16 South Pennsylvania Avenue, Oklahoma City, Oklahoma

73107

The backlog of the Climate Control Business was approximately $52.6 million and $59.0 million as of May 31 and April 30, 2013, respectively.

We have identified several strategic initiatives which we believe will drive increased sales growth and profitability. We also intend to further develop relationships with large industrial customers in our Chemical business, which we believe will create opportunities to drive increased product demand, particularly given the contracted nature of that segment of our business.

Thirteen customers (including their affiliates), primarily relating to the Chemical Business, accounted for approximately 37% of our total net receivables at March 31, 2013.

Climate Control Business’ products sales should outgrow broader markets.

During the first half of 2013, certain of our chemical facilities continued to have planned and unplanned downtime as a result of certain maintenance and equipment issues. As an example, after the Pryor facility resumed operations in April 2013, certain of its operations were out of production periodically during May, June and July 2013 for equipment repairs or maintenance.

We are currently building an ammonia plant at our El Dorado, Arkansas facility which will allow us to further reduce our cost position by using natural gas as the primary feedstock at that facility, which currently uses purchased ammonia as its feedstock. Given the potential for significant cost savings at the El Dorado facility, we currently estimate we will achieve a five-year payback period on the approximately $250.0 million investment in the ammonia plant.

During the later part of the second quarter of 2013 we negotiated an oral global agreement in principle with the EPA/DOJ to settle certain issues relating to the Clean Air Act. Settlement of this matter is subject to the parties entering into definitive settlement agreements and consent decrees and such being finalized after the notice and comment period. The proposed oral agreement in principle provides, among other things, the following: all of our Chemical Business’ nitric acid plants are to achieve certain emission rates within a certain time period for each plant. In order to achieve these emission rates, six of our Chemical Business’ eight nitric acid plants will require additional pollution control technology equipment to achieve the emission rates agreed upon. We have already completed necessary modifications at two of our Chemical Business’ existing nitric acid plants. The cost of the necessary pollution control equipment is estimated to range from $2.0 million to $3.0 million for each of the remaining six nitric acid plants; our Chemical Business will provide a reforestation mitigation project that is unrelated to our emissions or activities and will not be located at one of our plant sites, which we estimate will cost approximately $150,000; and a civil penalty to be paid by our Chemical Business in the amount of $725,000.

By letter dated April 19, 2013, the Oklahoma Department of Environmental Quality (“ODEQ”) identified 14 issues of alleged non-compliance and concern from the evaluation relating to federal and state air quality regulations. On July 2, 2013, a settlement was reached to resolve the allegations of the April 19, 2013, letter. Three of the violations were already resolved through the global settlement with the EPA/DOJ discussed above, and ODEQ agreed to resolve the remaining 11 violations for $100,000 (which amount is included in the $725,000 civil penalty discussed above), with the settlement being addressed as an addition to the global settlement discussed above.

We renewed one of our union agreements in July 2013 for a term of five years, and we expect to negotiate renewals in connection with two additional agreements which expire in October 2013 and November 2013.

Each of the named executive officers of the Company received a bonus in 2013 based on results for 2012 performance in the amount of $150,000, except such bonus for David M. Shear was $140,000 and for Steven J. Golsen was $112,000.

The Company expects to receive significant proceeds in connection with its insurance claims relating to its claims involving the El Dorado and Cherokee facilities, and has received from its insurance company approximately $65 million to date.

During April 2013, an explosion and fire occurred at the West Fertilizer Co. (“West Fertilizer”), located in West, Texas, causing death, bodily injury and substantial property damage. West Fertilizer is not owned or controlled by the Company, but West Fertilizer had been a customer of El Dorado Chemical Company (“EDC”), purchasing ammonium nitrate from EDC from time to time. The Company and EDC have received letters from counsel purporting to represent subrogated insurance carriers, personal injury claimants and persons who suffered property damages informing them that their clients are conducting investigations into the cause of the explosion and fire to determine, among other things, whether ammonium nitrate manufactured by EDC and supplied to West Fertilizer was stored at West Fertilizer at the time of the explosion and, if so, whether such ammonium nitrate may have been one of the contributing factors of the explosion. Other manufacturers of ammonium nitrate also supplied ammonium nitrate to West Fertilizer. The lawsuits that have been filed as of the date hereof name West Fertilizer and another supplier of ammonium nitrate as defendants, but neither EDC nor the Company have been named in any of these suits. At this time, EDC does not believe that its product was in storage at West Fertilizer at the time of the explosion. Furthermore, EDC does not believe that its product would have been a contributing factor in the explosion even if it had been stored at West Fertilizer at the time of the explosion. EDC has retained a firm specializing in cause and origin investigations, with particular experience with fertilizer facilities, to assist it in its own investigation. The Company and EDC have placed its liability insurance carrier on notice of this matter, which policies have aggregate limits of general liability totaling approximately $100 million, with a self-insured retention of $250,000.