(7) SHAREHOLDERS' EQUITY

Share-Based Compensation

At April 30, 2012, the Company has a share-based plan which provides for the granting of stock options and performance units to officers, directors and key employees of the Company. Total share-based compensation expense related to the Company's stock option plans are recorded in the consolidated statements of operations as follows:


	For the Three Months Ended April 30,				For the Six Months Ended April 30,
	2012		2011		2012		2011
	(in thousands)
Cost of sales	$	149	$	85	$	260	$	192
Selling expense		169		100		308		210
General and administrative expense		572		527		1,201		979

Total	$	890	$	712	$	1,769	$	1,381

Stock Option Plans

The Company's 1995 Stock Option Plan ("1995 Option Plan") expired on December 31, 2004, except as to options granted prior to that date. The Board adopted the AEP Industries Inc. 2005 Stock Option Plan ("2005 Option Plan") and the Company's shareholders approved the 2005 Option Plan at its annual shareholders meeting. The 2005 Option Plan became effective January 1, 2005 and will expire on December 31, 2014. The 2005 Option Plan provides for the granting of incentive stock options which may be exercised over a period of ten years, and the issuance of stock appreciation rights, restricted stock, performance units and non-qualified stock options, including fixed annual grants to non-employee directors. Under the 2005 Option Plan, each non-employee director receives a fixed annual grant of 2,000 stock options as of the date of the annual meeting of shareholders. The Company initially 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. The issuance of common stock resulting from the exercise of stock options and settlement of the vesting of performance units (for those employees who elected shares) during fiscal 2012 and 2011 has been made from new shares. At April 30, 2012, 378,237 shares are available to be issued under the 2005 Option Plan.

Stock Options

The fair value of options granted is estimated on the date of grant using a Black-Scholes options pricing model. Expected volatilities are calculated based on the historical volatility of the Company's stock. Management monitors stock option exercise and employee termination patterns to estimate forfeitures rates within the valuation model. Separate groups of employees, including executive officers and directors, that have similar historical exercise behavior are considered separately for valuation purposes. The expected holding period of stock options represents the period of time that stock options granted are expected to be outstanding. The risk-free interest rate is based on the Treasury note interest rate in effect on the date of grant for the expected term of the stock option.

The table below presents the weighted average assumptions used to calculate the fair value of stock options granted during the three and six months ended April 30, 2012 and 2011:


	For the Three Months Ended April 30,						For the Six Months Ended April 30,
	2012			2011			2012			2011
Risk-free interest rates		1.43	%		2.87	%		1.43	%		2.87	%
Expected life in years		7.5			7.5			7.5			7.5
Expected volatility		42.43	%		42.62	%		42.43	%		42.62	%
Dividend rate		0	%		0	%		0	%		0	%
Weighted average fair value per option at date of grant	$	15.79		$	14.19		$	15.79		$	14.19

The following table summarizes the Company's stock option plans as of April 30, 2012, and changes during the six months ended April 30, 2012:


	1995 Option Plan			2005 Option Plan			Total Number Of Options			Weighted Average Exercise Price per Option		Option Price Per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value $(000)
Options outstanding at October 31, 2011 (193,032 options exercisable)		142,832			85,000			227,832		$	23.07	$	7.87-42.60		3.1	$	1,589
Granted		—			12,000			12,000		$	33.67	$	33.67

Exercised		(73,444	)(a)		(9,000	)		(82,444	)	$	27.39	$	8.70-33.84
Forfeited/Cancelled		—			(2,000	)		(2,000	)	$	42.60	$	42.60
Expired		(1,000	)		—			(1,000	)	$	32.80	$	32.80

Options outstanding at April 30, 2012		68,388			86,000			154,388		$	21.27	$	7.87-42.60		4.5	$	2,216

Vested and expected to vest at April 30, 2012		68,388			86,000			154,388		$	21.27				4.5	$	2,216

Exercisable at April 30, 2012		68,388			51,600			119,988		$	18.97				3.3	$	2,016

(a)

Includes 2,000 options exercised at an exercise price of $9.30 per option and 59,180 options exercised at an exercise price of $31.60 per option for which 54,139 shares of common stock of the Company were tendered to the Company by the holder of the stock options for the payment of the exercise price of these options.

The table below presents information related to stock option activity for the three and six months ended April 30, 2012 and 2011:


	For the Three Months Ended April 30,				For the Six Months Ended April 30,
	2012		2011		2012		2011
	(in thousands)
Total intrinsic value of stock options exercised	$	356	$	20	$	509	$	82
Total fair value of stock options vested	$	170	$	277	$	229	$	336

Share-based compensation expense related to the Company's stock options recorded in the consolidated statements of operations for the three and six months ended April 30, 2012 was approximately $56,000 and $113,000, respectively, and $128,000 and $199,000 for the three and six months ended April 30, 2011, respectively. No compensation cost related to stock options was capitalized in inventory or any other assets for the three and six months ended April 30, 2012 and 2011. For the three and six months ended April 30, 2012 and 2011, there were no excess tax benefits recognized resulting from share-based compensation awards as the Company was not in a federal tax paying position.

As of April 30, 2012, there was $0.5 million of total unrecognized compensation cost related to non-vested stock options granted under the plans. That cost is expected to be recognized over a weighted-average period of 3.6 years.

Non-vested Stock Options

A summary of the Company's non-vested stock options at April 30, 2012 and changes during the six months ended April 30, 2012 are presented below:


Non-vested stock options	Shares			Weighted Average Grant Date Fair Value
Non-vested at October 31, 2011		34,800		$	16.38
Granted		12,000		$	15.79
Vested		(12,400	)	$	18.43
Forfeited		—			—

Non-vested at April 30, 2012		34,400		$	15.43

If an employee is terminated for any reason by the Company, or due to disability or retirement, any outstanding stock options that are exercisable as of the termination date may be exercised until the earlier of (a) three months following the termination date and (b) the expiration of the stock option term. If an employee ceases to be employed due to death, any outstanding stock options will become exercisable in full and the employee's beneficiary may exercise such stock options until the earlier of (a) one year following the date of death and (b) the expiration of the stock option term. Notwithstanding the foregoing, the Compensation Committee retains discretionary authority at any time, including immediately prior to or upon a change of control, to accelerate the exercisability of any award.

Performance Units

The 2005 Option Plan also provides for the granting of Board approved performance units ("Units"). Outstanding Units are subject to forfeiture based on an annual Adjusted EBITDA performance goal, as determined and adjusted by the Board. If the Company's Adjusted EBITDA equals or exceeds the performance goal, no Units will be forfeited. If the Company's Adjusted EBITDA is between 80% and less than 100% of the performance goal, such employee will forfeit such number of Units equal to (a) the Units granted multiplied by (b) the percentage Adjusted EBITDA is less than the performance goal. If Adjusted EBITDA is below 80% of the performance goal, the employee will forfeit all Units. Subsequent to the satisfaction of the performance goal, the vesting of the Units will occur equally over five years on the first through the fifth anniversaries of the grant date, provided that such person continues to be employed by the Company on such respective dates.

The Units will immediately vest (subject to pro-ration, if such termination event occurs during or as of the end of the fiscal year in which the initial grant was made) in the event of (1) the death of an employee, (2) the permanent disability of an employee (within the meaning of the Internal Revenue Code of 1986, as amended) or (3) a termination of employment due to the disposition of any asset, division, subsidiary, business unit, product line or group of the Company or any of its affiliates. In the case of any other termination, any unvested performance units will be forfeited. Notwithstanding the foregoing, the Compensation Committee retains discretionary authority at any time, including immediately prior to or upon a change of control, to accelerate the exercisability of any award, or the end of a performance period. For each Unit, upon vesting and the satisfaction of any required tax withholding obligation, the employee has the option to receive one share of the Company's common stock, the equivalent cash value or a combination of both.

Due to the cash settlement feature, the Units are liability classified and are recognized at fair value, depending on the percentage of requisite service rendered at the reporting date, and are remeasured at each balance sheet date to the market value of the Company's common stock at the reporting date.

As the Units contain both a performance and service condition, the Units have been treated as a series of separate awards or tranches for purposes of recognizing compensation expense. The Company will recognize compensation expense on a tranche-by-tranche basis, recognizing the expense as the employee works over the requisite service period for that specific tranche. The Company has applied the same assumption for forfeitures as employed in the Company's stock option plans, discussed above.

Total share-based compensation expense related to the Units was approximately $834,000 and $1.7 million for the three and six months ended April 30, 2012, respectively and $584,000 and $1.2 million for the three and six months ended April 30, 2011, respectively. At April 30, 2012 and October 31, 2011, there were $1.4 million and $1.1 million in current liabilities, respectively, and $1.4 million and $1.3 million in long-term liabilities, respectively, related to outstanding Units.

The following table summarizes the Units as of April 30, 2012, and changes during the six months ended April 30, 2012:


	2005 Option Plan			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value $(000)
Units outstanding at October 31, 2011		147,891		$	0.00		1.5	$	3,997
Units granted		134,066		$	0.00
Units exercised		(45,965	)	$	0.00			$	1,305
Units forfeited or cancelled		(300	)

Units outstanding at April 30, 2012		235,692		$	0.00		2.2	$	8,219

Vested and expected to vest at April 30, 2012		223,911					2.2	$	7,808

Exercisable at April 30, 2012		—

During the six months ended April 30, 2012, the Company paid $0.9 million in cash and issued 1,591 shares of its common stock (issued from new shares), net of withholdings, in settlement of the vesting of Units occurring during the first six months of fiscal 2012. During the six months ended April 30, 2011, the Company paid $0.6 million in cash and issued 2,009 shares of its common stock (issued from new shares), net of withholdings, in settlement of the vesting of Units occurring during the first six months of fiscal 2011.

Treasury Shares

The Company's Board has approved common stock repurchase programs authorizing management to repurchase shares of the Company's common stock. Repurchases may be made in the open market, in privately negotiated transactions or by other means, from time to time, subject to market conditions, applicable legal requirements and other factors, including the limitations set forth in the Company's debt covenants. The programs do not obligate the Company to acquire any particular amount of common stock and the programs may be suspended at any time at the Company's discretion.

On September 15, 2010, the Company's Board terminated the June 2010 Stock Repurchase Program (which had approximately $0.8 million remaining as of such date) and approved a new $8.0 million stock repurchase program (the "September 2010 Stock Repurchase Program"). On June 16, 2011, the Company's Board authorized an increase to the September 2010 Stock Repurchase Program which had approximately $4.5 million available to repurchase, to $20.0 million. As of April 30, 2012, approximately $1.0 million remained available for repurchase under such program.

The following table provides a summary of the quarterly repurchase activity during fiscal 2011 and the six months ended April 30, 2012 under the stock repurchase programs approved by the Board:


	Total number of shares purchased			Average price paid per share		Approximate dollar value of shares that may yet be purchased under the plans or programs
Fiscal 2011 period
Quarter ending January 31, 2011		5,900		$	26.17	$	4,744,699
Quarter ending April 30, 2011		7,100		$	28.52	$	4,542,192
Quarter ending July 31, 2011		650,000	(a)	$	29.30	$	955,000
Quarter ending October 31, 2011		—		$	—	$	955,000
Fiscal 2012 period
Quarter ending January 31, 2012		—		$	—	$	955,000
Quarter ending April 30, 2012		—		$	—	$	955,000

(a)

On June 17, 2011, the Company repurchased 650,000 shares of its common stock in privately negotiated transactions at an aggregate purchase price of $19.0 million, or $29.30 per share. The purchase price per share represented a discount of 1.9% to the closing price of the Company's common stock on June 17, 2011.

Preferred Shares

The Board may direct the issuance of up to one million shares of the Company's $1.00 par value Preferred Stock and may, at the time of issuance, determine the rights, preferences and limitations of each series.

On March 31, 2011, the Company adopted a stockholder rights plan (the "Rights Plan"), which entitles the holders of the rights to purchase from the Company 1/1,000^th of a share of Series A Junior Participating Preferred Stock, par value $1.00 per share, at a purchase price of $150.00 per share, as adjusted ( a "Right"), upon certain trigger events. The Company's Board declared a dividend of one Right per each share of common stock of the Company outstanding as of April 11, 2011. Each 1/1,000^th of a share of Series A Junior Participating Preferred Stock has terms that are substantially the economic and voting equivalent of one share of the Company's common stock. However, until a Right is exercised or exchanged in accordance with the provisions of the Rights Plan, the holder thereof will have no rights as a stockholder of the Company. The Rights Plan has a three-year term and the Board may terminate the Rights Plan at any time (subject to the redemption of the Rights for a nominal value). The Rights may cause substantial dilution to a person or group (together with all affiliates and associates of such person or group and any person or group of persons acting in concert therewith) that acquires beneficial ownership of 15% or more of the Company's stock on terms not approved by the Board or takes other specified actions.