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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

AEP INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(UNAUDITED)

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

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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 necessary for the fair presentation of the consolidated financial position as of July 31, 2004, the results of operations for the three and nine months ended July 31, 2004 and 2003 and cash flows for the nine months ended July 31, 2004 and 2003, have been made. The results of operations for the three and nine months ended July 31, 2004, are not necessarily indicative of the results to be expected for the full year.

        Certain prior period amounts related to the Company's discontinued Spanish operations (see Note 11) have been reclassified to conform to the current period's presentation.

        Certain information and footnote disclosures normally included in consolidated 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 on Form 10-K for the year ended October 31, 2003, filed with the U.S. Securities and Exchange Commission on February 12, 2004.

(2)    Earnings Per Share (EPS)

        Basic earnings per share ("EPS") is calculated by dividing income (loss) 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 of basic EPS for the three months ended July 31, 2004 and 2003 was 8,383,692 and 8,146,958, respectively. The number of shares used in such computation for the nine months ended July 31, 2004 and 2003 was 8,303,705 and 8,028,488, respectively. Diluted EPS is calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding, adjusted to reflect potentially dilutive securities (options) using the treasury stock method. Due to the net losses for the three and nine months ended July 31, 2004 and 2003, the assumed net exercise of stock options in those periods was excluded, as the effect would have been anti-dilutive. At July 31, 2004 and 2003, the Company had 569,312 and 147,130 options outstanding, respectively, that could potentially dilute basic earnings per share in future periods that have net income.

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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, less vendor rebates, and are comprised of the following:

        The last-in, first-out (LIFO) method was used for determining the cost of approximately 51% and 47% of total inventories at July 31, 2004 and October 31, 2003, respectively. Inventories would have been increased by $7.4 million and $4.0 million at July 31, 2004 and October 31, 2003, respectively, if the first-in first-out (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, 2004 and 2003, other income (expense), net on the consolidated statements of operations consists of the following:

(5)    Segment and Geographic 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 (excluding the discontinued operations of the Spanish subsidiary) by geographical area, with United States and Canada stated separately, for the three and nine months ended July 31, 2004 and 2003, respectively, is as follows:

        Operating income includes all costs and expenses directly related to the geographical area.

(6)    Derivative Instruments

        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

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approval, reporting and monitoring of derivative financial instrument activities. The Company does not hold or issue derivative financial instruments for trading purposes. The Company primarily enters into forward exchange contracts with terms that mirror the existing short-term intercompany loans, which give rise to the foreign currency risk. In addition, the Company hedges foreign currency risk on third party commitments with a duration of one year or less. At the inception of the hedge, foreign currency risk derivatives are designated as cash flow hedges and appropriate documentation is prepared. On an on-going basis, the Company assesses hedge effectiveness for all designated hedges in order to determine that each derivative continues to be effective.

        Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138 and SFAS No. 149, 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 used to hedge existing foreign currency denominated assets or liabilities, the gain or loss on these hedges is recorded immediately in operations to offset the changes in the foreign currency component of the fair value of the assets or liabilities being hedged. 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 operations when the hedged transaction affects operations. 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 operations. The change in value of the portion of the cash flow derivative not designated as a hedge is recorded in operations.

        For the nine months period ended July 31, 2004 and 2003, the changes in the net fair value of derivative financial instruments designated as cash flow hedges by the Company was a gain of $331,000 and a loss of $186,000, respectively, which are included in accumulated other comprehensive income (loss).

        The Company is exposed to credit losses if the counterparties to its outstanding derivative contracts are unable to perform their obligations. However, it does not expect any counterparties to fail to perform, as they are major financial institutions with high credit ratings and financial strength. Nevertheless, there is a risk that the Company's exposure to losses arising out of derivative contracts could be material if the counterparties to such agreements fail to perform their obligations.

(7)    Shareholders' Equity

        SFAS. No. 148 "Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No. 148"), provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also requires prominent disclosure about the effects on reported net income (loss) of an entity's accounting policy decision with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. We adopted SFAS No. 148 in the first quarter of fiscal 2003. Since we have not changed to a fair value method of stock-based compensation, the applicable portion of this statement only affects our disclosures.

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        The Company does not recognize compensation expense relating to employee stock options because options are only granted with an exercise price at least equal to the fair value of the Company's common stock on the effective date of the grant. If we had elected to recognize compensation expense using a fair value approach and, therefore, determined the compensation based on the value as determined by the Black-Scholes option pricing model, the pro forma net loss and loss per share would have been as follows:

        The fair value of each option was estimated on the date of grant using the following weighted average assumptions:

        The Company's 1995 Stock Option Plan expires on December 31, 2004. The Company's Board of Directors adopted the AEP Industries Inc. 2005 Stock Option Plan ("2005 Option Plan") and the Company's shareholders approved the 2005 Plan at its annual shareholders meeting held on April 13, 2004. The 2005 Plan will become effective January 1, 2005 and will expire on December 31, 2014. The 2005 Option Plan provides for the granting of incentive stock options ("ISOs") which may be exercised over a period of ten years and the issuance of Stock Appreciation Rights (SARs), restricted stock, performance shares and nonqualified stock options, including fixed annual grants, to nonemployee directors. Under the 2005 Option Plan, outside directors receive a fixed annual grant of 1,000 options at the time of the annual meeting of shareholders. The Company has reserved 1,000,000 shares of the Company's common stock for issuance under the 2005 Option Plan. These shares of common stock may be made available from authorized but unissued common stock, from treasury shares or from shares purchased on the open market.

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        During the nine months ended July 31, 2004 and 2003, the Company issued 154,036 and 234,470 shares, respectively, from treasury shares to fund the Company's 401(k) Savings and Employee Stock Ownership Plan contribution.

        The Company's 1995 Employee Stock Purchase Plan ("1995 Purchase Plan") provides for an aggregate of 300,000 shares of common stock which have been made available for purchase by eligible employees of the Company, including directors and officers, through payroll deductions over successive six-month offering periods. The purchase price of the common stock under the 1995 Purchase Plan is 85% of the lower of the last sales price per share of common stock in the over-the-counter market on either the first or last trading day of each six-month offering period.

        During the nine months ended July 31, 2004 and 2003, 74,070 and 59,936 shares, respectively were purchased by employees pursuant to the 1995 Purchase Plan, which expires on June 30, 2005. The Company's Board of Directors adopted the AEP Industries Inc. 2005 Employee Stock Purchase Plan ("2005 Purchase Plan") and the Company's shareholders approved the 2005 Purchase Plan at its annual shareholders meeting held on April 13, 2004. The 2005 Purchase Plan will become effective July 1, 2005 and will expire on June 30, 2015. The Company has reserved a maximum of 250,000 shares of the Company's common stock which will be made available for purchase by eligible employees, including employee directors and officers. The 2005 Purchase Plan will operate the same manner as the 1995 Purchase Plan, as outlined above.

(8)    Pension

        The Company has defined benefit plans at selected foreign locations. For most salaried employees, benefits under these plans generally are based on compensation and credited service. For most hourly employees, benefits under these plans are based on specified amounts per year of credited service, as defined. The Company funds these plans in amounts actuarially determined or in accordance with the funding requirements of local law and regulations.

        The components of net periodic benefit costs for the foreign defined benefit pension plans are as follows:

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(9)    Income Taxes

        Income taxes are accounted for using the asset and liability method. 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. A valuation allowance is established against deferred tax assets and is recorded when management estimates that it is more likely than not that the asset will not be realized.

        The provision for income taxes for the three months ended July 31, 2004 was $2.4 million on income before the provision of $0.5 million and the provision for income taxes the nine months ended July 31, 2004 was $6.3 million on income before the provision for income taxes of $4.8 million. In addition, the provision excludes approximately $1.6 million and $3.1 million of tax benefits for the three and nine months ended July 31, 2004 for foreign entities with net losses for which the Company has determined that it is more likely than not that the tax benefit will not be fully realized.

        The provision for income taxes for the three months ended July 31, 2003 was $3.6 million on income before the provision for income taxes of $1.5 million and the provision for income taxes for the nine months ended July 31, 2003 was $4.0 million on the loss before the provision for income taxes of $5.1 million. The provision for incomes taxes reflects the provision for entities having taxable income and excludes benefits for those foreign entities with net losses in which the Company has determined that it is more likely than not that the current tax benefit will not be fully realized.

        During the second quarter of fiscal 2004, the examination by the Internal Revenue Service of the Company's United States income tax returns for fiscal years 1995 through 1998 were closed. In May 2004, the Company received a tax refund in the amount of $1.8 million plus accrued interest of $800,000 (subsequently reduced in the third quarter by $314,000 as a result of the final settlement with the Internal Revenue Service) the effects of which have been recognized in the accompanying consolidated financial statements.

(10)    Liquidation of Fabbrica Italiana Articoli Plastici SpA

        On September 22, 2003, the Board of Directors of the Company's Italian holding company voted to voluntarily liquidate its Italian operating company, Fabbrica Italiana Articoli Plastici SpA ("FIAP"), because of its continued losses.

        FIAP manufactured flexible packaging, primarily thin PCV film for twist wrapping and general over wrap. The Company does not believe the activities of FIAP represent a separate major line or component of its business or separate class of customers as production and sale of similar products are done in other AEP European facilities. The Company's other facilities are expected to continue to produce and supply some of FIAP's customers. As a result, the Company has not recorded the losses associated with the shut down as a discontinued operation and has included the losses in operating expenses in its consolidated statement of operations.

        During the fourth quarter of fiscal 2003, the Company recorded a pre-tax loss of $13.3 million related to the shutdown of FIAP. This amount included $8.5 million related to asset impairments, allowances and write downs of accounts receivable, inventory, machinery and equipment and other current assets and $4.8 million, of which $2.0 million of employee termination benefits were paid in

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fiscal 2003, related to reserves included in accrued expenses on the consolidated balance sheet. The following is a summary of these reserves:

        Management used its best estimates in establishing the asset impairment charges, allowances, writedowns and reserves recorded as a result of the voluntary liquidation of FIAP. The Company has estimated the net realizable value of accounts receivable based on an analysis of collections made subsequent to October 31, 2003, as well as an assessment of the collectibility of the remaining customer balances for which payment has not been received. The write-down of inventories was determined based on an analysis of sales made subsequent to October 31, 2003, and estimates regarding the net realizable value of inventory remaining to be sold. The Company estimated the net realizable value of machinery and equipment based on sales made subsequent to October 31, 2003, and an estimate of the net realizable value of machinery and equipment remaining to be sold based on third party offers received to date.

        Employee termination benefits related to the severance of 163 employees in the Italian manufacturing facility were determined based on negotiations with the local Italian union. The agreement with the Italian union was comprised of three items: compliance with the Italian government requiring a social plan payout of approximately $977,000, which was paid in September and October of 2003; an exit bonus for each Italian employee negotiated between the Company and the union totaling $1,040,000, which was paid in September and October of 2003; and payment to the termination accrued indemnity fund, a statutorily determined amount in which the Company had accrued monthly and is not reflected in the table above. The accrued amount at September 22, 2003 was approximately $2.7 million. Of this amount, $0.6 million of this amount was paid in October 2003 and the remaining balance of $2.1 million was paid in fiscal 2004. Additionally, as part of the shutdown of the FIAP facility in Italy, the Company has closed it FIAP sales office located in Meudon, France. All five employees have been terminated. The severance package, as required by statutory law, is $1,095,000. $654,000 was paid during the first quarter 2004 and $546,000 was paid during the second quarter of fiscal 2004. There is no remaining liability for employee termination benefits after July 31, 2004.

        The reserve for agent contracts was determined by settled amounts between the Company and the agents after October 31, 2003. Final payments will be made during fourth quarter of fiscal 2004.

        Certain customers have asserted legal claims against the Company for disruption of their business due to the shutdown of FIAP. Estimates of the costs to settle these cases are approximately $601,000.

        Other costs relate to other litigation claims made against the Company and represent the Company's best estimate on settlement.

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        The Company did not record a tax benefit for the above charges or for the pre-tax losses of FIAP, as management believes it is more likely than not that the Company's tax losses will expire unused and as a result, a valuation allowance for the tax benefit has been made.

        The following information summarizes the results of operations of FIAP, excluding the above charges, included in the consolidated statements of operations:

        Expenses during the third quarter 2004 were greater than expected due to additional costs incurred, in compliance with Italian law, regarding the analysis and unanticipated removal of printing inks and chemicals, deemed hazardous. The Company expects to incur additional expenses during the remainder of fiscal 2004 related to the shutdown of FIAP. These expenses relate to the salaries of contracted people who will assist in the shutdown of the facility, utilities, liquidator costs, legal fees, accounting fees and any additional costs that may arise. The Company estimates that at July 31, 2004 these costs will be approximately $0.5 million. The Company also expects to sell the land and building of FIAP owned by its holding company for approximately $5.3 million which approximates its book value, which is recorded in assets held for sale in the consolidated balance sheets. Further, in accordance with SFAS No. 52, Foreign Currency Translation, the Company expects to charge operations for the accumulated translation adjustment component of FIAP's equity when the liquidation is substantially complete. At July 31, 2004, the FIAP accumulated translation loss included in accumulated other comprehensive loss was approximately $8.8 million.

(11)    Discontinued Operations

        In July 2004, the Company's management committed to a plan to dispose of its Spanish subsidiary, a component of the Company's European region, due to its continued losses. In addition, on July 26, 2004, the Company placed its Spanish subsidiary in a Suspension of Payments status under Spanish law. The Spanish subsidiary manufactures a range of products in PVC stretch film, primarily for the automatic and manual wrapping of fresh food and for catering film use.

        In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the disposal of the Spanish subsidiary is being accounted for as a discontinued operation and, accordingly, it assets and liabilities have been segregated from continuing operations in the accompanying consolidated balance sheets, and its operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations. The estimated loss on disposal includes the write-down of machinery and equipment of $5.3 million to its estimated net realizable value less cost to sell; depreciation of machinery and equipment has ceased. It is probable that sale of the Spanish operations will occur within the next twelve months. The Company has not

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recorded a liability for employee termination costs, lease termination costs and any claims that may arise because management believes that potential buyers will retain these liabilities.

        Prior to the decision to dispose of the Spanish subsidiary, it had an accumulated foreign currency translation loss of $3.6 million, which was carried as a reduction of consolidated shareholders' equity. In accordance with SFAS No. 52, Foreign Currency Translation, this amount has been charged to loss from disposition and, an equal and offsetting amount is reported in accumulated other comprehensive loss.

        Condensed financial information related to the discontinued operations of the Spanish subsidiary is as follows:

        Asset and liabilities to be disposed of are comprised of the following at July 31, 2004:

(12)    Commitments and Contingencies

        The Company is involved in routine litigation in the normal course of its business. Such proceedings are not expected to have a material adverse impact on the Company's results of operations, financial position or liquidity.

        In fiscal 2001, the European Commission served the Company's Holland subsidiary with a notice to produce various documents and other evidence relating to its investigation of a possible violation of

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European Competition Law by the subsidiary. The Company is cooperating with the European Commission in its investigation. The Company's last written communication with the European Commission was in January 2002. At this time, no litigation is pending against the Company involving this matter, and the Company is not in a position to evaluate the outcome of this investigation. However, there can be no assurance that in the event that the European Commission serves a Statement of Objections instituting a proceeding against the Company's Holland subsidiary which results in a fine being assessed, that the amount of the fine would not be material.

        In February 2004, the Company's New Zealand subsidiary was served with two summonses and complaints applicable to a business acquired by the subsidiary on November 2, 2001, and immediately transferred to a joint venture company, Rapak Asia Pacific Limited, in which the subsidiary held a 50.1% interest. The complaints allege approximately $9.0 million in damages for defective products manufactured both before and after November 2, 2001. The Company has referred this matter to the insurance carriers that it believes are responsible to defend and indemnify its New Zealand subsidiary for the alleged liability. The insurance carriers have agreed to defend the claims subject to reservations of rights. The Company also believes it may be entitled to indemnification under various agreements. Based on developments to date, the Company believes that the outcome of this matter will not have a material adverse effect on its results of operations, financial position or liquidity.

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Item 2.    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 seven 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 average between 60% and 70% of the cost of goods sold. Since resin costs 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 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, and thus in both cases with no impact on gross profit. While we experienced some pricing relief during the second half of fiscal 2003, the frequent increases in resin prices during our first and second quarters of fiscal 2003, resulted in customer resistance and competitive pressure, and we were not able to pass all of these increases to our customers effectively during the fiscal year ended October 31, 2003. This adversely affected our revenue, gross profit and earnings in fiscal 2003. Resin pricing increased 11% and 8% during the third quarter and the first nine months of fiscal 2004, respectively, in North America and at a much higher rate in our European and Asia/Pacific regions. In North America, we were able to pass through the current and previous period resin increases in the first nine months of fiscal 2004; however resin increases in the European and Asia/Pacific markets were not all passed through during the three and nine months ended July 31, 2004 due to the competitive market place. We anticipate a price increase in resin worldwide during the fourth quarter of fiscal 2004. 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.

Results of Continuing Operations

Three Months Ended July 31, 2004, as Compared to Three Months Ended July 31, 2003

Net Sales and Gross Profit

        Net sales for the three months ended July 31, 2004, increased by $18.7 million, or 10.1%, to $204.9 million from $186.2 million for the three months ended July 31, 2003. The increase in net sales included $4.9 million of positive impact of foreign exchange and $13.8 million from the increased sales volume offset by a slight decrease in per unit selling prices. Net sales in North America increased $22.8 million to $134.7 million in the third quarter of fiscal 2004 from $111.9 million in the same period in the prior fiscal year. The increase was primarily due to a 16.2% increase in sales volume along with a 3.3% increase in per unit average selling prices. The third quarter of 2004 also included $0.4 million of positive impact of foreign exchange relating to our Canadian operations. The increase in average selling prices is attributable to higher raw material costs, primarily resin, which we were able to pass through to our customers in the current period. Net sales in Europe decreased $4.9 million to $37.4 million for the three months ended July 31, 2004, from $42.3 million for the three months ended July 31, 2003. This decrease was a result of the continuing general economic pressures of the region which was affected by continuing strength of the Euro and its ongoing negative impact on the operation's large export business and the competitive marketplace. These conditions reduced per unit selling prices and sales volume by 13.4% and 3.5%, respectively. This resulted in a reduction in net sales of $6.9 million, which was offset by the positive impact of foreign exchange of $2.0 million for the

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period. Net sales in Asia/Pacific increased $0.8 million to $32.8 million for the three months ended July 31, 2004, from $32.0 million for the same period in fiscal 2003, primarily due to the positive impact of foreign exchange of $2.5 million offset by decreases of 3.2% in per unit selling prices and 2.0% in sales volume due to the competitive marketplace.

        Gross profit for the three months ended July 31, 2004, was $34.6 million compared to $29.4 million for the three months ended July 31, 2003. This increase of $5.2 million in gross profit resulted from increased sales volume, primarily in North America offset by a slight decrease in per unit selling prices. Gross profit in North America increased $6.0 million, or 27.9%, to $27.6 million for the quarter ended July 31, 2004, which resulted primarily from our ability to increase customer per unit selling prices during the period to recover higher raw material costs, primarily resin, which we were not able to pass through in fiscal 2003, and at the same time increased third quarter of fiscal 2004 sales volume by 16.2% versus the same period in the prior fiscal year. This increased volume helped reduce per unit manufacturing costs. Gross profit in Europe decreased $0.7 million, or 17.9% to $3.0 million for the three months ended July 31, 2004, from $3.7 million for the three months ended July 31, 2003. This decrease was primarily due to the continuing general economic pressures of the region, which decreased sales volume by 3.5% and lowered per unit selling prices by 13.4%. The reduction in volume had an adverse effect on per unit manufacturing cost for the quarter. This decrease was offset by $0.1 million of the positive effect of foreign exchange. Asia/Pacific gross profit for the three months ended July 31, 2004, decreased to $4.0 million from $4.2 million for the like period in the prior fiscal year. Gross profit decreased by $0.5 million due to reduced sales volume and average per unit selling prices offset by $0.3 million of the positive impact of foreign exchange.

Operating expenses

        Operating expenses for the three months ended July 31, 2004 increased $0.8 million to $27.1 million from the comparable period in the prior fiscal year. The operating expenses increased $2.5 million including $0.6 million of negative impact of foreign exchange offset by decreases of $1.7 million resulting from the closedown of our FIAP and United Kingdom operations during fiscal 2003. Delivery expenses for the third quarter of fiscal 2004 were $9.8 million versus $7.9 million in the prior year. After giving effect to the negative foreign exchange impact of $0.2 million, delivery expenses increased by $1.8 million from the prior year as a result of the 16.2% increase in North America sales volume in addition to slightly higher worldwide third party delivery costs caused by fuel cost increases in the third quarter of fiscal 2004. Selling expenses decreased by $0.9 million to $9.8 million from $10.7 million in the same period in the prior fiscal year. This decrease can be primarily attributed to $0.8 million resulting from the closedown of our FIAP and United Kingdom operations and net reductions in other selling expenses of $0.3 million, which were offset by the negative impact of foreign exchange of $0.2 million. General and administrative expenses for the three months ended July 31, 2004, decreased by $0.3 million to $7.5 million from $7.8 million in the same period in the prior fiscal year. The closedown of our FIAP and United Kingdom operations decreased general and administrative expenses by $0.6 million and was offset by the negative foreign exchange impact on general and administrative expenses of $0.3 million for the period.

Other Operating Income (Expense)

        Other operating income (expense) for the three months ended July 31, 2004 amounted to $5,000 in income versus $219,000 in expense when compared to the same period in the prior fiscal, which were the result of net gains (losses) on sales of property and equipment during the period in both fiscal years..

Interest Expense

        Interest expense for the three months ended July 31, 2004 and 2003, was $6.4 million for both periods. The third quarter fiscal 2004 interest expense includes $55,000 of negative impact of foreign

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exchange offset by decreases of $60,000 in interest expense, which resulted from slightly higher average interest rates paid during the current period, and by lower average debt outstanding for the three months ended July 31, 2004, as compared to the three months ended July 31, 2003.

Other Income (Expense)

        Other income (expense) for the three months ended July 31, 2004, amounted to a $564,000 in expense, a decrease of $332,000 in expense from $896,000 in expense in the comparable prior year period. This amount included $314,000 of reduced interest income that was received from the Internal Revenue Service and subsequently adjusted during the current period as a result of receiving a revised analysis of amounts due to the Company from the Internal Revenue Service. During the current period, we realized $244,000 of foreign currency transaction losses versus losses of $446,000 during the same period in the prior fiscal year due to the number of our hedge contracts settled in each period. We also recorded a loss on our investment in our joint venture of $645,000 in the prior year. On May 14, 2003, we sold our 50.1% ownership of Rapak Asia Pacific Limited ("Rapak") to our joint venture partner, DS Smith (UK) Limited. Other miscellaneous expense amounted to $6,000 for the current fiscal quarter versus income of $195,000 in the prior fiscal period.

Provision (Benefit) for Income Taxes

        The provision for income taxes for the three months ended July 31, 2004, was $2.4 million on income before the provision for income taxes of $0.5 million. The current provision for income taxes for the three months ended July 31, 2004, includes $0.8 million of net tax relating to entities that have taxable income and valuation allowances of $1.6 million relating to certain foreign entities with current period net losses in which we have has determined previously that it is more likely than not that the current tax benefit will not be fully utilized. The provision for income taxes for the three months ended July 31, 2003, was $3.6 million on the income before the provision for income taxes of $1.5 million. The provision for incomes taxes reflects the provision for entities having taxable income and excludes benefits for those foreign entities with net losses in which we have determined that it is more likely than not that the current tax benefit will not be fully utilized.

Discontinued Operations

        In July 2004, we approved a plan to dispose of our Spanish subsidiary, a component of our European region, through a sale due to its continued losses. In addition, on July 26, 2004 we placed our Spanish subsidiary in a Suspension of Payments status under Spanish law. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the disposal of the Spanish subsidiary is being accounted for as a discontinued operation. The loss from discontinued operations for the three months ended July 31, 2004, of $9.7 million includes net losses of the Spanish subsidiary of $0.8 million and $8.9 million in impairment charges at July 31, 2004 relating to write-down of machinery and equipment to fair value less cost to sell of $5.3 million and the write off of accumulated translation adjustments of $3.6 million. We believe that it is probable that the sale of the Spanish operations will occur within the next twelve months. We have not recorded liabilities for employee termination costs, lease termination costs or any claims that may arise because we have assumed that potential buyers will retain all of the liabilities of the subsidiary. The income from discontinued operations for the three months ended July 31, 2003 was $0.1 million, which included $0.3 million of net operating loss tax benefits.

        .

18

Results of Continuing Operations

Nine Months Ended July 31, 2004, as Compared to Nine Months Ended July 31, 2003

Net Sales and Gross Profit

        Net sales for the nine months ended July 31, 2004, increased by $51.2 million, or 9.5%, to $591.4 million from $540.2 million for the nine months ended July 31, 2003. The increase in net sales included $31.9 million of positive impact of foreign exchange, in addition to a $4.2 million from the higher per unit selling prices and $15.1 million from increased sales volume. Net sales in North America increased $48.0 million to $381.2 million in the first nine months of fiscal 2004 from $333.2 million in the same period in the prior fiscal year. The increase was primarily due to a 6.6% increase in per unit selling prices along with an increase of 6.43% in sales volume. The first nine months of fiscal 2004 also included $3.1 million of positive impact of foreign exchange relating to our Canadian operations. The increase in per unit selling prices is attributable to higher raw material costs, primarily resin, which because of the competitive market place were not entirely passed through to customers during fiscal 2003; however we were able to pass through such increased costs during the first nine months of fiscal 2004 along with current period increases. Net sales in Europe decreased $9.9 million to $110.0 million for the nine months ended July 31, 2004, from $119.9 million for the nine months ended July 31, 2003. This decrease was a result of the continuing general economic pressures of the region which was affected by continuing strength of the Euro and its ongoing negative impact on the operations large export business and the overall competitive marketplace. These conditions reduced per unit selling prices and sales volume by 11.1% and 8.4%, respectively. This resulted in a reduction in net sales of $22.2 million, which was offset by the positive impact of foreign exchange of $12.3 million for the period. Net sales in Asia/Pacific increased $13.1 million to $100.1 million for the nine months ended July 31, 2004, from $87.0 million for the same period in fiscal 2003, primarily due to the positive impact of foreign exchange of $16.6 million offset by a 1.3% decrease in per unit pricing and a 2.7% decrease in sales volume.

        Gross profit for the nine months ended July 31, 2004, was $103.5 million compared to $89.3 million for the nine months ended July 31, 2003. This increase of $14.2 million in gross profit was a result of the positive impact of foreign exchange of $3.9 million and increased per unit selling prices, primarily in North America, which improved worldwide gross profit by $10.3 million. Gross profit in North America increased $14.3 million, or 21.8%, to $80.1 million for the nine months ended July 31, 2004, which includes positive impact of foreign exchange of approximately $0.7 million. This overall increase was primarily due to our ability to increase customer per unit selling prices during the current nine month period to recover current and prior periods higher raw material costs, primarily resin, which we were not able to pass through in fiscal 2003 and the increased the sales volume by 6.4% versus the same period in the prior fiscal year. Gross profit in Europe decreased $1.3 million, or 10.4%, to $11.1 million for the nine months ended July 31, 2004, from $12.4 million for the nine months ended July 31, 2003. This decrease was primarily due to the continuing general economic pressures of the region, which decreased sales volume by 8.4%, and lowered per unit selling prices by 11.1%, which reduced gross profit by $2.5 million. The reduction in volume had an adverse effect on per unit manufacturing cost for the period. This decrease was offset by $1.2 million of positive impact of foreign exchange. Asia/Pacific gross profit for the nine months ended July 31, 2004, increased $1.2 million to $12.3 million from $11.1 million for the like period in the prior fiscal year. This increase was primarily the result of the positive impact of foreign exchange of $2.0 million offset by the competitive market which lowered sales volume by 2.7% for the period.

Operating expenses

        Operating expenses for the nine months ended July 31, 2004, were $79.2 million, an increase of $0.6 million, or 0.8%, from $78.6 million for the nine months ended July 31, 2003. The first nine months of fiscal 2004 operating expenses includes $4.0 million of negative impact of foreign exchange

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and other increases of $0.9 million. These increases were offset by $4.3 million in savings which resulted from the closedown of our FIAP and United Kingdom operations during fiscal 2003. Delivery expenses for the first nine months of fiscal 2004 were $27.2 million versus $25.5 million in the prior year period. After giving effect to the negative foreign exchange impact of $1.0 million, delivery expenses increased by $0.8 million from the prior year as a result of the 6.4% increase in sales volume in North America offset by lower worldwide third party delivery costs. Selling expenses decreased by $1.8 million to $29.5 million from $31.3 million in the same period in the prior fiscal year. This decrease is primarily attributed to $1.9 million resulting from the closedown of our FIAP and United Kingdom operations and net reductions in selling expenses of $1.2 million, which resulted from lower salaries and related payroll costs due to reduced head count and lower commissions paid due to reduction in sales volume in our foreign operations. These reductions were offset by the negative impact of foreign exchange of $1.3 million. General and administrative expenses for the nine months ended July 31, 2004, increased by $0.7 million to $22.4 million from $21.7 million in the same period in the prior fiscal year. This increase was primarily due to negative foreign exchange impact of $1.7 million and increases in professional and consulting fees of $0.7 million for the period, offset by the decrease of $1.7 million in general and administrative expenses resulting from the closedown of our FIAP and United Kingdom operations.

Other Operating Income (Expense)

        Other operating expense for the nine months ended July 31, 2004 and 2003 amounted to $4,000 and $42,000, respectively, in expense resulting from net losses from sales of property and equipment during both periods.

Interest Expense

        Interest expense for the nine months ended July 31, 2004, was $19.2 million versus $19.1 million for the same period in fiscal 2003. The first nine months of fiscal 2004 interest expense includes $302,000 of negative impact of foreign exchange offset by decreases of $201,000 in interest expense, which was a result of lower average debt outstanding for the nine months ended July 31, 2004, as compared to the nine months ended July 31, 2003.

Gain on Sale of Joint Venture

        On May 14, 2003, the Company sold its 50.1 percent ownership of Rapak Asia Pacific Limited ("Rapak") to its joint venture partner, DS Smith (UK) Limited and received sale proceeds of $7.5 million, net of expenses. During fiscal 2003, the Company's share of Rapak losses amounted to approximately $1 million, which reduced the investment value to $1.6 million. The sale produced a gain of $5.9 million ($3.5 million after tax).

Other Income (Expense)

        Other income (expense) for the nine months ended July 31, 2004, amounted to a $335,000 in expense, a decrease of $2.3 million in expense from $2.6 million in expense in the comparable prior year period. This amount included $486,000 of interest income received in May 2004 from the Internal Revenue Service based on calculations on our prior period's tax refund claims. During the current period, we realized $945,000 of foreign currency transaction losses versus losses of $1.8 million during the same period in the prior fiscal year due to the number of our hedge contracts settled in each period. We also recorded a loss on our investment in our joint venture of $1.0 million in the prior year. On May 14, 2003, we sold our 50.1% ownership of Rapak Asia Pacific Limited ("Rapak") to our joint venture partner, DS Smith (UK) Limited. Other miscellaneous income amounted to $124,000 for the nine months ended July 31, 2004 versus $254,000 in the prior fiscal period.

20

Provision (Benefit) for Income Taxes

        The provision for income taxes for the nine months ended July 31, 2004, was $6.3 million on income before the provision for income taxes of $4.8 million. The current provision for income taxes for the nine months ended July 31, 2004, includes $3.2 million of net tax relating to entities that have taxable income and valuation allowances of $3.1 million relating to certain foreign entities with current period net losses for which we have has determined that it is more likely than not that the current tax benefit will not be fully utilized. The provision for income taxes for the nine months ended July 31, 2003, was $4.0 million on the loss before the provision for income taxes of $5.1 million. The provision for incomes taxes reflects the provision for entities having taxable income and excludes benefits for those foreign entities with net losses for which we have determined that it is more likely than not that the current tax benefit will not be fully utilized.

Discontinued Operations

        In July 2004, we approved a plan to dispose of our Spanish subsidiary, a component of our European region, through a sale due to its continued losses. In addition, on July 26, 2004 we placed our Spanish subsidiary in a Suspension of Payments status under Spanish law. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the disposal of the Spanish subsidiary is being accounted for as a discontinued operation. The loss from discontinued operations for the nine months ended July 31, 2004 of $11.7 million includes pre tax losses of the Spanish subsidiary of $1.2 million for the period, impairment charges relating to write-down of machinery and equipment to fair value less cost to sell at July 31, 2004 of $5.3 million, the write off of accumulated translation adjustments of $3.6 million and an $1.6 million valuation allowance on deferred tax assets arising from net operating loss carryforwards of the Spanish subsidiary since we previously determined during the first six months of fiscal 2004 that it would not be fully utilized. We believe that it is probable that the sale of the Spanish operations will occur within the next twelve months. We have not recorded liabilities for employee termination costs, lease termination costs or any claims that may arise because we have assumed that potential buyers will retain all of the liabilities of the subsidiary. The net loss from discontinued operations for the nine months ended July 31, 2003 was $0.5 million, which included $0.7 million of net operating loss tax benefits.

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 $76.2 million at July 31, 2004, compared to $51.9 million at October 31, 2003. This $24.3 million increase in working capital was primarily the result of an $18.7 million reduction in accounts payable due to our current policy of accelerating payments to our major suppliers in order to take advantage of certain discounts being offered. In order to accelerate payments to our vendors we borrowed funds under the Congress Financial Corporation facility, which increased long-term debt by $20.0 million. The weakening of the United States dollar during the nine months ended July 31, 2004, increased translated working capital balances of our foreign subsidiaries by $0.6 million. The remaining increases and decreases in components of our net working capital reflect the normal operating activity for the period.

        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 a maximum credit facility of $85 million, including a letter of credit facility of up to $20 million. This credit facility was a three year agreement with our option to extend for two additional years. We exercised one of the options in August 2004, thereby extending the agreement until November 19, 2005, and retained the other option. Amounts available for borrowing

21

are based upon the sum of eligible domestic values of buildings and equipment at the closing date and eligible accounts receivable and inventories on a monthly basis. The credit facility is secured by mortgages and liens on our domestic assets and on 66% of our equity ownership in certain foreign subsidiaries. The agreement contains customary bank covenants, including limitations on the incurrence of debt, the disposition of assets, the making of restricted payments and the payment of cash dividends. If the loan's Excess Availability, as defined, is less than $20.0 million, we must meet certain minimum financial covenants and activate a lock-box whereby daily cash collections would automatically pay down the credit facility. In addition, whenever the lock-box is activated, we are required to classify our debt outstanding from Congress Financial Corporation as a current liability, which may have a material negative impact on our working capital. If the loan's Excess Availability is less than $10.0 million, we are subject to further restrictions including limitations on inter-company funding. During the first nine months of fiscal 2004 the Excess Availability under this credit facility ranged from $31.6 million to $58.0 million. Our Excess Availability under this facility was $49.7 million at July 31, 2004. We currently project that our Excess Availability under this facility will exceed $20.0 million throughout the remainder of fiscal 2004 and through July 31, 2005, at a minimum, based upon budgeted financial statements and budgeted cash requirements. Interest payable under this facility is based upon Excess Availability levels or certain leverage ratios at a margin of prime rate plus .25% to 1.0% for overnight borrowings and LIBOR plus a range of 2.25% to 3.00% for term loans up to one year. As of July 31, 2004, there was $27.9 million outstanding at a weighted average rate of 4.50% under this credit facility. This credit facility expires in November 2006 and is expected to be refinanced at that time.

        In November 1997, we completed an offering of $200.0 million in aggregate principal amount of 9.875% Senior Subordinated Debentures due November 15, 2007 ("Debentures"). The issue price was 99.224% resulting in an effective yield of 10%. The Debentures contain certain customary representations, warranties, covenants and conditions such as, but not limited to, cash flow ratio and certain restrictions on, but not limited to, dividends, consolidations and certain asset sales and additional indebtedness. We were in compliance with all of the covenants of the Debentures at July 31, 2004. In November 2003, we announced that from time to time and as permitted by our various loan agreements, we may repurchase up to $25.0 million of our 9.875% Senior Subordinated Debentures. We have made no repurchases during the nine months ended July 31, 2004.

        We maintain various credit facilities at our foreign subsidiaries. At July 31, 2004, the aggregate amount outstanding under such facilities was $31.1 million, of which $31.1 million is secured by various assets of the foreign subsidiaries, which may include accounts receivable, inventories and machinery and equipment. The carrying amount of the collateral at July 31, 2004, was $99.5 million. There was $7.9 million additional availability under these facilities at July 31, 2004. We guarantee certain of the debt of our foreign subsidiaries through corporate guarantees aggregating approximately $7.8 million at July 31, 2004. There are no existing events of default that would require us to satisfy these guarantees. Borrowings under these facilities are used to support operations at such subsidiaries and are generally serviced by local cash flow from operations.

        On July 28, 2004, AEP Industries Packaging Espana SA, filed for Suspension of Payments status under Spanish law, which was prompted by a demand for repayment by one of the Spanish subsidiary's lending banks. A payment was remitted to the bank in July 2004 of $1.1 million by the Company to satisfy this demand. The Suspension of Payments status under Spanish law allows the debtor to defer current payments to its creditors, which the parties will negotiate the final payment balances. As a result of the continued losses of the Spanish subsidiary, the Company's management approved a plan to dispose of its Spanish subsidiary through a sale to a third party in July 2004. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the disposal of the Spanish subsidiary is being accounted for as a discontinued operation. We believe that it is probable that sale of the Spanish operations will occur within the next twelve months. As a result, we have not recorded a liability for employee termination costs, lease termination costs and any claims that may arise as a result of the disposal.

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        During fiscal 2003, the we entered into two capital leases totaling $4.0 million related to manufacturing equipment. The current portion of these leases is contained in accrued liabilities and the long-term portion of $2.5 million is contained in other long-term liabilities. These capital leases will be paid in full by fiscal 2009.

        Our cash and cash equivalents were $8.3 million at July 31, 2004, as compared to $4.2 million at October 31, 2003. Net cash provided by operating activities from continuing operations during the nine months ended July 31, 2004, was $4.4 million, primarily due to depreciation and amortization of $23.2 million, decreases in net accounts receivable of $6.4 million, in other current assets of $1.3 million, in deferred income taxes of $7.8 million and in other assets of $1.4 million and an increase in long term liabilities of $1.2 million. These funding activities were offset by a net loss for the period of $1.5 million, increases in net inventories of $8.8 million and reductions in accounts payable and accrued expenses of $26.6 million. In each period, the net changes in other operating assets and liabilities reflect normal operating activity.

        Net cash used in investing activities during the nine months ended July 31, 2004, was $5.8 million, resulting primarily by investments in capital expenditures of $11.5 million. This was offset from sales of property and equipment and proceeds from assets held for sale (FIAP) of $5.7 million.

        Net cash provided by financing activities during the nine months ended July 31, 2004, was $10.7 million, reflecting net borrowings of $12.4 million under available credit facilities and proceeds from stock issuances of $0.5 million offset by an increase in restricted cash of $1.8 million resulting from the sale-leaseback of equipment in Belgium and payments made under capital lease agreements of $0.4 million.

        Net cash used in our discontinued operation during the nine months ended July 31, 2004 was $2.1 million, resulting primarily from its net loss.

        Our aggregate commitments under our Loan Agreement, Senior Subordinated Debentures, foreign borrowings, capital leases and noncancelable operating lease agreements as of July 31, 2004, are as follows:

(1)

We expect to refinance our Senior Subordinated Debentures and our revolving credit facility during fiscal year 2007.

We have estimated that for the remainder of fiscal 2004, we will use approximately $0.5 million of cash in the FIAP shutdown for the payment of salaries of contracted individuals, who will assist in the shutdown of the facility, utilities, liquidator costs, legal fees, accounting fees and any additional costs that may arise.

We know of no current or pending demands or commitments that will materially affect our liquidity.

        We believe that our cash on hand at July 31, 2004, and our cash flow from operations, assuming no material adverse change, combined with the availability of funds under the current 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. At July 31, 2004, we had an aggregate of approximately $57.6 million available under these credit facilities.

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Effects of Inflation

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

Contingencies

        In fiscal 2001, the European Commission served our Holland subsidiary with a notice to produce various documents and other evidence relating to its investigation of a possible violation of European Competition Law by the subsidiary. We are cooperating with the European Commission in its investigation. Our last written communication with the European Commission was in January 2002. At this time, no litigation is pending against us or our subsidiary involving this matter, and we are not in a position to evaluate the outcome of this investigation. However, there can be no assurance that in the event that the European Commission serves a Statement of Objections instituting a proceeding against our Holland subsidiary which results in a fine being assessed, that the amount of the fine would not be material.

        In February 2004, our New Zealand subsidiary was served with two summonses and complaints applicable to a business acquired by the subsidiary on November 2, 2001, and immediately transferred to a joint venture company, Rapak Asia Pacific Limited, in which the subsidiary held a 50.1% interest. The complaints allege approximately $9.0 million in damages for defective products manufactured both before and after November 2, 2001. We have referred this matter to the insurance carriers that we believe are responsible to defend and indemnify our New Zealand subsidiary for the alleged liability. Two of the insurance carriers have agreed to defend the claims subject to reservations of rights. We also believe we may be entitled to indemnification under various agreements. Based on developments to date, we believe that the outcome of this matter will not have a material adverse effect on its results of operations, financial position or liquidity.

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements 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 amount of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns, doubtful accounts, inventories, investments, intangible assets, assets held for sale, income taxes, financing operations, retirement benefits, and contingencies and litigation. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its consolidated financial statements.

•

Revenue recognition, including customer rebates, promotions and other incentive programs



•

Estimating valuation allowances and accrued liabilities, specifically the allowance for doubtful accounts, reserves for obsolete or potentially obsolete inventories, LIFO valuations and litigation accruals



•

Accounting for income taxes, estimating the realizability of deferred tax assets and evaluating income tax contingencies



•

Derivative instruments—cash flow hedges



•

Purchase accounting and valuation of investment in joint venture

24

•

Impairment of long-lived assets, including goodwill



•

Estimating the costs to shutdown divested entities

        We recognize sales and cost of sales at the time the product is shipped to the customer and records estimated reductions to revenue for customer rebates, returns, promotions or other incentive programs. Customer rebate programs are based upon annual rebate agreements based upon predetermined sales volume requirements and accrued at each customer's agreed rebate percentage. If market conditions were to decline, we may take actions to increase customer incentive programs, thus resulting in a reduction of gross sales and profit at the time the incentive is offered.

        Management estimates the allowance for doubtful accounts by analyzing accounts receivable balances by age, applying historical trend rates to the most recent 60 months' sales, less account write-offs to date. When it is deemed probable that a customer account is uncollectible, that balance is added to the calculated reserve. Actual results could differ from these estimates under different assumptions and may be affected by changes in the general economic conditions.

        Management reviews our physical inventories at each business unit to determine the obsolescence of the products on hand. When it determines that we have obsolete inventory, our North America operations scrap those inventory items and our international operations establish the appropriate reserve for these items. We maintain our United States inventory on the LIFO method of inventory valuation, except for supplies. The LIFO valuation is reviewed quarterly for net realizable value and adjusted accordingly.

        Management's current estimated ranges of liabilities related to pending litigation are based on management's best estimate of future costs. Final resolution of the litigation contingencies could result in amounts different from current accruals and, therefore, have an impact on our consolidated financial results in a future reporting period. We are involved in routine litigation in the normal course of its business and these proceedings are not expected to have a material adverse impact on our results of operations, financial position or liquidity.

        Management accounts for income taxes in accordance with SFAS 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. As part of the process of preparing our consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet.

        The realizability of our deferred tax assets is primarily dependent on the future taxable income of the entity to which the deferred tax asset relates. Management assesses the likelihood that such deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance must be established. Should the future taxable income of such entities be materially different from management's estimates an additional valuation allowance may be necessary in future periods. Such amounts, if necessary, could be material to our results of operations and financial position, as they were in fiscal 2003. Management has provided additional valuation allowances in the first nine months of fiscal 2004 of $3.1 million for certain foreign operations because management has determined that it is more likely than not that the current tax benefit will not be fully utilized.

        We operate internationally giving rise to exposure to market risks from changes in interest rates and foreign exchange rates. Derivative financial instruments are utilized by us to reduce these risks. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. We do not hold or issue derivative financial

25

instruments for trading purposes. Certain of our intercompany loans are short term in nature. In those loans, we primarily enter into forward exchange contracts with terms that mirror the existing intercompany loans, which give rise to the foreign currency risk. Gains and losses on these derivatives are recognized for changes in the fair value of these derivatives in the Consolidated Statements of Operations for each reporting period. In addition, we hedge foreign currency risk on third party commitments with cash flow hedges. At the inception of the hedge the derivative is designated as a cash flow hedge and appropriate documentation is prepared. On an on going basis we assess hedge effectiveness for all designated hedges in order to determine that each derivative continues to be effective. Should these cash flow hedges prove to be ineffective, changes in the fair value of the derivatives would be recognized in operations each reporting period.

        We have used our best estimates in establishing the asset impairment charges, provisions, writedowns and reserves recorded as a result of the voluntary liquidation of FIAP. We estimated the net realizable value of FIAP's accounts receivable based on an analysis of collections made through July 31, 2004, as well as regarding the collectibility of the remaining customer balances for which payment has not yet been received. Inventories were reviewed at July 31, 2004, and it was determined that no additional reserves were necessary. We estimated the net realizable value of machinery and equipment based on sales made through July 31, 2004, and an estimate of the net realizable value of machinery and equipment, land and building remaining to be sold based on third party offers received by us to date. Employee termination benefits were determined based on negotiation with the local Italian union. The agreement with the union was comprised of three items: compliance with the Italian government required social plan, exit bonuses for each employee negotiated between us and the union, and payment of the accrued termination indemnity fund, a statutorily determined amount which we had accrued monthly. Additionally, as part of the shutdown of the FIAP facility in Italy, we closed our FIAP sales office located in Meudon, France. All five employees have been terminated. The severance package was determined by statutory law and has been paid during the first nine months of fiscal 2004. The write-downs, provisions and reserves relating to the liquidation of FIAP were based upon the Company's best estimates given the information available at the filing date of our Form 10-Q for the nine months ended July 31, 2004. Actual realizable values or payments to be made may be different from such estimates, and such differences will be recognized as incurred or as better information is received.

        In July 2004, we approved a plan to sell of our Spanish subsidiary, a component of our European region, due to its continued losses. In addition, on July 26, 2004, when we placed our Spanish subsidiary in a Suspension of Payments status under Spanish law. We expect the sale of the Spanish operations to be completed within the next twelve months. The Spanish subsidiary manufactures a range of products in PVC stretch film, primarily for the automatic and manual wrapping of fresh food and for catering film use. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the disposal of the Spanish subsidiary is being accounted for as a discontinued operation and, accordingly, it assets and liabilities have been segregated from continuing operations in the accompanying consolidated balance sheets, and its operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations and cash flows. The estimated loss on disposal includes the write-down of machinery and equipment and write off of accumulated translation adjustments. Since it is probable that sale of the Spanish operations will occur within the next twelve months, the Company has not recorded a liability for employee termination costs, lease termination costs and any claims that may arise as a result of the disposal.

        As required by SFAS No. 142, we perform an annual assessment as to whether there was an indication that goodwill is impaired. We performed our annual impairment analysis under SFAS 142 on September 30, 2003 based on a comparison of our market capitalization to our book value at that date. We also performed a supplemental estimate of the fair value of our company using comparable industry multiples of cash flows compared to our book value. Our policy is that impairment of goodwill

26

will have occurred if the market capitalization of our company were to remain below book value for a period of more than six months or the estimated value of our company based on cash flow multiples is below book value. Should the carrying value of our company exceed its fair value for other than temporary period of time, the amount of any resulting goodwill impairment may be material to our financial position and results of operations. We concluded that goodwill was not impaired at September 30, 2003. In July 2004, we decided to dispose of our Spanish subsidiary, which was deemed a trigging event under SFAS No. 142 and as such, we tested the carrying value of goodwill for impairment at July 31, 2004 using the methods discussed above. We concluded that goodwill was not impaired at July 31, 2004. We plan to continue to perform our annual impairment test at September 30 in each fiscal year and continue to review our financial position quarterly for other triggering events as described in SFAS No. 142.

Forward-Looking Statements

        Management's Discussion and Analysis of Financial Condition and the Results of Operations and other sections of this report contain "Forward-Looking Statements" about prospects for the future, such as our ability to generate sufficient working capital, amount of Excess Availability under our credit facility, our FIAP liquidation estimates and reserves, our ability to continue to maintain sales and profits of our operations, our ability to stay in compliance with our debt covenants, and our ability to generate sufficient funds to meet our cash requirements. We wish to caution readers that the assumptions which form the basis for forward-looking statements with respect to or that may impact earnings or liquidity for, the year ending October 31, 2004, include many factors that are beyond our ability to control or estimate precisely. These risks and uncertainties include, but are not limited to, availability of raw materials, ability to pass raw material price increases to customers in a timely fashion, the potential of technological changes which would adversely affect the need for our products, price fluctuations which could adversely impact our inventory, and changes in United States or international economic or political conditions, such as inflation or fluctuations in interest or foreign exchange rates. Parties are cautioned not to rely on any such forward-looking statements or judgments in this section and in other parts of this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

        We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect our results of operations and financial condition. We seek to minimize these risks through operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not purchase, hold or sell derivative financial instruments for trading purposes.

Interest Rates

        We may use interest rate swaps, collars and options to manage our exposure to fluctuations in interest rates. At July 31, 2004, we were not a party to any interest rate swaps, collars or options.

        The fair value of our fixed interest rate debt varies with changes in interest rates. Generally, the fair value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. At July 31, 2004, the carrying value of our total debt was $261.1 million of which approximately $202.1 million was fixed rate debt. At July 31, 2004, the estimated fair value of our fixed rate debt, which includes the cost of replacing our fixed rate debt with borrowings at current market rates, was approximately $208.8 million.

Foreign Exchange

        We enter into derivative financial instruments (principally foreign exchange forward contracts against the Euro, Canadian dollar, Australian dollar and New Zealand dollar) primarily to hedge intercompany transactions and trade sales and purchases. Foreign currency forward contracts reduce

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our exposure to the risk that the eventual cash inflows and outflows, resulting from these intercompany and third party trade transactions denominated in a currency other than the functional currency, will be adversely affected by changes in exchange rates.

        At July 31, 2004, we had foreign exchange forward contracts outstanding with a notional contract amount of $31.4 million, all of which have a maturity of less than one year. As of July 31, 2004 the net fair value of derivative financial instruments designated as cash flow hedges by us was a gain of $0.4 million, which is included in other current assets.

        Our foreign subsidiaries had third party outstanding debt of approximately $31.1 million at July 31, 2004. Such debt is generally denominated in the functional currency of the borrowing subsidiary. We believe that this allows us to better match operating cash flows with debt service requirements and to better match foreign currency-denominated assets and liabilities, thereby reducing our need to enter into foreign exchange forward contracts.

Commodities

        We use commodity raw materials, primarily resin, and energy products, in conjunction with our manufacturing process. Generally, we acquire such components at market prices and do not use financial instruments to hedge commodity prices. As a result, we are exposed to market risks related to changes in commodity prices in connection with these components.

Risk Factors

        You should carefully consider the risks and uncertainties we describe both above in management's discussion and in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003, before deciding to invest in, or retain, shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about, or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed.

Item 4. Disclosure Controls and Procedures

        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission's rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of July 31, 2004 (the "Evaluation Date"), pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that as of July 31, 2004, our disclosure controls and procedures were effective.

        There were no significant changes in our internal controls over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting subsequent to the Evaluation Date.

        In response to recent legislation and proposed regulations, we have begun a process of reviewing our internal control structure and our disclosure controls and procedures. Although we believe our pre-existing disclosure controls and procedures were adequate to enable us to comply with our disclosure obligations, as a result of such review, we are implementing minor changes, from time to time, primarily to formalize and document procedures already in place.

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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

        In February 2004, our New Zealand subsidiary was served with two summonses and complaints applicable to a business acquired by the subsidiary on November 2, 2001, and immediately transferred to a joint venture company, Rapak Asia Pacific Limited, in which the subsidiary held a 50.1% interest. The complaints allege approximately $9.0 million in damages for defective products manufactured both before and after November 2, 2001. We have referred this matter to the insurance carriers that we believe are responsible to defend and indemnify our New Zealand subsidiary for the alleged liability. The insurance carriers have agreed to defend the claims subject to reservations of rights. We also believe we may be entitled to indemnification under various agreements. Based on developments to date, we believe that the outcome of this matter will not have a material adverse effect on its results of operations, financial position or liquidity.

        In addition, we are involved in routine litigation in the normal course of its business. The proceedings are not expected to have a material adverse impact on our results of operations, financial position or liquidity.

Item 6.    Exhibits and Reports on Form 8-K

(1)

The Company filed a Form 8-K, dated June 14, 2004.
The item reported was:
Item 12.    Results of Operations and Financial Condition.
Press release reporting the Company's fiscal 2004 second quarter and six months
results of operations.



(2)

The Company filed a Form 8-K, dated June 15, 2004.
The item reported was:
Item 10.    Amendments to the Company's Code of Ethics, or wavier of a provision
of the Code of Ethics.
Amended and Restated Code of Conduct filed.



(3)

The Company filed a Form 8-K, dated June 28, 2004.
The item reported was:
Item 5. Other Events and Required FD Disclosure.
On June 28, 2004, William F. Stoll Jr., an independent director of the Company
resigned from the Board of Directors.



(4)

The Company filed a Form 8-K, dated July 28, 2004.
The item reported was:
Item 5. Other Events and Required FD Disclosure.
On July 28, 2004, The Company issued a press release reporting that its Spanish
subsidiary, AEP Industries Packaging Espana SA, has filed for Suspension of
Payments status under Spanish law.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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