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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended October 31, 2001,

or

For the transition period from                              to                             

Commission file number 0-14550

AEP INDUSTRIES INC.
(Exact name of registrant as specified in its charter)

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

Common Stock, $.01 par value
(Title of class)

      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 requirement for the past 90 days. Yes /x/  No / /

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. / /

      The aggregate market value of the shares of the voting stock held by nonaffiliates of the Registrant was approximately $100,835,540 based upon the closing price of the stock, which was $23.96 on December 31, 2001.

      The number of shares of the Registrant's common stock outstanding as of December 31, 2001, was 7,794,466.

DOCUMENTS INCORPORATED BY REFERENCE

      List hereunder the documents, all or portions of which are incorporated by reference herein and the Part of the Form 10-K into which the document is incorporated:

      Proxy Statement to be filed with respect to the Registrant's Annual Meeting of Stockholders to be held on April 9, 2002—Part III, except as specifically excluded in the Proxy statement.

PART I

ITEM 1. BUSINESS

General

        AEP Industries Inc. ("AEP") is a leading worldwide manufacturer of plastic packaging films. We manufacture both commodity films, which are made to general specifications, and specialty films, which are made to customer specifications. The films are used in the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, construction, agriculture and textile industries. Our manufacturing operations are located in 9 countries in North America, Europe and the Asia/ Pacific Region.

Recent Developments

        On November 2, 2001, we entered into a series of transactions with Visypak Operations Pty Ltd. ("Visy") and DS Smith (UK) Ltd., ("DS Smith"), a subsidiary of DS Smith Plc. We formed a New Zealand company, Rapak Asia Pacific Ltd. ("Rapak") and sold 49.9% of the venture to DS Smith as part of a joint venture agreement for the operation of Rapak. Rapak acquired the "bag -in—box" business conducted by Visy in New Zealand and Australia and we transferred our New Zealand Liquipac business to Rapak. In addition, our New Zealand subsidiary acquired Visy's films and laminate business in New Zealand.

        On November 20, 2001, we entered into a loan and security agreement with Congress Financial Corporation, as agent, and the financial institutions named in the agreement, as Lenders. Under this agreement the Lenders provided us with a maximum credit facility of $85 million, including a letter of credit facility of up to $20 million. Amounts available for borrowing are based upon the sum of eligible domestic values of building and equipment at closing date and eligible accounts receivable and inventories on a monthly basis. The new credit facility is secured by mortgages and liens on our domestic assets and in 66% of our equity interest in certain foreign subsidiaries. The agreement contains customary covenants including limitations on the incurrence of debt, the disposition of assets, the making of restricted payments, and minimum EBITDA requirements if the loan's excess availability is less than $20.0 million. Amounts to be borrowed are limited by these available assets. At the closing, we borrowed the sum of $52.1 million, of which $51.8 million was used to pay off the existing long term credit facility. Rates under the new facility are comparable to those under the prior facility.

Products

        We are a leading worldwide manufacturer of plastic packaging films. We manufacture and market an extensive and diverse line of polyethylene, polyvinyl chloride and polypropylene flexible packaging products, with consumer, industrial and agricultural applications. Flexible packaging and film products are thin, ductile bags, sacks, labels and films used for food and non-food consumer, agricultural and industrial items. Flexible packaging containers not only protect their contents, they are also cost-effective, space-saving, lightweight, tamper-evident, convenient and often recyclable. The flexible packaging and film products manufactured by us are used in a variety of industries, including the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, construction, agricultural and textile industries.

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        The following table summarizes our product lines:

        We currently have manufacturing operations located in 9 countries. We divide our operations geographically into three principal regions, North America, Europe and Asia/Pacific. During fiscal 2001, North America, Europe and Asia/Pacific represented approximately 65%, 25% and 10%, respectively of our sales.

North American Operations

Resinite (polyvinyl chloride)

        We manufacture polyvinyl chloride food wrap for the supermarket, consumer, institutional and industrial markets in North America, offering a broad range of products with approximately 45 different formulations. These films are used for packaging of fresh red meats, poultry, fish, fruits and vegetables and bakery products.

        Our Resinite facility also manufactures dispenser (cutter) boxes containing polyvinyl chloride food wrap for sale to consumers and institutions, including restaurants, schools, hospitals and penitentiaries. Our most popular branded institutional polyvinyl chloride food wrap is marketed under the Seal Wrap® name. A substantial portion of the sales of this product is to large paper and food distributors, with the rest sold directly to supermarket chains.

Industrial Films

        We manufacture a broad range of industrial films, generally custom designed, including sheeting, tubing and bags. Bags are usually cut, rolled or perforated, drum, box, carton and pail liners. These bags can be used to package specialty items such as furniture and mattresses. We also manufacture films to protect items stored outdoors or in transit, such as boats and cars, and a wide array of shrink films, barrier films and overwrap films. We sell the majority of our industrial film output directly to customers on a national account basis, with approximately 20% sold through distributors.

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        Most of the industrial films manufactured by us, which may be as many as 20,000 separate and distinct products in any given year, are custom designed to meet the specific needs of our customers.

        We believe that the strength of our industrial film operations lies in our technologically superior products, high quality control standards, well-trained and knowledgeable sales force and commitment to customer service. Our sales force has expertise in packaging systems, provides technical support to our distribution network and focuses on product knowledge and customer relations.

        The industrial films market is comprised of a large number of smaller manufacturers who together constitute approximately two-thirds of all sales, with the remainder of the market represented by a few large manufacturers. Our research and development team continually improves applications and creates new industrial film products. This has helped establish us as one of the largest producers in this fragmented market. We believe we can expand our share of the industrial films market through our ability to offer a broad range of industrial as well as other packaging films (including stretch wrap), thereby offering our customers one-stop shopping.

Stretch Wrap

        We manufacture a family of high performance stretch wrap for wrapping and securing palletized products for shipping. We also market a wide variety of stretch wrap designed for commodity and specialty uses. We sell approximately 90% of our stretch wrap through distributors. The remainder of our output is sold directly to customers on a national account basis. Since the industry still is experiencing overcapacity in the marketplace, we have rationalized our sales force, consolidated our distribution activities and reformulated certain stretch products to help us realize significant cost reductions.

European Operations

European Resinite (polyvinyl chloride)

        Through our European Resinite division, we manufacture polyvinyl chloride food wrap in cutter boxes and perforated rolls which are primarily sold to restaurants and food service establishments. European Resinite sells films across Europe (with the exception of Italy, which is covered by Fabbrica Italiana Articoli Plastici, or FIAP) and sells most of its film directly to end-users. We are rationalizing our labor force and believe that this will have a positive impact on our operating results.

        The market for polyvinyl chloride food wrap is relatively mature in Northern Europe and is intensely competitive. We expect that growth in Europe will be driven by developing catering, food service and volume feeding markets in Eastern Europe and by developing food distribution markets in Southern and Eastern Europe. In certain European markets, a tax is levied on packaging materials based on weight, which has led to a demand for thinner but stronger meat films. We have the technology to deliver films with such properties at a low price. We believe this to be a competitive advantage.

European Flexibles

        Our European Flexibles division manufactures flexible packaging and converted films used in the food processing and pharmaceutical industries, including freezer film, processed cheese innerwrap and tamper-evident seals. European Flexibles also manufactures and sells polyethylene-based stretch wrap for wrapping and securing pallet loads. European Flexibles sells 70% of its stretch wrap to distributors, and 30% directly to end-users.

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FIAP

        Through FIAP, we manufacture polyvinyl chloride food wrap, unplasticized polyvinyl chloride twist wrap, and converted and printed films. FIAP is known as a specialist in unplasticized polyvinyl chloride twist wrap, which is used to wrap candles, candies and similar products. This product can also be used for battery covers and credit card laminates. The characteristics of this product are similar to cellophane and can be used as a low cost substitute. Films manufactured by FIAP are sold in the United States, Europe, Africa, and the Middle East, mostly through an internal sales force directly to end-users.

Asia/Pacific Operations

        We are a major manufacturer of industrial films, PVC films and printed and converted films in Australia and New Zealand. Our operations in the Asia/Pacific region resemble our North American and European operations with the same variety of films.

        We sell the majority of the products we manufacture in Australia and New Zealand to end-users and the remainder to distributors. The markets for plastic packaging products in Australia and New Zealand are relatively small, offering limited growth opportunities. However, since New Zealand and Australia are significant exporters of high protein products, we expect to participate in the growing market for packaging materials for these products for export to China and Southeast Asia.

        In November 2001, we combined our Liquipac (bag-in-box) business with the Liquibag systems business which we acquired at that time from Visy, and we placed these combined businesses into a new company. We then entered into a joint venture with DS Smith for the combined business. This venture will strengthen and expand the packaging solutions available to our customers in the Asia/Pacific marketplace.

Manufacturing

        We manufacture both industrial grade products, which are manufactured to industry specifications or for distribution from stock, and specialty products, which are manufactured under more exacting standards to assure that their chemical and physical properties meet the particular requirements of the customer or the specialized application appropriate to its intended market. Specialty products generally sell at higher margins than industrial grade products.

        We manufacture polyvinyl chloride food wrap in Griffin, Georgia, in Europe at two Resinite plants strategically located in Spain, and France, in Australia and in New Zealand. In fiscal 2001, we closed our United Kingdom manufacturing operations and the moved its production equipment to Spain during the current fiscal year.

        We manufacture stretch wrap and industrial films at several large geographically dispersed, integrated extrusion facilities located throughout the world, which also have the ability to produce other products. The size and location of those facilities, as well as their capacity to manufacture multiple types of flexible packaging products and to re-orient equipment as market conditions warrant, enable us to achieve savings and minimize overhead and transportation costs.

        At the FIAP facility in Italy, we manufacture polyvinyl chloride food wrap, unplasticized polyvinyl chloride twist wrap, and converted and printed films. We manufacture flexible packaging and converted films in Europe at facilities strategically located in Holland and Belgium. We also manufacture industrial films and flexible packaging and converted films at our facilities in Australia and New Zealand.

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Production

        In the film manufacturing process, resins with various properties are blended with chemicals and other concentrates to achieve a wide range of specified product characteristics, such as color, clarity, tensile strength, toughness, thickness, shrinkability, surface friction, transparency, sealability and permeability. The gauges of our products range from less than one mil (.001 inches) to more than 20 mils. Our extrusion equipment can produce printed products and film up to 40 feet wide. The blending of various kinds of resin combined with chemical and color additives is computer controlled to avoid waste and to maximize product consistency. The blended mixture is melted by a combination of applied heat and friction under pressure and is then mechanically mixed. The mixture is then forced through a die, at which point it is expanded into a flat sheet or a vertical tubular column of film and cooled. Several mixtures can be forced through separate dies simultaneously to produce a multi-layered film (co-extrusion), each layer having specific and distinct characteristics. The cooled film can then be shipped to a customer or can be further processed and then shipped.

        Generally, our manufacturing plants operate 24 hours a day, seven days a week, except for plants located in areas where hours of operation are limited by law, local custom or in cases when 24 hour operations are not economically advantageous.

        We have regularly upgraded or replaced older equipment in order to keep abreast of technological advances and to maximize production efficiencies by reducing labor costs, waste and production time. During the past five fiscal years, we made significant capital improvements, which included the construction of new manufacturing, warehouse and sales facilities, the purchase and lease of new state-of-the-art extrusion equipment and the upgrading of older equipment. We have shifted production among our plants to improve efficiency and cost savings and are upgrading and replacing equipment at certain of these facilities in order to increase production capacity and enhance efficiency. We will continue to upgrade or replace equipment, as we deem appropriate. In fiscal 2001, we installed a new eight color printing press in each of Holland, Australia and New Zealand, which improved our efficiencies and quality and at the same time expanded our product mix.

Quality Control

        We believe that maintaining the highest standards of quality in all aspects of our manufacturing operations plays an important part in our ability to maintain our competitive position. To that end, we have adopted strict quality control systems and procedures designed to test the mechanical properties of our products, such as strength, puncture resistance, elasticity, abrasion characteristics and sealability, which we regularly review and update, and modify as appropriate.

Raw Materials

        We manufacture film products primarily from polyethylene, polypropylene and polyvinyl chloride resins, all of which are available from a number of domestic and foreign suppliers. We select our suppliers based on the price, quality and characteristics of the resins they produce. Most of our purchases of resin in fiscal 2001 have been from 17 of the 19 major international resin suppliers, none of which accounted for more than 21% of our requirements. We believe that the loss of any resin supplier would not have a materially adverse effect on us.

        The resins used by us are produced from petroleum and natural gas. Instability in the world markets for petroleum and natural gas could adversely affect the prices of our raw materials and their general availability, and this could have an adverse effect on our profitability if the increased costs can not be passed on to customers. The cost of resin typically comprises approximately 60% of a manufacturer's cost of goods sold. In fiscal 2001and historically, with limited exceptions, we have been able to pass on substantially all of the price increases and decreases in raw materials to our customers on a penny for penny basis. During fiscal 1999 and fiscal 2000, as a result of frequent increases in resin

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prices, customer resistance and competitive pressure, we were not able to pass on a large part of these increases, and this adversely affected our revenue, gross profit and earnings. There can be no assurance that we will be able to pass on resin price increases on a penny for penny basis in the future.

        We generally maintain a resin inventory of less than or about one month's supply and have not experienced any difficulty in maintaining our supplies. Other raw materials, principally chemical colorings and other concentrates, are available from many sources.

Marketing and Sales

        We believe that our ability to continue to provide superior customer service will be critical to our success. Even in those markets where our products are considered commodities and price is the single most important factor, we believe that our sales and marketing capabilities and our ability to timely deliver products can be a competitive advantage. To that end, we have established good relations with our suppliers and have long-standing relationships with most of our customers, which we attribute to our ability to consistently manufacture high-quality products and provide timely delivery and superior customer service.

        We believe that our research and development efforts, our high efficiency equipment, which is both automated and microprocessor-controlled, and the technical training given to our sales personnel enhance our ability to expand our sales in all of our product lines. An important component of our marketing philosophy is the ability of our sales personnel to provide technical assistance to customers. Our sales force regularly consults with customers with respect to performance of our products and the customers' particular needs and communicates with appropriate research and development staff regarding these matters. In conjunction with the research and development staff, sales personnel are often able to recommend a product or suggest a resin blend to produce the product with the characteristics and properties which best suit the customers' requirements.

        We market our polyethylene products in North America, principally through our own sales force under the supervision of national and regional managers. We generally sell either directly to customers who are end-users of our products or to distributors for resale to end-users.

        We market our polyvinyl chloride and our stretch film products in North America primarily through large distributors. Because we have expanded and continue to expand our product lines, sales personnel are able to offer a broad line of products to our customers.

        In fiscal 2001 and 2000, approximately 64% and 61%, respectively, of our sales in North America were directly to distributors with the balance representing sales to end-users. We serve approximately 10,000 customers worldwide, none of which accounts for more than 5% of our net sales.

        Sales and marketing efforts in Europe and in the Asia/Pacific region are primarily by our sales force to end-users, although distributors are used in cases where the distributor adds value to the customer. Sales offices are assigned to each of our plants and a sales office is located in the United Kingdom.

Distribution

        We believe that the timely delivery to customers of our products is a critical factor in our ability to maintain our market position. In North America, all of our deliveries were by dedicated service haulers, contract carriers and common carriers. This enables us to better control the distribution process and thereby insures priority handling and direct transportation of products to our customers, thus improving the speed, reliability and efficiency of delivery.

        Because of the geographic dispersion of our plants, we are able to deliver most of our products within a 500-mile radius of our plants. This enables us to reduce our use of warehouses to store

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products. However, we also ship products great distances when necessary and export from the United States and Canada.

        Internationally, we use common and contract carriers to deliver most of our products, both in the country of origin and for export. We do not deliver our own products to an appreciable degree.

Research and Development

        We have a research and development department with a staff of approximately 16 persons. In addition, other members of management and supervisory personnel, from time to time, devote various amounts of time to research and development activities. The principal efforts of our research and development department are directed to maintaining and improving quality control in our manufacturing operations, assisting sales personnel in designing specialty products to meet individual customer's needs, developing new products and reformulating existing products to improve quality and/or reduce production costs. During fiscal 2001 and 2000, we focused a significant portion of our research and development efforts on co-extruded, high barrier one sided cling film and MAPAC® (modified atmosphere packaging, designed to either contain gases or allow the migration of gases) technologies.

        Our research and development department has developed a number of products with unique properties, which we consider proprietary, certain of which are protected by patents. In fiscal 2001, 2000 and 1999, we spent approximately $1.2 million, $1.5 million and $1.6 million, respectively, for research and development activities for continuing operations.

Competition

        The business of supplying plastic packaging products is extremely competitive, and we face competition from a substantial number of companies, which sell similar and substitute packaging products. Some of our competitors are subsidiaries or divisions of large, international, diversified companies with extensive production facilities, well-developed sales and marketing staffs and substantial financial resources.

        We compete principally with (i) local manufacturers, who compete with us in specific geographic areas, generally within a 500 mile radius of their plants, (ii) companies which specialize in the extrusion of a limited group of products, which they market nationally, and (iii) a limited number of manufacturers of flexible packaging products who offer a broad range of products and maintain production and marketing facilities domestically and internationally.

        Because many of our products are available from a number of local and national manufacturers, competition is highly price-sensitive and margins are relatively low. We believe that all of our products require efficient, low cost and high-speed production to remain cost competitive. We believe we also compete on the basis of quality, service and product differentiation.

        We believe that there are few barriers to entry into many of our markets, enabling new and existing competitors to rapidly affect market conditions. As a result, we may experience increased competition resulting from the introduction of products by new manufacturers. In addition, in several of our markets, products are generally regarded as a commodity. As a result, competition in such markets is based almost entirely on price and service.

Environmental Matters

        Our operations are subject to various federal, state and local environmental laws and regulations, which govern discharges into the air and water, the storage, handling and disposal of solid and hazardous wastes, the remediation of soil and groundwater contaminated by petroleum products or hazardous substances or wastes, and the health and safety of employees. Compliance with environmental laws may require material expenditures by us. The nature of our current and former operations and the history of industrial uses at some of our facilities expose us to the risk of liabilities or claims with respect to environmental and worker health and safety matters.

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        In addition, under certain environmental laws, a current or previous owner or operator of property may be jointly and severally liable for the costs of investigation, removal or remediation of certain substances on, under or in such property, without regard to negligence or fault. The presence of, or failure to remediate properly, such substances may adversely affect the ability to sell or rent such property or to borrow using such property as collateral. In addition, persons who generate or arrange for the disposal or treatment of hazardous substances may be jointly and severally liable for the costs of investigation, remediation or removal of such hazardous substances at or from the disposal or treatment facility, regardless of whether the facility is owned or operated by such person. Responsible parties also may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. We believe that there are no current environmental matters, which would have a material adverse effect on our financial position or results of operations.

Employees

        At October 31, 2001, we had approximately 3,000 employees worldwide, including officers and administrative personnel. In North America, we have three collective bargaining agreements covering 247 employees. These agreements expire in March 2002, March 2004, and in February 2005. Further, we have collective bargaining agreements at 14 international facilities, covering substantially all of the hourly employees at these facilities. As is common in many foreign jurisdictions, substantially all of our employees in these foreign jurisdictions are also covered by countrywide collective bargaining agreements. While we believe that our relations with our employees are satisfactory, a dispute between our employees and us could have a material adverse effect on our business.

Management

        At January 29, 2002, our directors and executive officers are as follows:

        In accordance with the Governance Agreement with Borden, Inc., now known as Borden Chemical, Inc. ("Borden"), Messrs. Clammer, Kelley, Stoll and Stuart are directors designated by Borden.

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        J. Brendan Barba is one of the founders of our company and has been our President, CEO and a director since our organization in January 1970. In November 1985, Mr. Barba assumed the additional title of Chairman of the Board of Directors.

        Paul M. Feeney has been an Executive Vice President, Finance, CFO and a director of our company since December 1988. From 1980 to 1988 Mr. Feeney was Vice President and Treasurer of Witco Corporation.

        John J. Powers was elected Executive Vice President, Sales and Marketing in May 1996. Prior thereto, he was Vice President—Industrial Products of our company.

        David J. Cron has been Executive Vice President, Manufacturing since July 1997. Prior thereto he was Vice President, Manufacturing, a plant manager and held various other positions since 1976.

        Edgar Reich has been employed by our company since July 1998 as director of European operations. He was elected Vice President, International Operations in November 1998 and Executive Vice President, International Operations in December 1999. Prior to July 1998 he held various international management positions with Witco Corporation.

        Paul C. Vegliante was elected Executive Vice President, Operations in December 1999. Prior thereto he was Vice President, Operations since June 1997 and held various other positions with our company during the previous three years.

        Lawrence R. Noll has been a Vice President and a director of our company since September 1993. For more than 13 years prior thereto, he was the Controller of our company, and he was re-elected Controller in October 1996. He was the Secretary of our company from September 1993 through April 1998.

        James B. Rafferty has been Vice President and Treasurer of our company since October 1996. Prior thereto, he was Assistant Treasurer since July 1996. From 1989 to 1995, Mr. Rafferty was Director of Treasury Operations at Borden, Inc.

        Jean L'Allier has been employed by our company as general counsel since April 1997. He was elected Vice President and General Counsel in November 1997 and elected Secretary in April 1998. For more than five years prior to April 1997 Mr. L'Allier was engaged in the private practice of law as a sole practitioner in New York City.

        Kenneth Avia has served as a director of our company since 1980. Mr Avia has been Executive Vice President of First Data Merchant Services (a merchant credit card processing company) since 1993 and served as Divisional Vice President of Automatic Data Processing, Inc. from 1984 to 1993.

        Adam H. Clammer has served as a director of our company since September 1999. Mr. Clammer has been an executive of Kohlberg Kravis Roberts & Co. from 1996 and was employed by Morgan Stanley & Co. from 1992 to 1995 as an investment banker.

        Paul E. Gelbard has served as a director of our company since 1991. Mr. Gelbard, has been Of Counsel to Warshaw Burstein Cohen Schlesinger & Kuh LLP, counsel to our company, since January 1, 2000. He was Of Counsel to Bachner Tally & Polevoy LLP, prior counsel to our company, from January 1997 to December 1999 and was a partner of such firm from 1974 to 1996.

        Kevin M. Kelley has served as a director of our company since December 2001. Mr. Kelley has been Executive Vice President of Borden since 1999 and was employed by Ripplewood Holdings LLC as a managing director from 1996 to 1999.

        Lee C. Stewart has served as a director of our company since December 1996. Mr. Stewart has been an investment banker with Daniel Stewart and Company since May 2001 and was a vice president of Union Carbide Corporation from 1996 to 2001. He was previously an investment banker with Bear

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Stearns & Co. Inc. for more than nine years prior thereto. He is currently a member of the board of directors of Marsulex Inc. and on the advisory board of Fletcher Asset Management, Inc.

        William F. Stoll, Jr has served as a director of our company since December 1999. Mr. Stoll has been a Senior Vice President and General Counsel to Borden since April 1998 and is a partner of Borden Capital Management Partners and Chairman of Wise Foods, Inc., affiliates of Borden, Inc. Prior thereto he was employed as a counsel to Westinghouse Electric Corporation for more than 20 years, his most recent position being Vice President and Deputy General Counsel since 1993.

        Scott M. Stuart has served as a director of our company since October 1996. Mr. Stuart has been a member of KKR & Co., LLC since 1996; general partner of Kohlberg Kravis Roberts & Co., L.P. in 1995; and an executive of Kohlberg Kravis Roberts & Co. from 1986 to 1994. Mr. Stuart also serves as a member of the Board of Directors of Borden, Newsquest Capital PLC, World Color Press, Inc., Glenisla Group Ltd. (U.K.), KC Cable, KSL Golf Holdings, Inc., KSL Land Corporation, KSL Recreation Corporation and Newsquest Media Group, Ltd.

Governance Agreement

        In connection with the Borden packaging acquisition, we entered into a Governance Agreement with Borden, dated as of June 20, 1996, with respect to certain matters relating to the corporate governance of our company. The Governance Agreement provides that our board of directors shall initially consist of ten members. Borden is entitled to designate four persons to serve on the board, subject to reduction in the event that Borden's stockholdings are reduced below 25% of the outstanding common stock of our company, and to participate in the selection of one independent director so long as Borden's stockholdings remain at 10%.

        The Governance Agreement also provides that Borden will have certain rights to designate directors to serve on specified committees, that the approval of a number of directors that represent at least 66²/3% of the total number of directors will be required on certain specific board actions, and that, as long as Borden owns in excess of 25% of our outstanding shares, a Borden-designated director must be part of the 66²/3% majority. The Governance Agreement also provides Borden with preemptive rights to purchase additional shares in order to maintain its percentage ownership of our outstanding shares so long as Borden holds at least 20% of our outstanding shares.

ITEM 2. PROPERTIES

        Our principal executive and administrative offices are located in a leased building in South Hackensack, New Jersey.

        We own all of our manufacturing facilities except for certain facilities in Australia and New Zealand. Sales offices are located at each of our plants.

        We are in the process of selling the land where our former United Kingdom's manufacturing plant and sales office previously stood.

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        The following chart sets forth manufacturing facilities operated by the Company:

(1)

Where we maintain multiple facilities at any particular location, the square footage has been aggregated. All facilities are owned by us, except for the following facilities, subject to leasehold interests: Christchurch, New Zealand (one of two facilities), Auckland, New Zealand; and Sydney Australia (one of two facilities).

        We believe that all of our properties are well maintained and in good condition, and that the current operating facilities are adequate for present and immediate future business needs. However, we are in the process of increasing capacity and automating some manufacturing operations and relocating and consolidating some manufacturing operations in Europe.

        In aggregate, we currently use approximately 3.1 million square feet of manufacturing, office and warehouse. Sales offices are assigned to each of our plants. As of October 31, 2001, our manufacturing facilities had a combined average annual production capacity exceeding 1.4 billion pounds.

ITEM 3. LEGAL PROCEEDINGS

        We are, from time to time, a party to litigation arising in the normal course of its business. We believe that there are currently no material legal proceedings the outcome of which would have a material adverse effect on our financial position or our results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our Common Stock is quoted on the Nasdaq National Market under the symbol "AEPI." The high and low closing prices for our Common Stock, as reported by Nasdaq Stock Market, Inc., for the two fiscal years ended October 31, 2000 and 2001, respectively, are as follows:

        On December 31, 2001, the closing price for a share of our common stock, as reported by Nasdaq, was $23.96.

        As of December 31, 2001, our common stock was held by approximately 1,800 stockholders of record or through nominee or street name accounts with brokers.

        No dividends have been paid to stockholders since December 1995. We paid cash dividends to our stockholders each fiscal quarter during the period from May 1, 1993, through October 31, 1995. In December 1995 our board of directors announced that future dividends would be suspended and that otherwise available funds would be reinvested in our business. The payment of future dividends is within the discretion of the board of directors and will depend upon business conditions, our earnings and financial condition and other relevant factors. We are subject to a number of covenants under the term loan and revolving credit facility and the Indenture pursuant to which our 9.875% Senior Subordinated Notes were issued and the credit facility that replaced the term loan and revolving credit facility in November 2001, including restrictions on the amount of dividends that may be paid.

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ITEM 6. SELECTED FINANCIAL DATA

*

Selected consolidated financial data for the years ended October 31, 1997 and 1998, have been restated to record the disposal of the Proponite division, which has been accounted for as a discontinued operation.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        Our primary business is the manufacturing and marketing of plastic films for use in the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, construction, agricultural and textile industries. We currently have manufacturing operations located in 9 countries in North America, Europe, and the Asia/Pacific region. We manufacture plastic films principally from resins blended with other raw materials. We may either sell the film or further process it by metallizing, printing, laminating, slitting or converting it. Our processing technologies enable us to create a variety of value-added products according to the specifications of our customers.

        Resin costs generally constitute approximately 60% of the cost of goods sold. Since resin costs typically fluctuate, selling prices are generally determined as a "spread" over resin costs, usually expressed as cents per pound. Accordingly, costs and profits are most often expressed in cents per pound, and, with certain exceptions, the historical increases and decreases in resin costs have generally been reflected over a period of time in the sales prices of the products on a penny for penny basis. Assuming a constant volume of sales, an increase in resin costs should therefore result in increased sales revenues but lower gross profit as a percentage of sales or gross profit margin, while a decrease in resin costs should result in lower sales revenues with higher gross profit margins.

Results of Operations

Year Ended October 31, 2001, as Compared to Year Ended October 31, 2000

Continuing Operations

        Net sales for the year ended October 31, 2001, decreased by $61.6 million or 8.8% to $639.7 million from $701.3 million in the prior fiscal year. Net sales in North America decreased to $417.2 million during fiscal 2001 from $449.7 million in fiscal 2000, or 7.2%, primarily due to a 4.2% decrease in sales volume in addition to a 3.2% decrease in per unit selling prices as a result of lower raw material costs, primarily resin, which were partially passed through to customers. Net sales in Europe decreased to $156.2 million for fiscal 2001 from $179.0 million in fiscal 2000, or 12.7%, primarily due to a 7.9% decrease in average selling prices in addition to a decrease in sales volume of 5.2% because of the continuing economic pressures of the region. Net sales in Asia/Pacific decreased to $66.2 million in fiscal 2001 from $72.7 million in fiscal 2000, or 8.8%, primarily due to decreases of 4.9% in average selling prices and 4.2% in sales volume, which resulted from the economic pressures of the region.

        Gross profit for the year ended October 31, 2001, amounted to $121.7 million compared to $123.5 million for fiscal 2000. North America experienced an 8.0% increase in gross profit of $7.0 million to $94.8 million for fiscal 2001 as a result of lower raw material costs and change in product mix. Gross profit in Europe decreased 19.5% to $21.1 million for fiscal 2001, primarily due to a decrease in average selling prices of 7.9% in addition to a reduction in sales volume of 5.2%, both of which resulted from the continuing economic pressures of the region. The European businesses also incurred additional costs of $1.8 million in both fiscal 2001 and 2000 associated with the shutdown of our North Baddesley, England, facilities and costs associated with the transfer of the manufacturing equipment from the UK to Spain. Asia/Pacific gross profit for fiscal 2001 decreased by $3.8 million, or 39.6%, as a result of a 4.9% decrease in average per unit selling prices and a 4.2% decrease in volume due to the competitive and economic pressures of the region. Gross profit was further reduced by $1.4 million for fiscal 2001 for the restructuring charges recorded for the shut down of the Melbourne, Australia, facility.

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        Operating expenses for the year ended October 31, 2001 decreased $3.3 million, or 3.2%, to $99.2 million from $102.6 million in fiscal 2000. Delivery expenses decreased $3.2 million, primarily due to a decrease in average third party delivery costs in North America and the reduction in worldwide sales volume of 4.4% in fiscal 2001 versus fiscal 2000. Selling and general and administrative expenses decreased by approximately $200,000, with no significant increases or decreases in any one area.

        Interest expense for the year ended October 31, 2001, was $28.2 million compared to $31.8 million for the year ended October 31, 2000. This decrease in interest expense resulted from lower average debt outstanding for the period combined with lower average interest rates paid during the current period.

        Other income (expense) for fiscal 2001 amounted to $5.1 million. This amount included foreign currency exchange gains realized during the period, gains on sales of property, plant and equipment and interest income.

        In April 2001, the Company sold its one half interest in Hitachi Filtec joint venture for $10.1 million, which resulted in a loss of $6.5 million after all fees and investment costs.

        Net loss from continuing operations for fiscal 2001, was $4.4 million compared to net loss from continuing operations of $4.3 million for fiscal 2000. This additional loss was primarily due to the decrease in average selling prices and sales volume for the fiscal year. The Company also incurred additional restructuring charges of $1.8 million for the close down of its manufacturing facilities in England and $1.4 million of restructuring charges for the closedown of its Melbourne, Australia, plant.

Year Ended October 31, 2000, as Compared to Year Ended October 31, 1999

Continuing Operations

        Net sales for the year ended October 31, 2000, increased by $31.3 million, or 4.7%, to $701.3 million from $670.1 million in the prior fiscal year. Net sales in North America increased to $449.7 million during fiscal 2000 from $408.2 million in fiscal 1999, or 10.2%, primarily due to a 1.2% increase in sales volume in addition to a 8.9% increase in per unit selling prices as a result of higher raw material costs which were partially passed through to customers. Net sales in Europe decreased to $179.0 million for fiscal 2000 from $186.1 million in fiscal 1999, or 3.8%, primarily due to a 3.6% decrease in average selling prices. Net sales in Asia/Pacific decreased to $72.7 million in fiscal 2000 from $75.7 million in fiscal 1999, or 4.1%, primarily due to a 5.3% decrease in average selling prices which resulted from the economic pressures of the region, partially offset by an increase in sales volume of 1.2%.

        Gross profit for the year ended October 31, 2000, amounted to $123.5 million compared to $142.0 million for fiscal 1999. North America experienced a decrease in gross profit of $6.5 million for fiscal 2000 due to higher raw material costs, primarily resin, which progressively increased during the latter part of fiscal 1999 and the first six months of fiscal 2000 which were only partially passed through to our customers because of the competitive market place. Gross profit in Europe decreased 29.5% to $26.5 million for fiscal 2000, primarily due to increased raw material prices not completely passed through to customers, a charge of $1.8 million associated with the shut down and consolidation of our North Baddesley, England facilities, as well as the general economic pressures in Eastern Europe which resulted in lower average selling prices and lower margins. Asia/Pacific gross profit for fiscal 2000 decreased by $881,000, or 8.8%, due to a 5.3% decrease in average per unit selling prices and the inability to completely pass through raw material increased costs which resulted from the economic pressures of the region.

        Operating expenses for the year ended October 31, 2000 decreased $2.2 million, or 2.1%, to $102.6 million from $104.8 million in fiscal 1999. Selling and general and administrative expenses decreased by a net amount of $800,000, with no significant increases or decreases in any one area.

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Delivery expenses decreased $1.4 million, primarily due to a decrease in average third party delivery costs in North America.

        Interest expense for the year ended October 31, 2000, was $31.8 million compared to $31.5 million for fiscal 1999. This increase in interest expense resulted from a charge to interest expense of $787,000, primarily due to the Company's amendment of its Credit Agreement in April 2000, which represented a write off of the unamortized prior debt issuance costs, which was partially offset by lower average debt outstanding for the period.

        Other income (expense) for fiscal 2000 amounted to $3.8 million. This amount includes foreign currency transaction gains realized during the period, gains on sale of equipment and income from investment in joint venture.

        Net loss from continuing operations for fiscal 2000 was $4.3 million compared to net income from continuing operations of $4.5 million for fiscal 1999. This decrease was primarily due to the decrease in per unit gross profit margins, which was a direct result of increased raw material costs that were only partially passed through to customers as discussed above. The Company also incurred a charge of $1.9 million for the period for the close down of its manufacturing facilities in England.

Discontinued Operations

        The gain from discontinued operations in fiscal 2000 of $222,000 resulted from the final disposition of the Proponite business that was sold in fiscal 1999. The loss from discontinued operations for fiscal 1999 of $18.9 million included the net losses of the Proponite business of $1.2 million for the period ended January 31, 1999. This loss also included an after tax charge of $17.2 million, established to write down property, plant and equipment, inventory and other assets and to provide for closedown expenses and the net losses for the period ended October 31, 1999. The rigids businesses in 1999 also had an additional net charge of $577,000.

Liquidity and Capital Resources

        We have historically financed our operations through cash flow generated from operations and borrowings by us and our subsidiaries under various credit facilities. Our principal uses of cash have been to fund working capital, including operating expenses, debt service and capital expenditures.

        Our working capital amounted to $39.0 million at October 31, 2001, compared to $32.6 million at October 31, 2000. This increase of $6.4 million in working capital is primarily attributable to the refinancing of our credit facility in November 2001 which reduced our current debt payable by $18.2 million. In addition, marking our derivatives to market in accordance with FASB 133 resulted in an unrealized gain of $956,000 on our derivative financial instruments held by us in other current assets at October 31, 2001. These increases were offset by net reductions in our accounts receivable, inventory and accounts payable. The remaining increases and decreases in components of our financial position reflect the reduced selling prices and lower raw material costs associated with the operating activity for fiscal 2001.

        On October 11, 1996, we entered into the Credit Agreement with the Morgan Guaranty Trust Company, as Agent. The Credit Agreement provided us with two credit facilities, consisting of a long-term credit facility in the amount of $350.0 million and a revolving credit facility currently for an amount up to $75.0 million. As of October 31, 2001, there was $39.3 million outstanding under the term credit facility. At October 31, 2001, there was a standby letter of credit in the amount of $1 million held as security against the Pennsylvania Industrial Loan due on February 24, 2002, thereby reducing the revolving credit facility availability to $74 million. There were no additional borrowings under this revolving credit facility at October 31, 2001.

17

        On April 19, 2000, we entered into an amendment to the Credit Agreement (the "Amendment"). The principal effects of the Amendment relate to certain changes in the financial ratios contained in the Credit Agreement, the change of the interest rate applicable to the Credit Agreement and the granting of security interests in our accounts receivables and inventory located in North America and in 66% of our equity interest in certain foreign subsidiaries. The interest rate margins which determine the interest rates applicable to the loans under the Credit Agreement increased as follows: the margin applicable to Base Rate loans (formerly 0% to .75%) increased to a range from .25% to 2.00% and the margin applicable to LIBOR Rate loans (formerly .45% to 1.75%) increased to a range from 1.25% to 3.00%.

        The Credit Agreement, as amended, contained financial covenants, the most significant of which are a cash flow ratio and a fixed charge coverage ratio. For the period from August 1, 2001, through October 31, 2001, the cash flow ratio may not exceed 4.0:1. For the period from August 1, 2001, through October 31, 2001, the fixed charge coverage ratio may not be less than 1.5:1. The Indenture pursuant to which we issued $200.0 million of 9.875% Senior Subordinated Notes contains customary covenants including limitations on the incurrence of debt, the disposition of assets and the making of restricted payments. We are currently in compliance with all of these covenants, and do not foresee any problems in remaining in compliance with these covenants.

        On November 20, 2001, we entered into a loan and security agreement with Congress Financial Corporation, as agent, and the financial institutions named in the agreement, as Lenders. Under this new credit facility the Lenders provided a maximum credit facility of $85 million, including a letter of credit facility of up to $20 million. Amounts available for borrowing are based upon the sum of eligible domestic values of building and equipment at closing date and eligible accounts receivable and inventories on a monthly basis. The new credit facility is secured by mortgages and liens on our domestic assets and in 66% of our equity interest in certain foreign subsidiaries. The agreement contains customary covenants including limitations on the incurrence of debt, the disposition of assets, the making of restricted payments, and minimum EBITDA requirements if the loan's excess availability is less than $20.0 million. At the closing, the Company borrowed the sum of $52.1 million, of which $51.8 million was used to pay off and terminate the existing term loan and revolving credit facility. Rates under the new facility are comparable to those under the prior facility.

        We maintain various unsecured short-term credit facilities at some of our foreign subsidiaries. At October 31, 2001, the aggregate amount outstanding under such facilities was $1.5 million, and $35.3 million was available for borrowing. Borrowings from these facilities are used to support operations at such subsidiaries and are generally serviced by cash flow from operations.

        Our cash and cash equivalents were $3.2 million at October 31, 2001, as compared to $2.9 million at October 31, 2000. Net cash provided by operating activities for the year ended October 31, 2001, was $37.3 million, consisting primarily of depreciation and amortization expense of $28.6 million, reduction of trade accounts receivable by $10.2 million, decrease in inventories on hand by $6.9 million, increase in accrued expenses of $2.6 million and a non-cash loss on the sale of our interest in the Hitachi Filtec joint venture of $6.5 million. These activities were partially offset by the net loss for the period of $4.4 million, reduction of trade accounts payable of $6.4 million, net gains on sale of property, plant and equipment of $4.2 million and net increases in other operating assets and liabilities of $2.5 million. In each period, the net decreases in other operating assets and liabilities reflect normal operating activity.

        Net cash used in investing activities was $5.4 million for the year ended October 31, 2001, which resulted primarily from our net investment in capital expenditures of $22.0 million, offset by net proceeds from the sale of the Company's investment in Hitachi Filtec joint venture of $9.6 million and sales of property, plant and equipment of $7.0 million.

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        Net cash used in financing activities in fiscal 2001 was $31.4 million, reflecting net repayments of $36.4 million on available credit facilities partially offset by proceeds from stock issuances of $5.0 million.

        The remaining increases and decreases in the components of our financial position reflect normal operating activity.

        We believe that our cash flow from operations, combined with the availability of funds under the new credit facility and credit lines available to our foreign subsidiaries for local currency borrowings will be sufficient to meet our working capital, capital expenditure and debt service requirements for the foreseeable future.

Contingencies

        The Company's Holland subsidiary has been served by the European Commission with a notice to produce various documents and other evidence relating to their investigation of a possible violation of European Competition Law. The Company is cooperating with the European Commission in its investigation. No litigation is pending against the Company involving this matter. At this time, the Company is not in a position to evaluate the outcome of this investigation.

Effects of Inflation

        Inflation is not expected to have significant impact on our business.

New Accounting Standards

        In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangibles". These standards establish requirements for reporting and accounting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 16, "Business Combinations" and No. 17, "Intangible Assets". These standards require Business Combinations to be accounted for as purchases, broaden the criteria for recording intangible assets separate from goodwill and requires the use of a non-amortization approach for purchased goodwill and certain intangible assets. Under the non-amortization approach, goodwill and certain intangible assets will not be amortized in the results of operations, but will be reviewed for impairment at least on an annual basis. This standard is effective no later than the Company's fiscal year beginning November 1, 2002, but may be adopted on November 1, 2001. The Company has elected to adopt this standard on November 1, 2001. The Company has recorded $867,000, $983,000 and $760,000 of goodwill amortization expense (net of related tax benefit) for the years ended October 31, 2001, 2000 and 1999, respectively. The Company has not completed its fair market valuations of the reporting units, but does not expect that any goodwill will be impaired.

        On October 3, 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," although it retains the impairment testing methodology used in SFAS No. 121. The accounting and reporting provisions of APBO No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," are superceded by SFAS No. 144, except that the Statement preserves the requirement of APBO No. 30 to report discontinued operations separately from continuing operations. The Statement covers a variety of implementation issues inherent in SFAS No. 121, unifies the framework used in accounting for assets to be disposed of and discontinued operations, and broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of

19

the entity in a disposal transaction. The Statement is effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 144 on November 1, 2002. The Company does not expect the adoption of the Statement to have a material impact on its results of operations.

Forward Looking Statements

        This Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in this Annual Report. These statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans" and similar expressions. Our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed above and elsewhere in this Annual Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Index:

Report of Independent Public Accountants

        Financial Statements:

Consolidated Balance Sheets as of October 31, 2001 and 2000

Consolidated Statements of Operations—For the years ended October 31, 2001, 2000 and 1999

Consolidated Statements of Shareholders' Equity—For the years ended October 31, 2001, 2000 and 1999

Consolidated Statements of Cash Flows—For the years ended October 31, 2001, 2000 and 1999

Notes to Consolidated Financial Statements

        Financial Statement Schedules:

Schedules included are set forth in Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        Not applicable.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        For information concerning this item, see "Item 1. Business—Management" of Part I hereof and the table and text under the captions "Election of Class A Directors and Nominee Biographies," "Standing Directors Biographies" and "Board of Directors Information" in the Proxy Statement to be filed with respect to the Annual Meeting of Stockholders to be held on April 9, 2002 (the "Proxy Statement"), which information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

        For information concerning this item, see the text and table under the caption "Executive Compensation" in the Proxy Statement, which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        For information concerning this item, see the table and text under the caption "Stock Ownership" in the Proxy Statement, which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        For information concerning this item, see the text under the caption "Other Information Concerning Directors, Officers and Shareholders" in the Proxy Statement, which information is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)

1.    Financial Statements:

        The financial statements of the Company filed in this Annual Report on Form 10-K are listed in Item 8.

2.

Financial Statement Schedules:

        The financial statement schedules of the Company filed in this Annual Report on Form 10-K are listed in the attached Index to Financial Statement Schedules.

3.

Exhibits:

        The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the attached Index to Exhibits.

(b)

Current Reports on Form 8-K:            None

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To AEP Industries Inc.:

        We have audited the accompanying consolidated balance sheets of AEP Industries Inc. (a Delaware corporation) as of October 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended October 31, 2001. These consolidated financial statements and the schedule referred to below 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 auditing standards generally accepted in the 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of AEP Industries Inc. as of October 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States.

        Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statement schedules is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Roseland, New Jersey
January 17, 2002

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AEP INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 2001 AND 2000

(in thousands, except share amounts)

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

23

AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999

(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 SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999

(in thousands)

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

25

AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999

(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

(1)

BASIS OF PRESENTATION:

        AEP Industries Inc. (the "Company") is an international manufacturer of a wide range of plastic film products. The Company's products are used in a number of industrial, commercial, food and agricultural applications and are sold worldwide, including North America, Western Europe and the Asia/Pacific regions.

(2)

SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation—

        The consolidated financial statements include the accounts of all majority-owned subsidiaries. All significant intercompany transactions have been eliminated.

Revenue Recognition—

        Revenues are recognized when products are shipped to customers.

Cash and Cash Equivalents—

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

Use of Estimates—

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property, Plant and Equipment—

        Property, plant and equipment are stated at cost. Depreciation and amortization are computed using primarily the straight-line method over the estimated useful lives of the assets. The cost of property, plant and equipment and the related accumulated depreciation and amortization are removed from the accounts upon the retirement or disposal of such assets and the resulting gain or loss is recognized at the time of disposition. The cost of maintenance and repairs is charged to expense as incurred.

Foreign Currency Translation—

        Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted average exchange rate for each period for revenues, expenses, gains and losses. Translation adjustments are recorded as a separate component of shareholders' equity and transaction adjustments are recorded in other income and expense.

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Research and Development Costs—

        Research and development costs are charged to expense as incurred. Approximately $1.2 million, $1.5 million and $1.6 million were incurred for such research and development during 2001, 2000 and 1999, respectively.

Income Taxes—

        Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, an asset and liability approach is required. Such approach results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities.

        The Company and its subsidiaries file separate foreign, state and local income tax returns and, accordingly, provide for such income taxes on a separate company basis.

Derivatives—

        The Company operates internationally, giving rise to exposure to market risks from changes in interest rates and foreign exchange rates. Derivative financial instruments are utilized by the Company to reduce these risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

        Gains and losses on contracts designated as hedges of net investments in foreign subsidiaries are accrued as exchange rates change and are recognized in shareholders' equity as cumulative translation adjustments. Gains and losses on contracts designated as hedges of identifiable foreign currency firm commitments are included in the measurement of the related foreign currency transaction.

        Effective November 1, 2000, the Company adopted FASB Statement 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. For derivative instruments designated and qualifying as cash flow hedges of anticipated foreign currency denominated transactions, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income/(loss) in shareholders' equity, and is reclassified into earnings when the hedged transaction affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the gain or loss on the associated financial instrument is recorded immediately in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gain or loss on these hedges is recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

        The cumulative adjustment recorded on November 1, 2000, to reflect the adoption of FAS 133 was to increase current assets and other comprehensive income by $4.4 million. Since adoption, changes in the fair value of derivative financial instruments held by the Company for the year ended October 31, 2001, resulted in net losses of $3.4 million. At October 31, 2001, changes in the fair value of derivative financial instruments held by the Company resulted in unrealized gains of $956,000, which were recognized for the period in other current assets and in shareholders' equity as a component of other comprehensive income.

Goodwill—

        Goodwill, representing the excess of the purchase price over the fair value of the net assets of acquired entities, is being amortized on a straight line basis over the period of expected benefit of

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35 years. The Company evaluates whether changes have occurred that would require revision of the remaining estimated useful life of the assigned goodwill or render the goodwill not recoverable. No reduction of goodwill for impairment was needed in 2001 or previous years.

Fair Value of Financial Instruments—

        Cash, accounts receivable, accounts payable and accrued expenses are reflected in the financial statements at fair value because of the short term maturity of those instruments. The fair value of the Company's debt and hedge contracts is discussed in Notes 6 and 7, respectively.

Concentration of Credit Risk—

        Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, trade receivables and financial instruments used in hedging activities.

        The Company places its cash equivalents and short-term investments with high-quality-credit institutions and limits the amount of credit exposure with any one financial institution.

        The Company sells its products to a large number of geographically diverse customers in a number of different industries, thus spreading the trade credit risk. The Company extends credit based on an evaluation of the customer's financial condition, generally without requiring collateral. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.

        The counterparties to the agreements relating to the Company's foreign exchange and interest rate instruments consist of a number of major, international financial institutions. The Company does not believe that there is significant risk of nonperformance by these counterparties as the Company continually monitors the credit ratings of such counterparties and limits the financial exposure and the amount of agreements entered into with any one institution.

Earnings Per Share—

        Basic EPS is calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. The number of shares used in such computation for the years ended October 31, 2001, 2000 and 1999, was 7,717,028, 7,493,685 and 7,333,670, respectively. Diluted EPS is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding, adjusted to reflect potentially dilutive securities (options). As a result of the net loss for the years ended October 31, 2001 and 2000, no equivalent shares attributable to options were considered in computing diluted EPS, as the effect would be anti-dilutive on the per share calulations. The computation of diluted earnings per share for the year ended October 31, 1999 was 7,509,672 shares. The computation of diluted EPS for fiscal 1999 includes 176,002 incremental shares for options outstanding and excludes 156,310 anti-dilutive options for the year then ended.

Stock Based Compensation—

        The Company accounts for its stock-based compensation awards to employees and directors under the accounting prescribed by Accounting Principles Board Opinion ("APBO") No. 25 and provides the disclosures required by SFAS No.123 "Accounting for Stock-Based Compensation" (See Note 8).

Long-Lived Assets—

        Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recovered. Assets to be disposed of are reported at the lower of the carrying value or the fair market value less costs to sell. In 1999, the Company recognized an impairment loss in the net

29

assets of discontinued operations. The fair value estimated by the Company was determined by market evaluations by qualified brokers (see Note 16).

New Accounting Standards—

        In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangibles". These standards establish requirements for reporting and accounting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 16, "Business Combinations" and No. 17, "Intangible Assets". These standards require Business Combinations to be accounted for as purchases, broaden the criteria for recording intangible assets separate from goodwill and requires the use of a non-amortization approach for purchased goodwill and certain intangible assets. Under the non-amortization approach, goodwill and certain intangible assets will not be amortized in the results of operations, but will be reviewed for impairment at least on an annual basis. SFAS No. 142 is effective no later than the Company's fiscal year beginning November 1, 2002, but may be adopted on November 1, 2001. The Company has elected to adopt this standard on November 1, 2001. The Company has recorded $867,000, $983,000 and $760,000 of goodwill amortization expense (net of related tax benefit) for the years ended October 31, 2001, 2000 and 1999, respectively. The Company has not completed its fair market valuations, but does not expect that any goodwill will be impaired.

        On October 3, 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," although it retains the impairment testing methodology used in SFAS No. 121. The accounting and reporting provisions of APBO No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," are superceded by SFAS No. 144, except that the Statement preserves the requirement of APBO No. 30 to report discontinued operations separately from continuing operations. The Statement is effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 144 on November 1, 2002. The Company does not expect the adoption of the Statement to have a material impact on its results of operations.

(3)

INVENTORIES:

        Inventories, 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 56% and 60% of total inventories at October 31, 2001 and 2000, respectively. Inventories would have been decreased by $2.1 million and increased by $1.3 million at October 31, 2001 and 2000, 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.

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(4)

PROPERTY, PLANT AND EQUIPMENT:

        A summary of the components of property, plant and equipment and their estimated useful lives is as follows—

        Maintenance and repairs expense was approximately $10.6 million, $10.1 million and $12.9 million for the years ended October 31, 2001, 2000 and 1999, respectively.

(5)

ACCRUED EXPENSES:

        At October 31, 2001 and 2000, accrued expenses consisted of the following—