding, LLC, Polypore International,
 Inc. and certain other persons a party thereto (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))4.2

Indenture, dated as of May 13, 2004, by and among PP Acquisition Corporation (merged with and into Polypore, Inc.), the Guarantors (as defined therein) and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142)) (the "8.75% Indenture")4.3

Form of 8.75% Senior Subordinated Dollar Notes Due 2012 (incorporated by reference to Exhibit C of the 8.75% Indenture)4.4

Form of 8.75% Senior Subordinated Euro Notes Due 2012 (incorporated by reference to Exhibit D of the 8.75% Indenture)4.5

Second Supplemental Indenture, dated as of July 31, 2007, between Polypore International, Inc., the Guarantors (as defined therein) and The Bank of New York (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K, filed on August 3, 2007)


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Exhibit
Number

Exhibit Description10.1

Stock Purchase Agreement, dated as of January 30, 2004, by and among Polypore, Inc., PP Acquisition Corporation and the stockholders of Polypore, Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.2

Guarantee and Collateral Agreement, dated as of May 13, 2004, by and among PP Holding Corporation, PP Acquisition Corporation and the subsidiaries of PP Acquisition Corporation identified therein (incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.3

Tax Sharing Agreement, dated as of May 13, 2004, by and among Polypore International, Inc., PP Holding Corporation and Polypore, Inc. (incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.4

Stockholders' Agreement, dated as of May 13, 2004, by and among Warburg Pincus Private Equity VIII, L.P., Warburg Pincus International Partners, L.P., PP Holding, LLC and Polypore International,
 Inc. (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.5
*
Polypore International, Inc. 2004 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File
No. 333-124142))10.6
*
Form of Director and Officer Indemnification Agreement entered into between Polypore, Inc. and certain employees of Polypore, Inc. (incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.7
*
Amended and Restated Employment Agreement, dated as of April 28, 2008, by and between Polypore International, Inc. and Robert B. Toth (incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K, filed with the SEC on May 1, 2008)10.8
*
Amended Employment Agreement, dated as of December 18, 2008, by and between Polypore International, Inc. and Robert B. Toth (incorporated by reference to Exhibit 10.8 to the company's Annual Report on
Form 10-K filed on March 12, 2009)10.9
*
Employment Agreement, dated as of April 7, 2006, by and between Polypore, Inc. and Mitchell J. Pulwer (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed
on August 15, 2006)10.10
*
Amended Employment Agreement, dated as of December 18, 2008, by and between Polypore International, Inc. and Mitchell J. Pulwer (incorporated by reference to Exhibit 10.10 to the company's Annual Report
on Form 10-K filed on March 12, 2009)10.11
*
Employment Agreement, dated as of April 4, 2006, by and between Membrana GmbH, a subsidiary of Polypore, Inc. and Josef Sauer (incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q filed on August 15, 2006)10.12
*
Polypore International, Inc. 2006 Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on August 15, 2006)10.13
*
Form of Executive Severance Plan Policy (incorporated by reference to Exhibit 10.13 to the company's Annual Report on Form 10-K filed on March 12, 2009)


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Exhibit
Number

Exhibit Description10.14
*
Polypore International, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.26 to Amendment No. 4 to the Company's Registration Statement on Form S-1 (Registration
No. 333-141273), filed with the SEC on June 15, 2007)10.15

Form of Restricted Stock Grant Notice and Agreement under the Polypore International, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on
Form S-8 filed on July 25, 2007 (Commission File No. 333-144846))10.16

Form of Option Grant Notice and Agreement under the Polypore International, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8
filed on July 25, 2007 (Commission File No. 333-144846))10.17

Amended and Restated Credit Agreement, dated as of July 3, 2007, between PP Holding Corporation, Polypore, Inc., Daramic Holding S.A.S., JPMorgan Chase Bank, N.A., as Administrative Agent, and the other
agents and lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on July 10, 2007)10.18

First Amendment and Reaffirmation Agreement, dated as of July 3, 2007, between PP Holding Corporation, Polypore, Inc., all of Polypore, Inc.'s domestic restricted subsidiaries and J.P. Morgan Chase Bank,
 N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed on July 10, 2007)21.1

Subsidiaries of Polypore International, Inc.23.1

Consent of Independent Registered Public Accounting Firm31.1

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


*Management
contract or compensatory plan or arrangement


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Signatures

Pursuant to the requirements of Section 13 or 15(d) 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.

POLYPORE INTERNATIONAL, INC.By:

/s/ ROBERT B. TOTH Robert B. Toth President and Chief Executive Officer


Date:
March 8, 2010

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the
dates indicated.

/s/ ROBERT B. TOTH Robert B. Toth

President, Chief Executive Officer and Director (Principal Executive Officer)

March 8, 2010/s/ LYNN AMOS Lynn Amos

Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

March 8, 2010/s/ MICHAEL GRAFF Michael Graff

Chairman of the Board

March 8, 2010/s/ DAVID BARR David Barr

Director

March 8, 2010/s/ CHARLES L. COONEY Charles L. Cooney

Director

March 8, 2010/s/ WILLIAM DRIES William Dries

Director

March 8, 2010/s/ FREDERICK C. FLYNN, JR. Frederick C. Flynn, Jr.

Director

March 8, 2010/s/ W. NICHOLAS HOWLEY W. Nicholas Howley

Director

March 8, 2010/s/ KEVIN KRUSE Kevin Kruse

Director

March 8, 2010


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Schedule II

Polypore International, Inc.  Financial statement scheduleValuation and qualifying accounts

For the years ended January 2, 2010, January 3, 2009 and December 29, 2007

Additions(in thousands)

Balance at
beginning
of year

Charged to
costs and
expenses

Charged to
other
accounts

Deductions

Balance at
end of yearYear ended January 2, 2010:Allowance for doubtful accounts

$
7,742

$
237

$
198
(1)
$
(998
)(2)
$
7,179Valuation allowance of deferred tax asset


15,423


829


574





16,826$
23,165

$
1,066

$
772

$
(998
)
$
24,005Year ended January 3, 2009:Allowance for doubtful accounts

$
8,812

$
(152
)
$
(302
)(1)
$
(616
)(2)
$
7,742Valuation allowance of deferred tax asset


6,050


10,812


(493
)

(946
)

15,423$
14,862

$
10,660

$
(795
)
$
(1,562
)
$
23,165Year ended December 29, 2007:Allowance for doubtful accounts

$
8,610

$
134

$
775
(1)
$
(707
)(2)
$
8,812Valuation allowance of deferred tax asset


6,200








(150
)

6,050$
14,810

$
134

$
775

$
(857
)
$
14,862


(1)Foreign
currency translation adjustment.(2)The
amount represents charge-offs net of recoveries.


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