Memo

This memo addresses the potential impact on Classic Ceramic, Inc.’s 2013 financial statements of the U.S. Environmental Protection Agency’s (EPA) investigation into the Company’s Twin Falls Facility. In fiscal year 2012, the Company did not make any disclosures related to the investigation, and we determined that the investigation did not pose a serious threat to the Company’s financial well-being at that time. However, we must re-evaluate the status of the environmental investigation because of the following changes in circumstances:

•According to a letter from the Company’s attorney, the EPA has authorized an initial $600,000 for a Remedial Investigation and Feasibility Study (RI/FS) at the Twin Falls site, for which Classic Ceramic has been listed as one of three potentially responsible parties (PRPs). The study will begin sometime in 2014.

•Management agrees that it will be responsible for its share of the RI/FS. The total cost of the RI/FS is expected to range from $600,000 to $1,800,000.

In order to determine the appropriate accounting and disclosures that should be made by the company, we must refer to the Accounting Standards Codification Topic 410, Subtopic 30, which discusses environmental obligations.

ASC 410-30-25-1, which echoes the requirements of ASC 450-20-25-2 for the accrual of contingent liabilities, states that a liability should be accrued when a) it is probable that the liability has been incurred, and b) that the amount of the loss can be reasonably estimated. In Classic Ceramic’s case, part a has clearly been met, as the EPA has authorized the initial stages of an RI/FS at the Twin Falls facility, and management has determined that they will be partially responsible for the cost of the RI/FS. However, it is less clear whether the amount of the liability can be reasonably estimated, as the total cost of the RI/FS is not yet known, and it is not yet known how that cost will be allocated among the three potentially responsible parties.

Because management has determined that it is not possible to reasonably estimate the amount of any obligation for remediation, we do not believe that it is necessary for the Company to record a liability at this point in time. However, they should record a liability as soon as enough information becomes available to reasonably estimate the amount of their obligation.

Although we do not find it necessary for Classic Ceramics to accrue a liability, they should make a disclosure about the Twin Falls facility in the notes to their financial statements. According to ASC 410-30-50-5, the disclosure requirements of ASC 450-20 (loss contingencies) are applicable to environmental remediation loss contingencies. ASC 450-20-50-3 states that disclosure of a contingency should be made if there is a reasonable possibility that a loss has been incurred, but an accrual was not made because one of the criteria was not met. In this situation, we believe that Classic Ceramics should make a disclosure because they are likely to be responsible for some portion of the remediation costs, but did not make an accrual because it is not possible to estimate the amount of the liability. ASC 450-20-50-4 specifies that the disclosure should include information about the nature of the contingency, and an estimate of the