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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File Number 000-50132
 
 Sterling Chemicals, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
Incorporation or organization)
    
    76-0502785(IRS Employer Identification No.)333 Clay Street, Suite 3600
Houston, Texas 77002-4109(Address of principal executive offices)
    
    (713) 650-3700(Registrants telephone number,
including area code)
 þ o
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




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IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
   Forward-Looking Statements
  
    
    current and future industry conditions and their effect on our results of
operations or financial position;
    
    the effect of economic conditions in the United States and globally;
    
    the extent, timing and impact of expansions of production capacity of our
products, by us or by our competitors;
    
    the potential effects of market and industry conditions and cyclicality on our
competitiveness, business strategy, results of operations or financial position;
    
    our ability to consummate development projects at our Texas City, Texas site;
    
    the adequacy of our liquidity;
    
    our environmental management programs and safety initiatives;
    
    our market sensitive financial instruments;
    
    future uses of, and requirements for, financial resources;
    
    future contractual obligations;
    
    future amendments, renewals or terminations of existing contractual
relationships;
    
    business strategies;
    
    growth opportunities;
    
    competitive position;
    
    expected financial position;
    
    future cash flows or dividends;
    
    budgets for capital and other expenditures;
    
    plans and objectives of management;
    
    outcomes of legal proceedings;
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
    
    compliance with applicable laws;
    
    our reliance on marketing partners;
    
    adequacy of insurance coverage or indemnification rights;
    
    the timing and extent of changes in commodity prices for our products or raw
materials;
    
    petrochemicals industry production capacity or operating rates;
    
    costs associated with the shut down and decommissioning of our styrene facility;
    
    increases in the cost of, or our ability to obtain, raw materials or energy;
    
    regulatory initiatives and compliance with governmental laws or regulations,
including environmental laws or regulations;
    
    customer preferences;
    
    our ability to attract or retain high quality employees;
    
    operating hazards attendant to the petrochemicals industry;
    
    casualty losses;
    
    losses resulting from weather-related or other force majeure-type events;
    
    changes in foreign, political, social or economic conditions;
    
    risks of war, military operations, other armed hostilities, terrorist acts or
embargoes;
    
    changes in technology, which could require significant capital expenditures in
order to maintain competitiveness or could cause existing manufacturing processes to
become obsolete;
    
    effects of litigation;
    
    cost, availability or adequacy of insurance; and
    
    various other matters, many of which are beyond our control.
  Document Summaries
  Access to Filings
  2




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3




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##### 



STERLING CHEMICALS, INC.
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4T. Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 6. Exhibits
    
    
    36EX-10.1EX-15.1EX-31.1EX-31.2EX-32.1EX-32.2
  4




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      
 5




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PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Share Data)
 Three months endedSeptember 30,
    
    
    Nine months ended September 30,2007
    
    
    
    
    
    
    2007(As Restated,
    
    
    
    
    
    
    (As Restated,2008
    
    
    See Note 12 )
    
    
    2008
    
    
    See Note 12)Revenues
    
    $
    42,317
    
    
    $
    32,988
    
    
    $
    128,311
    
    
    $
    99,838Cost of goods sold
    
    
    33,190
    
    
    
    27,073
    
    
    
    104,956
    
    
    
    85,490Gross profit
    
    
    9,127
    
    
    
    5,915
    
    
    
    23,355
    
    
    
    14,348Selling, general and administrative
expenses
    
    
    3,692
    
    
    
    2,042
    
    
    
    9,749
    
    
    
    6,865Impairment of long-lived assets
    
    
    754
    
    
    
    
    
    
    
    7,403
    
    
    
    Interest and debt related expenses
    
    
    4,188
    
    
    
    4,420
    
    
    
    13,121
    
    
    
    12,812Interest income
    
    
    (1,026
    )
    
    
    (501
    )
    
    
    (3,458
    )
    
    
    (1,148
    )Other (income) expense
    
    
    (1,489
    )
    
    
    
    
    
    
    (1,489
    )
    
    
    839Income (loss) from continuing
operations before income tax
    
    
    3,008
    
    
    
    (46
    )
    
    
    (1,971
    )
    
    
    (5,020
    )Benefit for income taxes
    
    
    (71
    )
    
    
    (17
    )
    
    
    (71
    )
    
    
    (990
    )Income (loss) from continuing operations
    
    $
    3,079
    
    
    $
    (29
    )
    
    $
    (1,900
    )
    
    $
    (4,030
    )Income (loss) from discontinued
operations, net of tax of zero, $4,883,
 zero and $4,884
    
    
    (1,791
    )
    
    
    45
    
    
    
    (9,750
    )
    
    
    7,245Net income (loss)
    
    $
    1,288
    
    
    $
    16
    
    
    $
    (11,650
    )
    
    $
    3,215Preferred stock dividends
    
    
    4,920
    
    
    
    5,135
    
    
    
    13,613
    
    
    
    13,161Net loss attributable to common
stockholders
    
    $
    (3,632
    )
    
    $
    (5,119
    )
    
    $
    (25,263
    )
    
    $
    (9,946
    )Loss per share of common stock
attributable to common stockholders,
basic and diluted:Loss from continuing operations
    
    $
    (0.65
    )
    
    $
    (1.83
    )
    
    $
    (5.48
    )
    
    $
    (6.08
    )Income (loss) from discontinued
operations, net of tax
    
    
    (0.63
    )
    
    
    0.02
    
    
    
    (3.45
    )
    
    
    2.56Basic and diluted loss per share
    
    $
    (1.28
    )
    
    $
    (1.81
    )
    
    $
    (8.93
    )
    
    $
    (3.52
    )Weighted average shares outstanding:Basic and diluted
    
    
    2,828,460
    
    
    
    2,828,460
    
    
    
    2,828,460
    
    
    
    2,828,460
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STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands, Except Share Data)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    157,282
    
    
    $
    100,183Accounts receivable, net of allowance of $33 and $39, respectively
    
    
    22,796
    
    
    
    29,157Inventories, net
    
    
    5,578
    
    
    
    5,044Prepaid expenses
    
    
    2,608
    
    
    
    3,129Deferred tax asset
    
    
    
    
    
    
    5,029Assets of discontinued operations
    
    
    456
    
    
    
    71,754Total current assets
    
    
    188,720
    
    
    
    214,296Property, plant and equipment, net
    
    
    67,600
    
    
    
    77,677Other assets
    
    
    8,603
    
    
    
    14,471Total assets
    
    $
    264,923
    
    
    $
    306,444LIABILITIES AND STOCKHOLDERS DEFICIENCY IN ASSETSCurrent liabilities:Accounts payable
    
    $
    10,348
    
    
    $
    13,715Accrued liabilities
    
    
    19,651
    
    
    
    22,789Liabilities of discontinued operations
    
    
    12,694
    
    
    
    11,528Total current liabilities
    
    
    42,693
    
    
    
    48,032Long-term debt
    
    
    150,000
    
    
    
    150,000Deferred tax liability
    
    
    
    
    
    
    5,029Deferred credits and other liabilities
    
    
    36,889
    
    
    
    26,168Long-term liabilities of discontinued operations
    
    
    38,497
    
    
    
    51,436Commitments and contingencies (Note 6)Redeemable preferred stock
    
    
    113,479
    
    
    
    99,866Stockholders equity:Common stock, $.01 par value (shares authorized 20,000,000;
shares issued and outstanding 2,828,460)
    
    
    28
    
    
    
    28Additional paid-in capital
    
    
    127,738
    
    
    
    141,174Accumulated deficit
    
    
    (244,192
    )
    
    
    (232,542
    )Accumulated other comprehensive (loss) income
    
    
    (209
    )
    
    
    17,253Total stockholders deficiency in assets
    
    
    (116,635
    )
    
    
    (74,087
    )Total liabilities and stockholders deficiency in assets
    
    $
    264,923

    
    
    $
    306,444
  7




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STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
 Nine months ended September 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (11,650
    )
    
    $
    3,215Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Blend gas deferred payments
    
    
    (2,653
    )
    
    
    Stock compensation expense
    
    
    177
    
    
    
    30Depreciation and amortization
    
    
    7,372
    
    
    
    8,287Benefit plans curtailment loss
    
    
    1,197
    
    
    
    Impairment of long-lived assets
    
    
    7,403
    
    
    
    Interest amortization
    
    
    1,074
    
    
    
    784Unearned income amortization
    
    
    (9,399
    )
    
    
    (747
    )Lower-of-cost-or-market adjustment
    
    
    
    
    
    
    1,522Loss on investment
    
    
    
    
    
    
    839Gain on disposal of property, plant and equipment
    
    
    
    
    
    
    (182
    )Deferred tax benefit
    
    
    
    
    
    
    (990
    )Other
    
    
    10
    
    
    
    28Change in assets/liabilities:Accounts receivable
    
    
    61,890
    
    
    
    (42,577
    )Inventories
    
    
    15,175
    
    
    
    11,721Prepaid expenses
    
    
    521
    
    
    
    (1,114
    )Other assets
    
    
    4,523
    
    
    
    1,935Accounts payable
    
    
    (2,908
    )
    
    
    10,607Accrued liabilities
    
    
    (1,972
    )
    
    
    (9,586
    )Other liabilities
    
    
    (8,826
    )
    
    
    (11,074
    )Net cash provided by (used in) operating activities
    
    
    61,934
    
    
    
    (27,302
    )Cash flows used in investing activities:Capital expenditures for property, plant and equipment
    
    
    (4,835
    )
    
    
    (5,884
    )Net proceeds from the sale of property, plant and equipment
    
    
    
    
    
    
    182Net cash used in investing activities
    
    
    (4,835
    )
    
    
    (5,702
    )Cash flows provided by financing activities:Repayment of tendered Old Secured Notes
    
    
    
    
    
    
    (100,579
    )Proceeds from the issuance of Secured Notes
    
    
    
    
    
    
    150,000Debt issuance costs
    
    
    
    
    
    
    (7,961
    )Net cash provided by financing activities
    
    
    
    
    
    
    41,460Net increase in cash
    
    
    57,099
    
    
    
    8,456Cash and cash equivalents  beginning of year
    
    
    100,183
    
    
    
    20,690Cash and cash equivalents  end of period
    
    $
    157,282
    
    
    $
    29,146Supplemental disclosures of cash flow information:Interest paid
    
    $
    8,128
    
    
    $
    5,012Interest income received
    
    
    3,458
    
    
    
    1,148Cash paid for income taxes
    
    
    313
    
    
    
    299
  8




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Basis of Presentation
  Reclassifications
  2. Stock-Based Compensation
   2008Expected life (years)
    
    
    7.5Expected volatility
    
    
    54.3
    %Expected dividend yield
    
    
    Risk-free interest rate
    
    
    3.5
    %Weighted-average fair value of options granted during the period
    
    $
    7.25
  3. Discontinued Operations
  9




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
    September 30,
    
    
    December 31,2008
    
    
    2007(Dollars in Thousands)Assets of discontinued operations:Accounts receivable, net
    
    $
    456
    
    
    $
    55,995Inventories
    
    
    
    
    
    
    15,709Other assets
    
    
    
    
    
    
    50Total
    
    $
    456
    
    
    $
    71,754Liabilities of discontinued operations:Accounts payable
    
    $
    
    
    
    $
    3,363Accrued liabilities (1)
    
    
    12,694
    
    
    
    8,165Deferred credits and other liabilities (1)
    
    
    38,497
    
    
    
    51,436Total
    
    $
    51,191
    
    
    $
    62,964
 
 (1)
    
    As of September 30, 2008, includes $50.9 million of
deferred income for the NOVA supply agreement that is being
amortized over the contractual non-compete period of five
years using the straight-line method. Accrued liabilities
include the current portion of $12.4 million and deferred
credits and other liabilities include the long-term portion
of $38.5 million. 10




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Three months ended September 30,
    
    Nine months ended September 30,2008
    
    2007
    
    2008
    
    2007(Dollars in thousands)Revenues
    
    $
    3,317
    
    
    $
    174,876
    
    
    $
    23,496
    
    
    $
    556,887Income (loss) before income taxes
    
    
    (1,791
    )
    
    
    (4,838
    )
    
    
    (9,750
    )
    
    
    2,361
  Accrued as of
    
    
    
    
    
    
    
    
    
    Accrued as ofDecember 31, 2007
    
    Additional accruals
    
    Cash payments
    
    September 30, 2008(Dollars in thousands)Severance accrual
    
    $
    521
    
    
    $
    1,257
    
    
    $
    1,517
    
    
    $
    261
 4. Impairment of Long-Lived Assets
    11




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
     5. Long-Term Debt
  1 4
 12




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 1 4
      13




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  6. Commitments and Contingencies
 Product Contracts:
  Environmental Regulations:
     14




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
   Legal Proceedings:
   15




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
     7. Income Taxes
 16




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  8. Pension Plans and Other Postretirement Benefits
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in Thousands)Service cost
    
    $
    
    
    
    $
    3
    
    
    $
    
    
    
    $
    308Interest cost
    
    
    3,589
    
    
    
    1,782
    
    
    
    8,954
    
    
    
    5,347Expected return on plan assets
    
    
    (4,097
    )
    
    
    (2,025
    )
    
    
    (10,597
    )
    
    
    (6,075
    )Curtailment loss (gain)
    
    
    907
    
    
    
    
    
    
    
    907
    
    
    
    (100
    )Net pension cost (benefit)
    
    $
    399
    
    
    $
    (240
    )
    
    $
    (736
    )
    
    $
    (520
    )
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in Thousands)Service cost
    
    $
    14
    
    
    $
    35
    
    
    $
    43
    
    
    $
    100Interest cost
    
    
    144
    
    
    
    349
    
    
    
    428
    
    
    
    1,041Amortization of unrecognized costs
    
    
    (541
    )
    
    
    (359
    )
    
    
    (1,624
    )
    
    
    (1,075
    )Curtailment loss
    
    
    290
    
    
    
    
    
    
    
    290
    
    
    
    Net plan costs (benefit)
    
    $
    (93
    )
    
    $
    25
    
    
    $
    (863
    )
    
    $
    66
  9. Operating Segment and Sales Information
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in Thousands)Revenues:Acetic acid
    
    $
    35,739
    
    
    $
    26,328
    
    
    $
    103,813
    
    
    $
    78,173Plasticizers
    
    
    6,547
    
    
    
    6,500
    
    
    
    24,028
    
    
    
    20,987Other
    
    
    31
    
    
    
    160
    
    
    
    470
    
    
    
    678Total
    
    $
    42,317
    
    
    $
    32,988
    
    
    $
    128,311
    
    
    $
    99,838
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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in Thousands)Segment gross profit:Acetic acid
    
    $
    9,629
    
    
    $
    8,039
    
    
    $
    23,203
    
    
    $
    20,521Plasticizers
    
    
    387
    
    
    
    241
    
    
    
    3,434
    
    
    
    697Other(1)
    
    
    (889
    )
    
    
    (2,365
    )
    
    
    (3,282
    )
    
    
    (6,870
    )Gross profit
    
    
    9,127
    
    
    
    5,915
    
    
    
    23,355
    
    
    
    14,348Selling, general and administrative expenses
    
    
    3,692
    
    
    
    2,042
    
    
    
    9,749
    
    
    
    6,865Impairment of long-lived assets(2)
    
    
    754
    
    
    
    
    
    
    
    7,403
    
    
    
    Interest and debt related expenses
    
    
    4,188
    
    
    
    4,420
    
    
    
    13,121
    
    
    
    12,812Interest income
    
    
    (1,026
    )
    
    
    (501
    )
    
    
    (3,458
    )
    
    
    (1,148
    )Other (income) expense
    
    
    (1,489
    )
    
    
    
    
    
    
    (1,489
    )
    
    
    839Income (loss) from continuing operations
before income tax
    
    $
    3,008
    
    
    $
    (46
    )
    
    $
    (1,971
    )
    
    $
    (5,020
    )Depreciation and amortization expenses:Acetic acid
    
    $
    1,563
    
    
    $
    1,325
    
    
    $
    4,601
    
    
    $
    3,957Plasticizers
    
    
    302
    
    
    
    499
    
    
    
    1,366
    
    
    
    1,479Other(3)
    
    
    424
    
    
    
    972
    
    
    
    1,405
    
    
    
    2,851Total
    
    $
    2,289
    
    
    $
    2,796
    
    
    $
    7,372
    
    
    $
    8,287Capital expenditures:Acetic acid
    
    $
    1,733
    
    
    $
    178
    
    
    $
    2,875
    
    
    $
    1,086Plasticizers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Otherplant infrastructure
    
    
    345
    
    
    
    1,356
    
    
    
    1,960
    
    
    
    4,798Total
    
    $
    2,078
    
    
    $
    1,534
    
    
    $
    4,835
    
    
    $
    5,884
 
 (1)
    
    Gross loss for Other includes various unallocated corporate charges and credits.(2)
    
    Includes impairments for our PA unit and turbo generator units, see Note 4 for more information.(3)
    
    Includes depreciation and amortization expense of $0.1 million and $0.7 million for
discontinued operations for the three months ended September 30, 2008 and 2007, respectively,
and $0.5 million and $2.0 million for the nine months ended September 30, 2008 and 2007,
respectively. September 30, 2008
    
    
    December 31, 2007(Dollars in Thousands)Total assets:Acetic acid
    
    $
    42,403
    
    
    $
    53,769Plasticizers
    
    
    5,428
    
    
    
    13,216Other(4)
    
    
    217,092
    
    
    
    239,459Total
    
    $
    264,923
    
    
    $
    306,444
 
 4)
    
    Components of Other are presented in the table below: September 30, 2008
    
    
    December 31, 2007(Dollars in Thousands)Total assets:Corporate:Cash
    
    $
    157,282
    
    
    $
    100,183Other
    
    
    19,170
    
    
    
    27,998Plant infrastructure:Property, plant and equipment, net
    
    
    40,184
    
    
    
    39,524Assets of discontinued operations
    
    
    456
    
    
    
    71,754Total
    
    $
    217,092
    
    
    $
    239,459
 18




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##### Table of Contents



STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Three months ended September 30,
    
    Nine months ended September 30,2008
    
    2007
    
    2008
    
    2007(Dollars in Thousands)Major customers:BP Chemicals
    
    $
    35,739
    
    
    $
    26,328
    
    
    $
    103,813
    
    
    $
    78,173BASF Corporation
    
    
    6,547
    
    
    
    6,500
    
    
    
    24,028
    
    
    
    20,987
 10. Leasing Arrangements
   Machinery and equipment
    
    $
    66,156Other
    
    
    768Less: accumulated depreciation
    
    
    (39,508
    )$
    27,416
  Fourth quarter of 2008
    
    $
    2,019Year ending December 31:2009
    
    
    8,0752010
    
    
    8,0752011
    
    
    8,0752012
    
    
    8,0752013
    
    
    8,075Thereafter
    
    
    12,594$
    54,988
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Minimum rentals
    
    $
    800
    
    
    $
    800
    
    
    $
    2,400
    
    
    $
    2,400Contingent rentals(1)
    
    
    3,436
    
    
    
    9,874
    
    
    
    21,371
    
    
    
    26,200$
    4,236
    
    
    $
    10,674
    
    
    $
    23,771
    
    
    $
    28,600
 
 (1)
    
    Contingent rentals are primarily based on sales volumes,
manufacturing costs and profit sharing. 19




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##### Table of Contents



STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Fourth quarter of 2008
    
    $
    1,938Year ending December 31:2009
    
    
    7,7512010
    
    
    7,7512011
    
    
    7,7512012
    
    
    7,7512013
    
    
    7,751Thereafter
    
    
    20,023$
    60,716
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Minimum rentals
    
    $
    1,938
    
    
    $
    1,938
    
    
    $
    5,813
    
    
    $
    5,813Contingent rentals(1)
    
    
    98
    
    
    
    11
    
    
    
    326
    
    
    
    119$
    2,036
    
    
    $
    1,949
    
    
    $
    6,139
    
    
    $
    5,932
 
 (1)
    
    Contingent rentals are based on carbon monoxide purchases in excess
of the minimum purchase requirement. 11. New Accounting Standards
    20




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
        21




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##### Table of Contents



STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 12. Restatement of Financial Information
  
    
    Paid-in-kind dividends on our Series A Convertible Preferred Stock were
incorrectly recorded as 4% of the Series A Convertible Preferred Stocks liquidation
value versus the fair value of the dividends. As a result of this error, redeemable
preferred stock was understated and additional paid-in capital was overstated by $31.9
million as of September 30, 2007 and preferred stock dividends and net loss attributable
to common shareholders were understated by $2.7 million and $6.1 million for the three
and nine months ended September 30, 2007, respectively.
    
    Disputed revenues were inappropriately recognized resulting in a gross up of the
consolidated statements of operations for the three and nine months ended September 30,
2007. Revenues and selling, general and administrative expenses were overstated by $1.0
million and $3.0 million for the three and nine months ended September 30, 2007.
    
    Deferred taxes were not recognized on benefit adjustments to other comprehensive
income, or OCI, for the quarterly period ended September 30, 2007. OCI was overstated
and benefit for income taxes was understated by $4.9 million for the three and nine
months ended September 30, 2007.
 22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Business Overview
      23




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##### Table of Contents



Recent Developments
  24




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##### Table of Contents




    
    the term of the agreement has been extended from July 31, 2016 until December
31, 2031, subject to an early termination right that may be exercised by BP Chemicals
as of December 31, 2026;
    
    after an adjustment period during 2008, BP Chemicals will pay us estimated
profit sharing payments quarterly, rather than the set quarterly advancement provided
in our Old Acetic Acid Production Agreement that resulted in large true-ups for profit
sharing payments at the end of each year;
    
    the ability of BP Chemicals to unilaterally shut down our acetic acid plant
under our Old Acetic Acid Production Agreement has been removed;
    
    we have the right to produce and sell acetic acid for our own account if BP
Chemicals purchases fall below specified levels for an extended period of time for
reasons other than our production issues;
    
    some indirect expenses for both parties have been excluded from the
reimbursement and profit sharing provisions, with each party entitled to retain for its
own account any costs savings realized in those areas but also solely responsible for
any increases in those costs; and
    
    after the expiration or termination of the Restated Acetic Acid Production
Agreement:
 
    
    at our request, BP Chemicals must continue to supply us with catalyst
if it is still in the catalyst supply business;
    
    we pay BP Chemicals for undepreciated capital only if the expiration or
termination is caused by us; and
    
    if our acetic acid plant is permanently shut down shortly thereafter,
BP Chemicals is required to pay a portion of any shut down expenses and a share of
our residual fixed costs for the following five years (unless the expiration or
termination is caused by us).
  25




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##### Table of Contents



Results of Operations
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Revenues and income from continuing operations
    Selling, general and administrative expenses
 26




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##### Table of Contents



Impairment of long-lived assets
  Interest income
  Other (income) expense
  Benefit for income taxes
  Discontinued operations
  Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Revenues and income from continuing operations
   27




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##### Table of Contents



Selling, general and administrative expenses
  Impairment of long-lived assets
   Interest income
  Other (income) expense
  28




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##### Table of Contents



Benefit for income taxes
  Discontinued operations
  Liquidity and Capital Resources
  1 4 1 4
  29




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##### Table of Contents



i.e.
 30




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##### Table of Contents



Working Capital
  Cash Flow
  Capital Expenditures
  Contractual Cash Obligations
  Critical Accounting Policies, Use of Estimates and Assumptions
  31




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##### Table of Contents



New Accounting Standards
      32




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 1 4
 
 Item 4T. Controls and Procedures
  Evaluation of Disclosure Controls and Procedures
 33




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##### Table of Contents



Internal Control Over Financial Reporting
  34




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##### Table of Contents



PART II.
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  35




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##### Table of Contents



Item 6. Exhibits
  ExhibitNumber
    
    
    
    Description of Exhibit**10.1
    
    
    
    First Amendment to Amended and Restated Revolving Credit Agreement dated
November 10, 2008 among Sterling Chemicals, Inc., The CIT Group/Business
Credit, Inc., as the Administrative Agent for the Lenders and the Lenders.#10.2
    
    
    
    2008 Amended and Restated Production Agreement dated effective as of January
1, 2008 between BP Amoco Chemical Company and Sterling Chemicals, Inc.
(incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K
filed on August 22, 2008).+10.3
    
    
    
    2008 Bonus Plan (incorporated by reference from Exhibit 10.2 to our Current
Report on Form 8-K filed on August 22, 2008).**15.1
    
    
    
    Letter of Grant Thornton LLP regarding unaudited interim financial information.**31.1
    
    
    
    Rule 13a-14(a) Certification of the Chief Executive Officer.**31.2
    
    
    
    Rule 13a-14(a) Certification of the Chief Financial Officer.**32.1
    
    
    
    Section 1350 Certification of the Chief Executive Officer.**32.2
    
    
    
    Section 1350 Certification of the Chief Financial Officer.
 
 **
    
    Filed or furnished herewith#
    
    Portions of this Exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for
confidential treatment+
    
    Management contract or compensatory plan or arrangement 36




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##### Table of Contents



SIGNATURES
  STERLING CHEMICALS, INC.
(Registrant)Date: November 11, 2008
    By
    /s/ JOHN V. GENOVAJohn V. GenovaPresident and Chief Executive OfficerDate: November  11, 2008
    By
    /s/ JOHN R. BEAVERJohn R. BeaverSenior Vice President-Finance
and
Chief Financial Officer
(Principal Financial Officer) 37




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    
    
    Description of Exhibit**10.1
    
    
    
    First Amendment to Amended and Restated Revolving Credit Agreement dated
November 10, 2008 among Sterling Chemicals, Inc., The CIT Group/Business
Credit, Inc., as the Administrative Agent for the Lenders and the Lenders.#10.2
    
    
    
    2008 Amended and Restated Production Agreement dated effective as of January
1, 2008 between BP Amoco Chemical Company and Sterling Chemicals, Inc.
(incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K
filed on August 22, 2008).+10.3
    
    
    
    2008 Bonus Plan (incorporated by reference from Exhibit 10.2 to our Current
Report on Form 8-K filed on August 22, 2008).**15.1
    
    
    
    Letter of Grant Thornton LLP regarding unaudited interim financial information.**31.1
    
    
    
    Rule 13a-14(a) Certification of the Chief Executive Officer.**31.2
    
    
    
    Rule 13a-14(a) Certification of the Chief Financial Officer.**32.1
    
    
    
    Section 1350 Certification of the Chief Executive Officer.**32.2
    
    
    
    Section 1350 Certification of the Chief Financial Officer.
 
 **
    
    Filed or furnished herewith#
    
    Portions of this Exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for
confidential treatment+
    
    Management contract or compensatory plan or arrangement