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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended July 31, 2002

OR

For the transition period from                              to                             

Commission file number 0-14450

AEP Industries Inc.
(Exact name of registrant as specified in its charter)

(201) 641-6600
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

        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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Item 1. Financial Statements

AEP INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)
(in thousands, except per share data)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(in thousands)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)    Summary of Significant Accounting Policies

        The consolidated financial information included herein has been prepared by the Company without audit, for filing with the Securities and Exchange Commission pursuant to the rules and regulations of the Commission.

        The consolidated financial statements include the accounts of AEP Industries Inc. and its majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In management's opinion, all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the consolidated financial position as of July 31, 2002, and the results of operations for the three and nine months ended July 31, 2002 and 2001, have been made. The consolidated statements of income for the three and nine months ended July 31, 2002, are not necessarily indicative of the results to be expected for the full year.

        Certain prior period amounts have been reclassified to conform to the current period's presentation.

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report to Shareholders for the fiscal year ended October 31, 2001.

(2)    Earnings Per Share (EPS)

        Basic EPS is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. The number of shares used in such computation for the three months ended July 31, 2002 and 2001, are 7,869,750 and 7,777,524, respectively. The number of shares used in such computation for the nine months ended July 31, 2002 and 2001, were 7,839,731 and 7,690,931, respectively. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding, adjusted to reflect potentially dilutive securities (options). The number of shares used in such computation for the three months ended July 31, 2002 and 2001, are 7,869,750 and 7,777,524 respectively. The number of shares used in such computation for the nine months ended July 31, 2002 and 2001, are 7,883,855, and 7,690,931, respectively. The computation of diluted EPS includes 44,124 incremental shares for options outstanding for the nine months ended July 31, 2002. As a result of the loss incurred for the three months ended July 31, 2002 and 2001, and the nine months ended July 31, 2001, no equivalent shares attributable to options were considered in computing diluted EPS, as such options would be anti-dilutive.

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(3)    Inventories

        Inventories are stated at the lower of cost (last-in, first-out method for domestic operations and first-in, first-out method for foreign operations and for supplies) or market, include material, labor and manufacturing overhead costs and are comprised of the following:

        The last-in, first-out (LIFO) method was used for determining the cost of approximately 47% and 56% of total inventories at July 31, 2002 and October 31, 2001, respectively. Inventories would have been increased by $1.0 million and decreased by $2.1 million at July 31, 2002 and October 31, 2001, respectively, if the FIFO method had been used exclusively. Because of the Company's continuous manufacturing process, there is no significant work in process at any point in time.

(4)    Other Income (Expense)

        For the three and nine months ended July 31, 2002 and 2001, other income (expense) consists of the following:

(5)    Segment Information

        The Company's operations are conducted within one business segment, the production, manufacture and distribution of plastic packaging products, primarily for the food/beverage, industrial and agricultural markets. The Company operates in three geographical regions, North America, Europe and Asia/Pacific.

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        Information about the Company's operations by geographical area for the three and nine months ended July 31, 2002 and 2001, respectively, is as follows:

(6)    Restructuring Charge

        In July 2000, the Board of Directors of the Company approved a restructuring plan designed to improve the operating efficiencies of its European operations and enhance its competitiveness in that market. The plan involves the closure of the North Baddesley, England manufacturing facility, cleanup and demolition of the manufacturing site and severance and other benefits for 33 employees. The restructuring charges of approximately $1.8 million and $1.9 million were recorded as cost of sales in the consolidated statements of operations for the years ended October 31, 2001 and 2000, respectively. These charges relate to severance costs ($1.5 million reserved in fiscal 2000 with all amounts having been paid as of July 31, 2002), actual cash expenditures made related to environmental costs, legal costs and the non-cash write-off of certain assets. The Company recorded zero and $51,000 in restructuring charges during the three months and nine months ended July 31, 2002, respectively, and expects to incur approximately $150,000 in additional charges, before recording any gains related to sale of property related to this restructuring plan and will record these charges in the appropriate periods in accordance with the requirements of Emerging Issues Task Force Pronouncement 94-3 and Staff Accounting Bulletin (SAB) No. 100. The Company expects the restructuring plan and all related costs including the sale of its property to be substantially completed by the end of 2002.

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(7)    Derivative Instruments

        In November 2000, the Company adopted Statement of Financial Accounting standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires that all derivative financial instruments such as interest rate swap contracts and foreign exchange contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. At July 31, 2002, the net fair value of derivative financial instruments designated as cash flow hedges by the Company was $1.4 million, which is included in accrued expenses and in shareholders' equity as a component of accumulated other comprehensive income.

(8)    Acquisition of Businesses

        On November 2, 2001, the Company acquired for approximately $8.8 million US dollars (after working capital adjustments), all the shares of the New Zealand and Australian flexible packaging businesses of Visypak Operations PTY Limited ("Visypak") in order to expand market share in the Asia/Pacific region. The accompanying consolidated statements of operations include the results of these transactions beginning November 2, 2001. Immediately following the transaction, the Company combined its Liquipac (bag-in-a-box) business with the liquibag systems business, which were part of the businesses it had acquired from Visypak, and sold 49.9 percent of the resulting venture to DS Smith (UK) Limited, a wholly-owned subsidiary of DS Smith, Plc., for approximately $8.9 million, resulting in a net gain of $6.8 million. The venture will be operated in coordination with DS Smith's worldwide "Rapak" enterprise. The Company does not have an effective controlling voting interest in this venture and as a result will be accounting for its investment under the equity method of accounting.

        A summary of the transactions is outlined below:

        The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141 "Business Combinations" and, accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based upon the estimated fair values at the date of the acquisition. The above acquisition resulted in negative goodwill of $3.1 million which was allocated as a reduction of acquired property, plant and equipment. The purchase price allocation is preliminary and further refinements are likely to be made based upon completion of final valuation studies and restructuring programs. Such refinements may increase or decrease property plant and equipment and the gain on the Rapak transaction above. At July 31, 2002, there was approximately $2.6 million remaining in accrued expenses related to severance ($1.5 million reserved at time of acquisition and $.5 million paid to date) and costs to close down acquired plants ($3.0 million reserved and $1.4 million paid to date).

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        The following unaudited pro forma information presents a summary of consolidated results of operations of the Company as if the acquisition, sale of Liquipac (excluding the one-time gain upon sale), and the formation of Rapak occurred at the beginning of fiscal 2001:

        Pro Forma information:

(9)    Goodwill and Other Intangible Assets

        In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangibles". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under the provisions of SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized, but tested annually for impairment or whenever there is an impairment indicator. In addition, upon adoption of SFAS No. 142, all goodwill must be assigned to reporting units for purposes of impairment testing and is no longer subject to amortization.

        The Company elected to adopt the provisions of SFAS No. 142 on November 1, 2001. As required by SFAS No. 142, the Company performed an assessment of whether there was an indication that goodwill was impaired at the date of adoption. In connection therewith, the Company determined that its operations represented one reporting unit and determined the reporting unit's fair value and compared it to the reporting unit's book value. As of November 1, 2001, the Company's reporting unit's fair value exceeded its carrying amounts. Accordingly, the Company was not required to perform any further transitional impairment tests. The Company plans to perform its impairment test each September 30 in the future.

        The Company had unamortized goodwill in the amount of $34.8 million at July 31, 2002 and October 31, 2001, subject to the provisions of SFAS Nos. 141 and 142. Substantially all of the unamortized goodwill is a result of the Company's acquisition of certain assets of the Global Packaging Business ("BGP") of Borden, Inc. in October 1996.

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        The following table sets forth the reconciliation of basic and diluted earnings per common share computations for the three and nine months ended July 31, 2001 as if SFAS No. 142 was adopted as of November 1, 2000: