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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 March 31, 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 o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 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 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;
    
    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;
    
    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, including those resulting from weather related 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.




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Document Summaries
  Access to Filings




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##### 



STERLING CHEMICALS, INC.
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4T. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 6. Exhibits
    
    
    21Second Amended and Restated Certification of IncorporationLetter of Grant Thornton LLPCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Section 1350Certification of CFO Pursuant to Section 1350
  1




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##### Table of Contents



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 ended March 31,20072008
    
    
    (As Restated)Revenues
    
    $
    38,199
    
    
    $
    32,715Cost of goods sold
    
    
    33,799
    
    
    
    27,088Gross profit
    
    
    4,400
    
    
    
    5,627Selling, general and administrative expenses
    
    
    2,418
    
    
    
    2,298Interest and debt related expenses
    
    
    4,213
    
    
    
    3,461Interest income
    
    
    (1,326
    )
    
    
    (76
    )Loss from continuing operations before income tax
    
    
    (905
    )
    
    
    (56
    )Provision for income taxes
    
    
    
    
    
    
    Loss from continuing operations
    
    $
    (905
    )
    
    $
    (56
    )Income (loss) from discontinued operations, net
of tax
    
    
    (6,224
    )
    
    
    2,725Net income (loss)
    
    $
    (7,129
    )
    
    $
    2,669Preferred stock dividends
    
    
    4,271
    
    
    
    3,049Net loss attributable to common stockholders
    
    $
    (11,400
    )
    
    $
    (380
    )Income (loss) per share of common stock
attributable to common stockholders, basic
and diluted:Loss from continuing operations
    
    $
    (1.83
    )
    
    $
    (1.10
    )Income (loss) from discontinued operations, net
of tax
    
    
    (2.20
    )
    
    
    0.96Basic and diluted loss per share
    
    $
    (4.03
    )
    
    $
    (0.14
    )Weighted average shares outstanding:Basic and diluted
    
    
    2,828,460
    
    
    
    2,828,460
  2




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STERLING CHEMICALS, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands, Except Share Data)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    170,459
    
    
    $
    100,183Accounts receivable, net of allowance of $49 and $39,
respectively
    
    
    11,713
    
    
    
    29,157Inventories, net
    
    
    5,211
    
    
    
    5,044Prepaid expenses
    
    
    2,027
    
    
    
    3,129Deferred tax asset
    
    
    5,029
    
    
    
    5,029Assets of discontinued operations
    
    
    1,807
    
    
    
    71,754Total current assets
    
    
    196,246
    
    
    
    214,296Property, plant and equipment, net
    
    
    76,678
    
    
    
    77,677Other assets, net
    
    
    14,301
    
    
    
    14,471Total assets
    
    $
    287,225
    
    
    $
    306,444LIABILITIES AND STOCKHOLDERS DEFICIENCY IN ASSETSCurrent liabilities:Accounts payable
    
    $
    12,248
    
    
    $
    13,715Accrued liabilities
    
    
    26,038
    
    
    
    30,289Liabilities of discontinued operations
    
    
    43
    
    
    
    4,028Total current liabilities
    
    
    38,329
    
    
    
    48,032Long-term debt
    
    
    150,000
    
    
    
    150,000Deferred tax liability
    
    
    5,029
    
    
    
    5,029Deferred credits and other liabilities
    
    
    75,217
    
    
    
    77,604Commitments and contingencies (Note 5)Redeemable preferred stock
    
    
    104,137
    
    
    
    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
    
    
    136,903
    
    
    
    141,174Accumulated deficit
    
    
    (239,671
    )
    
    
    (232,542
    )Accumulated other comprehensive income
    
    
    17,253
    
    
    
    17,253Total stockholders deficiency in assets
    
    
    (85,487
    )
    
    
    (74,087
    )Total liabilities and stockholders deficiency in assets
    
    $
    287,225
    
    
    $
    306,444
  3




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STERLING CHEMICALS, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
 Three months ended March 31,20072008
    
    
    (As Restated)Cash flows from operating activities:Net income (loss)
    
    $
    (7,129
    )
    
    $
    2,669Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Bad debt expense
    
    
    10
    
    
    
    Depreciation and amortization
    
    
    2,635
    
    
    
    2,729Interest amortization
    
    
    279
    
    
    
    100Unearned income amortization
    
    
    (2,125
    )
    
    
    Gain on disposal of property, plant and equipment
    
    
    
    
    
    
    (182
    )Other
    
    
    
    
    
    
    10Change in assets/liabilities:Accounts receivable
    
    
    72,264
    
    
    
    17,966Inventories
    
    
    14,900
    
    
    
    4,255Prepaid expenses
    
    
    1,102
    
    
    
    1,118Other assets
    
    
    (164
    )
    
    
    2,181Accounts payable
    
    
    (4,303
    )
    
    
    (13,405
    )Accrued liabilities
    
    
    (4,905
    )
    
    
    (3,581
    )Other liabilities
    
    
    (251
    )
    
    
    (5,224
    )Net cash provided by operating activities
    
    
    72,313
    
    
    
    8,636Cash flows used in investing activities:Capital expenditures for property, plant and equipment
    
    
    (2,037
    )
    
    
    (2,248
    )Increase in restricted cash
    
    
    
    
    
    
    (44,146
    )Net proceeds from the sale of property, plant and equipment
    
    
    
    
    
    
    182Net cash used in investing activities
    
    
    (2,037
    )
    
    
    (46,212
    )Cash flows provided by financing activities:Repayment of Old Secured Notes
    
    
    
    
    
    
    (57,994
    )Proceeds from the issuance of Secured Notes
    
    
    
    
    
    
    150,000Debt issuance costs
    
    
    
    
    
    
    (6,778
    )Net cash provided by financing activities
    
    
    
    
    
    
    85,228Net increase in cash and cash equivalents
    
    
    70,276
    
    
    
    47,652Cash and cash equivalents  beginning of year
    
    
    100,183
    
    
    
    20,690Cash and cash equivalents  end of period
    
    $
    170,459
    
    
    $
    68,342Supplemental disclosures of cash flow information:Interest paid
    
    $
    (128
    )
    
    $
    (2,501
    )Interest received
    
    
    1,326
    
    
    
    76Cash paid for income taxes
    
    
    404
    
    
    
    299
  4




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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
  Reclassifications
  2. Stock-Based Compensation
   3. Discontinued Operations
   5




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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  March 31, 2008
    
    
    December 31, 2007(Dollars in Thousands)Assets of discontinued operations:Accounts receivable, net
    
    $
    1,165
    
    
    $
    55,995Inventories
    
    
    642
    
    
    
    15,709Other assets
    
    
    
    
    
    
    50Total
    
    $
    1,807
    
    
    $
    71,754Liabilities of discontinued operations:Accounts payable
    
    $
    21
    
    
    $
    3,363Accrued liabilities
    
    
    11
    
    
    
    665Deferred credits and other liabilities
    
    
    11
    
    
    
    Total
    
    $
    43
    
    
    $
    4,028
  Three months ended March 31,2008
    
    2007Revenues
    
    $
    14,597
    
    
    $
    163,400Income (loss) before income taxes
    
    
    (6,224
    )
    
    
    2,725
  Accrued as of
    
    Additional
    
    
    
    
    
    Accrued as ofDecember 31, 2007
    
    accruals
    
    Cash payments
    
    March 31, 2008Severance accrual
    
    $
    325
    
    
    $
    
    
    
    $
    325
    
    
    $
    
 4. Long-Term Debt
  1 4
 6




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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 1 4
     7




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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 5. Commitments and Contingencies
 Product Contracts:
  Environmental Regulations:
      8




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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Legal Proceedings:
   9




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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
   th
  6. Income Taxes
  7. Pension Plans and Other Postretirement Benefits
  10




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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Three months ended March 31,2008
    
    
    2007(Dollars in Thousands)Service cost
    
    $
    
    
    
    $
    152Interest cost
    
    
    1,788
    
    
    
    1,783Expected return on plan assets
    
    
    (2,148
    )
    
    
    (2,025
    )Amortization
    
    
    2
    
    
    
    Net pension benefit
    
    $
    (358
    )
    
    $
    (90
    )
  Three months ended March 31,2008
    
    
    2007(Dollars in Thousands)Service cost
    
    $
    3
    
    
    $
    46Interest cost
    
    
    28
    
    
    
    364Amortization
    
    
    (106
    )
    
    
    (342
    )Net plan costs (benefit)
    
    $
    (75
    )
    
    $
    68
 8. Operating Segment and Sales Information
  Three months ended March 31,2008
    
    
    2007(Dollars in Thousands)Revenues:Acetic acid
    
    $
    28,935
    
    
    $
    24,832Plasticizers
    
    
    8,994
    
    
    
    7,516Other
    
    
    270
    
    
    
    367Total
    
    $
    38,199
    
    
    $
    32,715Segment gross profit:Acetic acid
    
    $
    3,987
    
    
    $
    5,833Plasticizers
    
    
    1,892
    
    
    
    185Other(1)
    
    
    (1,479
    )
    
    
    (391
    )Gross profit
    
    
    4,400
    
    
    
    5,627Selling, general and administrative expenses
    
    
    2,418
    
    
    
    2,298Interest and debt related expenses
    
    
    4,213
    
    
    
    3,461Interest income
    
    
    (1,326
    )
    
    
    (76
    )Loss from continuing operations before income tax
    
    $
    (905
    )
    
    $
    (56
    )Depreciation and amortization expenses:Acetic acid
    
    $
    1,512
    
    
    $
    1,317Plasticizers
    
    
    532
    
    
    
    486Other(2)
    
    
    591
    
    
    
    926Total
    
    $
    2,635
    
    
    $
    2,729Capital expenditures:Acetic acid
    
    $
    794
    
    
    $
    204Plasticizers
    
    
    
    
    
    
    Otherplant infrastructure
    
    
    1,243
    
    
    
    2,044Total
    
    $
    2,037
    
    
    $
    2,248
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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 March 31,
    
    
    December 31,2008
    
    
    2007(Dollars in Thousands)Total assets:Acetic acid
    
    $
    34,887
    
    
    $
    53,769Plasticizers
    
    
    12,999
    
    
    
    13,216Other(3)
    
    
    239,339
    
    
    
    239,459Total
    
    $
    287,225
    
    
    $
    306,444
 
 (1)
    
    Gross profit (loss) for Other includes various unallocated corporate charges and
credits.(2)
    
    Includes depreciation and amortization expense of $0.3 million and $0.6 million
for discontinued operations for the three months ended March 31, 2008 and 2007,
respectively.(3)
    
    Components of Other are presented in the table below: March 31,
    
    
    December 31,2008
    
    
    2007(Dollars in Thousands)Total assets:Corporate:Cash
    
    $
    170,459
    
    
    $
    100,183Other
    
    
    26,936
    
    
    
    27,998Plant infrastructure:Property, plant and equipment, net
    
    
    40,137
    
    
    
    39,524Assets of discontinued operations
    
    
    1,807
    
    
    
    71,754Total
    
    $
    239,339
    
    
    $
    239,459
  Three months ended March 31,2008
    
    2007(Dollars in Thousands)Major customers:BP Chemicals
    
    $
    28,935
    
    
    $
    24,832BASF Corporation
    
    
    8,994
    
    
    
    7,516
 9. New Accounting Standards
    12




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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
    10. Restatement of Financial Information
  
    
    Paid-in-kind dividends on our Series A Preferred Stock were incorrectly recorded as
4% of the Series A 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 approximately $27 million as of March 31
2007. Preferred stock dividends and net loss attributable to common shareholders was
understated by approximately $1 million for the three months ended March 31 2007.
    
    Disputed revenues were inappropriately recognized resulting in a gross up of the
consolidated statements of operations for the quarter ended March 31 2007. Revenues and
selling, general and administrative expenses were overstated by $1.0 million for the
three months ended March 31 2007.
 
 13




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     GRANT THORNTON LLP 
 14




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Business Overview
     15




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Results of Operations
 Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 Revenues and income (loss) from continuing operations
    Interest and debt related expenses
  Interest income
  Discontinued operations
  16




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Liquidity and Capital Resources
  1 4 1 4
    17




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i.e.
 Working Capital
  Cash Flow
  Capital Expenditures
  Recent Developments
  Contractual Cash Obligations
  Critical Accounting Policies, Use of Estimates and Assumptions
  18




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New Accounting Standards
       
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 1
 
 Item 4T. Controls and Procedures
  19




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20




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PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description of Exhibit**3.1
    
    - Second Amended and Restated Certification of Incorporation of Sterling Chemicals,
Inc.**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 21




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SIGNATURES
  STERLING CHEMICALS, INC.
(Registrant)Date: May 13, 2008
    
    By
    
    /s/ RICHARD K. CRUMPRichard K. CrumpPresident and Chief Executive OfficerDate: May 13, 2008
    
    By
    
    /s/ JOHN R. BEAVERJohn R. BeaverSenior Vice President-Finance and Chief Financial Officer(Principal Financial Officer)
 22




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EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit**3.1
    
    - Second Amended and Restated Certification of Incorporation of Sterling Chemicals,
Inc.**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