10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

¨ 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: 1-32258

Reynolds American Inc.

(Exact name of registrant as specified in its charter)

North Carolina	20-0546644
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

401 North Main Street

Winston-Salem, NC 27101

(Address of principal executive offices) (Zip Code)

(336) 741-2000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed from last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	þ	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 531,283,513 shares of common stock, par value $.0001 per share, as of July 7, 2014.

INDEX

		Page
Part I – Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income (Unaudited) – Three and Six Months Ended June 30, 2014 and 2013		3
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June 30, 2014 and 2013		4
	Condensed Consolidated Statements of Cash Flows (Unaudited) –Six Months Ended June 30, 2014 and 2013		5
	Condensed Consolidated Balance Sheets – June 30, 2014 (Unaudited) and December 31, 2013		6
	Notes to Condensed Consolidated Financial Statements (Unaudited)		7
	1 Business and Summary of Significant Accounting Policies		7
	2 Fair Value		10
	3 Intangible Assets		13
	4 Restructuring		14
	5 Income Per Share		15
	6 Inventories		15
	7 Income Taxes		15
	8 Borrowing Arrangements		16
	9 Commitments and Contingencies		17
	10 Shareholders’ Equity		62
	11 Stock Plans		64
	12 Segment Information		65
	13 Related Party Transactions		66
	14 RAI Guaranteed, Unsecured Notes — Condensed Consolidating Financial Statements		67
	15 Subsequent Event		77
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		78
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		105
Item 4.	Controls and Procedures		105
Part II – Other Information
Item 1.	Legal Proceedings		105
Item 1A.	Risk Factors		106
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		106
Item 6.	Exhibits		107
Signatures			108

2

Part I — Financial Information

Item 1. Financial Statements

REYNOLDS AMERICAN INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Millions, Except Per Share Amounts)

(Unaudited)

	For the Three  Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Net sales(1)	$	2,071		$	2,087		$	3,920		$	3,889
Net sales, related party		91			92			177			173
Net sales		2,162			2,179			4,097			4,062
Costs and expenses:
Cost of products sold(1)		959			999			1,889			1,693
Selling, general and administrative expenses		364			380			777			681
Amortization expense		3			2			5			3
Operating income		836			798			1,426			1,685
Interest and debt expense		62			65			121			127
Interest income		(1	)		(1	)		(2	)		(3	)
Other expense, net		—			2			1			—
Income from continuing operations before income taxes		775			732			1,306			1,561
Provision for income taxes		283			271			476			592
Income from continuing operations		492			461			830			969
Income from discontinued operations, net of tax		—			—			25			—
Net income	$	492		$	461		$	855		$	969
Basic income per share:
Income from continuing operations	$	0.92		$	0.84		$	1.55		$	1.77
Income from discontinued operations		—			—			0.05			—
Net income	$	0.92		$	0.84		$	1.60		$	1.77
Diluted income per share:
Income from continuing operations	$	0.92		$	0.84		$	1.55		$	1.76
Income from discontinued operations		—			—			0.04			—
Net income	$	0.92		$	0.84		$	1.59		$	1.76
Dividends declared per share	$	0.67		$	0.63		$	1.34		$	1.22

⁽¹⁾ Excludes excise taxes of $927 million and $983 million for the three months ended June 30, 2014 and 2013, respectively; and $1,773 million and $1,838 million for the six months ended June 30, 2014 and 2013, respectively.

See Notes to Condensed Consolidated Financial Statements (Unaudited)

3

REYNOLDS AMERICAN INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Millions)

(Unaudited)

	For the Three Months Ended June 30,
	2014			2013
Net income	$	492		$	461
Other comprehensive income (loss), net of tax:
Retirement benefits, net of tax expense (benefit) (2014 — $4; 2013 — $(7))		6			(10	)
Unrealized gain on long-term investments, net of tax		1			1
Amortization of realized loss on hedging instruments, net of tax		1			1
Cumulative translation adjustment and other, net of tax expense (benefit) (2014 — $(1); 2013 — $1)		(3	)		3
Comprehensive income	$	497		$	456
	For the Six Months Ended June 30,
	2014			2013
Net income	$	855		$	969
Other comprehensive income (loss), net of tax:
Retirement benefits, net of tax benefit (2013 — $10)		—			(15	)
Unrealized gain on long-term investments, net of tax expense (2014 — $1; 2013 — $2)		2			3
Amortization of realized loss on hedging instruments, net of tax		1			1
Cumulative translation adjustment and other, net of tax expense (benefit) (2014 — $(1); 2013 — $6)		(2	)		(12	)
Comprehensive income	$	856		$	946

See Notes to Condensed Consolidated Financial Statements (Unaudited)

4

REYNOLDS AMERICAN INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Millions)

(Unaudited)

	For the Six Months Ended June 30,
	2014			2013
Cash flows from (used in) operating activities:
Net income	$	855		$	969
Income from discontinued operations, net of tax		(25	)		—
Adjustments to reconcile to net cash flows from (used in) continuing operating activities:
Depreciation and amortization		51			55
Restructuring charge, net of cash payments		(7	)		(8	)
Deferred income tax expense		15			158
Pension and postretirement		(63	)		(60	)
Tobacco settlement		(480	)		(1,386	)
Other, net		(91	)		68
Net cash flows from (used in) operating activities		255			(204	)
Cash flows from (used in) investing activities:
Capital expenditures		(123	)		(50	)
Proceeds from termination of joint venture		35			31
Other, net		(24	)		5
Net cash flows used in investing activities		(112	)		(14	)
Cash flows from (used in) financing activities:
Dividends paid on common stock		(699	)		(650	)
Repurchase of common stock		(440	)		(475	)
Principal borrowings under revolving credit facility		1,000			—
Repayments under revolving credit facility		(200	)		—
Principal borrowings under term-loan facility		—			500
Excess tax benefit on stock-based compensation plans		10			11
Debt issuance costs and financing fees		—			(3	)
Net cash flows used in financing activities		(329	)		(617	)
Effect of exchange rate changes on cash and cash equivalents		(1	)		(3	)
Net change in cash and cash equivalents		(187	)		(838	)
Cash and cash equivalents at beginning of period		1,500			2,502
Cash and cash equivalents at end of period	$	1,313		$	1,664
Income taxes paid, net of refunds	$	499		$	364
Interest paid	$	125		$	135

See Notes to Condensed Consolidated Financial Statements (Unaudited)

5

REYNOLDS AMERICAN INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Millions)

	June 30, 2014			December 31, 2013
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,313		$	1,500
Accounts receivable		98			106
Accounts receivable, related party		66			56
Notes receivable		1			37
Other receivables		11			16
Inventories		1,059			1,127
Deferred income taxes, net		637			606
Prepaid expenses and other		273			207
Total current assets		3,458			3,655
Property, plant and equipment, net of accumulated depreciation (2014 — $1,592; 2013 — $1,579)		1,177			1,074
Trademarks and other intangible assets, net of accumulated amortization		2,412			2,417
Goodwill		8,018			8,011
Other assets and deferred charges		236			245
	$	15,301		$	15,402
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	137		$	185
Tobacco settlement accruals		1,248			1,727
Due to related party		1			—
Deferred revenue, related party		17			48
Revolving credit facility borrowings		800			—
Other current liabilities		1,120			1,116
Total current liabilities		3,323			3,076
Long-term debt (less current maturities)		5,091			5,099
Deferred income taxes, net		710			658
Long-term retirement benefits (less current portion)		1,158			1,221
Other noncurrent liabilities		124			181
Commitments and contingencies:
Shareholders’ equity:
Common stock (shares issued: 2014 — 531,283,513; 2013 — 538,053,024)		—			—
Paid-in capital		6,162			6,571
Accumulated deficit		(1,212	)		(1,348	)
Accumulated other comprehensive loss		(55	)		(56	)
Total shareholders’ equity		4,895			5,167
	$	15,301		$	15,402

See Notes to Condensed Consolidated Financial Statements (Unaudited)

6

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 — Business and Summary of Significant Accounting Policies

Overview

The condensed consolidated financial statements (unaudited) include the accounts of Reynolds American Inc., referred to as RAI, and its wholly owned subsidiaries. RAI’s wholly owned operating subsidiaries include R. J. Reynolds Tobacco Company; American Snuff Company, LLC, referred to as American Snuff Co.; Santa Fe Natural Tobacco Company, Inc., referred to as SFNTC; R. J. Reynolds Vapor Company, referred to as RJR Vapor; Niconovum AB; and Niconovum USA, Inc.

RAI was incorporated as a holding company in the state of North Carolina in 2004, and its common stock is listed on the NYSE under the symbol “RAI.” RAI was created to facilitate the business combination of the U.S. business of Brown & Williamson Holdings, Inc., referred to as B&W, an indirect wholly owned subsidiary of British American Tobacco p.l.c., referred to as BAT, with R. J. Reynolds Tobacco Company on July 30, 2004, with such combination referred to as the B&W business combination.

References to RJR Tobacco prior to July 30, 2004, relate to R. J. Reynolds Tobacco Company, a New Jersey corporation and a wholly owned subsidiary of R.J. Reynolds Tobacco Holdings, Inc., referred to as RJR. References to RJR Tobacco on and subsequent to July 30, 2004, relate to the combined U.S. assets, liabilities and operations of B&W and R. J. Reynolds Tobacco Company, a North Carolina corporation.

RAI’s reportable operating segments are RJR Tobacco, American Snuff and Santa Fe. The RJR Tobacco segment consists principally of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. The Santa Fe segment consists of the domestic operations of SFNTC. Included in All Other are RJR Vapor, Niconovum AB, Niconovum USA, Inc., and various international operations, among other RAI subsidiaries. The segments were identified based on how RAI’s chief operating decision maker allocates resources and assesses performance. Certain of RAI’s operating subsidiaries have entered into intercompany agreements for products or services with other subsidiaries. As a result, certain activities of an operating subsidiary may be included in a different segment of RAI.

RAI’s operating subsidiaries primarily conduct their businesses in the United States.

Basis of Presentation

The accompanying interim condensed consolidated financial statements (unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America, referred to as GAAP, for interim financial information and, in management’s opinion, contain all adjustments, consisting only of normal recurring items, necessary for a fair presentation of the results for the periods presented. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All material intercompany balances have been eliminated. For interim reporting purposes, certain costs and expenses are charged to operations in proportion to the estimated total annual amount expected to be incurred primarily based on sales volumes. The results for the interim period ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The condensed consolidated financial statements (unaudited) should be read in conjunction with the consolidated financial statements and related footnotes, which appear in RAI’s Annual Report on Form 10-K for the year ended December 31, 2013. Certain reclassifications were made to conform prior years’ financial statements to the current presentation. Certain amounts presented in note 9 are rounded in the aggregate and may not sum from the individually presented components. All dollar amounts, other than per share amounts, are presented in millions, except for amounts set forth in note 9 and as otherwise noted.

7

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Cost of Products Sold

Cost of products sold includes the expenses for the Master Settlement Agreement, referred to as the MSA, and other settlement agreements with the states of Mississippi, Florida, Texas and Minnesota, which together with the MSA are collectively referred to as the State Settlement Agreements; the federal tobacco quota buyout; and the user fees charged by the U.S. Food and Drug Administration, referred to as the FDA, which were as follows:

	For the Three  Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
State Settlement Agreements	$	456	$	521	$	912	$	789
Federal tobacco quota buyout		51		54		106		106
FDA user fees		33		31		67		63

In 2012, RJR Tobacco and certain other participating manufacturers, referred to as the PMs, including SFNTC, entered into a term sheet, referred to as the Term Sheet, with 17 states, the District of Columbia and Puerto Rico to settle certain claims related to the MSA non-participating manufacturer adjustment, referred to as the NPM Adjustment. The Term Sheet resolves claims related to volume years from 2003 through 2012 and puts in place a revised method to determine future adjustments from 2013 forward as to jurisdictions that join the agreement. The Term Sheet was not binding on the parties at the time it was executed. On March 12, 2013, a single, nationwide arbitration panel of three former federal judges, referred to as the Arbitration Panel, hearing the dispute related to the 2003 NPM Adjustment (and related matters) issued an order, referred to as the Order, authorizing the implementation of the Term Sheet. In addition, after the Order, one additional state signed the Term Sheet on April 12, 2013; and, two additional states signed the Term Sheet on May 24, 2013. As a result of the Order, the Term Sheet is now binding on all signatories.

Based on the jurisdictions bound by the Term Sheet through December 31, 2013, RJR Tobacco and SFNTC, collectively, will receive credits, currently estimated to total approximately $1.1 billion, with respect to their NPM Adjustment claims for the period from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period, which commenced with the April 2013 MSA payment. As a result of this binding Order, expenses for the MSA were reduced by approximately $15 million and $219 million for the three and six months ended June 30, 2013, respectively.

In June 2014, two additional states agreed to settle the NPM Adjustment disputes on similar terms as set forth in the Term Sheet, except for certain provisions related to the determination of credits to be received by the PMs. RJR Tobacco and SFNTC, collectively, will receive credits, currently estimated to total approximately $170 million, with respect to their NPM Adjustment claims from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period effectively beginning with the April 2014 MSA payment related to the addition of these two states. As a result, expenses for the MSA were reduced by approximately $34 million for the three and six months ended June 30, 2014.

In addition, as a result of meeting the performance requirements associated with the Term Sheet, RJR Tobacco and Santa Fe, collectively, recognized additional credits of $91 million and $75 million for the three months ended June 30, 2014 and 2013, respectively; and $154 million and $132 million for the six months ended June 30, 2014 and 2013, respectively. RJR Tobacco expects to recognize additional credits through 2017; and Santa Fe expects to recognize additional credits through 2016.

For additional information related to the NPM Adjustment settlement, see “— Litigation Affecting the Cigarette Industry —State Settlement Agreements — Enforcement and Validity; Adjustments” in note 9.

8

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Pension and Postretirement

Pension and postretirement benefits require balance sheet recognition of the net asset or liability for the overfunded or underfunded status of defined benefit pension and other postretirement benefit plans, on a plan-by-plan basis, and recognition of changes in the funded status in the year in which the changes occur.

Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. Differences between actual results and actuarial assumptions are accumulated and recognized in the year in which they occur as a mark-to-market adjustment, referred to as an MTM adjustment, to the extent such net gains and losses are in excess of 10% of the greater of the fair value of plan assets or the plan’s benefit obligation, referred to as the corridor. Actuarial gains and losses outside the corridor are generally recognized annually as of December 31, or when the plans are remeasured during an interim period.

Prior service costs of pension benefits, which are changes in benefit obligations due to plan amendments, are amortized on a straight-line basis over the average remaining service period for active employees, or average remaining life expectancies for inactive employees if most of the plan obligations are due to inactive employees. Prior service costs of postretirement benefits, which are changes in benefit obligations due to plan amendments, are amortized on a straight-line basis over the expected service period to full eligibility age for active employees, or average remaining life expectancies for inactive employees if most of the plan obligations are due to inactive employees.

The components of the pension benefits and the postretirement benefits are set forth below:

	For the Three Months Ended June 30,												For the Six Months Ended June 30,
	Pension Benefits						Postretirement Benefits						Pension Benefits						Postretirement Benefits
	2014			2013			2014			2013			2014			2013			2014			2013
Service cost	$	6		$	7		$	—		$	—		$	11		$	12		$	1		$	1
Interest cost		67			62			13			13			133			124			27			25
Expected return on plan assets		(91	)		(88	)		(3	)		(2	)		(181	)		(176	)		(6	)		(5	)
Amortization of prior service cost (credit)		1			1			(10	)		(11	)		2			2			(21	)		(21	)
Total benefit cost (credit)	$	(17	)	$	(18	)	$	—		$	—		$	(35	)	$	(38	)	$	1		$	—

RAI disclosed in its financial statements for the year ended December 31, 2013, that it expects to contribute $109 million to its pension plans in 2014, of which $4 million was contributed during the first six months of 2014.

Fair Value Measurement

RAI determines fair value of assets and liabilities, if any, using a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market participant assumptions based on the best information available in the circumstances.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price.

The levels of the fair value hierarchy are:

Level 1: inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.

9

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Level 3: inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

RAI evaluates its investments for possible impairment based on current economic conditions, credit loss experience and other criteria on a quarterly basis. The evaluation of investments for impairment requires significant judgments, including:

• the identification of potentially impaired securities;

• the determination of their estimated fair value;

• the assessment of whether any decline in estimated fair value is other-than-temporary; and

• the likelihood of selling before recovery.

If there is a decline in a security’s net realizable value that is other-than-temporary and it is not likely to be sold before recovery, the decline is separated into the amount of impairment related to credit loss and the amount of impairment related to all other factors. The decline related to the credit loss is recognized in earnings, while the decline related to all other factors is recognized in accumulated other comprehensive loss.

Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board, referred to as the FASB, issued guidance for discontinued operations, which changes the criteria for determining which disposals should be presented as discontinued operations and modifies related disclosure requirements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted, but only for those disposals that have not been reported in financial statements previously issued or available for guidance. The adoption of the amendment is not expected to have a material impact on RAI’s results of operations, cash flows or financial position.

In May 2014, the FASB issued amended guidance that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This amended guidance will replace most existing GAAP revenue recognition guidance and is effective for RAI for interim and annual reporting periods beginning on January 1, 2017. Early adoption is prohibited. RAI is evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures.

Note 2 — Fair Value

Financial assets carried at fair value as of June 30, 2014, were as follows:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash equivalents	$	1,226	$	—	$	—	$	1,226
Other assets and deferred charges:
Auction rate securities		—		—		79		79
Mortgage-backed security		—		—		12		12
Marketable equity security		4		—		—		4

10

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Financial assets carried at fair value as of December 31, 2013, were as follows:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash equivalents	$	1,443	$	—	$	—	$	1,443
Other assets and deferred charges:
Auction rate securities		—		—		76		76
Mortgage-backed security		—		—		13		13
Marketable equity security		4		—		—		4

There were no transfers between the levels for the six months ended June 30, 2014, or in the year ended December 31, 2013.

RAI has investments in auction rate securities linked to corporate credit risk, investments in auction rate securities related to financial insurance companies, an investment in a mortgage-backed security and an investment in a marketable equity security. The unrealized gains and losses, net of tax, were included in accumulated other comprehensive loss in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014, and consolidated balance sheet as of December 31, 2013. The funds associated with the auction rate securities will not be accessible until a successful auction occurs or a buyer is found.

In determining if the difference between amortized cost and estimated fair value of the auction rate securities or the mortgage-backed security was deemed either temporarily or other-than-temporarily impaired, RAI evaluated each type of long-term investment using a set of criteria, including decline in value, duration of the decline, period until anticipated recovery, nature of investment, probability of recovery, financial condition and near-term prospects of the issuer, RAI’s intent and ability to retain the investment, attributes of the decline in value, status with rating agencies, status of principal and interest payments and any other issues related to the underlying securities. To assess credit losses, RAI uses historical default rates, debt ratings, credit default swap spreads and recovery rates. RAI has the intent and ability to hold these investments for a period of time sufficient to allow for the recovery in market value.

All of the fair values of the auction rate securities, classified as Level 3, are linked to the longer-term credit risk of a diverse range of corporations, including, but not limited to, manufacturing, financial and insurance sectors. The fair value was determined by utilizing an income approach model, which was based upon the weighted average present value of future cash payments, given the probability of certain events occurring within the market. RAI considers the market for its auction rate securities to be inactive. The income approach model utilized observable inputs, including LIBOR-based interest rate curves, corporate credit spreads and corporate ratings/market valuations. Additionally, unobservable factors incorporated into the model included default probability assumptions based on historical migration tables, various default recovery rates and how these factors changed as ratings on the underlying collateral migrated from one level to another. As related to the unobservable factors, substantial changes, relative to historical trends, of the levels of corporate defaults or default recovery rates would impact the fair value measurement of these securities. Maturity dates for the auction rate securities begin in 2017.

The fair value for the mortgage-backed security, classified as Level 3, utilized a market approach and was based upon the calculation of an overall weighted average valuation, derived from the actual, or modeled, market pricing of the specific collateral. The market approach utilized actual pricing inputs when observable and modeled pricing, based upon changes in observable market pricing, when unobservable. Substantial changes in the observable market pricing would directly impact the unobservable pricing and the fair value measurement of this security. RAI has deemed the market for its mortgage-backed security to be inactive. The maturity of the mortgage-backed security has been extended to March 2015, with the annual option to extend an additional year. Given the underlying collateral and RAI’s intent to continue to extend this security, it is classified as a noncurrent asset.

RAI determined the change in the fair value of the investment in a marketable equity security using quoted market prices as of June 30, 2014.

11

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Financial assets classified as Level 3 investments were as follows:

	June 30, 2014							December 31, 2013
	Cost		Gross Unrealized Loss (1)			Estimated Fair  Value		Cost		Gross Unrealized Loss(1)			Estimated Fair  Value
Auction rate securities	$	99	$	(20	)	$	79	$	99	$	(23	)	$	76
Mortgage-backed security		19		(7	)		12		20		(7	)		13
	$	118	$	(27	)	$	91	$	119	$	(30	)	$	89

⁽¹⁾ Unrealized losses, net of tax, are reported in accumulated other comprehensive loss in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014, and consolidated balance sheet as of December 31, 2013.

The changes in the Level 3 investments during the six months ended June 30, 2014, were as follows:

	Auction Rate Securities
	Cost		Gross Gain (Loss)			Estimated Fair  Value
Balance as of January 1, 2014	$	99	$	(23	)	$	76
Unrealized gain		—		3			3
Balance as of June 30, 2014	$	99	$	(20	)	$	79

	Mortgage-Backed Security
	Cost			Gross Gain (Loss)			Estimated Fair  Value
Balance as of January 1, 2014	$	20		$	(7	)	$	13
Redemptions		(1	)		—			(1	)
Balance as of June 30, 2014	$	19		$	(7	)	$	12

Fair Value of Debt

The estimated fair value of RAI’s outstanding debt, in the aggregate, was $6.1 billion and $5.2 billion, with an effective average annual interest rate of approximately 4.1% and 4.5%, as of June 30, 2014, and December 31, 2013, respectively. The fair values are based on available market quotes, credit spreads and discounted cash flows, as appropriate.

Interest Rate Management

From time to time, RAI and RJR have used interest rate swaps to manage interest rate risk on a portion of their respective debt obligations. In 2009, RAI and RJR entered into offsetting floating to fixed interest rate swap agreements in the notional amount of $1.5 billion with maturity dates ranging from June 1, 2012 to June 15, 2017. The floating to fixed interest rate swap agreements were entered into with the same financial institution that held a notional amount of $1.5 billion of fixed to floating interest rate swaps.

In September 2011, RAI and RJR terminated the original and offsetting interest rate swap agreements, each with a notional amount of $1.5 billion, and received a total of $186 million cash in exchange for foregoing the future cash inflows associated with these swaps. These actions did not change the effective fixed rate of interest associated with the underlying debt.

In September 2013, RAI called for the redemption of, among other RAI notes, the $775 million outstanding principal amount of 7.625% notes due in 2016. Approximately $450 million of this outstanding principal amount was included in the interest rate swap agreements described above. As a result of this action and the maturity of debt in June 2012, RAI had $700 million of previously swapped outstanding fixed rate debt with an effective rate of interest of approximately 3.8%, as of June 30, 2014, and December 31, 2013.

In May 2012, RAI entered into forward starting interest rate contracts with an aggregate notional amount of $1 billion. RAI designated those derivatives as cash flow hedges of a future debt issuance, and they were determined to

12

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

be highly effective at inception. The forward starting interest rate contracts mitigated RAI’s exposure to changes in the benchmark interest rate from the date of inception until the date of the forecasted transaction. On October 31, 2012, RAI completed the sale of $2.55 billion in aggregate principal amount of senior notes, consisting of $450 million of 1.05% senior notes due October 30, 2015, $1.1 billion of 3.25% senior notes due November 1, 2022, and $1 billion of 4.75% senior notes due November 1, 2042. The forward starting interest rate contracts were terminated, and $23 million in associated losses were settled with cash payments to the counterparties. The effective portion of the losses are recorded in accumulated other comprehensive loss in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014, and consolidated balance sheet as of December 31, 2013, and will be amortized over the life of the related debt.

The amortization of derivative instruments impacted the condensed consolidated statements of income (unaudited) as follows:

	For the Three  Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Interest and debt expense	$	(4	)	$	(7	)	$	(8	)	$	(13	)

Note 3 — Intangible Assets

The changes in the carrying amounts of goodwill by segment were as follows:

	RJR Tobacco			American Snuff			Santa Fe		All Other		Consolidated
Goodwill	$	9,065		$	2,501		$	197	$	39	$	11,802
Accumulated impairment charges		(3,763	)		(28	)		—		—		(3,791	)
Net goodwill balance as of December 31, 2013		5,302			2,473			197		39		8,011
2014 Activity
Asset acquisition		—			—			—		7		7
Net goodwill balance as of June 30, 2014	$	5,302		$	2,473		$	197	$	46	$	8,018

On January 1, 2014, RAI completed its acquisition of certain assets and liabilities of a research and development company, for approximately $31 million in cash. The acquired assets will be used to provide additional research and development support for RAI’s operating companies. The estimated fair value of assets acquired, primarily real and personal property, and liabilities assumed was determined and recognized. The difference between the consideration paid and the acquisition-date value of the identifiable assets acquired and liabilities assumed was recognized as goodwill, as disclosed in the table above. The financial condition and results of operations do not meet the materiality criteria to be reportable and are therefore included in the operating segment All Other.

13

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

The carrying amounts and changes therein of trademarks and other intangible assets by segment were as follows:

	RJR Tobacco						American Snuff		Santa Fe		All Other		Consolidated
	Trademarks			Other			Trademarks		Trademarks		Other		Trademarks			Other
Finite-lived:
Balance as of December 31, 2013	$	18		$	20		$	8	$	—	$	—	$	26		$	20
Amortization		(3	)		(2	)		—		—		—		(3	)		(2	)
Balance as of June 30, 2014	$	15		$	18		$	8	$	—	$	—	$	23		$	18
Indefinite-lived:
Balance as of December 31, 2013	$	977		$	99		$	1,136	$	155	$	4	$	2,268		$	103
Balance as of June 30, 2014	$	977		$	99		$	1,136	$	155	$	4	$	2,268		$	103

Details of finite-lived intangible assets were as follows:

	June 30, 2014						December 31, 2013
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Contract manufacturing agreements	$	151	$	133	$	18	$	151	$	131	$	20
Trademarks		114		91		23		114		88		26
	$	265	$	224	$	41	$	265	$	219	$	46

The estimated remaining amortization associated with finite-lived intangible assets is expected to be expensed as follows:

Year	Amount
Remainder of 2014	$	6
2015		9
2016		8
2017		7
2018		6
Thereafter		5
	$	41

Note 4 — Restructuring

In 2012, RAI announced that it and its subsidiaries, RJR Tobacco and RAI Services Company, had completed a business analysis designed to identify resources to reinvest in their businesses. As a result of this initiative, the total U.S. workforce of RAI and its subsidiaries will decline by a net of approximately 10% upon the completion of the restructuring by the end of 2015. Substantially all cash payments related to the restructuring will be complete by the end of 2015.

As of June 30, 2014, $99 million had been utilized to date. Accordingly, in the condensed consolidated balance sheet (unaudited) as of June 30, 2014, $30 million was included in other current liabilities and $20 million was included in other noncurrent liabilities.

14

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

The changes in the restructuring liability were as follows:

	Employee Severance and Benefits
Balance as of December 31, 2012	$	71
Utilized in 2013		(14	)
Balance as of December 31, 2013		57
Utilized in 2014		(7	)
Balance as of June 30, 2014	$	50

Note 5 — Income Per Share

The components of the calculation of income per share were as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Income from continuing operations	$	492	$	461	$	830	$	969
Income from discontinued operations		—		—		25		—
Net income	$	492	$	461	$	855	$	969
Basic weighted average shares, in thousands		533,311		546,320		535,037		548,837
Effect of dilutive potential shares:
Restricted stock units		1,454		1,682		1,787		1,889
Diluted weighted average shares, in thousands		534,765		548,002		536,824		550,726

Note 6 — Inventories

The major components of inventories were as follows:

	June 30, 2014		December 31, 2013
Leaf tobacco	$	921	$	1,049
Other raw materials		78		66
Work in process		67		70
Finished products		166		130
Other		31		18
Total		1,263		1,333
Less LIFO allowance		204		206
	$	1,059	$	1,127

RJR Tobacco performs its annual LIFO inventory valuation at December 31. Interim periods represent an estimate of the expected annual valuation.

Note 7 — Income Taxes

The provision for income taxes from continuing operations was as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Provision for income taxes from continuing operations	$	283		$	271		$	476		$	592
Effective tax rate		36.5	%		37.0	%		36.4	%		37.9	%

15

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

The effective tax rate for the three and six months ended June 30, 2014, as compared with the same prior-year periods, was favorably impacted by a decrease in tax attributable to the reversal of tax reserves and interest related to a federal audit settlement and an increase in the domestic production activities deduction of the American Jobs Creation Act of 2004. The effective tax rate for each period differed from the federal statutory rate of 35% due to the impact of state taxes and certain nondeductible items.

The audit of the 2010 and 2011 tax years by the Internal Revenue Service was closed on February 27, 2014. A tax benefit of $25 million attributable to the reversal of tax reserves was recorded in discontinued operations.

Note 8 — Borrowing Arrangements

RAI Notes

As of June 30, 2014, there were no current maturities of long-term debt.

Credit Agreement

In October 2013, RAI entered into a credit agreement, referred to as the Credit Agreement, with a syndicate of lenders, providing for a four-year $1.35 billion senior unsecured revolving credit facility, which may be increased to $1.6 billion at the discretion of the lenders upon the request of RAI.

The Credit Agreement contains restrictive covenants that:

• limit the ability of RAI and its subsidiaries to (1) pay dividends and repurchase stock, (2) engage in transactions with affiliates, (3) create liens, and (4) engage in sale-leaseback transactions involving a Principal Property, as defined in the Credit Agreement; and

• limit the ability of RAI and its Material Subsidiaries, as such term is defined in the Credit Agreement, to sell or dispose of all or substantially all of their assets and engage in specified mergers or consolidations.

The Credit Agreement also contains a restrictive covenant that limits the amount of debt that may be incurred by non-guarantor subsidiaries, together with certain financial covenants. The restrictive covenants in the Credit Agreement are subject to a number of qualifications and exceptions. The financial covenant levels in the Credit Agreement are 3.00 to 1.00 for the consolidated leverage ratio and 4.00 to 1.00 for the consolidated interest coverage ratio. In addition, the maturity date of the Credit Agreement is October 8, 2017, which date may be extended, with the agreement of the requisite lenders, in two separate one-year increments. The Credit Agreement contains customary events of default, including upon a change in control, as defined therein, that could result in the acceleration of all amounts and cancellation of all commitments outstanding under the Credit Agreement.

RAI is able to use the revolving credit facility under the Credit Agreement for borrowings and issuances of letters of credit at its option, subject to a $300 million sublimit on the aggregate amount of letters of credit. Issuances of letters of credit reduce availability under such revolving credit facility.

Under the terms of the Credit Agreement, RAI is required to pay a facility fee of between 0.125% and 0.30% per annum, based generally on the ratings of RAI’s senior, unsecured, long-term indebtedness, on the lender commitments in respect of the revolving credit facility thereunder.

Borrowings under the Credit Agreement bear interest, at the option of RAI, at a rate equal to an applicable margin, again, based generally on the ratings of RAI’s senior, unsecured, long-term indebtedness, plus:

• the alternate base rate, which is the higher of (1) the federal funds effective rate from time to time plus 0.5%, (2) the prime rate and (3) the reserve adjusted eurodollar rate for a one month interest period plus 1%; or

• the eurodollar rate, which is the reserve adjusted rate at which eurodollar deposits for one, two, three or six months are offered in the interbank eurodollar market.

16

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Overdue principal outstanding under the revolving credit facility under the Credit Agreement bears interest at a rate equal to the rate then in effect with respect to such borrowings, plus 2.0% per annum. Any amount besides principal that becomes overdue bears interest at a rate equal to 2.0% per annum in excess of the rate of interest applicable to base rate loans.

The obligations of RAI under the Credit Agreement are unsecured. Certain of RAI’s subsidiaries, including its Material Subsidiaries, have guaranteed, on an unsecured basis, RAI’s obligations under the Credit Agreement.

A summary of the borrowings and repayments under the revolving credit facility are shown below:

	Amount			Interest Rate
Balance as of December 31, 2013	$	—
April 2014 borrowings		750			1.46	%
Repayments of April 2014 borrowings		(200	)
June 2014 borrowings		250			1.45	%
Balance as of June 30, 2014	$	800

As of June 30, 2014, there were $5 million of letters of credit outstanding under the Credit Agreement.

Note 9 — Commitments and Contingencies

Tobacco Litigation — General

Introduction

Various legal proceedings or claims, including litigation claiming that cancer and other diseases, as well as addiction, have resulted from the use of, or exposure to, RAI’s operating subsidiaries’ products, are pending or may be instituted against RJR Tobacco, American Snuff Co. or their affiliates, including RAI and RJR, or indemnitees, including B&W. These pending legal proceedings include claims relating to cigarette products manufactured by RJR Tobacco or certain of its affiliates and indemnitees, as well as claims relating to smokeless tobacco products manufactured by American Snuff Co. A discussion of the legal proceedings relating to cigarette products is set forth below under the heading “— Litigation Affecting the Cigarette Industry.” All of the references under that heading to tobacco-related litigation, smoking and health litigation and other similar references are references to legal proceedings relating to cigarette products and are not references to legal proceedings involving smokeless tobacco products, and case numbers under that heading include only cases involving cigarette products. The legal proceedings relating to the smokeless tobacco products manufactured by American Snuff Co. are discussed separately under the heading “— Smokeless Tobacco Litigation” below.

In connection with the B&W business combination, RJR Tobacco has agreed to indemnify B&W and its affiliates, including its indirect parent, BAT, against certain liabilities, costs and expenses incurred by B&W or its affiliates arising out of the U.S. cigarette and tobacco business of B&W. As a result of this indemnity, RJR Tobacco has assumed the defense of pending B&W-specific tobacco-related litigation, has paid the judgments and costs related to certain pre-business combination tobacco-related litigation of B&W, and has posted bonds on behalf of B&W, where necessary, in connection with cases decided since the B&W business combination.

Certain Terms and Phrases

Certain terms and phrases used in this disclosure may require some explanation. The term “judgment” or “final judgment” refers to the final decision of the court resolving the dispute and determining the rights and obligations of the parties. At the trial court level, for example, a final judgment generally is entered by the court after a jury verdict and after post-verdict motions have been decided. In most cases, the losing party can appeal a verdict only after a final judgment has been entered by the trial court.

The term “damages” refers to the amount of money sought by a plaintiff in a complaint, or awarded to a party by a jury or, in some cases, by a judge. “Compensatory damages” are awarded to compensate the prevailing party for actual losses suffered, if liability is proved. In cases in which there is a finding that a defendant has acted willfully,

17

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

maliciously or fraudulently, generally based on a higher burden of proof than is required for a finding of liability for compensatory damages, a plaintiff also may be awarded “punitive damages.” Although damages may be awarded at the trial court stage, a losing party generally may be protected from paying any damages until all appellate avenues have been exhausted by posting a supersedeas bond. The amount of such a bond is governed by the law of the relevant jurisdiction and generally is set at the amount of damages plus some measure of statutory interest, modified at the discretion of the appropriate court or subject to limits set by court or statute.

The term “per curiam” refers to an opinion entered by a court. In most cases, it is used to indicate that the opinion entered is a brief announcement of the court’s decision and is not accompanied by a written opinion.

The term “settlement” refers to certain types of cases in which cigarette manufacturers, including RJR Tobacco and B&W, have agreed to resolve disputes with certain plaintiffs without resolving the case through trial. The principal terms of certain settlements entered into by RJR Tobacco and B&W are explained below under “— Accounting for Tobacco-Related Litigation Contingencies.”

Theories of Recovery

The plaintiffs seek recovery on a variety of legal theories, including negligence, strict liability in tort, design defect, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, medical monitoring and violations of state and federal antitrust laws. In certain of these cases, the plaintiffs claim that cigarette smoking exacerbated injuries caused by exposure to asbestos.

The plaintiffs seek various forms of relief, including compensatory and, where available, punitive damages, treble or multiple damages and statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and other equitable relief. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.

Defenses

The defenses raised by RJR Tobacco, American Snuff Co. and their affiliates and indemnitees include, where applicable and otherwise appropriate, preemption by the Federal Cigarette Labeling and Advertising Act of some or all claims arising after 1969, or by the Comprehensive Smokeless Tobacco Health Education Act for claims arising after 1986, the lack of any defect in the product, assumption of the risk, contributory or comparative fault, lack of proximate cause, remoteness, lack of standing and statutes of limitations or repose. RAI and RJR have asserted additional defenses, including jurisdictional defenses, in many of the cases in which they are named.

Accounting for Tobacco-Related Litigation Contingencies

In accordance with GAAP, RAI and its subsidiaries, including RJR Tobacco, American Snuff Co. and SFNTC, as applicable, record any loss concerning litigation at such time as an unfavorable outcome becomes probable and the amount can be reasonably estimated on an individual case-by-case basis. For the reasons set forth below, RAI’s management continues to conclude that the loss of any particular pending smoking and health tobacco litigation claim against RJR Tobacco or its affiliates or indemnitees, or the loss of any particular claim concerning the use of smokeless tobacco products against American Snuff Co., when viewed on an individual basis, is not probable, except for the Engle Progeny cases noted below.

RJR Tobacco and its affiliates believe that they have valid defenses to the smoking and health tobacco litigation claims against them, as well as valid bases for appeal of adverse verdicts against them. RAI, RJR Tobacco and their affiliates and indemnitees have, through their counsel, filed pleadings and memoranda in pending smoking and health tobacco litigation that set forth and discuss a number of grounds and defenses that they and their counsel believe have a valid basis in law and fact. With the exception of Engle Progeny cases, described below, RJR Tobacco and its affiliates and indemnitees continue to win the majority of smoking and health tobacco litigation claims that reach trial, and a very high percentage of the tobacco-related litigation claims brought against them continue to be dismissed at or before trial. Based on their experience in the smoking and health tobacco litigation against them and the strength of the defenses available to them in such litigation, RJR Tobacco and its affiliates believe that their successful defense of smoking and health tobacco litigation in the past will continue in the future.

18

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

An accrual of $12.4 million has been recorded in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014. This amount includes $2.4 million for compensatory damages, attorneys’ fees and statutory interest for the following Engle Progeny cases – $780,000 for compensatory damages and $63,000 for attorneys’ fees and statutory interest for Hiott and Starr-Blundell and $1.56 million for attorneys’ fees and statutory interest for Ward, the judgment of which was paid in January 2014, and $10 million for estimated costs in connection with the U.S. Department of Justice case, described below. During the second quarter of 2014, an aggregate payment of $72.4 million ($56.1 million for compensatory and punitive damages and $16.3 million for attorneys’ fees and statutory interest) was made in satisfaction of the adverse judgments in nine Engle Progeny cases – Jimmie Lee Brown, Koballa, Duke, Walker, Kirkland, Sury, Mack, Emmon Smith, and Townsend, described below. No other liabilities for pending smoking and health litigation have been recorded as of June 30, 2014. As other cases proceed through the appellate process, RAI will evaluate the need for further accruals on an individual case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.

It is the policy of RJR Tobacco and its affiliates to vigorously defend all tobacco-related litigation claims. Generally, RJR Tobacco and its affiliates and indemnitees have not settled any smoking and health tobacco litigation claims. Other than actions taken pursuant to “offer of judgment” statutes, as described below in “—Litigation Affecting the Cigarette Industry,” RJR Tobacco and its affiliates do not intend to settle such claims.

With respect to smoking and health tobacco litigation claims, the only significant settlements reached by RJR Tobacco and B&W involved:

• the State Settlement Agreements and the funding by various tobacco companies of a $5.2 billion trust fund contemplated by the MSA to benefit tobacco growers; and

• the original Broin flight attendant case discussed below under “— Litigation Affecting the Cigarette Industry — Broin II Cases.”

The circumstances surrounding the State Settlement Agreements and the funding of a trust fund to benefit the tobacco growers are readily distinguishable from the current categories of smoking and health cases involving RJR Tobacco or its affiliates and indemnitees. The claims underlying the State Settlement Agreements were brought on behalf of the states to recover funds paid for health care and medical and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. The State Settlement Agreements settled all the health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions and contain releases of various additional present and future claims. In accordance with the MSA, various tobacco companies agreed to fund a $5.2 billion trust fund to be used to address the possible adverse economic impact of the MSA on tobacco growers. A discussion of the State Settlement Agreements, and a table depicting the related payment schedule, is set forth below under “—Litigation Affecting the Cigarette Industry — Health-Care Cost Recovery Cases.”

The states were a unique set of plaintiffs and are not involved in any of the smoking and health cases remaining against RJR Tobacco or its affiliates and indemnitees. Although RJR Tobacco and certain of its affiliates and indemnitees continue to be defendants in health-care cost recovery cases similar in theory to the state cases but involving other plaintiffs, such as Native American tribes and foreign governments, the vast majority of such cases have been dismissed on legal grounds. RJR Tobacco and its affiliates, including RAI, believe that the same legal principles that have resulted in dismissal of health-care cost recovery cases either at the trial court level or on appeal should compel dismissal of the similar pending cases.

As with claims that were resolved by the State Settlement Agreements, the other cases settled by RJR Tobacco can be distinguished from existing cases pending against RJR Tobacco and its affiliates and indemnitees. The original Broin case, discussed below under “— Litigation Affecting the Cigarette Industry — Broin II Cases,” was settled in the middle of trial during negotiations concerning a possible nation-wide settlement of claims similar to those underlying the State Settlement Agreements.

In 2010, RJR Tobacco entered into a comprehensive agreement with the Canadian federal, provincial and territorial governments, which resolved all civil claims related to the movement of contraband tobacco products in Canada during the period 1985 through 1999 that the Canadian governments could assert against RJR Tobacco and its affiliates. These claims were separate from any smoking and health tobacco litigation.

19

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Likewise, in 2004, RJR Tobacco and B&W separately settled the antitrust case DeLoach v. Philip Morris Cos., Inc., which was brought by a unique class of plaintiffs: a class of all tobacco growers and tobacco allotment holders. The plaintiffs asserted that the defendants conspired to fix the price of tobacco leaf and to destroy the federal government’s tobacco quota and price support program. Despite legal defenses they believed to be valid, RJR Tobacco and B&W separately settled this case to avoid a long and contentious trial with the tobacco growers. The DeLoach case and the antitrust case currently pending against RJR Tobacco and B&W involve different types of plaintiffs and different theories of recovery under the antitrust laws than the smoking and health cases pending against RJR Tobacco and its affiliates and indemnitees.

Finally, as discussed under “— Litigation Affecting the Cigarette Industry — State Settlement Agreements—Enforcement and Validity; Adjustments,” RJR Tobacco and B&W each has settled certain cases brought by states concerning the enforcement of State Settlement Agreements. Despite legal defenses believed to be valid, these cases were settled to avoid further contentious litigation with the states involved. These enforcement actions involve alleged breaches of State Settlement Agreements based on specific actions taken by particular defendants. Accordingly, any future enforcement actions involving State Settlement Agreements will be reviewed by RJR Tobacco on the merits and should not be affected by the settlement of prior enforcement cases.

American Snuff Co. also believes that it has valid defenses to the smokeless tobacco products litigation against it. American Snuff Co. asserted and will continue to assert some or all of these defenses in each case at the time and in the manner deemed appropriate by American Snuff Co. and its counsel. No verdict or judgment has been returned or entered against American Snuff Co. on any claim for personal injuries allegedly resulting from the use of smokeless tobacco products. American Snuff Co. intends to defend vigorously all smokeless tobacco litigation claims asserted against it. No liability for pending smokeless tobacco litigation was recorded in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014.

Cautionary Statement

Even though RAI’s management continues to conclude that the loss of particular pending smoking and health tobacco litigation claims against RJR Tobacco or its affiliates or indemnitees, or the loss of any particular case concerning the use of smokeless tobacco against American Snuff Co., when viewed on an individual case-by-case basis, is not probable (except for the Engle Progeny cases described below), the possibility of material losses related to such litigation is more than remote. Litigation is subject to many uncertainties, and generally, it is not possible to predict the outcome of any particular litigation pending against RJR Tobacco, American Snuff Co. or their affiliates or indemnitees, or to reasonably estimate the amount or range of any possible loss.

Although RJR Tobacco believes that it has valid bases for appeals of adverse verdicts in its pending cases, and RJR Tobacco and RAI believe they have valid defenses to all actions, and intend to defend all actions vigorously, it is possible that there could be further adverse developments in pending cases, and that additional cases could be decided unfavorably against RAI, RJR Tobacco or their affiliates or indemnitees. Determinations of liability or adverse rulings in such cases or in similar cases involving other cigarette manufacturers as defendants, even if such judgments are not final, could have a material adverse effect on the litigation against RJR Tobacco or its affiliates or indemnitees and could encourage the commencement of additional tobacco-related litigation. In addition, a number of political, legislative, regulatory and other developments relating to the tobacco industry and cigarette smoking have received wide media attention. These developments may negatively affect the outcomes of tobacco-related legal actions and encourage the commencement of additional similar litigation.

Although it is impossible to predict the outcome of such events on pending litigation and the rate new lawsuits are filed against RJR Tobacco or its affiliates or indemnitees, a significant increase in litigation or in adverse outcomes for tobacco defendants, or difficulties in obtaining the bonding required to stay execution of judgments on appeal, could have a material adverse effect on any or all of these entities. Moreover, notwithstanding the quality of defenses available to RJR Tobacco and its affiliates and indemnitees in litigation matters, it is possible that RAI’s results of operations, cash flows or financial position could be materially adversely affected by the ultimate outcome of certain pending litigation matters against RJR Tobacco or its affiliates or indemnitees.

20

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Similarly, smokeless tobacco litigation is subject to many uncertainties. Notwithstanding the quality of defenses available to American Snuff Co., it is possible that RAI’s results of operations, cash flows or financial position could be materially adversely affected by the ultimate outcome of certain pending litigation matters against American Snuff Co.

Litigation Affecting the Cigarette Industry

Overview

Introduction. In connection with the B&W business combination, RJR Tobacco agreed to indemnify B&W and its affiliates against, among other things, certain litigation liabilities, costs and expenses incurred by B&W or its affiliates arising out of the U.S. cigarette and tobacco business of B&W. Accordingly, the cases discussed below include cases brought solely against RJR Tobacco and its affiliates, including RAI and RJR; cases brought against both RJR Tobacco, its affiliates and B&W; and cases brought solely against B&W and assumed by RJR Tobacco in the B&W business combination.

During the second quarter of 2014, eight tobacco-related cases were served against RJR Tobacco or its affiliates or indemnitees. On June 30, 2014, there were 170 cases pending against RJR Tobacco or its affiliates or indemnitees: 154 in the United States and 16 in Canada, as compared with 159 total cases on June 30, 2013. The U.S. case number does not include the approximately 564 individual smoker cases pending in West Virginia state court as a consolidated action, 4,865 Engle Progeny cases, involving approximately 5,973 individual plaintiffs, and 2,572 Broin II cases (as hereinafter defined), pending in the United States against RJR Tobacco or its affiliates or indemnitees. Of the U.S. cases pending on June 30, 2014, 16 are pending in federal court, 137 in state court and 1 in tribal court, primarily in the following states: Maryland (28 cases); Florida (25 cases); Missouri (19 cases); New York (14 cases); and Louisiana (10 cases).

The following table lists the categories of the U.S. tobacco-related cases pending against RJR Tobacco or its affiliates or indemnitees as of June 30, 2014, compared with the number of cases pending against RJR Tobacco, its affiliates or indemnitees as of March 31, 2014, as reported in RAI’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2014, filed with the SEC on April 23, 2014, and a cross-reference to the discussion of each case type.

21

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Case Type	RJR Tobacco’s U.S. Case  Numbers as of June 30, 2014	Change in Number of Cases Since March 31,  2014 Increase/(Decrease)	Page Reference
Individual Smoking and Health	99	4	27
West Virginia IPIC (Number of Plaintiffs)*	1 (approx. 564)	No change	27
Engle Progeny (Number of Plaintiffs)**	4,865 (app. 5,973)	(115) (140)	28
Broin II	2,572	No change	42
Class Action	8	No change	42
Health-Care Cost Recovery	2	No change	45
State Settlement Agreements—Enforcement and Validity; Adjustments	30	No change	52
Antitrust	1	No change	56
Other Litigation and Developments	13	(1)	57

* Includes as one case the approximately 564 cases pending as a consolidated action In Re: Tobacco Litigation Individual Personal Injury Cases, sometimes referred to as West Virginia IPIC cases, described below. The West Virginia IPIC cases have been separated from the Individual Smoking and Health cases for reporting purposes.

** The Engle Progeny cases have been separated from the Individual Smoking and Health cases for reporting purposes. The number of cases has decreased as the result of many of the federal and state court cases being dismissed or duplicate actions being consolidated.

The following cases against RJR Tobacco and B&W have attracted significant attention: the Florida state court class-action case, Engle v. R. J. Reynolds Tobacco Co. and the related Engle Progeny cases; and the case brought by the U.S. Department of Justice under the federal Racketeer Influenced and Corrupt Organizations Act, referred to as RICO.

In 2000, a jury in Engle v. Liggett Group, a class action brought against the major U.S. cigarette manufacturers by Florida smokers allegedly harmed by their addiction to nicotine, rendered a $145 billion punitive damages verdict in favor of the class. In 2006, the Florida Supreme Court set aside that award, prospectively decertified the class, and preserved several of the Engle jury findings for use in subsequent individual actions to be filed within one year of its decision. The preserved findings include jury determinations that smoking causes various diseases, that nicotine is addictive, and that each defendant sold cigarettes that were defective and unreasonably dangerous, committed unspecified acts of negligence and individually and jointly concealed unspecified information about the health risks of smoking.

In the wake of Engle, thousands of individual progeny actions were filed in federal and state courts in Florida. Such actions are commonly referred to as “Engle Progeny” cases. As of June 30, 2014, 1,744 Engle Progeny cases were pending in federal court, and 3,121 of them were pending in state court. These cases include approximately 5,973 plaintiffs. In addition, as of June 30, 2014, RJR Tobacco was aware of 17 additional Engle Progeny cases that had been filed but not served. Ninety-nine Engle Progeny cases have been tried in Florida state and federal courts since 2011, and numerous state court trials are scheduled for 2014. The number of pending cases fluctuates for a variety of reasons, including voluntary and involuntary dismissals. Voluntary dismissals include cases in which a plaintiff accepts an “offer of judgment,” referred to in Florida statutes as “proposals for settlement,” from RJR Tobacco and/or its affiliates. An offer of judgment, if rejected by the plaintiff, preserves RJR Tobacco’s right to recover attorneys’ fees under Florida law in the event of a verdict favorable to RJR Tobacco. Such offers are sometimes made through court-ordered mediations.

In Engle Progeny cases tried to date, a central issue has been the proper use of the preserved Engle findings. RJR Tobacco has argued that use of the Engle findings to establish individual elements of progeny claims (such as defect, negligence and concealment) is a violation of federal due process. In 2013, however, both the Florida Supreme Court and the U.S. Court of Appeals for the Eleventh Circuit, referred to as the Eleventh Circuit, rejected that argument. In addition to this global due process argument, RJR Tobacco raises many other factual and legal defenses as appropriate in each case. These defenses may include, among other things, arguing that the plaintiff is not a proper member of the Engle class, that the plaintiff did not rely on any statements by any tobacco company, that the trial was conducted unfairly, that some or all claims are barred by applicable statutes of limitation or statutes of repose, or that any injury was caused by the smoker’s own conduct.

22

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Twenty-four Engle Progeny cases have become final to date. These cases resulted in aggregate payments by RJR Tobacco of $186.4 million ($140.1 million for compensatory and punitive damages and $46.3 million for attorneys’ fees and statutory interest). During the second quarter of 2014, an aggregate payment of $72.4 million ($56.1 million for compensatory and punitive damages and $16.3 million for attorneys’ fees and statutory interest) was made in satisfaction of the adverse judgments in the Jimmie Lee Brown, Koballa, Duke, Walker, Kirkland, Sury, Mack, Emmon Smith and Townsend cases, described below. Based on RJR Tobacco’s evaluation, an accrual of $2.4 million ($780,000 for compensatory damages and $63,000 for attorneys’ fees and statutory interest for Hiott and Starr-Blundell and $1.56 million for attorneys’ fees and statutory interest for Ward, the judgment of which was paid in January 2014) was recorded in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014. The following chart reflects the details related to Hiott and Starr-Blundell:

Plaintiff Case Name	RJR Tobacco Allocation of Fault		Compensatory Damages (as adjusted)(1)		Punitive Damages		Appeal Status
Hiott		40%	$	730,000	$	—	Notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Starr-Blundell		10%		50,000		—	Pending — First DCA
Totals			$	780,000	$	—

⁽¹⁾  Compensatory damages are adjusted to reflect the reduction required by the allocation of fault. Punitive damages are not adjusted and reflect the amount of the final judgment(s) signed by the trial court judge(s). The amounts listed above do not include attorneys’ fees or statutory interest that apply to the judgments.

The following chart reflects verdicts in all other individual Engle Progeny cases, pending as of June 30, 2014, in which a verdict has been returned against RJR Tobacco or B&W, or both, and has not been set aside on appeal. No liability for any of these cases has been recorded in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014. This chart does not include the mistrials or verdicts returned in favor of RJR Tobacco or B&W, or both.

Plaintiff Case Name	RJR Tobacco Allocation of Fault		Compensatory Damages (as adjusted)(1)		Punitive Damages		Appeal Status
Cohen		33.3%	$	3,300,000	$	—	Punitive damages set aside; remanded for partial new trial; notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Putney		30%		—		—	Reversed and remanded for further proceedings; notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Buonomo		77.5%		4,060,000		—	Punitive damages set aside; remanded for new trial; notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Webb		90%		—		—	Reversed and remanded for new trial on damages; new trial scheduled for November 3, 2014
Soffer		40%		2,000,000		—	Pending — Florida Supreme Court

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Ciccone	30	%		1,000,000			—	Pending — Florida Supreme Court
Hallgren	25	%		500,000			750,000	Notice to invoke jurisdiction of Florida Supreme Court pending; stayed
Calloway	27	%		16,100,000	(2)		17,250,000	Pending — Fourth DCA
Hancock	5	%		700			—	Pending — Fourth DCA
Sikes	51	%		3,520,000			2,000,000	Notice to invoke jurisdiction of Florida Supreme Court pending
James Smith	55	%		600,000	(2)		20,000	Pending — Eleventh Circuit
Schlenther	50	%		5,030,000	(2)		2,500,000	Pending — Second DCA
Ballard	55	%		5,000,000			—	Pending — Third DCA
Williams	85	%		4,250,000			—	Pending — Third DCA
Evers	60	%		1,938,000			—	Punitive damages reversed; pending — Second DCA
Schoeff	75	%		7,875,000			30,000,000	Pending — Fourth DCA
Marotta	58	%		3,480,000			—	Pending — Fourth DCA
Searcy	30	%		1,000,000	(2)		1,670,000	Pending — Eleventh Circuit
Aycock	72.5	%		4,277,000			—	Pending — Eleventh Circuit
Graham	20	%		550,000			—	Pending — Eleventh Circuit
Odum	50	%		100,000			—	Pending — First DCA
Skolnick	30	%		767,000			—	Pending — Fourth DCA
Thibault	70	%		1,750,000	(2)		1,275,000	Pending — First DCA
Grossman	75	%		15,350,000	(2)		22,500,000	Pending — Fourth DCA
Gafney	33	%		1,914,000			—	Pending — Fourth DCA
Crawford	70	%		9,000,000			1,000,000	Pending — Third DCA
Harford	18	%		59,000			—	Post-trial motions are pending(3)
Cheeley	50	%		1,500,000			2,000,000	Pending — Fourth DCA
Goveia	35	%		297,500			2,250,000	Pending — Fifth DCA
Clayton	10	%		60,000			—	Final judgment has not been entered
Bowden	30	%		1,500,000			—	Pending — First DCA
Burkhart	25	%		2,500,000	(2)		1,250,000	Post-trial motions are pending(3)
Bakst	75	%		4,503,000			14,000,000	Post-trial motions are pending(3)
Robinson	70.5	%		16,900,000		$	23,600,000,000	Post-trial motions are pending(3)
Totals			$	120,681,200		$	23,698,465,000

⁽¹⁾  Unless otherwise noted, compensatory damages in these cases are adjusted to reflect the jury’s allocation of comparative fault. Punitive damages are not so adjusted. The amounts listed above do not include attorneys’ fees or statutory interest that may apply to the judgments.

⁽²⁾  The court did not apply comparative fault in the final judgment.

⁽³⁾  Should the pending post-trial motions be denied, RJR Tobacco will likely file a notice of appeal with the appropriate appellate court.

As of June 30, 2014, outstanding judgments in favor of the Engle Progeny plaintiffs have been entered and remain outstanding against RJR Tobacco in the amount of $120,681,200 in compensatory damages (as adjusted) and in the amount of $23,698,465,000 in punitive damages, for a total of $23,819,146,200. Excluding the Robinson case, where a jury awarded $16.9 million in compensatory damages and $23.6 billion in punitive damages and where post-trial motions are pending before the trial court, outstanding judgments in favor of the Engle Progeny plaintiffs have been entered and remain outstanding against RJR Tobacco in the amount of $103,781,200 in compensatory damages (as adjusted) and in the amount of $98,465,000 in punitive damages, for a total of $202,246,200. All of these verdicts are at various stages in the appellate process. RJR Tobacco continues to believe that it has valid defenses in these cases, including case-specific issues beyond the due process issue discussed above. It is the policy of RJR Tobacco and its affiliates to vigorously defend all smoking and health claims, including in Engle Progeny cases.

Should RJR Tobacco not prevail in any particular individual Engle Progeny case or determine that in any individual Engle Progeny case an unfavorable outcome has become probable and the amount can be reasonably estimated, a loss would be recognized, which could have a material adverse effect on earnings and cash flows of RAI in a particular quarter or year. This position on loss recognition for Engle Progeny cases as of June 30, 2014, is consistent with RAI’s and RJR Tobacco’s historic position on loss recognition for other smoking and health litigation. It is also the policy of RJR Tobacco to record any loss concerning litigation at such time as an unfavorable outcome becomes probable and the amount can be reasonably estimated on an individual case-by-case basis.

24

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

In the U.S. Department of Justice case, brought in 1999 in the U.S. District Court for the District of Columbia, the government sought, among other forms of relief, the disgorgement of profits pursuant to the civil provisions of RICO. The U.S. Court of Appeals for the District of Columbia ruled in 2005 that disgorgement is not an available remedy in the case. The bench trial ended in June 2005, and the court, in August 2006, issued its ruling, among other things, finding certain defendants, including RJR Tobacco and B&W, liable for the RICO claims, imposing no direct financial penalties on the defendants, but ordering the defendants to make certain “corrective communications” in a variety of media and enjoining the defendants from using certain brand descriptors. Both sides appealed to the U.S. Court of Appeals for the District of Columbia. In May 2009, the U.S. Court of Appeals largely affirmed the findings against the tobacco company defendants and remanded to the trial court for further proceedings. The U.S. Supreme Court denied the parties’ petitions for writ of certiorari in June 2010. In June 2014, the district court issued an implementation order for the corrective-statements remedy. That order stays implementation until the exhaustion of the defendants’ appeal challenging the constitutionality of the corrective statements. Additional remand proceedings remain ongoing.

For a detailed description of these cases, see “— Engle and Engle Progeny Cases” and “— Health-Care Cost Recovery Cases — U.S. Department of Justice Case” below.

In November 1998, the major U.S. cigarette manufacturers, including RJR Tobacco and B&W, entered into the MSA with 46 U.S. states, Washington, D.C. and certain U.S. territories and possessions. These cigarette manufacturers previously settled four other cases, brought on behalf of Mississippi, Florida, Texas and Minnesota, by separate agreements with each state. These State Settlement Agreements:

• settled all health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions;

• released the major U.S. cigarette manufacturers from various additional present and potential future claims;

• imposed future payment obligations in perpetuity on RJR Tobacco, B&W and other major U.S. cigarette manufacturers; and

• placed significant restrictions on their ability to market and sell cigarettes and smokeless tobacco products.

Payments under the State Settlement Agreements are subject to various adjustments for, among other things, the volume of cigarettes sold, relevant market share and inflation. See “— Health-Care Cost Recovery Cases — State Settlement Agreements” below for a detailed discussion of the State Settlement Agreements, including RAI’s operating subsidiaries’ monetary obligations under these agreements. RJR Tobacco records the allocation of settlement charges as products are shipped.

Scheduled Trials. Trial schedules are subject to change, and many cases are dismissed before trial. It is likely that RJR Tobacco and other cigarette manufacturers will have an increased number of tobacco-related trials in 2014. There are five cases, exclusive of Engle Progeny cases, scheduled for trial as of June 30, 2014 through June 30, 2015, for RJR Tobacco or its affiliates and indemnitees: one non-smoking and health case, three individual smoking and health cases and one class action. There are 67 Engle Progeny cases against RJR Tobacco and/or B&W set for trial through June 30, 2015, but it is not known how many of these cases will actually be tried.

Trial Results. From January 1, 2011 through June 30, 2014, 105 smoking and health, Engle Progeny and health-care cost recovery cases in which RJR Tobacco or B&W were defendants were tried, including six trials for cases where mistrials were declared in the original proceedings. Verdicts in favor of RJR Tobacco, B&W and, in some cases, RJR Tobacco, B&W and other defendants, were returned in 54 cases, including 14 mistrials, tried in Florida (51), Missouri (1) and West Virginia (2). Verdicts in favor of the plaintiffs were returned in 47 cases tried in Florida and one in New York. Three cases in Florida were dismissed during trial.

25

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

In the second quarter of 2014, five Engle Progeny cases in which RJR Tobacco was a defendant were tried:

• In Dupre v. Philip Morris USA, Inc., the court declared a mistrial because the jury was unable to reach a unanimous verdict.

• In Burkhart v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the plaintiff, found the plaintiff to be 50% at fault, RJR Tobacco to be 25% at fault, and the remaining defendants to collectively be 25% at fault, and awarded $5 million in compensatory damages. The jury also awarded $1.25 million in punitive damages against RJR Tobacco and $1.25 million collectively against the remaining defendants.

• In Starbuck v. R. J. Reynolds Tobacco Co., the court declared a mistrial because the jury was unable to reach a unanimous verdict.

• In Bakst v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the plaintiff, found the decedent, Juanita Thurston, to be 25% at fault and RJR Tobacco to be 75% at fault, and awarded $6 million in compensatory damages plus $4,209 for funeral expenses. The jury also awarded $14 million in punitive damages.

• In Davis v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the defendants, including RJR Tobacco.

In addition, since the end of the second quarter of 2014, decisions were entered in the following Engle Progeny case:

• In Robinson v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the plaintiff, found the decedent, Michael Johnson, Sr., to be 29.5% at fault and RJR Tobacco to be 70.5% at fault and awarded $16.9 million in compensatory damages and $23.6 billion in punitive damages.

For a detailed description of the above-described cases, see “— Engle and Engle Progeny Cases” below.

In the second quarter of 2014, no non-Engle Progeny individual smoking and health cases in which RJR Tobacco was a defendant were tried.

The following chart reflects the verdicts in the smoking and health cases or health-care cost recovery cases that have been tried and remain pending as of June 30, 2014, in which verdicts have been returned against RJR Tobacco or B&W, or both. For information on the verdicts in the Engle Progeny cases that have been tried and remain pending as of June 30, 2014, in which verdicts have been returned against RJR Tobacco or B&W, or both, see the Engle Progeny cases chart above. For information on the post-trial status of individual smoking and health cases and the governmental health-care cost recovery case, see “— Individual Smoking and Health Cases,” and “—Health-Care Cost Recovery Cases – U.S. Department of Justice Case,” respectively, below:

Date of Verdict	Case Name/Type	Jurisdiction	Verdict
August 17, 2006	United States v. Philip Morris USA, Inc. [Governmental Health-Care Cost Recovery]	U.S. District Court, District of Columbia (Washington, DC)	RJR Tobacco and B&W were found liable for civil RICO claims; were enjoined from using certain brand descriptors and from making certain misrepresentations; and were ordered to make corrective communications on five subjects, including smoking and health and addiction, to reimburse the U.S. Department of Justice appropriate costs associated with the lawsuit, and to maintain document web sites.
May 26, 2010	Izzarelli v. R. J. Reynolds Tobacco Co. [Individual]	U.S. District Court, District of Connecticut, (Bridgeport, CT)	$13.9 million in compensatory damages; 58% of fault assigned to RJR Tobacco, which reduced the award to $8.08 million against RJR Tobacco; $3.97 million in punitive damages.

26

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Individual Smoking and Health Cases

As of June 30, 2014, 99 individual cases were pending in the United States against RJR Tobacco, B&W, as its indemnitee, or both. This category of cases includes smoking and health cases alleging personal injury brought by or on behalf of individual plaintiffs, but does not include the Broin II, Engle Progeny or West Virginia IPIC cases discussed below. A total of 97 of the individual cases are brought by or on behalf of individual smokers or their survivors, while the remaining two cases are brought by or on behalf of individuals or their survivors alleging personal injury as a result of exposure to environmental tobacco smoke, referred to as ETS.

Below is a description of the individual smoking and health cases against RJR Tobacco or B&W, or both, which went to trial or were decided during the period from January 1, 2014 to June 30, 2014, or remained on appeal as of June 30, 2014.

On May 26, 2010, the jury returned a verdict in favor of the plaintiff in Izzarelli v. R. J. Reynolds Tobacco Co., a case filed in December 1999 in the U.S. District Court for the District of Connecticut. The plaintiff sought to recover damages for personal injuries that the plaintiff alleges she sustained as a result of unsafe and unreasonably dangerous cigarette products and for economic losses she sustained as a result of unfair trade practices of the defendant. The jury found RJR Tobacco to be 58% at fault and the plaintiff to be 42% at fault, awarded $13.9 million in compensatory damages and found the plaintiff to be entitled to punitive damages. In December 2010, the court awarded the plaintiff $3.97 million in punitive damages. Final judgment was entered in December 2010, in the amount of $11.95 million. The court granted the plaintiff’s motion for offer of judgment interest, and awarded the plaintiff $15.8 million for the period of December 6, 1999 up to and including December 5, 2010, and approximately $4,000 per day thereafter until an amended judgment was entered. The amended judgment was entered in the amount of approximately $28.1 million in March 2011. RJR Tobacco filed a notice of appeal in September 2011, and the plaintiff thereafter cross appealed with respect to the punitive damages award. In September 2013, the U.S. Court of Appeals for the Second Circuit issued an opinion that certified the following question to the Connecticut Supreme Court: “Does Comment i to section 402A of the Restatement (Second) of Torts preclude a suit premised on strict products liability against a cigarette manufacturer based on evidence that the defendant purposefully manufactured cigarettes to increase daily consumption without regard to the resultant increase in exposure to carcinogens, but in the absence of evidence of any adulteration or contamination?” Subsequently, the plaintiff submitted a motion to the U.S. Court of Appeals for the Second Circuit to amend the certification order to add a second question to the Connecticut Supreme Court: “Does Comment i to section 402A of the Restatement (Second) of Torts preclude a claim under the [Connecticut Products Liability Act] against a cigarette manufacturer for negligence (in the design of its cigarette products)?” The Second Circuit denied the plaintiff’s motion. The Connecticut Supreme Court accepted the certified question and denied the plaintiff’s request to amend the question with the same additional question that the plaintiff proposed to the Second Circuit. The deadline for the plaintiff to submit her brief is July 31, 2014, and RJR Tobacco’s brief will be due 30 days thereafter. The Second Circuit has retained jurisdiction over the parties’ appeals and will decide the case after the Connecticut Supreme Court has completed its proceedings.

On June 19, 2013, in Whitney v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the defendants, including RJR Tobacco. The case was filed in January 2011, in the Circuit Court, Alachua County, Florida. The plaintiff alleged that as a result of using the defendants’ products, she suffers from lung cancer and emphysema. Final judgment was entered in July 2013. The plaintiff filed a notice of appeal to the First District Court of Appeal, and the defendants filed a notice of cross appeal in August 2013. Briefing is underway.

West Virginia IPIC

In re: Tobacco Litigation Individual Personal Injury Cases began in 1999, in West Virginia state court, as a series of roughly 1,200 individual plaintiff cases making claims with respect to cigarettes manufactured by Philip Morris, Lorillard, RJR Tobacco, B&W and The American Tobacco Company. The cases were consolidated for a Phase I trial on various defense conduct issues, to be followed in Phase II by individual trials of any claims left

27

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

standing. Over the years, approximately 600 individual plaintiff claims were dismissed for failure to comply with the case management order, leaving 564 individual cases pending as of April 2013. On April 15, 2013, the Phase I jury trial began and ended with a virtually complete defense verdict on May 15, 2013. The jury found that cigarettes were not defectively designed, were not defective due to a failure to warn prior to July 1, 1969, that defendants were not negligent, did not breach warranties and did not engage in conduct which would warrant punitive damages. The only claim remaining after the verdict was the jury’s finding that all ventilated filter cigarettes manufactured and sold between 1964 and July 1, 1969 were defective for a failure to instruct. The defendants believe that there are only 30 plaintiffs remaining who arguably claim to have smoked a ventilated filter cigarette during the relevant period. The court initially entered judgment on the verdict identifying the 30 plaintiffs remaining, but vacated those orders as premature (leaving to a later day the task of identifying the plaintiffs who might be able to assert a ventilated filter failure to instruct claim during the narrow relevant period). The court entered a new judgment in October 2013, dismissing all claims lost by the plaintiffs and purporting to make those claims and all of the jury rulings immediately subject to appeal. The plaintiffs filed a notice of appeal to the West Virginia Supreme Court of Appeals in November 2013. Briefing is complete. The defendants reserved the right to challenge the ventilated filter claim in the event any plaintiff pursues and succeeds on such a claim.

Engle and Engle Progeny Cases

Trial began in July 1998 in Engle v. R. J. Reynolds Tobacco Co., a class action filed in Circuit Court, Miami-Dade County, Florida. The Engle class consisted of Florida citizens and residents, and their survivors, who suffer from or have died from diseases or medical conditions caused by an addiction to smoking. The action was brought against the major U.S. cigarette manufacturers, including RJR Tobacco and B&W. In July 1999, the Engle jury found against RJR Tobacco, B&W and the other defendants in the initial phase of the trial, which addressed alleged common issues related to the defendants’ conduct, general causation, the addictiveness of cigarettes, and potential entitlement to punitive damages.

On July 14, 2000, in the second phase of the trial, the jury returned a punitive damages verdict in favor of the class of approximately $145 billion, including verdicts of $36.3 billion and $17.6 billion against RJR Tobacco and B&W, respectively.

On appeal, the Florida Supreme Court prospectively decertified the class, and it set aside the punitive damages award as both premature and excessive. However, the court preserved a number of findings from Phase I of the trial, including findings that cigarettes can cause certain diseases, that nicotine is addictive, and that defendants placed defective cigarettes on the market, breached duties of care, and concealed health-related information about cigarettes. The court authorized former class members to file individual lawsuits within one year, and it stated that the preserved findings would have res judicata effect in those actions.

In the wake of the Florida Supreme Court ruling, thousands of individuals filed separate lawsuits seeking to benefit from the Engle findings. As of June 30, 2014, RJR Tobacco was a defendant in 4,865 Engle Progeny cases in both state and federal courts in Florida. These cases include approximately 5,973 plaintiffs. Many of these cases are in active discovery or nearing trial.

In Engle Progeny cases tried to date, a central issue is the proper use of the preserved Engle findings. RJR Tobacco has argued that use of the Engle findings to establish individual elements of progeny claims (such as defect, negligence and concealment) is a violation of federal due process. In 2013, however, both the Florida Supreme Court and the Eleventh Circuit rejected that argument.

In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applied to all Engle Progeny cases in the aggregate. In May 2011, Florida removed the provision that would have allowed it to expire on December 31, 2012. The bond cap for any given individual Engle Progeny case varies depending on the number of judgments in effect at a given time, but never exceeds $5 million per case. The legislation, which became effective in June 2009 and 2011, applies to judgments entered after the original 2009 effective date.

Below is a description of the Engle Progeny cases against RJR Tobacco or B&W, or both, which went to trial or were decided during the period from January 1, 2014 to June 30, 2014, or remained on appeal as of June 30, 2014.

28

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On May 20, 2009, in Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., a case filed in March 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff. The plaintiff alleged that the decedent, Roger Brown, developed smoking-related diseases, which resulted in his death. The plaintiff sought compensatory damages and an unspecified amount of punitive damages. The jury later returned a verdict that the decedent was 50% at fault for his injuries and awarded compensatory damages of $1.2 million. No punitive damages were awarded. RJR Tobacco’s post-trial motions were denied, and the court entered final judgment in the amount of $600,000. RJR Tobacco filed a notice of appeal to the Fourth DCA, and posted a supersedeas bond in the amount of approximately $700,000. The Fourth DCA affirmed the trial court’s judgment in September 2011. In November 2011, RJR Tobacco filed a notice to invoke discretionary jurisdiction of the Florida Supreme Court. In May 2013, the Florida Supreme Court accepted jurisdiction based on express and direct conflict. In February 2014, upon further consideration, the court determined that it should exercise discretion and discharge jurisdiction, and, accordingly, dismissed RJR Tobacco’s petition for review. In March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco raised the issue of whether generic findings from the decertified Engle class action – findings the Florida Supreme Court deemed “useless” for issue preclusion purposes – may be used to excuse thousands of plaintiffs in follow-on cases from proving essential elements of their claims without violating the defendants’ due process rights. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending its disposition of the petition for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and then dispose of it consistent with its ruling in that case. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $3.1 million in satisfaction of the judgment on June 27, 2014.

On February 25, 2010, in Grossman v. R. J. Reynolds Tobacco Co., a case filed in December 2007 in the Circuit Court, Broward County, Florida, the court declared a mistrial due to the jury’s inability to reach a decision. The plaintiff alleged that as a result of an addiction to cigarettes, the decedent, Laura Grossman, developed lung cancer and died. The plaintiff sought damages in excess of $15,000 and all taxable costs and interest. Retrial began in March 2010. In April 2010, the jury returned a verdict in favor of the plaintiff in Phase I, and in Phase II awarded $1.9 million in compensatory damages and no punitive damages. The jury also found RJR Tobacco to be 25% at fault, the decedent to be 70% at fault and the decedent’s spouse to be 5% at fault. Final judgment was entered in June 2010, in the amount of $483,682. RJR Tobacco filed a notice of appeal to the Fourth DCA, and posted a supersedeas bond in the amount of approximately $484,000. The plaintiff filed a notice of cross appeal. In June 2012, the Fourth DCA entered an opinion that affirmed the trial court’s judgment, but remanded the case for a new trial on all Phase II issues. In October 2012, RJR Tobacco filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2014, the Florida Supreme Court declined to accept jurisdiction of the appeal of the original verdict. Retrial began on July 11, 2013. On July 31, 2013, the jury returned a verdict in favor of the plaintiff, found the decedent to be 25% at fault and RJR Tobacco to be 75% at fault, and awarded $15.35 million in compensatory damages and $22.5 million in punitive damages. Final judgment was entered in August 2013 and did not include a reduction for comparative fault. RJR Tobacco filed a notice of appeal to the Fourth DCA and the plaintiff filed a notice of cross appeal in October 2013. RJR Tobacco’s original bond was returned, and RJR Tobacco posted a new bond in the amount of $5 million. Briefing is underway.

On March 10, 2010, in Cohen v. R. J. Reynolds Tobacco Co., a case filed in May 2007 in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff. The plaintiff alleged that the decedent, Nathan Cohen, developed lung cancer as a result of using the defendants’ products, and sought in excess of $15,000 compensatory damages and unspecified punitive damages. On March 24, 2010, the jury awarded the plaintiff $10 million in compensatory damages, and found the decedent to be 33.3% at fault, RJR Tobacco to be 33.3% at fault and the remaining defendant to be 33.3% at fault. The jury also awarded $20 million in punitive damages, of which $10 million was assigned to RJR Tobacco. In July 2010, the court entered final judgment against RJR Tobacco in the amount of $3.33 million in compensatory damages and $10 million in punitive damages. The court entered an amended judgment in September 2010 to include interest from the date of the verdict. RJR Tobacco filed a notice of appeal to the Fourth DCA and posted a supersedeas bond in the amount of $2.5 million. In September 2012, the Fourth DCA affirmed the liability finding and the compensatory damages award, but reversed the finding of entitlement to punitive damages, and remanded the case for a retrial limited to the issue of liability for concealment and conspiracy. The defendants and the plaintiff filed separate notices to invoke the discretionary jurisdiction of the Florida Supreme Court in January 2013. In February 2014, the Florida Supreme Court, on its own motion, consolidated the petitions for review filed by the plaintiff and RJR Tobacco and stayed the petitions pending disposition by the court of Hess v. Philip Morris USA, Inc., which deals with the application of the statute of repose as an affirmative defense to claims of fraudulent concealment and conspiracy to commit fraudulent concealment.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On April 21, 2010, in Townsend v. R. J. Reynolds Tobacco Co., a case filed in December 2007 in the Circuit Court, Alachua County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 51% at fault and the decedent, Frank Townsend, to be 49% at fault, and awarded $10.8 million in compensatory damages and $80 million in punitive damages. The plaintiff alleged that the decedent died from lung cancer as a result of his addiction to the defendant’s products, and sought an unspecified amount of compensatory and punitive damages. The trial court entered judgment in the amount of $5.5 million in compensatory damages and $40.8 million in punitive damages, which represents 51% of the original damages verdicts. RJR Tobacco appealed to the First DCA, which affirmed the compensatory damages award, but remanded the case to the trial court with instructions to remit the punitive damages award or grant a new trial on punitive damages. On remand, the trial court remitted the punitive damages award to $20 million. The plaintiff consented to the remittitur, but RJR Tobacco refused to consent and insisted on a new trial on punitive damages. Nonetheless, the trial court entered a final judgment of $5.5 million in compensatory damages and $20 million in punitive damages. RJR Tobacco again appealed. In the second appeal, the First DCA held that the remitted punitive award was not excessive and that RJR Tobacco could not reject the remittitur and insist on a new trial. Following the denial of its post decision motions in the First DCA, RJR Tobacco filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court in September 2013. In February 2014, the Florida Supreme Court declined to accept jurisdiction. In March 2014, RJR Tobacco posted a supersedeas bond in the amount of $15 million. This bond replaces the original $5 million bond posted. Also in March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $32.7 million in satisfaction of the judgment on June 20, 2014.

On April 26, 2010, in Putney v. R. J. Reynolds Tobacco Co., a case filed in December 2007 in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Margot Putney, to be 35% at fault, RJR Tobacco to be 30% at fault and the remaining defendants to be 35% at fault, and awarded $15.1 million in compensatory damages and $2.5 million in punitive damages each against RJR Tobacco and the remaining defendants. The plaintiff alleged that the decedent suffered from nicotine addiction and lung cancer as a result of using the defendants’ products and sought an unspecified amount of compensatory and punitive damages. In August 2010, final judgment was entered against RJR Tobacco in the amount of $4.5 million in compensatory damages, and $2.5 million in punitive damages. RJR Tobacco filed a notice of appeal and the plaintiff filed a notice of cross appeal. In December 2010, the court entered an amended final judgment to provide that interest would run from April 26, 2010. The defendants filed a joint notice of appeal to the Fourth DCA of the amended final judgment, and RJR Tobacco posted a supersedeas bond in the amount of approximately $2.4 million. In June 2013, the Fourth DCA held that the court erred in denying the defendants’ motion for remittitur of the compensatory damages for loss of consortium and in striking the defendants’ statute of repose affirmative defenses. As a result, the verdict was reversed, and the case was remanded for further proceedings. The plaintiff’s motion for rehearing, written opinion on one issue, or certification of conflict to the Florida Supreme Court was denied in August 2013. The defendants and the plaintiff filed separate notices to invoke the discretionary jurisdiction of the Florida Supreme Court in September 2013. In December 2013, the Florida Supreme Court consolidated the petitions for review filed by the plaintiff and the defendants and stayed the petitions pending disposition of Hess v. Philip Morris USA Inc., described above.

On May 20, 2010, in Buonomo v. R. J. Reynolds Tobacco Co., a case filed in October 2007 in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 77.5% at fault and the decedent, Matthew Buonomo, to be 22.5% at fault, and awarded $5.2 million in compensatory damages and $25 million in punitive damages. The plaintiff alleged that the decedent was addicted to cigarettes and, as a result, developed one or more smoking-related medical conditions and/or diseases and sought an unspecified amount of compensatory and punitive damages. Post-trial motions were denied, but the court, in accordance with the Florida statutory limitation on punitive damage awards, ordered the punitive damage award of $25 million be reduced to $15.7 million – three times the compensatory damages award of $5.2 million. In August 2010, the court entered final judgment in the amount of $4.06 million in compensatory damages and $15.7 million in punitive damages.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

RJR Tobacco filed a notice of appeal to the Fourth DCA and posted a supersedeas bond in the amount of $5 million. The plaintiff also filed a notice of appeal. In September 2013, the Fourth DCA affirmed the final judgment and damages award to the plaintiff on strict liability and negligence. However, the court reversed the judgment entered for the plaintiff on the claims for fraudulent concealment and conspiracy to commit fraud by concealment due to the erroneous striking of RJR Tobacco’s statute of repose defense. As a result, the punitive damages award was set aside and remanded for a new trial. In December 2013, the Fourth DCA denied RJR Tobacco’s motion for rehearing. In January 2014, RJR Tobacco and the plaintiff filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court. In June 2014, the Florida Supreme Court stayed the petitions for review pending disposition by the court of Hess v. Philip Morris USA Inc., described above.

On October 15, 2010, in Frazier v. Philip Morris USA Inc., now known as Russo v. Philip Morris USA Inc., a case filed in December 2007 in the Circuit Court, Miami-Dade County, Florida, the jury returned a verdict in favor of the defendants. The plaintiff alleged that as a result of smoking defendants’, including RJR Tobacco’s, products she developed chronic obstructive pulmonary disease, and sought in excess of $15,000 in compensatory damages and unspecified punitive damages. Final judgment was entered in February 2011. The plaintiff filed a notice of appeal to the Third DCA, and the defendants filed a notice of cross appeal. In April 2012, the Third DCA reversed the trial court’s judgment, directed entry of judgment in the plaintiff’s favor and ordered a new trial. In July 2012, the defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. The Florida Supreme Court accepted jurisdiction of the case in September 2013. Oral argument in the Florida Supreme Court occurred on April 30, 2014. A decision is pending. The new trial is scheduled for October 13, 2014.

On October 29, 2010, in Koballa v. Philip Morris USA Inc., a case filed in December 2007, in the Circuit Court, Volusia County, Florida against tobacco industry defendants, including RJR Tobacco, the court declared a mistrial after the jury informed the court that they were unable to reach a verdict. The plaintiff alleged that as a result of the use of the defendants’ defective and unreasonably dangerous tobacco products, she suffers from, or has suffered from, nicotine addiction, lung cancer and other smoking-related medical conditions and/or diseases, and sought an unspecified amount of compensatory and punitive damages. Retrial began on March 21, 2011, and on March 31, 2011, the jury returned an inconsistent verdict. The jury found that RJR Tobacco was not liable for the plaintiff’s injuries, but found that her past injuries were worth $1 million with the plaintiff being 70% at fault and RJR Tobacco 30% at fault. The court entered final judgment in August 2011. RJR Tobacco filed a notice of appeal to the Fifth DCA, and posted a supersedeas bond in the amount of $300,000. In September 2012, the Fifth DCA affirmed the trial court’s judgment, per curiam. In November 2012, RJR Tobacco filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. The Florida Supreme Court declined to accept jurisdiction in February 2014. RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court on March 28, 2014. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $349,000 in satisfaction of the judgment on June 20, 2014.

On November 15, 2010, in Webb v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Levy County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 90% at fault and the decedent, James Horner, to be 10% at fault, and awarded $8 million in compensatory damages and $72 million in punitive damages. The plaintiff alleged that as a result of smoking the defendant’s products, the decedent developed one or more smoking-related diseases, and sought in excess of $15,000 in compensatory and unspecified punitive damages. The court entered judgment, and RJR Tobacco appealed to the First DCA and posted a supersedeas bond in the amount of $5 million. That court affirmed the liability verdict, but ordered a remittitur or a new trial on damages. On remand, the trial court remitted the compensatory damages award to $4 million and the punitive damages award to $25 million. The plaintiff consented to the remitted judgment, and RJR Tobacco rejected the remittitur and demanded a new trial on damages. Nonetheless, the trial court entered the remitted judgment. RJR Tobacco again appealed to the First DCA. In the second appeal, the First DCA found that the trial court erred in concluding that only the plaintiff had the right to choose between accepting the remittitur and proceeding with a new trial. The First DCA thus ordered a new trial on damages. The new trial on damages is scheduled for November 3, 2014.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On February 10, 2011, in Kirkland v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Hillsborough County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 10% at fault and the plaintiff to be 90% at fault, and awarded $100,000 in compensatory damages. The jury also awarded the plaintiff $250,000 in punitive damages. The plaintiff alleged that he was addicted to cigarettes, and as a result, developed larynx cancer and other smoking-related medical conditions and/or diseases, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered in March 2011. The plaintiff filed a notice of appeal to the Second DCA in April 2011. RJR Tobacco filed a notice of cross appeal and posted a supersedeas bond in the amount of $260,000. In January 2012, the plaintiff voluntarily dismissed his appeal. In December 2013, the Second DCA affirmed the trial court’s judgment, per curiam. RJR Tobacco’s motion for a written opinion was denied in January 2014. In March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $464,000 in satisfaction of the judgment on June 16, 2014.

On March 18, 2011, in Mack v. R. J. Reynolds Tobacco Co., a case filed in June 2008, in the Circuit Court, Alachua County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 51% at fault and the decedent, Peter Mack, Sr., to be 49% at fault, and awarded $1 million in compensatory damages. No punitive damages were awarded. The plaintiff alleged that due to the decedent’s addiction to cigarettes, he developed bronchitis and lung cancer, and sought an unspecified amount of compensatory and punitive damages. In April 2011, final judgment was entered in favor of the plaintiff. RJR Tobacco appealed, and the First DCA reversed the trial court’s judgment and remanded the case for a new trial. Retrial began on December 3, 2012. On December 14, 2012, the jury returned a verdict in favor of the plaintiff, found the decedent to be 35% at fault and RJR Tobacco to be 65% at fault and awarded $2.9 million in compensatory damages. Final judgment was entered in December 2012. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of $1.9 million. In March 2014, the First DCA affirmed the judgment of the trial court, per curiam. In March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $4.2 million in satisfaction of the judgment in June 2014.

On April 13, 2011, in Tullo v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of RJR Tobacco and the plaintiff, but against the remaining defendants. The jury awarded $4.5 million in compensatory damages and no punitive damages. The jury found the decedent, Dominick Tullo, to be 45% at fault and the remaining defendants cumulatively to be 55% at fault. The plaintiff alleged that the decedent was addicted to cigarettes manufactured by the defendants, and as a result, developed chronic obstructive pulmonary disease and other smoking-related illnesses and/or diseases. The plaintiff sought in excess of $15,000 against each defendant, taxable costs and interest. Final judgment was entered in April 2011. The remaining defendants filed an appeal to the Fourth DCA, and the plaintiff filed a cross appeal. The plaintiff also filed a notice of appeal of the order denying the plaintiff’s motion for new trial against RJR Tobacco. RJR Tobacco filed a cross appeal of the same order. In August 2013, the Fourth DCA affirmed the final judgment entered by the trial court, including the jury’s verdict of no liability to RJR Tobacco.

On April 26, 2011, in Andy Allen v. R. J. Reynolds Tobacco Co., a case filed in September 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 45% at fault, the decedent, Patricia Allen, to be 40% at fault and the remaining defendant to be 15% at fault, and awarded $6 million in compensatory damages and $17 million in punitive damages against each defendant. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent developed chronic obstructive pulmonary disease, and sought in excess of $15,000 in compensatory damages. Final judgment was entered against RJR Tobacco in the amount of $19.7 million in May 2011. In October 2011, the trial court entered a remittitur of the punitive damages to $8.1 million and denied all other post-trial motions. The defendants filed a joint notice of appeal, RJR Tobacco posted a supersedeas bond in the amount of $3.75 million, and the plaintiff filed a notice of

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

cross appeal in November 2011. In May 2013, the First DCA reversed the trial court’s judgment and remanded the case for a new trial. In August 2013, the plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2014, the Florida Supreme Court declined to accept jurisdiction. Retrial has tentatively been scheduled for November 3, 2014.

On May 20, 2011, in Jewett v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 20% at fault, the decedent, Barbara Jewett, to be 70% at fault and the remaining defendant to be 10% at fault, and awarded $1.1 million in compensatory damages and no punitive damages. The plaintiff alleged that the decedent, Barbara Jewett, was addicted to cigarettes and as a result of her addiction, developed chronic obstructive pulmonary disease, emphysema and respiratory failure, and sought in excess of $15,000 in compensatory damages. Final judgment was entered in June 2011. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of $218,600. In November 2012, the First DCA reversed the judgment and remanded the case for a new trial. The plaintiff and the defendants filed separate notices to invoke the discretionary jurisdiction of the Florida Supreme Court in March 2013. In February 2014, the Florida Supreme Court declined to accept jurisdiction. The new trial has not been scheduled.

On June 16, 2011, in Soffer v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Alachua County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 40% at fault, the decedent, Maurice Soffer, to be 60% at fault, and awarded $5 million in compensatory damages and no punitive damages. The plaintiff alleged that the decedent was addicted to cigarettes and, as a result, developed lung cancer and other smoking-related conditions and/or diseases, and sought in excess of $15,000 in compensatory damages. Final judgment was entered against RJR Tobacco in the amount of $2 million. The plaintiff filed a notice of appeal to the First DCA in July 2011. RJR Tobacco filed a notice of cross appeal and posted a supersedeas bond in the amount of $2 million. In October 2012, the First DCA affirmed the trial court’s ruling in full. On the direct appeal, the court held that only intentional torts could support a punitive damages claim and held that Engle Progeny plaintiffs may not seek punitive damages for negligence or strict liability because the original Engle class did not seek punitive damages for those claims. The First DCA certified the question to the Florida Supreme Court as one of great public importance. On the cross appeal, the court rejected RJR Tobacco’s arguments about the use of the Engle findings and the statute of limitations. RJR Tobacco filed a motion for rehearing or for certification to the Florida Supreme Court and the plaintiff filed a motion for rehearing or rehearing en banc. In January 2013, the First DCA granted rehearing on RJR Tobacco’s cross appeal to clarify that the trial court’s application of Engle findings did not violate RJR Tobacco’s due process rights. Otherwise, rehearing, rehearing en banc and certification were denied. RJR Tobacco and the plaintiff both filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2014, the Florida Supreme Court declined to accept jurisdiction of RJR Tobacco’s petition for review and accepted the plaintiff’s petition for review requesting the Florida Supreme Court review the decision of the First DCA. Briefing is underway, and oral argument has not been scheduled.

On July 15, 2011, in Ciccone v. R. J. Reynolds Tobacco Co., a case filed in August 2004, in the Circuit Court, Broward County, Florida, a jury returned a verdict finding the plaintiff is a member of the Engle class. The plaintiff alleged that as a result of the use of the defendant’s tobacco products, the decedent, George Ciccone, suffered from nicotine addiction and one or more smoking-related diseases and/or medical conditions, and sought an unspecified amount of compensatory and punitive damages. On July 21, 2011, the jury awarded approximately $3.2 million in compensatory damages and $50,000 in punitive damages. The jury found the decedent to be 70% at fault and RJR Tobacco to be 30% at fault. Final judgment was entered in September 2011, and RJR Tobacco filed a notice of appeal to the Fourth DCA. RJR Tobacco posted a supersedeas bond in the amount of approximately $1 million on October 17, 2011. In August 2013, the Fourth DCA affirmed the judgment of the trial court, but reversed the punitive damages award and remanded the case to the trial court for entry of a final judgment that eliminates the punitive damages award. RJR Tobacco’s motion for rehearing or rehearing en banc was denied in November 2013. The Florida Supreme Court accepted jurisdiction of the case in June 2014. Briefing is underway.

On September 15, 2011, in Ojeda v. R. J. Reynolds Tobacco Co., a case filed in October 2007, in the Circuit Court, Miami-Dade County, Florida, a jury returned a verdict in favor of RJR Tobacco. The plaintiff alleged that as a result of the use of the defendant’s products, the decedent, Juan Ojeda, suffered from one or more smoking-related medical conditions and/or diseases, and sought an unspecified amount of damages. Final judgment was entered September 26, 2011. The plaintiff filed a notice of appeal to the Third DCA in October 2012. In July 2014, the Third DCA affirmed, per curiam, the trial court’s final judgment.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On November 28, 2011, in Sury v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, William Sury, to be 60% at fault, RJR Tobacco to be 20% at fault, and the remaining defendant to be 20% at fault, and awarded $1 million in compensatory damages and no punitive damages. The plaintiff alleged that as a result of the use of the defendants’ products, the decedent suffered from lung cancer, and sought an unspecified amount of damages. Final judgment was entered in March 2012. The court entered an amended final judgment that held the defendants jointly and severally liable for the entire $1 million, even though the jury had allocated 60% of fault to the plaintiff and 20% of fault to a co-defendant. The defendants filed a notice of appeal to the First DCA on April 20, 2012, and RJR Tobacco posted a supersedeas bond in the amount of $500,000. In June 2013, the First DCA affirmed the final judgment. RJR Tobacco’s motion for rehearing was denied in August 2013. In January 2014, the Florida Supreme Court denied RJR Tobacco’s petition for review of the First DCA’s decision. RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court in March 2014. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $1.7 million in satisfaction of the judgment on June 20, 2014.

On January 24, 2012, in Hallgren v. R. J. Reynolds Tobacco Co., a case filed in April 2007, in the Circuit Court, Highlands County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Claire Hallgren, to be 50% at fault, RJR Tobacco to be 25% at fault, and the remaining defendant to be 25% at fault, and awarded $2 million in compensatory damages and $750,000 in punitive damages against each defendant. The plaintiff alleged that the decedent was addicted to the defendants’ products, and as a result, suffered from lung cancer, and sought in excess of $15,000 in compensatory damages and unspecified punitive damages. In March 2012, the court entered final judgment in the amount of approximately $1 million for which RJR Tobacco and the other defendant are jointly and severally liable; and $750,000 in punitive damages against each defendant. The defendants filed a joint notice of appeal to the Second DCA, and RJR Tobacco posted a supersedeas bond in the amount of approximately $1.3 million in May 2012. The plaintiff filed a notice of cross appeal. In October 2013, the Second DCA affirmed the trial court’s ruling that punitive damages can be awarded for negligence and strict liability claims as well as for the intentional tort claims brought under Engle. The court certified a conflict with the First DCA’s decision in Soffer and the Fourth DCA’s decision in Ciccone. The court also certified the following question to be of great public importance – “Are members of the Engle class who pursue individual damages actions in accordance with the decision in Engle v. Liggett Group, Inc., entitled to pursue punitive damages under claims for strict liability and negligence?” In November 2013, the defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In June 2014, the Florida Supreme Court stayed the petition pending disposition of Russo v. Philip Morris USA Inc., described above.

On February 29, 2012, in Marotta v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Broward County, Florida, the court declared a mistrial during jury prequalification. The plaintiff alleged that the decedent, Phil Marotta, was addicted to cigarettes and, as a result, suffered from lung cancer. The plaintiff sought compensatory damages in excess of $75,000, including compensatory and punitive damages, costs and pre-judgment interest. Retrial began on March 7, 2013. On March 20, 2013, a jury returned a verdict in favor of the plaintiff, found the decedent to be 42% at fault and RJR Tobacco to be 58% at fault and awarded $6 million in compensatory damages and no punitive damages. Final judgment was entered against RJR Tobacco in the amount of $3.48 million, and RJR Tobacco filed a notice of appeal to the Fourth DCA in April 2013. The plaintiff filed a notice of cross appeal in May 2013. Briefing is underway.

On March 19, 2012, in McCray v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that the decedent, Mercedia Walker, was addicted to the defendants’ tobacco products, and as a result, suffered from one or more smoking-related diseases and/or medical conditions. The plaintiff sought compensatory damages for all injuries and losses, all recoverable costs of the case, and all legally recoverable interest. Final judgment was entered in March 2012. The plaintiff filed a notice of appeal to the Eleventh Circuit in July 2012. Oral argument occurred on March 4, 2014. A decision is pending.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On March 27, 2012, in Emmon Smith v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Jackson County, Florida, a jury returned a verdict in favor of the plaintiff, found Mr. Smith to be 30% at fault and RJR Tobacco to be 70% at fault, and awarded $10 million in compensatory damages. The jury also awarded $20 million in punitive damages. The plaintiff alleged that he was addicted to cigarettes manufactured by the defendant, and as a result, developed lung cancer, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered on April 2, 2012. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of $5 million. In November 2013, the First DCA affirmed the judgment of the trial court, per curiam. RJR Tobacco’s motion for issuance of a written opinion, certification and rehearing en banc was denied in February 2014. In March 2014, RJR Tobacco’s notice to invoke the discretionary jurisdiction of the Florida Supreme Court was dismissed. Also in March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $29.8 million in satisfaction of the judgment on June 20, 2014.

On April 10, 2012, in Duke v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Sarah Duke, to be 75% at fault and RJR Tobacco to be 25% at fault, and awarded $30,705 in compensatory damages and no entitlement to punitive damages. The plaintiff alleged that as a result of the use of the defendant’s products, the decedent developed smoking-related diseases. The plaintiff sought compensatory and punitive damages, including costs and interest. RJR Tobacco filed a notice of appeal to the Eleventh Circuit in September 2012. In November 2012, RJR Tobacco posted a supersedeas bond in the amount of approximately $7,800. In February 2013, the Eleventh Circuit granted the joint motion to consolidate the appeal with the appeal in Walker v. R. J. Reynolds Tobacco Co., discussed below. In September 2013, the Eleventh Circuit affirmed the jury verdict in favor of the plaintiff. RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court in March 2014. In the petition, RJR Tobacco raised the issue of whether full faith and credit principles or due process permit generic findings from the decertified Engle class action – findings the Florida Supreme Court deemed “useless” for issue preclusion purposes – may be used to excuse thousands of plaintiffs in follow-on cases from proving essential elements of their claims. RJR Tobacco requested that the petition be granted or held pending disposition of the petition for writ of certiorari filed in Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then disposed of consistent with its ruling in that case. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $7,700 in satisfaction of the judgment on June 20, 2014.

On May 17, 2012, in Calloway v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Johnnie Calloway, to be 20.5% at fault, RJR Tobacco to be 27% at fault, and the remaining defendants collectively to be 52.5% at fault, and awarded $20.5 million in compensatory damages and $17.25 million in punitive damages against RJR Tobacco and $37.6 million collectively against the remaining defendants. The plaintiff alleged that as a result of using the defendants’ products, the decedent became addicted and developed smoking-related diseases and/or conditions. The plaintiff sought compensatory and punitive damages, including costs and interest. In its ruling on the post-trial motions, the court determined that the jury’s apportionment of comparative fault did not apply to the compensatory damages award. Final judgment was entered in August 2012. In September 2012, the defendants filed a notice of appeal to the Fourth DCA, and RJR Tobacco posted a supersedeas bond in the amount of $1.5 million. The plaintiff filed a notice of cross appeal. Briefing is underway.

On May 21, 2012, in Walker v. R. J. Reynolds Tobacco Co., a case filed in August 2007, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Albert Walker, to be 90% at fault and RJR Tobacco to be 10% at fault, and awarded $275,000 in compensatory damages with no entitlement to punitive damages. The plaintiff alleged that as a result of the use of the defendant’s products, the decedent suffered bodily injury. The plaintiff sought compensatory and punitive damages, including costs and interest. The court entered final judgment in May 2012. RJR Tobacco filed a notice of appeal to the Eleventh

35

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Circuit and posted a supersedeas bond in the amount of $27,775. In February 2013, the Eleventh Circuit granted the joint motion to consolidate the appeal with the appeal in Duke v. R. J. Reynolds Tobacco Co., discussed above. RJR Tobacco posted a substitute supersedeas bond in the amount of approximately $45,800 in June 2013. In September 2013, the Eleventh Circuit affirmed the jury verdict in favor of the plaintiff. RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court in March 2014. In the petition, RJR Tobacco raised the issue of whether full faith and credit principles or due process permit generic findings from the decertified Engle class action – findings the Florida Supreme Court deemed “useless” for issue preclusion purposes – may be used to excuse thousands of plaintiffs in follow-on cases from proving essential elements of their claims. RJR Tobacco requested that the petition be granted or held pending disposition of the petition for writ of certiorari filed in Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then disposed of consistent with its ruling in that case. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $46,100 in satisfaction of the judgment on June 20, 2014.

On August 1, 2012, in Hiott v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Kenneth Hiott, to be 60% at fault and RJR Tobacco to be 40% at fault, and awarded $1.83 million in compensatory damages and no punitive damages. The plaintiff alleged that as a result of using the defendant’s product, the decedent suffered from addiction and smoking-related diseases and/or conditions. The plaintiff sought an unspecified amount of compensatory and punitive damages. In November 2012, final judgment was entered against RJR Tobacco in the amount of $730,000 in compensatory damages. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of $730,000 in December 2012. In January 2014, the First DCA affirmed the trial court’s decision. RJR Tobacco filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court in January 2014. In June 2014, the Florida Supreme Court stayed the petition pending the court’s disposition of Hess v. Philip Morris USA Inc., described above.

On August 10, 2012, in Hancock v. Philip Morris USA, Inc., a case filed in January 2008, in the Circuit Court, Miami-Dade County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Edna Siwieck, to be 90% at fault, RJR Tobacco to be 5% at fault and the remaining defendant to be 5% at fault. However, the jury did not award compensatory damages and found that the plaintiff was not entitled to punitive damages. The court determined that the jury verdict was inconsistent due to the parties previously stipulating to $110,200 in medical expenses, which is subject to the allocation of fault. The defendants agreed to an additur for that amount. The plaintiff alleged that as a result of using the defendants’ products, the decedent suffered from chronic obstructive pulmonary disease. The plaintiff sought an unspecified amount of compensatory and punitive damages, costs and interest. Final judgment was entered against RJR Tobacco in the amount of $705 in October 2012. The stipulated amount was reduced by the defendants’ motion to reduce economic damages by collateral sources. The plaintiff filed a notice of appeal to the Fourth DCA, and the defendants filed a notice of cross appeal in November 2012. Briefing is underway.

On September 19, 2012, in Baker v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of the defendant, RJR Tobacco. The plaintiff alleged that as a result of using the defendant’s products, the decedent, Elmer Baker, suffered from lung cancer. The plaintiff sought compensatory damages in excess of $15,000, costs and interest. Final judgment was entered in January 2013, in favor of RJR Tobacco. The plaintiff filed a notice of appeal to the Fourth DCA, and RJR Tobacco filed a notice of cross appeal in February 2013. Briefing is complete. Oral argument has not been scheduled.

On September 20, 2012, in Sikes v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Jimmie Sikes, to be 49% at fault and RJR Tobacco to be 51% at fault, and awarded $4.1 million in compensatory damages and $2 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s product, the decedent suffered from chronic obstructive pulmonary disease, and sought in excess of $15,000 of compensatory damages. Final judgment was entered against RJR Tobacco in the amount of $6.1 million on June 3, 2013. The court entered a corrected final judgment against RJR Tobacco in the amount of $5.5 million and vacated the June 3, 2013 final judgment. RJR Tobacco filed a notice of appeal to the First DCA, and posted a supersedeas bond in the amount of $5 million in July 2013. In July 2014, the First DCA affirmed the trial court’s decision, per curiam, but following the Hiott case, certified a conflict to the Florida Supreme Court with Hess v. Philip Morris USA Inc., both cases are described above. The deadline for either party to file a notice to invoke the discretionary jurisdiction of the Florida Supreme Court is August 25, 2014.

36

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On October 17, 2012, in James Smith v. R. J. Reynolds Tobacco Co., a case filed in August 2007, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Wanette Smith, to be 45% at fault and RJR Tobacco to be 55% at fault, and awarded $600,000 in compensatory damages and $20,000 in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from lung cancer and chronic obstructive pulmonary disease. The plaintiff sought compensatory and punitive damages, costs and interest. Final judgment was entered against RJR Tobacco in the amount of $620,000. RJR Tobacco filed a notice of appeal to the Eleventh Circuit and posted a supersedeas bond in the amount of approximately $620,000 in September 2013. Briefing is complete. Oral argument has not been scheduled.

On October 18, 2012, in Schlenther v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Hillsborough County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Beverly Schlenther, to be 50% at fault and RJR Tobacco to be 50% at fault, and awarded $5 million in compensatory damages and $2.5 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from chronic obstructive pulmonary disease and heart disease. The plaintiff sought compensatory and punitive damages, costs and interest. In April 2013, the court vacated the punitive damage award, granted a new trial on entitlement to punitive damages and the amount of any such damages and abated the new trial pending the Florida Supreme Court decision in Soffer v. R. J. Reynolds Tobacco Co., described above. The plaintiff filed a notice of appeal to the Second DCA of the order granting RJR Tobacco’s motion for a new trial, and RJR Tobacco filed a notice of cross appeal of the same order. In October 2013, the trial court entered a partial final judgment against RJR Tobacco in the amount of $5.03 million in compensatory damages with no reduction for comparative fault. RJR Tobacco filed a notice of appeal of the partial final judgment. In November 2013, the plaintiff filed a motion to temporarily relinquish jurisdiction to the trial court to permit the trial court to enter a final judgment based on the decision in Hallgren, described above. The Second DCA granted the plaintiff’s motion, and jurisdiction was relinquished for 45 days. In December 2013, the trial court denied the defendant’s post-trial motions, including RJR Tobacco’s motion for a new trial, and entered final judgment against RJR Tobacco in the amount of $5 million for compensatory damages, $29,705 for funeral expenses and $2.5 million in punitive damages. Both parties filed voluntary dismissals of their prior appeals. RJR Tobacco subsequently filed a notice of appeal in December 2013 to the Second DCA of the final judgment and posted a supersedeas bond in the amount of $5 million in January 2014. Oral argument is scheduled for September 3, 2014.

On October 19, 2012, in Ballard v. R. J. Reynolds Tobacco Co., a case filed in September 2007 in the Circuit Court, Miami-Dade County, Florida, a jury returned a verdict in favor of the plaintiff, found the plaintiff to be 45% at fault and RJR Tobacco to be 55% at fault, and awarded $8.55 million in compensatory damages. Punitive damages were not at issue. The plaintiff alleged that as a result of using the defendant’s products, he suffers from bladder cancer and emphysema, and sought an unspecified amount of compensatory and punitive damages. The court entered final judgment against RJR Tobacco in the amount of $4.7 million in October 2012, and in August 2013, the court entered an amended final judgment against RJR Tobacco in the amount of $5 million. RJR Tobacco filed a notice of appeal to the Third DCA and posted a supersedeas bond in the amount of $5 million in October 2013. Briefing is underway.

On December 12, 2012, in Virginia Williams v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Miami-Dade County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Milton Williams, to be 15% at fault and RJR Tobacco to be 85% at fault, and awarded $5 million in compensatory damages. Punitive damages were not sought. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from pharyngeal cancer, and sought an unspecified amount of damages. Final judgment was entered against RJR Tobacco in the amount of $4.25 million in compensatory damages in January 2013. RJR Tobacco filed a notice of appeal to the Third DCA and posted a supersedeas bond in the amount of $4.25 million, and the plaintiff filed a notice of cross appeal in August 2013. Oral argument is scheduled for August 18, 2014.

On February 11, 2013, in Evers v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Hillsborough County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Jacqueline Loyd, to be 31% at fault, RJR Tobacco to be 60% at fault, and the remaining defendant to be 9% at fault,

37

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

and awarded $3.23 million in compensatory damages and $12.36 million in punitive damages against RJR Tobacco only. The plaintiff alleged that as a result of using the defendants’ products, the decedent became addicted and suffered from smoking-related diseases and/or conditions, and sought an unspecified amount of damages. In March 2013, the court granted the defendants’ post-trial motions for directed verdict on fraudulent concealment, conspiracy and punitive damages. As a result, the $12.36 million punitive damages award was set aside. The plaintiff’s motion to reconsider directed verdict as to concealment, conspiracy and punitive damages was denied on April 8, 2013. The plaintiff filed a notice of appeal to the Second DCA, the defendants filed a notice of cross appeal, and RJR Tobacco posted a supersedeas bond in the amount of $1.77 million in May 2013. Briefing is complete. Oral argument has not been scheduled.

On February 13, 2013, in Schoeff v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, James Schoeff, to be 25% at fault, RJR Tobacco to be 75% at fault, and awarded $10.5 million in compensatory damages and $30 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from addiction and one or more smoking-related diseases and/or conditions, including lung cancer, and sought in excess of $15,000 in damages. In April 2013, final judgment was entered against RJR Tobacco in the amount of $7.88 million in compensatory damages and $30 million in punitive damages. RJR Tobacco filed a notice of appeal to the Fourth DCA, and the plaintiff filed a notice of cross appeal in May 2013. Briefing is underway.

On April 1, 2013, in Searcy v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Carol LaSard, to be 40% at fault, RJR Tobacco to be 30% at fault and the remaining defendant to be 30% at fault, and awarded $6 million in compensatory damages and $10 million in punitive damages against each defendant. The plaintiff alleged that as a result of using the defendants’ products, the decedent suffered from lung cancer, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered against RJR Tobacco in the amount of $6 million in compensatory damages and $10 million in punitive damages. In September 2013, the trial court granted the defendants’ motion for a new trial, or in the alternative, reduction or remittitur of the damages awarded to the extent it sought remittitur of the damages. The compensatory damage award was remitted to $1 million, and the punitive damage award was remitted to $1.67 million against each defendant. The remaining post-trial motions were denied. The plaintiff’s motion to reconsider the trial court’s order granting in part the defendants’ motion for remittitur of the damages award was denied in October 2013. The plaintiff filed a notice of acceptance of remittitur in November 2013, and the court issued an amended final judgment. The defendants filed a joint notice of appeal to the Eleventh Circuit, and RJR Tobacco posted a supersedeas bond in the amount of approximately $2.2 million in November 2013. Briefing is underway.

On April 18, 2013, in Aycock v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Richard Aycock, to be 27.5% at fault and RJR Tobacco to be 72.5% at fault, and awarded $5.9 million in compensatory damages. Punitive damages were not awarded. The plaintiff alleged that the decedent was addicted to cigarettes manufactured by the defendant and, as a result, suffered from lung cancer, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered against RJR Tobacco in the amount of $4.28 million in April 2013. RJR Tobacco filed a notice of appeal to the Eleventh Circuit in September 2013, and posted a supersedeas bond in the amount of $4.32 million in October 2013. Oral argument occurred on June 5, 2014. A decision is pending.

On May 2, 2013, in David Cohen v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Helen Cohen, to be 40% at fault, RJR Tobacco to be 30% at fault, and the remaining defendants collectively to be 30% at fault, and awarded $2.06 million in compensatory damages. The plaintiff alleged that as a result of using the defendants’ products, the decedent became addicted and suffered from one or more smoking-related diseases and/or conditions, and sought in excess of $15,000 in compensatory damages and unspecified punitive damages. Final judgment was entered against RJR Tobacco in the amount of $617,000 in May 2013. In July 2013, the court granted the defendants’ motion for a new trial due to the plaintiff’s improper arguments during closing. The new trial date has not been scheduled. The plaintiff filed a notice of appeal to the Fourth DCA, and the defendants filed a notice of cross appeal. Briefing is underway.

38

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On May 22, 2013, in John Campbell v. R. J. Reynolds Tobacco Co., a case pending in Polk County, Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent, Judy Campbell, became addicted to smoking cigarettes and suffered from unspecified smoking-related conditions and/or diseases, and sought an unspecified amount of damages. The plaintiff’s motion for a new trial was denied and the court entered final judgment in July 2013. The plaintiff filed a notice of appeal to the Second DCA, and the defendants filed a notice of cross appeal in August 2013. Briefing is underway.

On May 23, 2013, in Earl Graham v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Faye Graham, to be 70% at fault, RJR Tobacco to be 20% at fault and the remaining defendant to be 10% at fault, and awarded $2.75 million in compensatory damages. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent became addicted to smoking cigarettes which resulted in her death, and sought an unspecified amount of damages. Final judgment was entered against RJR Tobacco in the amount of $550,000 in May 2013. The defendants filed a joint notice of appeal to the Eleventh Circuit, and RJR Tobacco posted a supersedeas bond in the amount of approximately $556,000 in October 2013. Briefing is complete. Oral argument has not been scheduled.

On June 4, 2013, in Starr-Blundell v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Lucy Mae Starr, to be 80% at fault, RJR Tobacco to be 10% at fault and the remaining defendant to be 10% at fault, and awarded $500,000 in compensatory damages. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent suffered from lung cancer and other smoking relating diseases and/or conditions, and sought in excess of $15,000 in damages. The court entered final judgment in the amount of $50,000 against each defendant in November 2013. The plaintiff filed a notice of appeal to the First DCA, and the defendants filed a notice of cross appeal in December 2013. RJR Tobacco posted a supersedeas bond in the amount of $50,000 in December 2013. Briefing is underway.

On June 7, 2013, in Odum v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Ethelene Hazouri, to be 50% at fault and RJR Tobacco to be 50% at fault, and awarded $200,000 in compensatory damages. The plaintiff alleged that as a result of smoking the defendant’s products, the decedent suffered from lung cancer, and sought an unspecified amount of damages. Final judgment was entered against RJR Tobacco in the amount of $264,000, for damages and taxable costs, in November 2013. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of approximately $264,000 in December 2013. Briefing is underway.

On June 14, 2013, in Skolnick v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Leo Skolnick, to be 40% at fault, RJR Tobacco to be 30% at fault and the remaining defendant to be 30% at fault, and awarded $2.56 million in compensatory damages. The plaintiff alleged that as a result of using the defendants’ products, the decedent suffered from lung cancer, and sought in excess of $15,000 in compensatory damages and unspecified punitive damages. The court entered final judgment against RJR Tobacco in the amount of $766,500 in July 2013. The defendants filed a joint notice of appeal to the Fourth DCA, and the plaintiff filed a notice of cross appeal in December 2013. RJR Tobacco posted a supersedeas bond in the amount of $767,000 in March 2014. Briefing is underway.

On June 19, 2013, in Thibault v. R. J. Reynolds Tobacco Co., a case pending in the Circuit Court, Escambia County, Florida, the jury returned a verdict in favor of the plaintiff, found the decedent, Evelyn Thibault, to be 30% at fault and RJR Tobacco to be 70% at fault, and awarded $1.75 million in compensatory damages and $1.28 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from chronic obstructive pulmonary disease, and sought an unspecified amount of compensatory and punitive damages. The court determined that comparative fault did not apply to reduce the amount of the verdict. In June 2013, the court entered final judgment against RJR Tobacco in the amount of $3.03 million. RJR Tobacco filed a notice of appeal to the First DCA in August 2013. RJR Tobacco posted a supersedeas bond in the amount of $3.03 million in September 2013. Briefing is underway.

39

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On September 20, 2013, in Gafney v. R. J. Reynolds Tobacco Co., a case pending in Palm Beach County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Frank Gafney, to be 34% at fault, RJR Tobacco to be 33% at fault and the remaining defendant to be 33% at fault, and awarded $5.8 million in compensatory damages. Punitive damages were not awarded. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent developed chronic obstructive pulmonary disease, and sought in excess of $15,000 in compensatory damages. Final judgment was entered against RJR Tobacco in the amount of $1.9 million in September 2013. The defendants filed a joint notice of appeal to the Fourth DCA, and RJR Tobacco posted a supersedeas bond in the amount of $1.9 million in November 2013. The plaintiff filed a notice of cross appeal. Briefing is underway.

On September 30, 2013, in Crawford v. R. J. Reynolds Tobacco Co., a case pending in Miami-Dade County, Florida, a jury returned a verdict in favor of the plaintiff, found the plaintiff to be 30% at fault and RJR Tobacco to be 70% at fault, and awarded $9 million in compensatory damages and $1 million in punitive damages. The plaintiff alleged that as a result of smoking the defendant’s products, he suffered from addiction and one or more smoking-related conditions and/or diseases, and sought an unspecified amount of damages. Final judgment was entered against RJR Tobacco in the amount of $9 million in compensatory damages and $1 million in punitive damages in October 2013. RJR Tobacco filed a notice of appeal to the Third DCA and posted a supersedeas bond in the amount of $5 million in November 2013. Oral argument occurred on July 2, 2014. A decision is pending.

On November 15, 2013, in Chamberlain v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that as a result of smoking the defendants’ products, he suffers from chronic obstructive pulmonary disease and lung cancer, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered in favor of the defendants in November 2013. The plaintiff’s motion for a new trial was denied in April 2014. The plaintiff filed a notice of appeal to the Eleventh Circuit on June 27, 2014. Briefing is underway.

On January 9, 2014, in Bush v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Escambia County, Florida, the court declared a mistrial due to the inability to seat a jury. The plaintiff alleged that as a result of his use of the defendants’ products, he suffers from nicotine addiction and one or more smoking-related diseases and/or conditions, and sought an unspecified amount of compensatory damages. A new trial will be scheduled at a later date.

On January 27, 2014, in Harford v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the plaintiff to be 82% at fault and RJR Tobacco to be 18% at fault, and awarded $330,000 in compensatory damages. The plaintiff alleged that as a result of his use of the defendant’s products, he suffers from addiction and lung cancer, and sought an unspecified amount of compensatory and punitive damages. The plaintiff filed a motion for a new trial in February 2014. A decision is pending.

On January 31, 2014, in Cheeley v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Georgia Cheeley, to be 50% at fault and RJR Tobacco to be 50% at fault, and awarded $3 million in compensatory damages and $2 million in punitive damages. The plaintiff alleged that as a result of smoking the defendant’s products, the decedent suffered from one or more smoking-related conditions or diseases, and sought in excess of $15,000 in compensatory damages. The court entered final judgment against RJR Tobacco in the amount of $1.5 million in compensatory damages and $2 million in punitive damages. RJR Tobacco filed a notice of appeal to the Fourth DCA and posted a supersedeas bond in the amount of $3.5 million in April 2014. The plaintiff filed a notice of cross appeal in May 2014. Briefing is underway.

On February 3, 2014, in Deshaies v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of RJR Tobacco. The plaintiff alleged that as a result of smoking the defendant’s products, he suffers from one or more smoking-related conditions or diseases, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered in February 2014. Post-trial motions are pending.

40

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On February 18, 2014, in Goveia v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Orange County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Mary Goveia, to be 30% at fault, RJR Tobacco to be 35% at fault, and the remaining defendant to be 35% at fault, and awarded $850,000 in compensatory damages and $2.25 million in punitive damages against each defendant. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent became addicted and suffered from one or more smoking-related diseases and/or conditions, and sought an unspecified amount of compensatory and punitive damages. Post-trial motions were denied in April 2014. Final judgment was entered in the amount of $297,500 in compensatory damages and $2.25 million in punitive damages against each defendant in April 2014. The defendants filed a joint notice of appeal to the Fifth DCA, and RJR Tobacco posted a supersedeas bond in the amount of $2.5 million in April 2014. Briefing is underway.

On February 27, 2014, in Banks v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that as a result of using the defendants’ products, the decedent, George Banks, developed one or more smoking-related diseases and/or conditions, and sought in excess of $15,000 in compensatory damages. The plaintiff’s motion for a new trial was denied, and the court entered final judgment in favor of RJR Tobacco and the other defendant in May 2014. The plaintiff filed a notice of appeal to the Fourth DCA, and the defendants filed a notice of cross appeal in June 2014. Briefing is underway.

On March 17, 2014, in Clayton v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, David Clayton, to be 90% at fault and RJR Tobacco to be 10% at fault and awarded $600,000 in compensatory damages. Punitive damages were not awarded. The plaintiff alleged that as a result of smoking the defendant’s products, the decedent suffered from bodily injury and died, and sought an unspecified amount of damages. Final judgment has not been entered.

On March 26, 2014, in Bowden v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, William Bowden, to be 40% at fault, RJR Tobacco to be 30% at fault and the remaining defendant to be 30% at fault, and awarded $5 million in compensatory damages. Punitive damages were not awarded. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent suffered from unspecified injuries which resulted in his death, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered against each defendant in the amount of $1.5 million in compensatory damages in March 2014. Post-trial motions were denied in May 2014. The defendants filed a joint notice of appeal to the First DCA, the plaintiff filed a notice of cross appeal and RJR Tobacco posted a supersedeas bond in the amount of $1.5 million in June 2014. Briefing is underway.

On April 29, 2014, in Dupre v. Philip Morris USA Inc., a case filed in December 2007, in the Circuit Court, Manatee County, Florida, the court declared a mistrial because the jury was unable to reach a unanimous verdict. The plaintiff alleged that the decedent, Richard Dupre, was addicted to cigarettes manufactured by the defendant, and as a result, developed one or more smoking-related diseases and/or conditions. The plaintiff is seeking compensatory and punitive damages, costs and interest. Retrial has been scheduled for April 27, 2015.

On May 16, 2014, in Burkhart v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the plaintiff to be 50% at fault, RJR Tobacco to be 25% at fault, and the remaining defendants to collectively be 25% at fault, and awarded $5 million in compensatory damages and $1.25 million in punitive damages against RJR Tobacco and $1.25 million in punitive damages collectively against the remaining defendants. The plaintiff alleged that she became addicted to smoking cigarettes manufactured by the defendants and suffers from one or more smoking-related diseases and/or conditions. The plaintiff sought an unspecified amount of compensatory and punitive damages, costs and interest. Final judgment was entered on June 11, 2014, and did not include a reduction for comparative fault. Post-trial motions are pending.

On May 19, 2014, in Starbuck v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, the court declared a mistrial because the jury was unable to reach a unanimous verdict. The plaintiff alleged that he suffers from addiction and one or more smoking-related diseases or conditions. The plaintiff is seeking an unspecified amount of compensatory damages. Retrial is scheduled for December 1, 2014.

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On June 23, 2014, in Bakst v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Juanita Thurston, to be 25% at fault and RJR Tobacco to be 75% at fault, and awarded $6 million in compensatory damages plus $4,209 for funeral expenses and $14 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from nicotine addiction and one or more smoking-related diseases and/or conditions, including lung cancer. The plaintiff sought in excess of $15,000 in compensatory damages, punitive damages, recoverable costs and interest. Post-trial motions are pending.

On June 25, 2014, in Davis v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that as a result of smoking the defendants’ products, she suffers from nicotine addiction and one or more smoking-related diseases and/or conditions. The plaintiff sought an unspecified amount of compensatory damages, costs and interest. Final judgment was entered on June 27, 2014. It is unknown if the plaintiff will file post-trial motions or an appeal at this time.

On July 17, 2014, in Robinson v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Escambia County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Michael Johnson, Sr., to be 29.5% at fault and RJR Tobacco to be 70.5% at fault, and awarded $16.9 million in compensatory damages and determined that the plaintiff is entitled to punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from lung cancer. The plaintiff sought an unspecified amount of damages, costs and interest. On July 18, 2014, the jury awarded $23.6 billion in punitive damages. Post-trial motions are pending.

Broin II Cases

RJR Tobacco, B&W and other cigarette manufacturer defendants settled Broin v. Philip Morris, Inc. in October 1997. This case had been brought in Florida state court on behalf of flight attendants alleged to have suffered from diseases or ailments caused by exposure to ETS in airplane cabins. The settlement agreement required the participating tobacco companies to pay a total of $300 million in three annual $100 million installments, allocated among the companies by market share, to fund research on the early detection and cure of diseases associated with tobacco smoke. It also required those companies to pay a total of $49 million for the plaintiffs’ counsel’s fees and expenses. RJR Tobacco’s portion of these payments was approximately $86 million; B&W’s portion of these payments was approximately $57 million. The settlement agreement bars class members from bringing aggregate claims or obtaining punitive damages and also bars individual claims to the extent that they are based on fraud, misrepresentation, conspiracy to commit fraud or misrepresentation, RICO, suppression, concealment or any other alleged intentional or willful conduct. The defendants agreed that, in any individual case brought by a class member, the defendant will bear the burden of proof with respect to whether ETS can cause certain specifically enumerated diseases, referred to as “general causation.” With respect to all other issues relating to liability, including whether an individual plaintiff’s disease was caused by his or her exposure to ETS in airplane cabins, referred to as “specific causation,” the individual plaintiff will have the burden of proof. On September 7, 1999, the Florida Supreme Court approved the settlement. The Broin II cases arose out of the settlement of this case.

On October 5, 2000, the Broin court entered an order applicable to all Broin II cases that the terms of the Broin settlement agreement do not require the individual Broin II plaintiffs to prove the elements of strict liability, breach of warranty or negligence. Under this order, there is a rebuttable presumption in the plaintiffs’ favor on those elements, and the plaintiffs bear the burden of proving that their alleged adverse health effects actually were caused by exposure to ETS in airplane cabins, that is, specific causation.

As of June 30, 2014, there were 2,572 Broin II lawsuits pending in Florida. There have been no Broin II trials since 2007.

Class-Action Suits

Overview. As of June 30, 2014, eight class-action cases were pending in the United States against RJR Tobacco or its affiliates or indemnitees. In 1996, the Fifth Circuit Court of Appeals in Castano v. American Tobacco Co.

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overturned the certification of a nation-wide class of persons whose claims related to alleged addiction to tobacco products. Since this ruling by the Fifth Circuit, most class-action suits have sought certification of state-wide, rather than nation-wide, classes. Class-action suits based on claims similar to those asserted in Castano or claims that class members are at a greater risk of injury or injured by the use of tobacco or exposure to ETS are pending against RJR Tobacco and its affiliates and indemnitees in state or federal courts in California, Illinois, Louisiana, Missouri, and West Virginia. All pending class-action cases are discussed below.

The pending class actions against RJR Tobacco or its affiliates or indemnitees include four cases alleging that the use of the term “lights” constitutes unfair and deceptive trade practices under state law or violates the federal RICO statute. Such suits are pending in state or federal courts in Illinois and Missouri and are discussed below under “— ’Lights’ Cases.”

Finally, certain third-party payers have filed health-care cost recovery actions in the form of class actions. These cases are discussed below under “— Health-Care Cost Recovery Cases.”

Few smoker class-action complaints have been certified or, if certified, have survived on appeal. Eighteen federal courts, including two courts of appeals, and most state courts that have considered the issue have rejected class certification in such cases. Apart from the Castano case discussed above, only two smoker class actions have been certified by a federal court — In re Simon (II) Litigation, and Schwab [McLaughlin] v. Philip Morris USA, Inc., both of which were filed in the U.S. District Court for the Eastern District of New York and ultimately decertified.

California Business and Professions Code Case. In Sateriale v. R. J. Reynolds Tobacco Co., a class action filed in November 2009 in the U.S. District Court for the Central District of California, the plaintiffs brought the case on behalf of all persons who tried unsuccessfully to redeem Camel Cash certificates from 1991 through March 31, 2007, or who held Camel Cash certificates as of March 31, 2007. The plaintiffs allege that in response to the defendants’ action to discontinue redemption of Camel Cash as of March 31, 2007, customers, like the plaintiffs, attempted to exchange their Camel Cash for merchandise and that the defendants, however, did not have any merchandise to exchange for Camel Cash. The plaintiffs allege unfair business practices, deceptive practices, breach of contract and promissory estoppel. The plaintiffs seek injunctive relief, actual damages, costs and expenses. In January 2010, the defendants filed a motion to dismiss, which prompted the plaintiffs to file an amended complaint in February 2010. The class definition changed to a class consisting of all persons who reside in the U.S. and tried unsuccessfully to redeem Camel Cash certificates, from October 1, 2006 (six months before the defendant ended the Camel Cash program) or who held Camel Cash certificates as of March 31, 2007. The plaintiffs also brought the class on behalf of a proposed California subclass, consisting of all California residents meeting the same criteria. In May 2010, RJR Tobacco’s motion to dismiss the amended complaint for lack of jurisdiction over subject matter and, alternatively, for failure to state a claim was granted with leave to amend. The plaintiffs filed a second amended complaint. In July 2010, RJR Tobacco’s motion to dismiss the second amended complaint was granted with leave to amend. The plaintiffs filed a third amended complaint, and RJR Tobacco filed a motion to dismiss in September 2010. In December 2010, the court granted RJR Tobacco’s motion to dismiss with prejudice. Final judgment was entered by the court, and the plaintiffs filed a notice of appeal, in January 2011. In July 2012, the appellate court affirmed the dismissal of the plaintiffs’ claims under the Unfair Competition Law and the Consumer Legal Remedies Acts and reversed the dismissal of the plaintiffs’ claims for promissory estoppel and breach of contract. RJR Tobacco’s motion for rehearing or rehearing en banc was denied in October 2012. RJR Tobacco filed its answer to the plaintiffs’ third amended complaint in December 2012. Trial is scheduled for November 4, 2014.

“Lights” Cases. As noted above, “lights” class-action cases are pending against RJR Tobacco or B&W in Illinois (2) and Missouri (2). The classes in these cases generally seek to recover $50,000 to $75,000 per class member for compensatory and punitive damages, injunctive and other forms of relief, and attorneys’ fees and costs from RJR Tobacco and/or B&W. In general, the plaintiffs allege that RJR Tobacco or B&W made false and misleading claims that “lights” cigarettes were lower in tar and nicotine and/or were less hazardous or less mutagenic than other cigarettes. The cases typically are filed pursuant to state consumer protection and related statutes.

Many of these “lights” cases were stayed pending review of the Good v. Altria Group, Inc. case by the U.S. Supreme Court. In that “lights” class-action case against Altria Group, Inc. and Philip Morris USA, the U.S. Supreme Court decided that these claims are not preempted by the Federal Cigarette Labeling and Advertising Act or by the Federal Trade Commission’s, referred to as FTC, historic regulation of the industry. Since this decision in December 2008, a number of the stayed cases have become active again.

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The seminal “lights” class-action case involves RJR Tobacco’s competitor, Philip Morris, Inc. Trial began in Price v. Philip Morris, Inc. in January 2003. In March 2003, the trial judge entered judgment against Philip Morris in the amount of $7.1 billion in compensatory damages and $3 billion in punitive damages. Based on Illinois law, the bond required to stay execution of the judgment was set initially at $12 billion. Philip Morris pursued various avenues of relief from the $12 billion bond requirement. On December 15, 2005, the Illinois Supreme Court reversed the lower court’s decision and sent the case back to the trial court with instructions to dismiss the case. On December 5, 2006, the trial court granted the defendant’s motion to dismiss and for entry of final judgment. The case was dismissed with prejudice the same day. In December 2008, the plaintiffs filed a petition for relief from judgment, stating that the U.S. Supreme Court’s decision in Good v. Altria Group, Inc. rejected the basis for the reversal. The trial court granted the defendant’s motion to dismiss the plaintiffs’ petition for relief from judgment in February 2009. In March 2009, the plaintiffs filed a notice of appeal to the Illinois Appellate Court, Fifth Judicial District, requesting a reversal of the February 2009 order and remand to the circuit court. On February 24, 2011, the appellate court entered an order, concluding that the two-year time limit for filing a petition for relief from a final judgment began to run when the trial court dismissed the plaintiffs’ lawsuit on December 18, 2006. The appellate court therefore found that the petition was timely, reversed the order of the trial court, and remanded the case for further proceedings. Philip Morris filed a petition for leave to appeal to the Illinois Supreme Court. On September 28, 2011, the Illinois Supreme Court denied Philip Morris’s petition for leave to appeal and returned the case to the trial court for further proceedings. In December 2012, the trial court denied the plaintiffs’ petition for relief from the judgment. The plaintiffs filed a notice of appeal to the Illinois Appellate Court, Fifth Judicial District. In April 2014, the appellate court reinstated the 2003 verdict. In May 2014, Philip Morris filed a petition for leave to appeal to the Illinois Supreme Court and a motion for supervisory order. Philip Morris has requested the Illinois Supreme Court to direct the Fifth Judicial District to vacate its April 2014 judgment and to order the Fifth Judicial District to affirm the trial court’s denial of the plaintiff’s petition for relief from the judgment, or in the alternative, grant its petition for leave to appeal. A decision is pending.

In Turner v. R. J. Reynolds Tobacco Co., a case filed in February 2000 in Circuit Court, Madison County, Illinois, a judge certified a class in November 2001. In June 2003, RJR Tobacco filed a motion to stay the case pending Philip Morris’s appeal of the Price v. Philip Morris, Inc. case mentioned above, which the judge denied in July 2003. In October 2003, the Illinois Fifth District Court of Appeals denied RJR Tobacco’s emergency stay/supremacy order request. In November 2003, the Illinois Supreme Court granted RJR Tobacco’s motion for a stay pending the court’s final appeal decision in Price. On October 11, 2007, the Illinois Fifth District Court of Appeals dismissed RJR Tobacco’s appeal of the court’s denial of its emergency stay/supremacy order request and remanded the case to the Circuit Court. A status conference is scheduled for August 20, 2014.

In Howard v. Brown & Williamson Tobacco Corp., another case filed in February 2000 in Circuit Court, Madison County, Illinois, a judge certified a class in December 2001. In June 2003, the trial judge issued an order staying all proceedings pending resolution of the Price v. Philip Morris, Inc. case mentioned above. The plaintiffs appealed this stay order to the Illinois Fifth District Court of Appeals, which affirmed the Circuit Court’s stay order in August 2005. There is currently no activity in the case.

A “lights” class-action case is pending against each of RJR Tobacco and B&W in Missouri. In Collora v. R. J. Reynolds Tobacco Co., a case filed in May 2000 in Circuit Court, St. Louis County, Missouri, a judge in St. Louis certified a class in December 2003. In April 2007, the court granted the plaintiffs’ motion to reassign Collora and the following cases to a single general division: Craft v. Philip Morris Companies, Inc. and Black v. Brown & Williamson Tobacco Corp., discussed below. In April 2008, the court stayed the case pending U.S. Supreme Court review in Good v. Altria Group, Inc. A nominal trial date of January 10, 2011 was scheduled, but it did not proceed at that time. A status conference is scheduled for February 2, 2015.

Finally, in Black v. Brown & Williamson Tobacco Corp., a case filed in November 2000 in Circuit Court, City of St. Louis, Missouri, B&W removed the case to the U.S. District Court for the Eastern District of Missouri. The plaintiffs filed a motion to remand, which was granted in March 2006. In April 2008, the court stayed the case pending U.S. Supreme Court review in Good v. Altria Group, Inc. A nominal trial date of January 10, 2011, was scheduled, but it did not proceed at that time. A status conference is scheduled for February 2, 2015.

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In the event RJR Tobacco and its affiliates or indemnitees lose one or more of the pending “lights” class-action suits, RJR Tobacco, depending upon the amount of any damages ordered, could face difficulties in its ability to pay the judgment or obtain any bond required to stay execution of the judgment which could have a material adverse effect on RJR Tobacco’s, and consequently RAI’s, results of operations, cash flows or financial position.

Other Class Actions. In Young v. American Tobacco Co., Inc., a case filed in November 1997 in Circuit Court, Orleans Parish, Louisiana, the plaintiffs brought an ETS class action against U.S. cigarette manufacturers, including RJR Tobacco and B&W, and parent companies of U.S. cigarette manufacturers, including RJR, on behalf of all residents of Louisiana who, though not themselves cigarette smokers, have been exposed to secondhand smoke from cigarettes which were manufactured by the defendants, and who allegedly suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. In March 2013, the court entered an order staying the case, including all discovery, pending the implementation of the smoking cessation program ordered by the court in Scott v. The American Tobacco Co.

In Parsons v. A C & S, Inc., a case filed in February 1998 in Circuit Court, Ohio County, West Virginia, the plaintiff sued asbestos manufacturers, U.S. cigarette manufacturers, including RJR Tobacco and B&W, and parent companies of U.S. cigarette manufacturers, including RJR, seeking to recover $1 million in compensatory and punitive damages individually and an unspecified amount for the class in both compensatory and punitive damages. The class was brought on behalf of persons who allegedly have personal injury claims arising from their exposure to respirable asbestos fibers and cigarette smoke. The plaintiffs allege that Mrs. Parsons’ use of tobacco products and exposure to asbestos products caused her to develop lung cancer and to become addicted to tobacco. In December 2000, three defendants, Nitral Liquidators, Inc., Desseaux Corporation of North America and Armstrong World Industries, filed bankruptcy petitions in the U.S. Bankruptcy Court for the District of Delaware, In re Armstrong World Industries, Inc. Pursuant to section 362(a) of the Bankruptcy Code, Parsons is automatically stayed with respect to all defendants.

Finally, in Jones v. American Tobacco Co., Inc., a case filed in December 1998 in Circuit Court, Jackson County, Missouri, the defendants removed the case to the U.S. District Court for the Western District of Missouri in February 1999. The action was brought against the major U.S. cigarette manufacturers, including RJR Tobacco and B&W, and parent companies of U.S. cigarette manufacturers, including RJR, by tobacco product users and purchasers on behalf of all similarly situated Missouri consumers. The plaintiffs allege that their use of the defendants’ tobacco products has caused them to become addicted to nicotine. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. The case was remanded to the Circuit Court in February 1999. There is currently no activity in this case.

Health-Care Cost Recovery Cases

Health-care cost recovery cases have been brought by a variety of plaintiffs. Other than certain governmental actions, these cases largely have been unsuccessful on remoteness grounds, which means that one who pays an injured person’s medical expenses is legally too remote to maintain an action against the person allegedly responsible for the injury.

As of June 30, 2014, two health-care cost recovery cases were pending in the United States against RJR Tobacco, B&W, as its indemnitee, or both, as discussed below after the discussion of the State Settlement Agreements. A limited number of claimants have filed suit against RJR Tobacco, its current or former affiliates, B&W and other tobacco industry defendants to recover funds for health care, medical and other assistance paid by foreign provincial governments in treating their citizens. For additional information on these cases, see “— International Cases” below.

State Settlement Agreements. In June 1994, the Mississippi Attorney General brought an action, Moore v. American Tobacco Co., against various industry members, including RJR Tobacco and B&W. This case was brought on behalf of the state to recover state funds paid for health care and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. Most other states, through their attorneys general or other state agencies, sued RJR Tobacco, B&W and other U.S. cigarette manufacturers based on similar theories. The cigarette manufacturer defendants, including RJR Tobacco and B&W, settled the first four of these cases scheduled for trial — Mississippi, Florida, Texas and Minnesota — by separate agreements with each such state.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On November 23, 1998, the major U.S. cigarette manufacturers, including RJR Tobacco and B&W, entered into the Master Settlement Agreement with attorneys general representing the remaining 46 states, the District of Columbia, Puerto Rico, Guam, the Virgin Islands, American Samoa and the Northern Marianas. Effective on November 12, 1999, the MSA settled all the health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions and released various additional present and future claims.

In the settling jurisdictions, the MSA released RJR Tobacco, B&W, and their affiliates and indemnitees, including RAI, from:

• all claims of the settling states and their respective political subdivisions and other recipients of state health-care funds, relating to past conduct arising out of the use, sale, distribution, manufacture, development, advertising, marketing or health effects of, the exposure to, or research, statements or warnings about, tobacco products; and

• all monetary claims of the settling states and their respective political subdivisions and other recipients of state health-care funds, relating to future conduct arising out of the use of or exposure to, tobacco products that have been manufactured in the ordinary course of business.

Set forth below is the unadjusted tobacco industry settlement payment schedule for 2012 and beyond:

	2012		2013		2014		2015		2016		2017		Thereafter
First Four States’ Settlements:(1)
Mississippi Annual Payment	$	136	$	136	$	136	$	136	$	136	$	136	$	136
Florida Annual Payment		440		440		440		440		440		440		440
Texas Annual Payment		580		580		580		580		580		580		580
Minnesota Annual Payment		204		204		204		204		204		204		204
Remaining Jurisdictions’ Settlement:
Annual Payments(1)		8,004		8,004		8,004		8,004		8,004		8,004		8,004
Total	$	9,364	$	9,364	$	9,364	$	9,364	$	9,364	$	9,364	$	9,364

⁽¹⁾ Subject to adjustments for changes in sales volume, inflation and other factors. All payments are to be allocated among the companies on the basis of relative market share. For further information, see “— State Settlement Agreements—Enforcement and Validity; Adjustments” below.

RAI’s operating subsidiaries expenses and payments under the State Settlement Agreements for 2012 and 2013, and the projected expenses and payments for 2014 and beyond are set forth below ⁽²⁾.

	2012		2013		2014		2015		2016		2017		Thereafter
Settlement expenses	$	2,370	$	1,819		—		—		—		—		—
Settlement cash payments	$	2,414	$	2,582		—		—		—		—		—
Projected settlement expenses					$	>1,800	$	>1,900	$	>1,800	$	>2,000	$	>2,000
Projected settlement cash payments					$	>1,900	$	>1,900	$	>1,900	$	>1,800	$	>2,000

⁽²⁾ Amounts beginning in 2013 reflect the impact of the Term Sheet described below under “—State Settlement Agreements – Enforcement and Validity; Adjustments- Partial Settlement of Certain NPM Adjustment Claims” .

The State Settlement Agreements also contain provisions restricting the marketing of tobacco products. Among these provisions are restrictions or prohibitions on the use of cartoon characters, brand-name sponsorships, apparel and other merchandise, outdoor and transit advertising, payments for product placement, free sampling and lobbying. Furthermore, the State Settlement Agreements required the dissolution of three industry-sponsored research and trade organizations.

The State Settlement Agreements have materially adversely affected RJR Tobacco’s shipment volumes. RAI believes that these settlement obligations may materially adversely affect the results of operations, cash flows or financial position of RAI and RJR Tobacco in future periods. The degree of the adverse impact will depend, among

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other things, on the rate of decline in U.S. cigarette sales in the premium and value categories, RJR Tobacco’s share of the domestic premium and value cigarette categories, and the effect of any resulting cost advantage of manufacturers not subject to the State Settlement Agreements.

U.S. Department of Justice Case. On September 22, 1999, in United States v. Philip Morris USA Inc., the U.S. Department of Justice brought an action against RJR Tobacco, B&W and other tobacco companies in the U.S. District Court for the District of Columbia. The government initially sought to recover federal funds expended by the federal government in providing health care to smokers who developed diseases and injuries alleged to be smoking-related, based on several federal statutes. In addition, the government sought, pursuant to the civil provisions of RICO, disgorgement of profits the government contends were earned as a consequence of a RICO racketeering “enterprise.” In September 2000, the court dismissed the government’s claims asserted under the Medical Care Recovery Act as well as those under the Medicare Secondary Payer provisions of the Social Security Act, but did not dismiss the RICO claims. In February 2005, the U.S. Court of Appeals for the District of Columbia ruled that disgorgement is not an available remedy in this case. The government’s petition for writ of certiorari with the U.S. Supreme Court was denied in October 2005. The non-jury, bench trial began in September 2004, and closing arguments concluded in June 2005.

On August 17, 2006, the court found certain defendants, including RJR Tobacco and B&W, liable for the RICO claims, but did not impose any direct financial penalties. The court instead enjoined the defendants from committing future racketeering acts, participating in certain trade organizations, making misrepresentations concerning smoking and health and youth marketing, and using certain brand descriptors such as “low tar,” “light,” “ultra light,” “mild” and “natural.” The court also ordered defendants to issue “corrective communications” on five subjects, including smoking and health and addiction, and to comply with further undertakings, including maintaining web sites of historical corporate documents and disseminating certain marketing information on a confidential basis to the government. In addition, the court placed restrictions on the ability of the defendants to dispose of certain assets for use in the United States, unless the transferee agrees to abide by the terms of the court’s order, and ordered the defendants to reimburse the U.S. Department of Justice its taxable costs incurred in connection with the case.

Certain defendants, including RJR Tobacco, filed notices of appeal to the U.S. Court of Appeals for the District of Columbia in September 2006. The government filed its notice of appeal in October 2006. In addition, the defendants, including RJR Tobacco, filed joint motions asking the district court to clarify and to stay its order pending the defendants’ appeal. On September 28, 2006, the district court denied the defendants’ motion to stay. On September 29, 2006, the defendants, including RJR Tobacco, filed a motion asking the court of appeals to stay the district court’s order pending the defendants’ appeal. The court granted the motion in October 2006.

In November 2006, the court of appeals stayed the appeals pending the trial court’s ruling on the defendants’ motion for clarification. The defendants’ motion was granted in part and denied in part. The defendants’ motion as to the meaning and applicability of the general injunctive relief of the August 2006 order was denied. The request for clarification as to the scope of the provisions in the order prohibiting the use of descriptors and requiring corrective statements at retail point of sale was granted. The court also ruled that the provisions prohibiting the use of express or implied health messages or descriptors do apply to the actions of the defendants taken outside of the United States.

In May 2009, the U.S. Court of Appeals largely affirmed the finding of liability against the tobacco defendants and remanded to the trial court for dismissal of the trade organizations. The court also largely affirmed the remedial order, including the denial of additional remedies, but vacated the order and remanded for further proceedings as to the following four discrete issues:

• the issue of the extent of Brown & Williamson Holdings, Inc.’s control over tobacco operations was remanded for further fact finding and clarification;

• the remedial order was vacated to the extent that it binds all defendants’ subsidiaries and was remanded to the lower court for determination as to whether inclusion of the subsidiaries and which of the subsidiaries satisfy Rule 65(d) of the Federal Rules of Civil Procedure;

• the court held that the provision found in paragraph four of the injunction, concerning the use of any express or implied health message or health descriptor for any cigarette brand, should not be read to govern overseas sales. The issue was remanded to the lower court with instructions to reformulate it so as to exempt foreign activities that have no substantial, direct and foreseeable domestic effects; and

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• the remedial order was vacated regarding “point of sale” displays and remanded for the district court to evaluate and make due provisions for the rights of innocent persons, either by abandoning this part of the remedial order or re-crafting a new version reflecting the rights of third parties.

RJR Tobacco and the other defendants, as well as the Department of Justice, filed petitions for writ of certiorari to the U.S. Supreme Court in February 2010. In June 2010, the U.S. Supreme Court denied the parties’ petitions for writ of certiorari.

Post-remand proceedings are underway to determine the extent to which the original order will be implemented. On December 22, 2010, the trial court dismissed Brown & Williamson Holdings, Inc. from the litigation. On March 3, 2011, the defendants filed a motion for vacatur, in which they moved to vacate the trial court’s injunctions and factual findings and dismiss the case in its entirety. The court denied the motion on June 1, 2011. The defendants filed a notice of appeal. In addition, the parties to the lawsuit entered into an agreement concerning certain technical obligations regarding their public websites. Pursuant to this agreement, RJR Tobacco agreed to deposit $3.125 million over three years into the registry of the district court. In July 2012, the Court of Appeals for the D.C. Circuit affirmed the trial court’s denial of the defendants’ motion to vacate the injunctions. In November 2012, the trial court entered an order wherein the court determined the language to be included in the text of the corrective statements and directed the parties to engage in discussions with the Special Master to implement them. The defendants filed a notice of appeal of that order on January 25, 2013. In February 2013, the appellate court granted the defendants’ motion to hold the case in abeyance pending the District Court’s resolution of corrective-statement implementation issues. The mediation process on implementation issues has concluded, and the trial court entered an implementation order on June 2, 2014. The order stays implementation pending exhaustion of appeals on the corrective-statements remedy. On June 25, 2014, the defendants filed a notice of appeal from the implementation order. On July 2, 2014, the defendants filed an unopposed motion asking the appellate court to consolidate the appeal from the implementation order with the appeal held in abeyance and to set a briefing schedule. In light of the implementation mediation and subsequent order, $10 million has been accrued for the estimated costs of the corrective communications and is included in the condensed consolidated balance sheet (unaudited) as of June 30, 2014.

Native American Tribe Case. As of June 30, 2014, one Native American tribe case was pending before a tribal court against RJR Tobacco and B&W, Crow Creek Sioux Tribe v. American Tobacco Co., a case filed in September 1997 in Tribal Court, Crow Creek Sioux, South Dakota. The plaintiffs seek to recover actual and punitive damages, restitution, funding of a clinical cessation program, funding of a corrective public education program, and disgorgement of unjust profits from sales to minors. The plaintiffs claim that the defendants are liable under the following theories: unlawful marketing and targeting of minors, contributing to the delinquency of minors, unfair and deceptive acts or practices, unreasonable restraint of trade and unfair method of competition, negligence, negligence per se, conspiracy and restitution of unjust enrichment. The case is dormant.

International Cases. Nine health-care reimbursement cases have been filed against RJR Tobacco, its current or former affiliates, or B&W outside the United States, by nine Canadian provinces. The remaining Canadian province, the Province of Nova Scotia, has indicated an intention to file a similar case. In these actions, foreign governments are seeking to recover for health care, medical and other assistance paid and to be paid in treating their citizens for tobacco-related disease. No such actions are pending in the United States. Pursuant to the terms of the 1999 sale of RJR Tobacco’s international tobacco business, RJR Tobacco has tendered the defense of these actions to Japan Tobacco Inc., referred to as JTI. Subject to a reservation of rights, JTI has assumed the defense of RJR Tobacco and its current or former affiliates.

• British Columbia—In 1997, British Columbia enacted a statute, subsequently amended, which created a civil cause of action for the government to recover the costs of health-care benefits incurred for insured populations of British Columbia residents resulting from tobacco-related disease. An action brought on behalf of the Province of British Columbia pursuant to the statute against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and certain of its affiliates, was dismissed in February 2000 when the British Columbia Supreme Court ruled that the legislation was unconstitutional and set aside service ex juris against the foreign defendants for that reason. British Columbia then enacted a revised statute, pursuant to which an action was filed in January 2001 against many of the same defendants,

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

including RJR Tobacco and one of its affiliates, in Supreme Court, British Columbia. In that action, the British Columbia government seeks to recover the present value of its total expenditures for health-care benefits provided for insured persons resulting from tobacco-related disease or the risk of tobacco-related disease caused by alleged breaches of duty by the manufacturers, the present value of its estimated total expenditures for health-care benefits that reasonably could be expected to be provided for those insured persons resulting from tobacco-related disease or the risk of tobacco-related disease in the future, court ordered interest, and costs, or in the alternative, special or increased costs. The government alleges that the defendants are liable under the British Columbia statute by reason of their “tobacco related wrongs,” which are alleged to include: selling defective products, failure to warn, sale of cigarettes to children and adolescents, strict liability, deceit and misrepresentation, violation of trade practice and competition acts, concerted action, and joint liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. RJR Tobacco and its affiliate filed statements of defense in January 2007. Pretrial discovery is ongoing.

• New Brunswick — In March 2008, a case was filed on behalf of Her Majesty the Queen in Right of the Province of New Brunswick, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco’s predecessor and one of RJR Tobacco’s affiliates, in the Trial Division in the Court of Queen’s Bench of New Brunswick. The claim is brought pursuant to New Brunswick legislation enacted in 2008, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the New Brunswick government seeks to recover essentially the same types of damages that are being sought in the British Columbia action described above based on analogous theories of liability. RJR Tobacco and its affiliate filed statements of defense in March 2010. Pretrial discovery is ongoing.

• Ontario — In September 2009, a case was filed on behalf of the Province of Ontario, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Ontario Superior Court of Justice. The claim is brought pursuant to Ontario legislation enacted in 2009, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Ontario government seeks to recover essentially the same types of damages that are being sought in the British Columbia and New Brunswick actions described above based on analogous theories of liability, although the government also asserted claims based on the illegal importation of cigarettes, which claims were deleted in an amended statement of claim filed in August 2010. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Newfoundland and Labrador — In February 2011, a case was filed on behalf of the Province of Newfoundland and Labrador, Canada against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the General Trial Division of the Supreme Court of Newfoundland and Labrador. The claim is brought pursuant to legislation passed in Newfoundland in 2001 and proclaimed in February 2011, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Newfoundland government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Quebec — In June 2012, a case was filed on behalf of the Province of Quebec, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Superior Court of the Province of Quebec, District of Montreal. The claim is brought pursuant to legislation enacted in Quebec in 2009, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Quebec government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. RJR Tobacco and its affiliate have brought a motion challenging the jurisdiction of the Quebec court, which was dismissed. Pretrial discovery is ongoing. Separately, in August 2009, certain Canadian manufacturers filed a constitutional challenge to the Quebec statute, which was dismissed on March 5, 2014. An appeal of that decision has been filed.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

• Manitoba — In May 2012, a case was filed on behalf of the Province of Manitoba, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Court of Queen’s Bench, Winnipeg Judicial Centre, Manitoba. The claim is brought pursuant to legislation assented to in 2006 and proclaimed in 2012, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Manitoba government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Saskatchewan — In June 2012, a case was filed on behalf of the Province of Saskatchewan, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Court of Queen’s Bench, Judicial Centre of Saskatoon, Saskatchewan. The claim is brought pursuant to legislation assented to in 2007 and proclaimed in 2012, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Saskatchewan government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Alberta — In June 2012, a case was filed on behalf of the Province of Alberta, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Court of Queen’s Bench of Alberta Judicial Centre, Calgary, Alberta. The claim is brought pursuant to legislation assented to in 2009 and proclaimed in 2012, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Alberta government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Prince Edward Island — In September 2012, a case was filed on behalf of the Province of Prince Edward Island, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Supreme Court of Prince Edward Island (General Section), Charlottetown, Prince Edward Island. The claim is brought pursuant to legislation assented to in 2009 and proclaimed in 2012, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Prince Edward Island government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

The following seven putative Canadian class actions were filed against various Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in courts in the Provinces of Alberta, British Columbia, Manitoba, Nova Scotia, Ontario and Saskatchewan, although the plaintiffs’ counsel have been actively pursuing only the action pending in British Columbia at this time:

• In Adams v. Canadian Tobacco Manufacturers’ Council, a case filed in July 2009 in the Court of Queen’s Bench for Saskatchewan against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging her own addiction and chronic obstructive pulmonary disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals who were alive on July 10, 2009, and who have suffered, or who currently suffer, from chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after having smoked a minimum of 25,000 cigarettes designed, manufactured, imported, marketed or distributed by the defendants, as well as disgorgement of revenues earned by the defendants. RJR Tobacco and its affiliate have brought a motion challenging the jurisdiction of the Saskatchewan court.

• In Dorion v. Canadian Tobacco Manufacturers’ Council, a case filed in June 2009, in the Court of Queen’s Bench of Alberta against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging her own addiction and chronic bronchitis

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, dependents and family members, who purchased or smoked cigarettes designed, manufactured, marketed or distributed by the defendants, as well as restitution of profits and reimbursement of government expenditure for health-care benefits allegedly caused by the use of tobacco products.

• In Kunka v. Canadian Tobacco Manufacturers’ Council, a case filed in 2009 in the Court of Queen’s Bench of Manitoba against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging her own addiction and chronic obstructive pulmonary disease, severe asthma and lung disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, and their dependents and family members, who purchased or smoked cigarettes manufactured by the defendants, as well as restitution of profits and reimbursement of government expenditure for health-care benefits allegedly caused by the use of tobacco products.

• In Semple v. Canadian Tobacco Manufacturers’ Council, a case filed in June 2009 in the Supreme Court of Nova Scotia against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging his own addiction and chronic obstructive pulmonary disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, dependents and family members, who purchased or smoked cigarettes designed, manufactured, marketed or distributed by the defendants for the period from January 1, 1954, to the expiry of the opt-out period as set by the court, as well as restitution of profits and reimbursement of government expenditure for health-care costs allegedly caused by the use of tobacco products.

• In Bourassa v. Imperial Tobacco Canada Limited, a case filed in June 2010 in the Supreme Court of British Columbia against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, the heir to a deceased smoker, alleging that the deceased was addicted to and suffered emphysema resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, who were alive on June 12, 2007, and who have suffered, or who currently suffer from chronic respiratory diseases, after having smoked a minimum of 25,000 cigarettes designed, manufactured, imported, marketed, or distributed by the defendants, as well as disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed. RJR Tobacco and its affiliate have filed a challenge to the jurisdiction of the British Columbia court. The plaintiff filed a motion for certification in April 2012, and filed affidavits in support in August 2013.

• In McDermid v. Imperial Tobacco Canada Limited, a case filed in June 2010 in the Supreme Court of British Columbia against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging his own addiction and heart disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, who were alive on June 12, 2007, and who have suffered, or who currently suffer from heart disease, after having smoked a minimum of 25,000 cigarettes designed, manufactured, imported, marketed, or distributed by the defendants, as well as disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed. RJR Tobacco and its affiliate have filed a challenge to the jurisdiction of the British Columbia court.

• In Jacklin v. Canadian Tobacco Manufacturers’ Council, a case filed in June 2012 in the Ontario Superior Court of Justice against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging her own addiction and chronic obstructive pulmonary disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, who were alive on June 12, 2007, and who have suffered, or who currently suffer from chronic obstructive pulmonary disease, heart disease, or cancer, after having smoked a minimum of 25,000 cigarettes designed, manufactured, imported, marketed, or distributed by the defendants, as well as restitution of profits, and reimbursement of government expenditure for health-care benefits allegedly caused by the use of tobacco products.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

In each of these seven cases, the plaintiffs allege fraud, fraudulent concealment, breach of warranty, breach of warranty of merchantability and of fitness for a particular purpose, failure to warn, design defects, negligence, breach of a “special duty” to children and adolescents, conspiracy, concert of action, unjust enrichment, market share liability, joint liability, and violations of various trade practices and competition statutes. Pursuant to the terms of the 1999 sale of RJR Tobacco’s international tobacco business, RJR Tobacco has tendered the defense of these seven actions to JTI. Subject to a reservation of rights, JTI has assumed the defense of RJR Tobacco and its current or former affiliates in these actions.

State Settlement Agreements—Enforcement and Validity; Adjustments

As of June 30, 2014, there were 30 cases concerning the enforcement, validity or interpretation of the State Settlement Agreements in which RJR Tobacco or B&W is a party. This number includes those cases, discussed below, relating to disputed payments under the State Settlement Agreements.

In April 2005, the Mississippi Attorney General notified B&W of its intent to seek approximately $3.9 million in additional payments under the Mississippi Settlement Agreement. The Mississippi Attorney General asserts that B&W failed to report in its net operating profit or its shipments, cigarettes manufactured by B&W under contract for Star Tobacco or its parent, Star Scientific, Inc. B&W advised the State that it did not owe the state any money. In August 2005, the Mississippi Attorney General filed in the Chancery Court of Jackson County, Mississippi, a Notice of Violation, Motion to Enforce Settlement Agreement, and Request for an Accounting by Defendant Brown & Williamson Holdings, Inc., formerly known as Brown & Williamson Tobacco Corporation. In this filing, Mississippi estimated that its damages exceeded $5.0 million. On August 24, 2011, the court entered an order finding in favor of the State on the Star contract manufacturing issue, that the total amount of the underpayment from B&W was approximately $3.8 million and that interest on the underpayment was approximately $4.3 million. The court also appointed a Special Master to undertake an accounting of the benefit received by B&W for failure to include its profits from Star contract manufacturing in its net operating profits reported to the State. B&W filed a motion to certify the Star contract issue for interlocutory appeal, pursuant to Rule 54 (b) of the Mississippi Rules of Civil Procedure. On January 9, 2012, that motion was denied. A report from the Special Master on the benefit received by B&W was issued on April 30, 2014. A hearing on the Special Master’s Report and Recommendation was held before the court on July 2, 2014. A ruling from the court is pending.

In February 2010, the Mississippi Attorney General filed a motion alleging that RJR Tobacco had improperly failed to report shipments of certain categories of cigarette volumes, and for certain years had improperly reported its net operating profit. As a result, the State alleges that settlement payments to it were improperly reduced. RJR Tobacco disputes these allegations and is vigorously defending against them. Hearings on these issues were held on January 24-25, 2012, and May 9, 2012. On May 15, 2012, the court entered an order finding in favor of RJR Tobacco on the claim related to RJR Tobacco’s reported net operating profits in the year used as a baseline for future calculations of the State’s net operating profits payment. The State had sought $3.8 million in damages for this issue, with an additional $2.7 million in interest. On June 19, 2012, the court entered an order finding in favor of the State on the remaining issues, holding that the total amount of the underpayment was approximately $3.3 million and that interest on the underpayment was also approximately $3.3 million, though the court also held that this amount should be offset by additional payments previously made by Lorillard Tobacco Company on some of these issues. The court further ordered RJR Tobacco to perform an accounting of its profits and shipments from 1999-2011. On July 10, 2012, RJR Tobacco filed a petition with the Mississippi Supreme Court requesting leave to immediately appeal the court’s ordered accounting and its entry of judgment for the State without first conducting an evidentiary hearing. On August 15, 2012, the request was denied. An independent accountant acceptable to both the State and RJR Tobacco was identified and retained. On August 8, 2013, the final report of the independent accountant was filed with the court. The report generally found that RJR Tobacco’s accounting and reporting of information in connection with settlement payment calculations was correct. In some respects, the report expressly disagreed with findings made earlier by the trial court. On December 13, 2013, the State of Mississippi filed its report as to additional damages due it from RJR Tobacco, challenging in various respects the findings set forth in the final report of the independent accountant and seeking various changes to the damages calculations. Also on December 13, 2013, RJR Tobacco filed a motion to finalize remaining damages of third round issues, and/or reconsider, the June 19, 2012, order requesting that the court implement the findings of the independent accountant in a final order on the damage issues and/or to revisit its earlier rulings “in light of the findings and determinations in the independent accountant’s report.” A hearing on these motions was held on July 2, 2014. A ruling from the court is pending.

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Finally, in connection with the actions brought against RJR Tobacco and B&W, the court awarded the State attorneys’ fees and expenses in an amount to be determined. On May 1, 2013, a hearing on attorneys’ fees and expenses was held before the Special Master appointed by the court. On November 19, 2013, the Special Master issued a report and recommendations on application for award of costs and attorneys’ fees. The Special Master ruled that attorneys’ fees are to be paid with respect to the settlement payment claims against B&W and RJR Tobacco at 25% of “total amounts” awarded to the State of Mississippi by the court in its August 24, 2011, ruling. This recommendation would result in an attorneys’ fee award of approximately $3.7 million, plus 25% of accumulated interest. On December 13, 2013, the State of Mississippi filed a statement seeking various clarifications of the Special Master’s ruling. Also on December 13, 2013, B&W and RJR Tobacco filed their objections to the ruling. A hearing on these issues was held on July 2, 2014. A ruling from the court is pending.

In May 2006, the State of Florida filed a motion, in the Circuit Court of the Fifteenth Judicial Circuit, in and for Palm Beach County, Florida, to enforce the Florida Settlement Agreement, for an Accounting by Brown & Williamson Holdings, Inc., and for an Order of Contempt, raising substantially the same issues as raised by the Mississippi Attorney General and seeking approximately $12.4 million in additional payments under the Florida Settlement Agreement, as well as $17.0 million in interest payments. This matter is currently in the discovery phase.

NPM Adjustment Claims. The MSA includes an adjustment that potentially reduces the annual payment obligations of RJR Tobacco and the other PMs. Certain requirements, collectively referred to as the Adjustment Requirements, must be satisfied before the NPM Adjustment for a given year is available:

• an Independent Auditor must determine that the PMs have experienced a market share loss beyond a triggering threshold to those manufacturers that do not participate in the MSA, such non-participating manufacturers, referred to as NPMs; and

• in a binding arbitration proceeding, a firm of independent economic consultants must find that the disadvantages of the MSA were a significant factor contributing to the loss. This finding is known as a significant factor determination.

When the Adjustment Requirements are satisfied, the MSA provides that the NPM Adjustment applies to reduce the annual payment obligation of the PMs. However, an individual settling state may avoid its share of the NPM Adjustment if it had in place and diligently enforced during the entirety of the relevant year a “Qualifying Statute” that imposes escrow obligations on NPMs that are comparable to what the NPMs would have owed if they had joined the MSA. In such event, the state’s share of the NPM Adjustment is reallocated to other settling states, if any, that did not have in place and diligently enforce a Qualifying Statute.

NPM Adjustment Claim for 2003. For 2003, the Adjustment Requirements were satisfied. As a result, in April 2006, RJR Tobacco placed approximately $647 million of its MSA payment into a disputed payments account, in accordance with a procedure established by the MSA. That amount represented RJR Tobacco’s share of the 2003 NPM Adjustment as calculated by the Independent Auditor. In March 2007, the Independent Auditor issued revised calculations that reduced RJR Tobacco’s share of the NPM Adjustment for 2003 to approximately $615 million. As a result, in April 2007, RJR Tobacco instructed the Independent Auditor to release to the settling states approximately $32 million from the disputed payments account.

Following RJR Tobacco’s payment of a portion of its 2006 MSA payment into the disputed payments account, 37 of the settling states filed legal proceedings in their respective MSA courts seeking declaratory orders that they diligently enforced their Qualifying Statutes during 2003 and/or orders compelling RJR Tobacco and the other PMs that placed money in the disputed payments account to pay the disputed amounts to the settling states. In response, RJR Tobacco and other PMs, pursuant to the MSA’s arbitration provisions, moved to compel arbitration of the parties’ dispute concerning the 2003 NPM Adjustment, including the states’ diligent enforcement claims, before an arbitration panel consisting of three retired federal court judges. The settling states opposed these motions, arguing, among other things, that the issue of diligent enforcement must be resolved by MSA courts in each of the 52 settling states and territories.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Forty-seven of the 48 courts that addressed the question whether the dispute concerning the 2003 NPM Adjustment is arbitrable ruled that arbitration is required under the MSA. The Montana Supreme Court ruled that the State of Montana did not agree to arbitrate the question of whether it diligently enforced a Qualifying Statute. Subsequently, Montana and the PMs reached an agreement whereby the PMs agreed not to contest Montana’s claim that it diligently enforced the Qualifying Statute during 2003.

In January 2009, RJR Tobacco and certain other PMs entered into an Agreement Regarding Arbitration, referred to as the Arbitration Agreement, with 45 of the MSA settling states (representing approximately 90% of the allocable share of the settling states) pursuant to which those states agreed to participate in a multistate arbitration of issues related to the 2003 NPM Adjustment. Under the Arbitration Agreement, the signing states had their ultimate liability, if any, with respect to the 2003 NPM Adjustment reduced by 20%, and RJR Tobacco and the other PMs that placed their share of the disputed 2005 NPM Adjustment (discussed below) into the disputed payments account, without releasing or waiving any claims, authorized the release of those funds to the settling states.

The arbitration panel contemplated by the MSA and the Arbitration Agreement, referred to as the Arbitration Panel, was selected, and proceedings before the panel with respect to the 2003 NPM Adjustment claim began in July 2010. Following the completion of document and deposition discovery, on November 3, 2011, RJR Tobacco and the other PMs advised the Arbitration Panel that they were not contesting the “diligent enforcement” of 12 states and the four U.S. territories with a combined allocable share of less than 14%. The “diligent enforcement” of the remaining 33 settling states, the District of Columbia and Puerto Rico was contested and became the subject of further proceedings. A common issues hearing was held in April 2012, and state specific evidentiary hearings with respect to the contested states were initiated.

As a result of the partial settlement of certain NPM Adjustment claims, as described in more detail below, as well as the earlier decisions not to contest the diligent enforcement of 13 states, two of which are participants in the partial settlement, and the four U.S. territories, only 15 contested settling states required state specific diligent enforcement rulings. State specific evidentiary hearings were completed as of the end of May 2013.

On September 11, 2013, the Arbitration Panel issued rulings with respect to the 15 remaining contested states. The Arbitration Panel ruled that six states (representing approximately 14.68% allocable share) – Indiana, Kentucky, Maryland, Missouri, New Mexico and Pennsylvania – had not diligently enforced their Qualifying Statutes in 2003. At that time, RJR Tobacco estimated that as a result of these rulings, it was entitled to the maximum remaining amount with respect to its 2003 NPM Adjustment claim – approximately $266 million, plus interest and earnings. All six states that were found “non-diligent” by the Arbitration Panel filed motions to vacate and/or modify the diligent enforcement rulings on the 2003 NPM Adjustment claim. To date, only the state courts in Pennsylvania and Missouri have entered orders affecting the settlement payment calculations. Both courts modified the judgment reduction method that had been adopted by the Arbitration Panel, the effect of which was to reduce RJR Tobacco’s recovery from these two states by a total of $75 million. The orders in Pennsylvania and Missouri are being appealed.

Separately, two of the states found to be “non-diligent”, Kentucky and Indiana, have joined the Term Sheet on financial terms more favorable to the industry than those received by the original signatory states. That brings the total number of jurisdictions that have joined the Term Sheet to 24, representing 49.87% allocable share. As a result of these two states joining the Term Sheet, RJR Tobacco now estimates that the maximum remaining amount of its claim with respect to the 2003 NPM Adjustment claim is $197 million, plus interest and earnings, and before reduction for the impact of the Pennsylvania and Missouri court orders.

Until such time as the various remaining state motions challenging the rulings of the Arbitration Panel have been resolved, including any necessary appeals, uncertainty exists as to the timing, process and amount of RJR Tobacco’s ultimate recovery with respect to its remaining share of the 2003 NPM Adjustment claim. Due to the uncertainty over the final resolution of the 2003 NPM Adjustment claim, no amounts resulting from the rulings of the Arbitration Panel for the remaining four states have been recognized in the condensed consolidated financial statements (unaudited) as of June 30, 2014.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

NPM Adjustment Claims for 2004-2013. From 2006 to 2008, proceedings (including significant factor arbitrations before an independent economic consulting firm) were initiated with respect to the NPM Adjustment for 2004, 2005 and 2006. Ultimately, the Adjustment Requirements were satisfied with respect to each of these NPM Adjustments.

In June 2009, RJR Tobacco, certain other PMs and the settling states entered into an agreement with respect to the 2007, 2008 and 2009 significant factor determinations. This agreement provided that the settling states would not contest that the disadvantages of the MSA were “a significant factor contributing to” the market share loss experienced by the PMs in those years. The stipulation pertaining to each of the three years covered by the agreement became effective in February of the year a final determination by the firm of independent economic consultants would otherwise have been expected (2010, 2011 and 2012, respectively), if the issue had been arbitrated on the merits. RJR Tobacco and the PMs paid a total amount of $5 million into the States’ Antitrust/Consumer Protection Tobacco Enforcement Fund established under Section VIII(c) of the MSA for each year covered by that agreement, with RJR Tobacco paying approximately 47% of such amounts. On January 9, 2012, a new agreement with respect to significant factor determinations pertaining to 2010, 2011 and 2012 was entered into on terms essentially identical to the earlier agreement.

Based on the payment calculations of the Independent Auditor and the agreement described above regarding the 2007, 2008 and 2009 significant factor determinations, the Adjustment Requirements have been satisfied with respect to the NPM Adjustments for 2007, 2008 and 2009. In addition, based on the payment calculations of the Independent Auditor and the agreement described above regarding the 2010, 2011 and 2012 significant factor determinations, the Adjustment Requirements have been satisfied with respect to the NPM Adjustment for 2010 and 2011.

The approximate maximum principal amounts of RJR Tobacco’s share of the disputed NPM Adjustments for the years 2004 through 2011, as currently calculated by the Independent Auditor, are as follows (the amounts shown below do not include the interest or earnings thereon to which RJR Tobacco believes it would be entitled under the MSA and do not reflect any reduction as a result of the Term Sheet described below):

Year for which NPM Adjustment calculated		2004		2005		2006		2007		2008		2009		2010		2011
Year in which deduction for NPM Adjustment was taken		2007		2008		2009		2010		2011		2012		2013		2014
RJR Tobacco’s approximate share of disputed NPM Adjustment (millions)	$	562	$	445	$	419	$	435	$	468	$	472	$	470	$	421

In addition to the NPM Adjustment claims described above, RJR Tobacco has filed dispute notices with respect to its 2012 and 2013 annual MSA payments relating to the NPM Adjustments potentially applicable to those years. The amount at issue for those two years is approximately $880 million in the aggregate.

Preliminary discussions are currently underway with the jurisdictions that have not joined the Term Sheet for the partial settlement of certain NPM Adjustment claims, described below, to initiate arbitration proceedings with respect to the 2004 NPM Adjustment.

Due to the uncertainty over the final resolution of the 2004-2013 NPM Adjustment claims asserted by RJR Tobacco, no assurances can be made related to the amounts, if any, that will be realized or any amounts (including interest) that will be owed, except as described below related to the partial settlement of certain NPM Adjustment claims.

Partial Settlement of Certain NPM Adjustment Claims. On November 14, 2012, RJR Tobacco, certain other PMs and certain settling states entered into a Term Sheet that set forth terms on which accrued and potential NPM Adjustment claims for 2003 through 2014 could be resolved. The Term Sheet also set forth a restructured NPM Adjustment process to be applied on a going-forward basis, starting with the 2013 volume year. The Term Sheet was provided to all of the MSA settling states for their review and consideration. A total of 17 states, the District of Columbia and Puerto Rico, together representing just under 42% allocable share, determined to join the proposed settlement. RJR Tobacco and the other PMs indicated that they were prepared to go forward with the proposed settlement with that level of jurisdictional participation.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

The Term Sheet provided that the Arbitration Panel in place to deal with the 2003 NPM Adjustment (and other NPM Adjustment-related matters) must review the proposed settlement and enter an appropriate order to confirm for the Independent Auditor that it should implement, as necessary, the terms of the settlement agreement.

On March 12, 2013, the Arbitration Panel entered a Stipulated Partial Settlement and Award, referred to as the Award, reflecting the financial terms of the Term Sheet. On March 29, 2013, the Independent Auditor issued a notice indicating that it intended to implement the financial provisions of the Term Sheet, and also issued various revised payment calculations pertaining to payment years 2009 through 2012 and final calculations pertaining to payment year 2013 that reflected implementation of the financial provisions of the Term Sheet.

On April 12, 2013, Oklahoma joined the Term Sheet, bringing to 20 the total number of jurisdictions that have joined the settlement, representing approximately 43% allocable share, and the Independent Auditor issued revised payment calculations reflecting the financial impact of Oklahoma’s decision to join the settlement. Subsequently, on May 24, 2013, Connecticut and South Carolina also joined the Term Sheet bringing to 22 the total number of jurisdictions that have joined the settlement, representing approximately 46% allocable share. Efforts by two states, Colorado and Ohio, to obtain injunctions to prevent implementation of the Award were unsuccessful.

On June 10, 2014, Kentucky, and on June 26, 2014, Indiana, joined the Term Sheet, bringing to 24 the total number of jurisdictions that have joined the settlement, representing approximately 49.87% allocable share. These states, both of which were among the states found “non-diligent” by the Arbitration Panel, joined the Term Sheet on financial terms more favorable to the industry than those received by the original signatory states.

As of June 30, 2014, 11 non-settling states have motions pending, in their respective MSA courts, to vacate and/or modify the Award. The motions filed by Idaho and Colorado have been denied.

For additional information related to the Term Sheet and the Award, see “— Cost of Products Sold” in note 1.

Other NPM Matters. Separately, on August 19, 2011, Idaho sent a letter on behalf of itself and 31 other states, stating their intent to initiate arbitration with respect to whether amounts used to measure the domestic cigarette market and to calculate PM payment obligations under the MSA should be the adjusted gross or the net number of cigarettes on which federal excise tax (including arbitrios de cigarillos) is paid. The parties also agreed to arbitrate the Independent Auditor’s calculation of the volume adjustment with respect to the treatment of “roll your own,” referred to as RYO, tobacco. On January 21, 2013, the panel ruled that adjusted gross figures should be used in payment calculations and that, in the calculation of the volume adjustment, the Independent Auditor should use 0.0325 ounces of RYO tobacco to be the equivalent of one cigarette.

Antitrust Case

A number of tobacco wholesalers and consumers have sued U.S. cigarette manufacturers, including RJR Tobacco and B&W, in federal and state courts, alleging that cigarette manufacturers combined and conspired to set the price of cigarettes in violation of antitrust statutes and various state unfair business practices statutes. In these cases, the plaintiffs asked the court to certify the lawsuits as class actions on behalf of other persons who purchased cigarettes directly or indirectly from one or more of the defendants. As of June 30, 2014, all of the federal and state court cases on behalf of indirect purchasers had been dismissed.

In Smith v. Philip Morris Cos., Inc., a case filed in February 2000, and pending in District Court, Seward County, Kansas, the court granted class certification in November 2001, in an action brought against the major U.S. cigarette manufacturers, including RJR Tobacco and B&W, and the parent companies of the major U.S. cigarette manufacturers, including RJR, seeking to recover an unspecified amount in actual and punitive damages. The plaintiffs allege that the defendants participated in a conspiracy to fix or maintain the price of cigarettes sold in the United States. In an opinion dated March 23, 2012, the court granted summary judgment in favor of RJR Tobacco and B&W on the plaintiffs’ claims. On July 18, 2014, the Court of Appeals of the State of Kansas affirmed the granting of summary judgment.

56

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Other Litigation and Developments

JTI Claims for Indemnification. By purchase agreement dated March 9, 1999, amended and restated as of May 11, 1999, referred to as the 1999 Purchase Agreement, RJR and RJR Tobacco sold the international tobacco business to JTI. Under the 1999 Purchase Agreement, RJR and RJR Tobacco retained certain liabilities relating to the international tobacco business sold to JTI. Under its reading of the indemnification provisions of the 1999 Purchase Agreement, JTI has requested indemnification for damages allegedly arising out of these retained liabilities. As previously reported, a number of the indemnification claims between the parties relating to the activities of Northern Brands in Canada have been resolved. The other matters for which JTI has requested indemnification for damages under the indemnification provisions of the 1999 Purchase Agreement are described below:

• In a letter dated March 31, 2006, counsel for JTI stated that JTI would be seeking indemnification under the 1999 Purchase Agreement for any damages it may incur or may have incurred arising out of a Southern District of New York grand jury investigation, a now-terminated Eastern District of North Carolina grand jury investigation, and various actions filed by the European Community and others in the U.S. District Court for the Eastern District of New York, referred to as the EDNY, against RJR Tobacco and certain of its affiliates on November 3, 2000, August 6, 2001, and (as discussed in greater detail below) October 30, 2002, and against JTI on January 11, 2002.

• JTI also has sought indemnification relating to a Statement of Claim filed on April 23, 2010, against JTI Macdonald Corp., referred to as JTI-MC, by the Ontario Flue-Cured Tobacco Growers’ Marketing Board, referred to as the Board, Andy J. Jacko, Brian Baswick, Ron Kichler, and Aprad Dobrenty, proceeding on their own behalf and on behalf of a putative class of Ontario tobacco producers that sold tobacco to JTI-MC during the period between January 1, 1986, and December 31, 1996, referred to as the Class Period, through the Board pursuant to certain agreements. The Statement of Claim seeks recovery for damages allegedly incurred by the class representatives and the putative class for tobacco sales during the Class Period made at the contract price for duty free or export cigarettes with respect to cigarettes that, rather than being sold duty free or for export, purportedly were sold in Canada, which allegedly breached one or more of a series of contracts dated between June 4, 1986, and July 3, 1996. A motion to dismiss was argued in January 2014. The decision has been reserved.

• Finally, JTI has advised RJR and RJR Tobacco of its view that, under the terms of the 1999 Purchase Agreement, RJR and RJR Tobacco are liable for a roughly $1.7 million judgment entered in 1998, plus interest and costs, in an action filed in Brazil by Lutz Hanneman, a former employee of a former RJR Tobacco subsidiary. RJR and RJR Tobacco deny that they are liable for this judgment under the terms of the 1999 Purchase Agreement.

Although RJR and RJR Tobacco recognize that, under certain circumstances, they may have these and other unresolved indemnification obligations to JTI under the 1999 Purchase Agreement, RJR and RJR Tobacco disagree with JTI as to (1) what circumstances relating to any such matters may give rise to indemnification obligations by RJR and RJR Tobacco, and (2) the nature and extent of any such obligation. RJR and RJR Tobacco have conveyed their position to JTI, and the parties have agreed to resolve their differences at a later time.

European Community. On October 30, 2002, the European Community and ten of its member states filed a complaint in the EDNY against RJR, RJR Tobacco and several currently and formerly related companies. The complaint contains many of the same or similar allegations found in an earlier complaint, now dismissed, filed in August 2001 and also alleges that the defendants, together with certain identified and unidentified persons, engaged in money laundering and other conduct violating civil RICO and a variety of common laws. The complaint also alleges that the defendants manufactured cigarettes that were eventually sold in Iraq in violation of U.S. sanctions. The plaintiffs seek compensatory, punitive and treble damages among other types of relief. This matter had been stayed and largely inactive until November 24, 2009, when, with the court’s permission, the European Community and member states filed and served a second amended complaint. The second amended complaint added 16 member states as plaintiffs and RAI, RJR Tobacco and R. J. Reynolds Global Products Inc., referred to as GPI, as defendants. The allegations contained in the second amended complaint are in most respects either identical or similar to those found in the prior complaint, but now add new allegations primarily regarding the activities of RAI,

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

RJR Tobacco and GPI following the B&W business combination. Pursuant to a stipulation and order, the defendants filed a motion to dismiss the plaintiffs’ second amended complaint on February 15, 2010. Ruling on part of the defendants’ motion to dismiss, on March 8, 2011, the court dismissed the plaintiffs’ RICO claims, and reserved decision as to dismissal of the plaintiffs’ state-law claims. Thereafter, on May 13, 2011, the court granted the remaining portion of the defendants’ motion and dismissed the plaintiffs’ state-law claims based on the court’s lack of subject matter jurisdiction. On May 16, 2011, the clerk of court entered a judgment dismissing the action in its entirety. On June 10, 2011, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the Second Circuit, appealing from the May 16, 2011, judgment, as well as the March 8, 2011, and May 13, 2011, orders that respectively resulted in the dismissal of their RICO and state-law claims. Oral argument occurred on February 24, 2012.

On April 23, 2014, a three judge panel of the Second Circuit issued a decision on the appeal, and on April 29, 2014, a corrected decision was issued. The Second Circuit concluded that: (1) as pled, the RICO claims are within the scope of the RICO statute, and (2) the federal court does have subject matter jurisdiction over the state-law claims. Accordingly, the three judge panel of the Second Circuit decided that the judgment of the district court should be vacated, and the case remanded to the district court for further proceedings. On May 7, 2014, the defendants filed in the Second Circuit a petition for panel rehearing, or rehearing en banc, regarding the plaintiffs’ RICO claims. The parties are awaiting a decision on the petition. If the Second Circuit denies further review, it is expected that after remand the district court will consider the remaining grounds for dismissal contained in the defendants’ February 15, 2010 motion to dismiss which have not previously been addressed by the district court or the Second Circuit.

FDA Litigation. On February 25, 2011, RJR Tobacco, Lorillard, Inc., and Lorillard Tobacco Company jointly filed a lawsuit, Lorillard, Inc. v. U.S. Food and Drug Administration, in the U.S. District Court for the District of Columbia, challenging the composition of TPSAC which had been established by the FDA under the FDA Tobacco Act. The complaint alleges that certain members of the TPSAC and certain members of its Constituents Subcommittee have financial and appearance conflicts of interest that are disqualifying under federal ethics law and regulations, and that the TPSAC is not “fairly balanced,” as required by the Federal Advisory Committee Act, referred to as FACA. In March 2011, the plaintiffs filed an amended complaint, which added an additional claim, based on a nonpublic meeting of members of the TPSAC, in violation of the FACA. The court granted the plaintiffs’ unopposed motion to file a second amended complaint adding a count addressing the FDA’s refusal to produce all documents generated by the TPSAC and its subcommittee in preparation of the menthol report. On August 1, 2012, the court denied the FDA’s motion to dismiss. The FDA filed its answer to the complaint on October 12, 2012. The parties participated in a status conference on April 22, 2013, with Lorillard and RJR Tobacco filing an amended complaint the same day. Briefing for summary judgment motions was completed on September 20, 2013. On July 21, 2014, the court granted the plaintiffs’ summary judgment motions finding that three members of the TPSAC Committee had impermissible conflicts of interest. As relief, the court ordered the FDA to reconstitute the committee in conformance with the law and enjoined the agency from using or relying on the TPSAC’s 2011 Menthol Report. The FDA has the right to appeal to the U.S. Court of Appeals for the District of Columbia.

For a detailed description of the FDA Tobacco Act, see “— Governmental Activity” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part I, Item 2.

Other Matters. In Richard Villarreal v. R. J. Reynolds Tobacco Co., a case filed June 6, 2012, the plaintiff filed a collective action complaint against R. J. Reynolds Tobacco Co., Pinstripe, Inc., and CareerBuilder, LLC, in the U.S. District Court, Northern District of Georgia. The complaint alleges unlawful discrimination with respect to the hiring of individuals to fill entry-level regional sales positions in violation of the Age Discrimination in Employment Act (29 U.S.C. §621, et seq.). Although the complaint is currently a single plaintiff case, the complaint seeks collective/class-action status. RJR Tobacco’s and Pinstripe’s motion for partial dismissal was granted on March 6, 2013, thereby eliminating the plaintiff’s disparate impact claim and limiting the relevant time period for both the plaintiff’s claims and potential class claims. RJR Tobacco and Pinstripe filed answers to the remaining disparate treatment claim on March 20, 2013. Defendant CareerBuilder was dismissed with prejudice on September 25, 2012. Discovery is currently proceeding. The plaintiff’s Fed.R.Civ.P. 54(b) motion to certify for immediate appeal the trial court’s prior dismissal of plaintiff’s disparate impact and time-barred claims was granted on May 21, 2014. Final judgment as to certain claims (those claims based on a disparate impact theory of relief and claims challenging hiring decisions made before November 19, 2009) was entered on May 21, 2014. The plaintiff filed a notice of appeal of the final judgment on June 18, 2014. The defendants filed a motion to dismiss the plaintiff’s appeal on July 3, 2014.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Smokeless Tobacco Litigation

As of June 30, 2014, American Snuff Co. was a defendant in six actions brought by individual plaintiffs in West Virginia state court seeking damages in connection with personal injuries allegedly sustained as a result of the usage of American Snuff Co.’s smokeless tobacco products. These actions are pending before the same West Virginia court as the 564 consolidated individual smoker cases against RJR Tobacco, B&W, as RJR Tobacco’s indemnitee, or both. Pursuant to the court’s December 3, 2001, order, the smokeless tobacco claims and defendants remain severed.

Pursuant to a second amended complaint filed in September 2006, American Snuff Co. is a defendant in Vassallo v. United States Tobacco Company, pending in the Eleventh Circuit Court in Miami-Dade County, Florida. The individual plaintiff alleges that he sustained personal injuries, including addiction and cancer, as a result of his use of smokeless tobacco products, allegedly including products manufactured by American Snuff Co. The plaintiff seeks unspecified compensatory and consequential damages in an amount greater than $15,000. There is no punitive damages demand in this case, though the plaintiff retains the right to seek leave of court to add such a demand later. Discovery is underway.

Tobacco Buyout Legislation

In 2004, legislation was passed eliminating the U.S. Government’s tobacco production controls and price support program. The buyout of tobacco quota holders provided for in the Fair and Equitable Tobacco Reform Act, referred to as FETRA, is funded by a direct quarterly assessment on every tobacco product manufacturer and importer, on a market-share basis measured on volume to which federal excise tax is applied. The aggregate cost of the buyout to the industry is approximately $9.9 billion, including approximately $9.6 billion payable to quota tobacco holders and growers through industry assessments over ten years, into 2014, and approximately $290 million for the liquidation of quota tobacco stock. RAI’s operating subsidiaries’ annual expense under FETRA for 2014 is estimated to be approximately $165 million.

RAI’s operating subsidiaries recorded the FETRA assessment on a quarterly basis as cost of goods sold. RAI’s operating subsidiaries estimate that their overall share of the buyout will approximate $2.5 billion prior to the deduction of permitted offsets under the MSA. The FETRA assessment expires in September 2014.

ERISA Litigation

In May 2002, in Tatum v. The R.J.R. Pension Investment Committee of the R. J. Reynolds Tobacco Company Capital Investment Plan, an employee of RJR Tobacco filed a class-action suit in the U.S. District Court for the Middle District of North Carolina, alleging that the defendants, RJR, RJR Tobacco, the RJR Employee Benefits Committee and the RJR Pension Investment Committee, violated the Employee Retirement Income Security Act of 1974, referred to as ERISA. The actions about which the plaintiff complains stem from a decision made in 1999 by RJR Nabisco Holdings Corp., subsequently renamed Nabisco Group Holdings Corp., referred to as NGH, to spin off RJR, thereby separating NGH’s tobacco business and food business. As part of the spin-off, the 401(k) plan for the previously related entities had to be divided into two separate plans for the now separate tobacco and food businesses. The plaintiff contends that the defendants breached their fiduciary duties to participants of the RJR 401(k) plan when the defendants removed the stock funds of the companies involved in the food business, NGH and Nabisco Holdings Corp., referred to as Nabisco, as investment options from the RJR 401(k) plan approximately six months after the spin-off. The plaintiff asserts that a November 1999 amendment (the “1999 Amendment”) that eliminated the NGH and Nabisco funds from the RJR 401(k) plan on January 31, 2000, contained sufficient discretion for the defendants to have retained the NGH and Nabisco funds after January 31, 2000, and that the failure to exercise such discretion was a breach of fiduciary duty. In his complaint, the plaintiff requests, among other things, that the court require the defendants to pay as damages to the RJR 401(k) plan an amount equal to the subsequent appreciation that was purportedly lost as a result of the liquidation of the NGH and Nabisco funds.

In July 2002, the defendants filed a motion to dismiss, which the court granted in December 2003. In December 2004, the U.S. Court of Appeals for the Fourth Circuit reversed the dismissal of the complaint, holding that the 1999 Amendment did contain sufficient discretion for the defendants to have retained the NGH and Nabisco funds as of February 1, 2000, and remanded the case for further proceedings. The court granted the plaintiff leave to file an amended complaint and denied all pending motions as moot. In April 2007, the defendants moved to dismiss

59

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

the amended complaint. The court granted the motion in part and denied it in part, dismissing all claims against the RJR Employee Benefits Committee and the RJR Pension Investment Committee. The remaining defendants, RJR and RJR Tobacco, filed their answer and affirmative defenses in June 2007. The plaintiff filed a motion for class certification, which the court granted in September 2008. The district court ordered mediation, but no resolution of the case was reached. In September 2008, each of the plaintiffs and the defendants filed motions for summary judgment, and in January 2009, the defendants filed a motion to decertify the class. A second mediation occurred in June 2009, but again no resolution of the case was reached. The district court overruled the motions for summary judgment and the motion to decertify the class.

A non-jury trial was held in January and February 2010. During closing arguments, the plaintiff argued for the first time that certain facts arising at trial showed that the 1999 Amendment was not validly adopted, and then moved to amend his complaint to conform to this evidence at trial. On June 1, 2011, the court granted the plaintiff’s motion to amend his complaint and found that the 1999 Amendment was invalid.

The parties filed their findings of fact and conclusions of law on February 4, 2011. On February 25, 2013, the district court dismissed the case with prejudice. On March 8, 2013, the plaintiffs filed a notice of appeal. Oral argument occurred on March 18, 2014. A decision is pending.

Environmental Matters

RAI and its subsidiaries are subject to federal, state and local environmental laws and regulations concerning the discharge, storage, handling and disposal of hazardous or toxic substances. Such laws and regulations provide for significant fines, penalties and liabilities, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous or toxic substances. In addition, third parties may make claims against owners or operators of properties for personal injuries and property damage associated with releases of hazardous or toxic substances. In the past, RJR Tobacco has been named a potentially responsible party with third parties under the Comprehensive Environmental Response, Compensation and Liability Act with respect to several superfund sites. RAI and its subsidiaries are not aware of any current environmental matters that are expected to have a material adverse effect on the business, results of operations or financial position of RAI or its subsidiaries.

RAI and its operating subsidiaries believe that climate change is an environmental issue primarily driven by carbon dioxide emissions from the use of energy. RAI’s operating subsidiaries are working to reduce carbon dioxide emissions by minimizing the use of energy where cost effective, minimizing waste to landfills and increasing recycling. Climate change is not viewed by RAI’s operating subsidiaries as a significant direct economic risk to their businesses, but rather an indirect risk involving the potential for a longer-term general increase in the cost of doing business. Regulatory changes are difficult to predict, but the current regulatory risks to the business of RAI’s operating subsidiaries with respect to climate change are relatively low. Financial impacts will be driven more by the cost of natural gas and electricity. Efforts are made to anticipate the effect of increases in fuel costs directly impacting RAI’s operating subsidiaries by evaluating natural gas usage and market conditions. Occasionally forward contracts are purchased, limited to a two-year period, for natural gas. In addition, RAI’s operating subsidiaries are continually evaluating energy conservation measures and energy efficient equipment to mitigate impacts of increases in energy costs.

Regulations promulgated by the EPA and other governmental agencies under various statutes have resulted in, and likely will continue to result in, substantial expenditures for pollution control, waste treatment, facility modification and similar activities. RAI and its subsidiaries are engaged in a continuing program to comply with federal, state and local environmental laws and regulations, and dependent upon the probability of occurrence and reasonable estimation of cost, accrue or disclose any material liability. Although it is difficult to reasonably estimate the portion of capital expenditures or other costs attributable to compliance with environmental laws and regulations, RAI does not expect such expenditures or other costs to have a material adverse effect on the business, results of operations, cash flows or financial position of RAI or its subsidiaries.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Other Contingencies

In connection with the sale of the international tobacco business to JTI, pursuant to the 1999 Purchase Agreement, RJR and RJR Tobacco agreed to indemnify JTI against:

• any liabilities, costs and expenses arising out of the imposition or assessment of any tax with respect to the international tobacco business arising prior to the sale, other than as reflected on the closing balance sheet;

• any liabilities, costs and expenses that JTI or any of its affiliates, including the acquired entities, may incur after the sale with respect to any of RJR’s or RJR Tobacco’s employee benefit and welfare plans; and

• any liabilities, costs and expenses incurred by JTI or any of its affiliates arising out of certain activities of Northern Brands.

As described above in “— Litigation Affecting the Cigarette Industry — Other Litigation and Developments — JTI Claims for Indemnification,” RJR Tobacco has received claims for indemnification from JTI, and several of these have been resolved. Although RJR and RJR Tobacco recognize that, under certain circumstances, they may have other unresolved indemnification obligations to JTI under the 1999 Purchase Agreement, RJR and RJR Tobacco disagree what circumstances described in such claims give rise to any indemnification obligations by RJR and RJR Tobacco and the nature and extent of any such obligation. RJR and RJR Tobacco have conveyed their position to JTI, and the parties have agreed to resolve their differences at a later date.

RJR Tobacco, SFNTC and American Snuff Co. have entered into agreements to indemnify certain distributors and retailers from liability and related defense costs arising out of the sale or distribution of their products. Additionally, SFNTC has entered into an agreement to indemnify a supplier from liability and related defense costs arising out of the sale or use of SFNTC’s products. The cost has been, and is expected to be, insignificant. RJR Tobacco, SFNTC and American Snuff Co. believe that the indemnified claims are substantially similar in nature and extent to the claims that they are already exposed to by virtue of their having manufactured those products.

Except as otherwise noted above, RAI is not able to estimate the maximum potential amount of future payments, if any, related to these indemnification obligations.

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Note 10 — Shareholders’ Equity

	Common Stock		Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance as of December 31, 2012	$	—	$	7,275		$	(1,707	)	$	(311	)	$	5,257
Net income		—		—			969			—			969
Retirement benefits, net of $10 million tax benefit		—		—			—			(15	)		(15	)
Unrealized gain on long-term investments, net of $2 million tax expense		—		—			—			3			3
Amortization of realized loss on hedging instruments, net of tax		—		—			—			1			1
Cumulative translation adjustment and other, net of $6 million tax expense		—		—			—			(12	)		(12	)
Dividends - $1.22 per share		—		—			(673	)		—			(673	)
Common stock repurchased		—		(475	)		—			—			(475	)
Equity incentive award plan and stock-based compensation		—		30			—			—			30
Excess tax benefit on stock-based compensation plans		—		11			—			—			11
Balance as of June 30, 2013	$	—	$	6,841		$	(1,411	)	$	(334	)	$	5,096

	Common Stock		Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance as of December 31, 2013	$	—	$	6,571		$	(1,348	)	$	(56	)	$	5,167
Net income		—		—			855			—			855
Unrealized gain on long-term investments, net of $1 million tax expense		—		—			—			2			2
Amortization of realized loss on hedging instruments, net of tax		—		—			—			1			1
Cumulative translation adjustment and other, net of $1 million tax benefit		—		—			—			(2	)		(2	)
Dividends - $1.34 per share		—		—			(719	)		—			(719	)
Common stock repurchased		—		(440	)		—			—			(440	)
Equity incentive award plan and stock-based compensation		—		21			—			—			21
Excess tax benefit on stock-based compensation plans		—		10			—			—			10
Balance as of June 30, 2014	$	—	$	6,162		$	(1,212	)	$	(55	)	$	4,895

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2013, were as follows:

	Retirement Benefits			Unrealized Gain (Loss) on Long-Term Investments			Realized Loss on Hedging Instruments			Cumulative Translation Adjustment and Other			Total
Balance as of December 31, 2012	$	(265	)	$	(21	)	$	(14	)	$	(11	)	$	(311	)
Other comprehensive income (loss) before reclassifications		(3	)		3			—			(12	)		(12	)
Amounts reclassified from accumulated other comprehensive income (loss)		(12	)		—			1			—			(11	)
Net current-period other comprehensive income (loss)		(15	)		3			1			(12	)		(23	)
Balance as of June 30, 2013	$	(280	)	$	(18	)	$	(13	)	$	(23	)	$	(334	)

The components of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2014, were as follows:

	Retirement Benefits			Unrealized Gain (Loss) on Long-Term Investments			Realized Loss on Hedging Instruments			Cumulative Translation Adjustment and Other			Total
Balance as of December 31, 2013	$	(17	)	$	(16	)	$	(13	)	$	(10	)	$	(56	)
Other comprehensive income (loss) before reclassifications		12			2			—			(2	)		12
Amounts reclassified from accumulated other comprehensive income (loss)		(12	)		—			1			—			(11	)
Net current-period other comprehensive income (loss)		—			2			1			(2	)		1
Balance as of June 30, 2014	$	(17	)	$	(14	)	$	(12	)	$	(12	)	$	(55	)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidated statement of income (unaudited) for the three months ended June 30, were as follows:

Components	Amounts Reclassified						Affected Line Item
	2014			2013
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(5	)	$	(5	)	Cost of products sold
Amortization of prior service costs		(4	)		(5	)	Selling, general and administrative expenses
		(9	)		(10	)
Deferred taxes		3			4		Provision for income taxes
Net of tax	$	(6	)	$	(6	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	1		Interest and debt expense
Deferred taxes		—			—		Provision for income taxes
Net of tax	$	1		$	1
Total reclassifications	$	(5	)	$	(5	)	Net income

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidated statement of income (unaudited) for the six months ended June 30, were as follows:

Components	Amounts Reclassified						Affected Line Item
	2014			2013
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(10	)	$	(10	)	Cost of products sold
Amortization of prior service costs		(9	)		(9	)	Selling, general and administrative expenses
		(19	)		(19	)
Deferred taxes		7			7		Provision for income taxes
Net of tax	$	(12	)	$	(12	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	1		Interest and debt expense
Deferred taxes		—			—		Provision for income taxes
Net of tax	$	1		$	1
Total reclassifications	$	(11	)	$	(11	)	Net income

Share Repurchases and Other

On November 14, 2011, the board of directors of RAI authorized the repurchase, from time to time on or before mid-2014, of up to $2.5 billion of outstanding shares of RAI common stock in open-market or privately negotiated transactions. In connection with the share repurchase program, RAI and B&W entered into an agreement, pursuant to which B&W agreed to participate in the repurchase program on a basis approximately proportionate with B&W’s 42% ownership of RAI’s common stock. RAI, B&W and BAT also entered into Amendment No. 3 to the governance agreement, pursuant to which RAI has agreed that, so long as B&W’s ownership interest has not dropped below 25%, if RAI issues shares of its common stock or any other RAI equity security to certain designated persons, including its directors, officers or employees, then RAI will repurchase a number of shares of outstanding RAI common stock so that the number of outstanding shares of RAI common stock are not increased, and B&W’s ownership interest is not decreased, by such issuance after taking into account such repurchase.

During the first six months of 2014, RAI repurchased and cancelled 7,715,763 shares for $412 million, resulting in the conclusion of the above-described repurchase program with total repurchases of 55,353,807 shares for $2.5 billion. Due to RAI’s incorporation in North Carolina, which does not recognize treasury shares, the shares are cancelled at the time of repurchase.

Restricted stock units granted in March 2011 under the 2009 Omnibus Incentive Compensation Plan, referred to as the Omnibus Plan, vested in March 2014 and were settled with the issuance of 1,468,294 shares of RAI common stock. In addition, during the first three months of 2014, at a cost of $28 million, RAI purchased 554,042 shares that were forfeited and cancelled with respect to tax liabilities associated with restricted stock units vesting under the Omnibus Plan.

Effective February 10, 2014, and on May 8, 2014, RAI’s board of directors declared a quarterly cash dividend of $0.67 per common share, or $2.68 on an annualized basis, to shareholders of record as of March 10, 2014 and June 10, 2014, respectively.

Note 11 — Stock Plans

In February 2014, the board of directors of RAI approved a grant to key employees of RAI and its subsidiaries, effective March 3, 2014, of 1,049,348 nonvested restricted stock units under the Omnibus Plan. The restricted stock units generally will vest on March 3, 2017. Upon settlement, each grantee will receive a number of shares of RAI’s common stock equal to the product of the number of vested units and a percentage up to 150% based on the average RAI annual incentive award plan score over the three-year period ending December 31, 2016.

As an equity-based grant, compensation expense relating to the 2014 grant under the Omnibus Plan will take into account the vesting period lapsed and will be calculated based on the per share closing price of RAI common stock on the date of grant, or $53.29. Dividends paid on shares of RAI common stock will accumulate on the

64

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

restricted stock units and will be paid to the grantee on the vesting date. If RAI fails to pay its shareholders cumulative dividends of at least $8.04 per share for the three-year performance period ending December 31, 2016, then each award will be reduced by an amount equal to three times the percentage of the dividend underpayment, up to a maximum reduction of 50%.

In April 2014, the board of directors of RAI approved a grant to a key employee of RAI, effective May 1, 2014, of 149,192 nonvested restricted stock units under the Omnibus Plan. The restricted stock units generally will vest on May 1, 2015. Upon settlement, the grantee will receive a number of shares of RAI’s common stock equal to the product of the number of vested units and a percentage up to 150% based on the overall performance of RAI and its subsidiaries during the one-year performance period beginning May 1, 2014, and ending April 30, 2015, against RAI’s 2014 annual incentive award program metrics and other performance factors.

As an equity-based grant, compensation expense relating to this 2014 grant under the Omnibus Plan will take into account the vesting period lapsed and will be calculated based on the per share closing price of RAI common stock as of the end of each quarter, which was $60.35 as of June 30, 2014. Dividends paid on shares of RAI common stock will accumulate on the restricted stock units and will be paid to the grantee on the vesting date. If RAI fails to pay its shareholders cumulative dividends of at least $2.68 per share for the one-year performance period ending April 30, 2015, then the award will be reduced by an amount equal to three times the percentage of the dividend underpayment, up to a maximum reduction of 50%.

Note 12 — Segment Information

RAI’s reportable operating segments are RJR Tobacco, American Snuff and Santa Fe. The RJR Tobacco segment consists principally of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. The Santa Fe segment consists of the domestic operations of SFNTC. Included in All Other are RJR Vapor, Niconovum AB, Niconovum USA, Inc., and various international operations, among other RAI subsidiaries. The segments were identified based on how RAI’s chief operating decision maker allocates resources and assesses performance. Certain of RAI’s operating subsidiaries have entered into intercompany agreements for products or services with other subsidiaries. As a result, certain activities of an operating subsidiary may be included in a different segment of RAI.

RAI’s largest reportable operating segment, RJR Tobacco, is the second largest tobacco company in the United States. RJR Tobacco’s brands include two of the best-selling cigarettes in the United States: CAMEL and PALL MALL. These brands, and its other brands, including WINSTON, KOOL, DORAL, SALEM, MISTY and CAPRI, are manufactured in a variety of styles and marketed in the United States. As part of its total tobacco strategy, RJR Tobacco also offers a smoke-free tobacco product, CAMEL Snus. RJR Tobacco manages contract manufacturing of cigarette and tobacco products through arrangements with BAT affiliates, and manages the export of tobacco products to certain U.S. territories, U.S. duty-free shops and U.S. overseas military bases. RJR Tobacco also manages the super-premium cigarette brands, DUNHILL and STATE EXPRESS 555, which are licensed from BAT.

American Snuff is the second largest smokeless tobacco products manufacturer in the United States. American Snuff’s primary brands include its largest selling moist snuff brands, GRIZZLY and KODIAK.

Santa Fe manufactures and markets cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand in the United States.

RJR Vapor is a manufacturer and distributor of digital vapor cigarettes under the VUSE brand name in the United States. Niconovum AB and Niconovum USA, Inc., are marketers of nicotine replacement therapy products in Sweden and the United States, respectively, under the ZONNIC brand name.

Intersegment revenues and items below the operating income line of the condensed consolidated statements of income (unaudited) are not presented by segment, since they are excluded from the measure of segment profitability reviewed by RAI’s chief operating decision maker. Additionally, information about total assets by segment is not reviewed by RAI’s chief operating decision maker and therefore is not disclosed.

65

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Segment Data:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Net sales:
RJR Tobacco	$	1,736		$	1,792		$	3,299		$	3,350
American Snuff		195			194			379			361
Santa Fe		168			148			303			263
All Other		63			45			116			88
Consolidated net sales	$	2,162		$	2,179		$	4,097		$	4,062
Operating income (loss):
RJR Tobacco(1)	$	726		$	663		$	1,208		$	1,421
American Snuff		110			107			212			200
Santa Fe(2)		84			72			149			126
All Other		(49	)		(19	)		(88	)		(23	)
Corporate expense		(35	)		(25	)		(55	)		(39	)
Consolidated operating income	$	836		$	798		$	1,426		$	1,685
Reconciliation to income from continuing operations before income taxes:
Consolidated operating income(1)(2)	$	836		$	798		$	1,426		$	1,685
Interest and debt expense		62			65			121			127
Interest income		(1	)		(1	)		(2	)		(3	)
Other expense, net		—			2			1			—
Income from continuing operations before income taxes	$	775		$	732		$	1,306		$	1,561

⁽¹⁾  Includes NPM Adjustment credits of $124 million and $89 million for the three months ended June 30, 2014 and 2013, respectively; and $186 million and $348 million for the six months ended June 30, 2014 and 2013, respectively, see “— Cost of Products Sold” in note 1.

⁽²⁾  Includes NPM Adjustment credits of $1 million for each of the three months ended June 30, 2014 and 2013; and $2 million and $3 million for the six months ended June 30, 2014 and 2013, respectively see “— Cost of Products Sold” in note 1.

Note 13 — Related Party Transactions

RAI and RAI’s operating subsidiaries engage in transactions with affiliates of BAT, which owns approximately 42% of RAI’s outstanding common stock. A summary of balances and transactions with such BAT affiliates is as follows:

Balances:

	June 30, 2014		December 31, 2013
Accounts receivable, related party	$	66	$	56
Due to related party		1		—
Deferred revenue, related party		17		48

66

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Significant transactions:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Net sales	$	91	$	92	$	177	$	173
Purchases		4		6		13		9
RAI common stock purchases from B&W		114		62		155		170
Capsule royalty income		3		1		6		4

RAI’s operating subsidiaries, primarily RJR Tobacco, sell contract-manufactured cigarettes, tobacco leaf and processed tobacco to BAT affiliates. In December 2012, RJR Tobacco entered into an amendment to its contract manufacturing agreement with a BAT affiliate, which amendment, among other things, requires either party to provide three years’ notice to the other party to terminate the agreement without cause, with any such notice to be given no earlier than January 1, 2016. Net sales to BAT affiliates, primarily cigarettes, represented approximately 4% of RAI’s total net sales during the three and six months ended June 30, 2014 and 2013.

RJR Tobacco recorded deferred sales revenue relating to leaf sold to BAT affiliates that had not been delivered as of the end of the respective quarter, given that RJR Tobacco has a legal right to bill the BAT affiliates. Leaf sales revenue to BAT affiliates is recognized when the product is shipped to the customer. RJR Tobacco recorded royalty income from the license of capsule technology to BAT affiliates.

RAI’s operating subsidiaries also purchase unprocessed leaf at market prices, and import cigarettes at prices not to exceed manufacturing costs plus 10%, from BAT affiliates.

In connection with RAI’s share repurchase program, RAI and B&W entered into an agreement on November 14, 2011, pursuant to which B&W agreed to participate in the repurchase program on a basis approximately proportionate with B&W’s 42% ownership of RAI common stock. Under this agreement, which concluded in the second quarter of 2014, RAI repurchased 2,887,715 shares of RAI common stock from B&W during the six months ended June 30, 2014, and 21,702,839 shares in total.

Note 14 — RAI Guaranteed, Unsecured Notes — Condensed Consolidating Financial Statements

The following condensed consolidating financial statements relate to the guaranties of RAI’s $5.1 billion unsecured notes. Certain of RAI’s direct, wholly owned subsidiaries and certain of its indirectly owned subsidiaries have fully and unconditionally, and jointly and severally, guaranteed these notes. The following condensed consolidating financial statements include: the accounts and activities of RAI, the parent issuer; RJR, RJR Tobacco, American Snuff Co., SFNTC, and certain of RAI’s other subsidiaries, the Guarantors; other direct and indirect subsidiaries of RAI that are not Guarantors; and elimination adjustments.

67

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Condensed Consolidating Statements of Income

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Three Months Ended June 30, 2014
Net sales	$	—		$	2,029		$	54		$	(12	)	$	2,071
Net sales, related party		—			91			—			—			91
Net sales		—			2,120			54			(12	)		2,162
Cost of products sold		—			921			49			(11	)		959
Selling, general and administrative expenses		17			287			60			—			364
Amortization expense		—			3			—			—			3
Operating income (loss)		(17	)		909			(55	)		(1	)		836
Interest and debt expense		62			20			2			(22	)		62
Interest income		(22	)		—			(1	)		22			(1	)
Other income, net		—			(10	)		—			10			—
Income (loss) before income taxes		(57	)		899			(56	)		(11	)		775
Provision for (benefit from) income taxes		(20	)		323			(20	)		—			283
Equity income from subsidiaries		529			3			—			(532	)		—
Net income (loss)	$	492		$	579		$	(36	)	$	(543	)	$	492
For the Three Months Ended June 30, 2013
Net sales	$	—		$	2,063		$	34		$	(10	)	$	2,087
Net sales, related party		—			92			—			—			92
Net sales		—			2,155			34			(10	)		2,179
Cost of products sold		—			993			16			(10	)		999
Selling, general and administrative expenses		3			334			43			—			380
Amortization expense		—			2			—			—			2
Operating income (loss)		(3	)		826			(25	)		—			798
Interest and debt expense		63			30			—			(28	)		65
Interest income		(28	)		—			(1	)		28			(1	)
Other (income) expense, net		1			(12	)		3			10			2
Income (loss) before income taxes		(39	)		808			(27	)		(10	)		732
Provision for (benefit from) income taxes		(14	)		297			(12	)		—			271
Equity income from subsidiaries		486			2			—			(488	)		—
Net income (loss)	$	461		$	513		$	(15	)	$	(498	)	$	461

68

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2014
Net sales	$	—		$	3,843		$	97		$	(20	)	$	3,920
Net sales, related party		—			177			—			—			177
Net sales		—			4,020			97			(20	)		4,097
Cost of products sold		—			1,826			82			(19	)		1,889
Selling, general and administrative expenses		20			644			113			—			777
Amortization expense		—			5			—			—			5
Operating income (loss)		(20	)		1,545			(98	)		(1	)		1,426
Interest and debt expense		121			43			3			(46	)		121
Interest income		(46	)		(1	)		(1	)		46			(2	)
Other (income) expense, net		2			(21	)		(1	)		21			1
Income (loss) from continuing operations before income taxes		(97	)		1,524			(99	)		(22	)		1,306
Provision for (benefit from) income taxes		(34	)		546			(36	)		—			476
Equity income from subsidiaries		918			9			—			(927	)		—
Income (loss) from continuing operations		855			987			(63	)		(949	)		830
Income from discontinued operations		—			25			—			—			25
Net income (loss)	$	855		$	1,012		$	(63	)	$	(949	)	$	855
For the Six Months Ended June 30, 2013
Net sales	$	—		$	3,840		$	68		$	(19	)	$	3,889
Net sales, related party		—			173			—			—			173
Net sales		—			4,013			68			(19	)		4,062
Cost of products sold		—			1,684			28			(19	)		1,693
Selling, general and administrative expenses		6			602			73			—			681
Amortization expense		—			3			—			—			3
Operating income (loss)		(6	)		1,724			(33	)		—			1,685
Interest and debt expense		124			60			—			(57	)		127
Interest income		(57	)		(1	)		(2	)		57			(3	)
Other (income) expense, net		2			(24	)		1			21			—
Income (loss) before income taxes		(75	)		1,689			(32	)		(21	)		1,561
Provision for (benefit from) income taxes		(27	)		634			(15	)		—			592
Equity income from subsidiaries		1,017			7			—			(1,024	)		—
Net income (loss)	$	969		$	1,062		$	(17	)	$	(1,045	)	$	969

69

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Condensed Consolidating Statements of Comprehensive Income

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Three Months Ended June 30, 2014
Net income (loss)	$	492		$	579		$	(36	)	$	(543	)	$	492
Other comprehensive income (loss), net of tax:
Retirement benefits		6			7			—			(7	)		6
Unrealized gain on long-term investments		1			1			—			(1	)		1
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		(3	)		(2	)		(2	)		4			(3	)
Comprehensive income (loss)	$	497		$	585		$	(38	)	$	(547	)	$	497
For the Three Months Ended June 30, 2013
Net income (loss)	$	461		$	513		$	(15	)	$	(498	)	$	461
Other comprehensive income (loss), net of tax:
Retirement benefits		(10	)		(13	)		(1	)		14			(10	)
Unrealized gain on long-term investments		1			1			—			(1	)		1
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		3			3			4			(7	)		3
Comprehensive income (loss)	$	456		$	504		$	(12	)	$	(492	)	$	456
For the Six Months Ended June 30, 2014
Net income (loss)	$	855		$	1,012		$	(63	)	$	(949	)	$	855
Other comprehensive income (loss), net of tax:
Retirement benefits		—			1			—			(1	)		—
Unrealized gain on long-term investments		2			2			—			(2	)		2
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		(2	)		(1	)		(2	)		3			(2	)
Comprehensive income (loss)	$	856		$	1,014		$	(65	)	$	(949	)	$	856
For the Six Months Ended June 30, 2013
Net income (loss)	$	969		$	1,062		$	(17	)	$	(1,045	)	$	969
Other comprehensive income (loss), net of tax:
Retirement benefits		(15	)		(18	)		(1	)		19			(15	)
Unrealized gain on long-term investments		3			3			—			(3	)		3
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		(12	)		(12	)		(6	)		18			(12	)
Comprehensive income (loss)	$	946		$	1,035		$	(24	)	$	(1,011	)	$	946

70

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the three months ended June 30, 2014, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(5	)	$	(5	)	$	—	$	5		$	(5	)	Cost of products sold
Amortization of prior service costs		(4	)		(4	)		—		4			(4	)	Selling, general and administrative expenses
		(9	)		(9	)		—		9			(9	)
Deferred taxes		3			3			—		(3	)		3		Provision for income taxes
Net of tax	$	(6	)	$	(6	)	$	—	$	6		$	(6	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(5	)	$	(6	)	$	—	$	6		$	(5	)	Net income (loss)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the three months ended June 30, 2013, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(5	)	$	(5	)	$	—	$	5		$	(5	)	Cost of products sold
Amortization of prior service costs		(5	)		(5	)		—		5			(5	)	Selling, general and administrative expenses
		(10	)		(10	)		—		10			(10	)
Deferred taxes		4			4			—		(4	)		4		Provision for income taxes
Net of tax	$	(6	)	$	(6	)	$	—	$	6		$	(6	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(5	)	$	(6	)	$	—	$	6		$	(5	)	Net income (loss)

71

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the six months ended June 30, 2014, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(10	)	$	(10	)	$	—	$	10		$	(10	)	Cost of products sold
Amortization of prior service costs		(9	)		(9	)		—		9			(9	)	Selling, general and administrative expenses
		(19	)		(19	)		—		19			(19	)
Deferred taxes		7			7			—		(7	)		7		Provision for income taxes
Net of tax	$	(12	)	$	(12	)	$	—	$	12		$	(12	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(11	)	$	(12	)	$	—	$	12		$	(11	)	Net income (loss)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the six months ended June 30, 2013, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(10	)	$	(10	)	$	—	$	10		$	(10	)	Cost of products sold
Amortization of prior service costs		(9	)		(9	)		—		9			(9	)	Selling, general and administrative expenses
		(19	)		(19	)		—		19			(19	)
Deferred taxes		7			7			—		(7	)		7		Provision for income taxes
Net of tax	$	(12	)	$	(12	)	$	—	$	12		$	(12	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(11	)	$	(12	)	$	—	$	12		$	(11	)	Net income (loss)

72

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Condensed Consolidating Statements of Cash Flows

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2014
Cash flows from (used in) operating activities	$	326		$	635		$	(44	)	$	(662	)	$	255
Cash flows from (used in) investing activities:
Capital expenditures		—			(41	)		(86	)		4			(123	)
Proceeds from termination of joint venture		—			—			35			—			35
Contributions to intercompany investments		(32	)		—			—			32			—
Other, net		143			41			(33	)		(175	)		(24	)
Net cash flows from (used in) investing activities		111			—			(84	)		(139	)		(112	)
Cash flows from (used in) financing activities:
Dividends paid on common stock		(699	)		(637	)		—			637			(699	)
Repurchase of common stock		(440	)		—			—			—			(440	)
Principal borrowings under revolving credit facility		1,000			—			—			—			1,000
Repayments under revolving credit facility		(200	)		—			—			—			(200	)
Excess tax benefit on stock-based compensation plans		10			—			—			—			10
Dividends paid on preferred stock		(21	)		—			—			21			—
Receipt of equity		—			—			32			(32	)		—
Other, net		(31	)		(320	)		176			175			—
Net cash flows from (used in) financing activities		(381	)		(957	)		208			801			(329	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(1	)		—			(1	)
Net change in cash and cash equivalents		56			(322	)		79			—			(187	)
Cash and cash equivalents at beginning of period		444			696			360			—			1,500
Cash and cash equivalents at end of period	$	500		$	374		$	439		$	—		$	1,313

73

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Condensed Consolidating Statements of Cash Flows

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2013
Cash flows from (used in) operating activities	$	199		$	(356	)	$	(23	)	$	(24	)	$	(204	)
Cash flows from (used in) investing activities:
Capital expenditures		—			(33	)		(20	)		3			(50	)
Proceeds from termination of joint venture		—			—			31			—			31
Other, net		31			18			—			(44	)		5
Net cash flows from (used in) investing activities		31			(15	)		11			(41	)		(14	)
Cash flows from (used in) financing activities:
Dividends paid on common stock		(650	)		—			—			—			(650	)
Repurchase of common stock		(475	)		—			—			—			(475	)
Principal borrowings under term-loan facility		500			—			—			—			500
Excess tax benefit on stock-based compensation plans		11			—			—			—			11
Dividends paid on preferred stock		(21	)		—			—			21			—
Debt issuance costs and financing fees		(3	)		—			—			—			(3	)
Other, net		(11	)		(120	)		87			44			—
Net cash flows from (used in) financing activities		(649	)		(120	)		87			65			(617	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(3	)		—			(3	)
Net change in cash and cash equivalents		(419	)		(491	)		72			—			(838	)
Cash and cash equivalents at beginning of period		755			1,420			327			—			2,502
Cash and cash equivalents at end of period	$	336		$	929		$	399		$	—		$	1,664

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Condensed Consolidating Balance Sheets

(Dollars in Millions)

	Parent Issuer		Guarantors		Non- Guarantors		Eliminations			Consolidated
June 30, 2014
Assets
Cash and cash equivalents	$	500	$	374	$	439	$	—		$	1,313
Accounts receivable		—		59		39		—			98
Accounts receivable, related party		—		66		—		—			66
Notes receivable		—		1		—		—			1
Other receivables		127		1,101		2		(1,219	)		11
Inventories		—		966		94		(1	)		1,059
Deferred income taxes, net		—		649		1		(13	)		637
Prepaid expenses and other		60		211		4		(2	)		273
Total current assets		687		3,427		579		(1,235	)		3,458
Property, plant and equipment, net		4		983		190		—			1,177
Trademarks and other intangible assets, net		—		2,408		4		—			2,412
Goodwill		—		7,999		19		—			8,018
Long-term intercompany notes receivable		1,700		201		—		(1,901	)		—
Investment in subsidiaries		10,092		481		—		(10,573	)		—
Other assets and deferred charges		94		179		19		(56	)		236
Total assets	$	12,577	$	15,678	$	811	$	(13,765	)	$	15,301
Liabilities and shareholders’ equity
Accounts payable	$	1	$	111	$	25	$	—		$	137
Tobacco settlement accruals		—		1,248		—		—			1,248
Due to related party		—		1		—		—			1
Deferred revenue, related party		—		17		—		—			17
Revolving credit facility borrowings		800		—		—		—			800
Other current liabilities		1,525		745		85		(1,235	)		1,120
Total current liabilities		2,326		2,122		110		(1,235	)		3,323
Long-term intercompany notes payable		201		1,380		320		(1,901	)		—
Long-term debt (less current maturities)		5,091		—		—		—			5,091
Deferred income taxes, net		—		764		2		(56	)		710
Long-term retirement benefits (less current portion)		40		1,109		9		—			1,158
Other noncurrent liabilities		24		100		—		—			124
Shareholders’ equity		4,895		10,203		370		(10,573	)		4,895
Total liabilities and shareholders’ equity	$	12,577	$	15,678	$	811	$	(13,765	)	$	15,301

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Condensed Consolidating Balance Sheets

(Dollars in Millions)

	Parent Issuer		Guarantors		Non- Guarantors		Eliminations			Consolidated
December 31, 2013
Assets
Cash and cash equivalents	$	444	$	696	$	360	$	—		$	1,500
Accounts receivable		—		74		32		—			106
Accounts receivable, related party		—		56		—		—			56
Notes receivable		—		1		36		—			37
Other receivables		76		198		6		(264	)		16
Inventories		—		1,069		59		(1	)		1,127
Deferred income taxes, net		—		614		1		(9	)		606
Prepaid expenses and other		29		172		7		(1	)		207
Total current assets		549		2,880		501		(275	)		3,655
Property, plant and equipment, net		5		986		83		—			1,074
Trademarks and other intangible assets, net		—		2,413		4		—			2,417
Goodwill		—		7,999		12		—			8,011
Long-term intercompany notes receivable		1,842		1,295		—		(3,137	)		—
Investment in subsidiaries		9,736		473		—		(10,209	)		—
Other assets and deferred charges		94		187		18		(54	)		245
Total assets	$	12,226	$	16,233	$	618	$	(13,675	)	$	15,402
Liabilities and shareholders’ equity
Accounts payable	$	1	$	169	$	15	$	—		$	185
Tobacco settlement accruals		—		1,727		—		—			1,727
Deferred revenue, related party		—		48		—		—			48
Other current liabilities		601		744		46		(275	)		1,116
Total current liabilities		602		2,688		61		(275	)		3,076
Long-term intercompany notes payable		1,295		1,700		142		(3,137	)		—
Long-term debt (less current maturities)		5,099		—		—		—			5,099
Deferred income taxes, net		—		710		2		(54	)		658
Long-term retirement benefits (less current portion)		38		1,172		11		—			1,221
Other noncurrent liabilities		25		156		—		—			181
Shareholders’ equity		5,167		9,807		402		(10,209	)		5,167
Total liabilities and shareholders’ equity	$	12,226	$	16,233	$	618	$	(13,675	)	$	15,402

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Note 15 – Subsequent Event

On July 15, 2014, RAI, a wholly owned subsidiary of RAI, and Lorillard Inc., referred to as Lorillard, entered into a merger agreement pursuant to which RAI agreed to acquire Lorillard in a cash and stock transaction valued at $27.4 billion (based on the closing price of RAI common stock on July 14, 2014), including the assumption of net debt. Upon the consummation of the merger, each share of Lorillard common stock will be converted into the right to receive (1) 0.2909 of a share of RAI common stock plus (2) $50.50 per share in cash.

Also on July 15, 2014, RAI entered into a purchase agreement with a subsidiary of Imperial Tobacco Group PLC, referred to as Imperial, pursuant to which Imperial agreed to purchase the KOOL, SALEM and WINSTON (and, under certain circumstances, DORAL) brands of RJR Tobacco, the MAVERICK and blu eCigs brands of Lorillard, and other assets and, agreed to assume certain liabilities for a total consideration of approximately $7.1 billion. As part of this transaction, Imperial will acquire certain other assets owned by Lorillard, including its manufacturing and research and development facilities, and approximately 2,900 employees, including a national sales force. The closing of the sale of these assets to Imperial is conditioned upon, among other things, RAI’s completion of the acquisition of Lorillard.

BAT and B&W, RAI’s largest shareholder, have agreed that B&W will vote its shares in favor of the issuance of additional RAI shares contemplated by the parties’ subscription agreement and the merger agreement, and that BAT will maintain its 42% beneficial ownership in RAI through a purchase of additional shares of RAI common stock for approximately $4.7 billion.

On July 15, 2014, in connection with the Lorillard transaction, RAI entered into a commitment letter, referred to as the Commitment Letter, with J.P. Morgan Securities LLC, JPMorgan Chase Bank, N.A., and Citigroup Global Markets Inc.. Under the Commitment Letter, subject to the terms and conditions therein, JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc. (or certain of their affiliates) have committed (subject to the satisfaction or waiver of the conditions stated therein) to provide a 364-day senior unsecured term loan bridge facility in an aggregate principal amount of up to $9 billion for the purpose of financing part of the cash portion of the Lorillard transaction, and fees and expenses in connection with the transactions contemplated by the Lorillard transaction.

The proposed transactions, referred to as the Proposed Transactions, are subject to customary closing conditions, including shareholder and regulatory approvals. The merger agreement contains certain other termination rights for each of RAI and Lorillard, including the right of each party to terminate the merger agreement if the merger has not been consummated by July 15, 2015, subject to an automatic six-month extension if, on July 15, 2015, the merger has not yet received antitrust approval or certain specified legal restraints are in place but all other closing conditions have been satisfied. The Proposed Transactions are scheduled to close substantially at the same time.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of RAI’s business, initiatives, critical accounting estimates and its consolidated results of operations and financial position. Following the overview and discussion of business initiatives, the critical accounting estimates disclose certain accounting estimates that are material to RAI’s results of operations and financial position for the periods presented in this report. The discussion and analysis of RAI’s results of operations compares the second quarter of 2014 with the second quarter of 2013, and the first six months of 2014 with the first six months of 2014. Disclosures related to liquidity and financial position complete management’s discussion and analysis. You should read this discussion and analysis of RAI’s consolidated financial position and results of operations in conjunction with the financial information included in the condensed consolidated financial statements (unaudited).

Overview and Business Initiatives

RAI’s reportable operating segments are RJR Tobacco, American Snuff and Santa Fe. The RJR Tobacco segment consists principally of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. The Santa Fe segment consists of the domestic operations of SFNTC. Included in All Other are RJR Vapor, Niconovum AB, Niconovum USA, Inc., and various international operations, among other RAI subsidiaries. The segments were identified based on how RAI’s chief operating decision maker allocates resources and assesses performance. Certain of RAI’s operating subsidiaries have entered into intercompany agreements for products or services with other subsidiaries. As a result, certain activities of an operating subsidiary may be included in a different segment of RAI.

As a result of shifts in consumer preferences, RAI’s strategy continues to focus on transforming tobacco to deliver sustainable earnings growth, strong cash flow and enhanced long-term shareholder value. This transformation strategy includes growing the core cigarette business, moist-snuff business, focusing on innovation and engaging with adult tobacco consumers, while maintaining efficient and effective operations.

To achieve its strategy, RAI encourages the migration of adult smokers to smoke-free tobacco products and other products, which it believes aligns consumer preferences for new alternatives to traditional tobacco products in view of societal pressure to reduce smoking. RAI’s operating companies facilitate this migration through innovation, including the development of CAMEL Snus, heat-not-burn cigarettes, digital vapor cigarettes and nicotine replacement therapy technologies. RAI remains committed to maintaining high standards of corporate governance and business conduct in a high performing culture.

RAI’s largest reportable operating segment, RJR Tobacco, is the second largest tobacco company in the United States. RJR Tobacco’s brands include two of the best-selling cigarettes in the United States: CAMEL and PALL MALL. These brands, and its other brands, including WINSTON, KOOL, DORAL, SALEM, MISTY and CAPRI, are manufactured in a variety of styles and marketed in the United States. RJR Tobacco manages contract manufacturing of cigarettes and tobacco products through arrangements with BAT affiliates, and manages the export of tobacco products to certain U.S. territories, U.S. duty-free shops and U.S. overseas military bases. RJR Tobacco also manages the super-premium cigarette brands, DUNHILL and STATE EXPRESS 555, which are licensed from BAT.

American Snuff is the second largest smokeless tobacco products manufacturer in the United States. American Snuff’s primary brands include its largest selling moist snuff brands, GRIZZLY and KODIAK.

Santa Fe manufactures and markets super-premium cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand in the United States.

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RJR Tobacco

RJR Tobacco primarily conducts business in the highly competitive U.S. cigarette market. The international rights to substantially all of RJR Tobacco’s brands were sold in 1999 to JTI, and no international rights were acquired in connection with the B&W business combination. The U.S. cigarette market, which has a few large manufacturers and many smaller participants, is a mature market in which overall adult consumer demand has declined since 1981, and is expected to continue to decline. Profitability of the U.S. cigarette industry and RJR Tobacco continues to be adversely impacted by decreases in consumption, increases in state excise taxes and governmental regulations and restrictions, such as marketing limitations, product standards and ingredients legislation.

RJR Tobacco’s cigarette brand portfolio strategy is based upon three brand categories: growth, support and non-support. The growth brands consist of a premium brand, CAMEL, and the largest traditional value brand, PALL MALL. Although both of these brands are managed for long-term market share and profit growth, CAMEL will continue to receive the most significant equity support. The support brands include four premium brands, WINSTON, KOOL, SALEM and CAPRI, and two value brands, DORAL and MISTY, all of which receive limited marketing support. The non-support brands, consisting of all other brands, are managed to maximize near-term profitability. The key objectives of the portfolio strategy are designed to focus on the long-term market share growth of the growth brands while managing the support brands for long-term sustainability and profitability. Consistent with that strategy, RJR Tobacco continues to evaluate some of its non-core cigarette styles for potential elimination.

RJR Tobacco’s portfolio also includes CAMEL Snus, a smoke-free tobacco product. CAMEL Snus is heat-treated tobacco in individual pouches that provides convenient tobacco consumption.

Competition is based primarily on brand positioning, including price, product attributes and packaging, consumer loyalty, promotions, advertising and retail presence, as well as finding efficient and effective means of balancing market share and profit growth. Cigarette brands produced by the major manufacturers generally require competitive pricing, substantial marketing support, retail programs and other incentives to maintain or improve market position or to introduce a new brand or brand style. Competition among the major cigarette manufacturers continues to be highly competitive and includes product innovation and expansion into smoke-free tobacco categories.

RJR Tobacco is committed to building and maintaining a portfolio of profitable brands. RJR Tobacco’s marketing programs are designed to strengthen brand image, build brand awareness and loyalty, and switch adult smokers of competing brands to RJR Tobacco brands. In addition to building strong brand equity, RJR Tobacco’s marketing approach utilizes a retail pricing strategy, including discounting at retail, to defend certain brands’ shares of market against competitive pricing pressure. RJR Tobacco’s competitive pricing methods may include list price changes, discounting programs, such as retail and wholesale buydowns, periodic price reductions, off-invoice price reductions, dollar-off promotions and consumer coupons. Retail buydowns refer to payments made to the retailer to reduce the price that consumers pay at retail. Consumer coupons generally are distributed by a variety of methods, including in, or on, the pack and by direct mail.

American Snuff

American Snuff offers a range of differentiated smokeless tobacco products to adult tobacco consumers, primarily moist snuff. The moist snuff category is divided into premium and price-value brands. The highly competitive moist snuff category has developed many of the characteristics of the larger cigarette market, including multiple pricing tiers, focused marketing programs and significant product innovation.

In contrast to the declining U.S. cigarette market, U.S. moist snuff retail volumes grew approximately 4% in the first six months of 2014. Profit margins on moist snuff products are generally higher than on cigarette products. Moist snuff’s growth is partially attributable to cigarette smokers switching from cigarettes to smokeless tobacco products or using both.

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American Snuff faces significant competition in the smokeless tobacco category. Similar to the cigarette market, competition is based primarily on brand positioning and price, as well as product attributes and packaging, consumer loyalty, promotions, advertising and retail presence.

Santa Fe

Santa Fe competes in the U.S. cigarette market with its NATURAL AMERICAN SPIRIT brand, which is the leader in the super-premium cigarette category and is a top 10 best-selling cigarette brand. It is priced higher than most other competitive brands, and is differentiated from key competitors through its use of all natural, additive-free tobacco, including styles made with organic tobacco. Competition in the cigarette category is based primarily on brand positioning, including price, product attributes and packaging, consumer loyalty, promotions, advertising and retail presence.

All Other

RJR Vapor expanded the distribution of VUSE digital vapor cigarettes to retail outlets throughout Colorado in 2013 and into Utah in the first quarter of 2014. The initial phase of the national expansion of VUSE began in June 2014, and the next wave of distribution is scheduled for the third quarter of 2014. The expansion is expected to continue in phases through March 2015, when VUSE will be available in most retail outlets. VUSE’s innovative digital technology is designed to deliver a consistent flavor and vapor experience.

Niconovum AB, is a marketer of nicotine replacement therapy products in Sweden under the ZONNIC brand name. Niconovum USA, Inc., is in lead markets in Iowa and Nebraska with ZONNIC, a nicotine replacement therapy gum.

Transaction Agreements

On July 15, 2014, RAI, a wholly owned subsidiary of RAI, and Lorillard, entered into a merger agreement pursuant to which RAI agreed to acquire Lorillard in a cash and stock transaction valued at $27.4 billion (based on the closing price of RAI common stock on July 14, 2014), including the assumption of net debt. Upon the consummation of the merger, each share of Lorillard common stock will be converted into the right to receive (1) 0.2909 of a share of RAI common stock plus (2) $50.50 per share in cash.

Also on July 15, 2014, RAI entered into a purchase agreement with Imperial, pursuant to which Imperial agreed to purchase the KOOL, SALEM and WINSTON (and, under certain circumstances, DORAL) brands of RJR Tobacco, the MAVERICK and blu eCigs brands of Lorillard, and other assets and, agreed to assume certain liabilities for a total consideration of approximately $7.1 billion. As part of this transaction, Imperial will acquire certain other assets owned by Lorillard, including its manufacturing and research and development facilities, and approximately 2,900 employees, including a national sales force. The closing of the sale of these assets to Imperial is conditioned upon, among other things, RAI’s completion of the acquisition of Lorillard.

BAT and B&W, RAI’s largest shareholder, have agreed that B&W will vote its shares in favor of the issuance of additional RAI shares contemplated by the parties’ subscription agreement and the merger agreement, and that BAT will maintain its 42% beneficial ownership in RAI through a purchase of additional shares of RAI common stock for approximately $4.7 billion.

On July 15, 2014, in connection with the Lorillard transaction, RAI entered into a Commitment Letter with J.P. Morgan Securities LLC, JPMorgan Chase Bank, N.A., and Citigroup Global Markets Inc.. Under the Commitment Letter, subject to the terms and conditions therein, JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc. (or certain of their affiliates) have committed (subject to the satisfaction or waiver of the conditions stated therein) to provide a 364-day senior unsecured term loan bridge facility in an aggregate principal amount of up to $9 billion for the purpose of financing part of the cash portion of the Lorillard transaction, and fees and expenses in connection with the transactions contemplated by the Lorillard transaction.

The Proposed Transactions are subject to customary closing conditions, including shareholder and regulatory approvals. The merger agreement contains certain other termination rights for each of RAI and Lorillard, including the right of each party to terminate the merger agreement if the merger has not been consummated by July 15, 2015, subject to an automatic six-month extension if, on July 15, 2015, the merger has not yet received antitrust approval or certain specified legal restraints are in place but all other closing conditions have been satisfied. The Proposed Transactions are scheduled to close substantially at the same time.

For further discussion of these transactions, see RAI’s Current Report on Form 8-K dated July 15, 2014.

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Critical Accounting Estimates

GAAP requires estimates and assumptions to be made that affect the reported amounts in RAI’s condensed consolidated financial statements (unaudited) and accompanying notes. Some of these estimates require difficult, subjective and/or complex judgments about matters that are inherently uncertain, and as a result, actual results could differ from those estimates. Due to the estimation processes involved, the following summarized accounting policies and their application are considered to be critical to understanding the business operations, financial position and results of operations of RAI and its subsidiaries.

Litigation

RAI discloses information concerning litigation for which an unfavorable outcome is more than remote. RAI and its subsidiaries record their legal expenses and other litigation costs and related administrative costs as selling, general and administrative expenses as those costs are incurred. RAI and its subsidiaries will record any loss related to litigation at such time as an unfavorable outcome becomes probable and the amount can be reasonably estimated on an individual case-by-case basis. When the reasonable estimate is a range, the recorded loss will be the best estimate within the range. If no amount in the range is a better estimate than any other amount, the minimum amount of the range will be recorded.

RJR Tobacco, American Snuff Co. or their affiliates, including RAI, and RJR, or indemnitees, have been named in a number of tobacco-related legal actions, proceedings or claims seeking damages in amounts ranging into the hundreds of millions or even billions of dollars. Unfavorable judgments have been returned in a number of tobacco-related cases and state enforcement actions.

RAI and its subsidiaries believe that they have valid bases for appeal of adverse verdicts against them and believe they have valid defenses to all actions, and they intend to defend all actions vigorously. RAI’s management continues to conclude that the loss of any particular smoking and health tobacco litigation claim against RJR Tobacco or its affiliates or indemnitees, including B&W, or the loss of any particular claim concerning the use of smokeless tobacco products against American Snuff Co., when viewed on an individual basis, is not probable or estimable, except for Engle Progeny cases described in “— Litigation Affecting the Cigarette Industry — Engle and Engle Progeny Cases” in note 9 to condensed consolidated financial statements (unaudited).

Litigation is subject to many uncertainties, and it is possible that some of the tobacco-related legal actions, proceedings or claims could ultimately be decided against RJR Tobacco, American Snuff Co. or their affiliates, including RAI, and indemnitees. Any unfavorable outcome of such actions could have a material adverse effect on the consolidated results of operations, cash flows or financial position of RAI or its subsidiaries.

For further discussion of the litigation and legal proceedings pending against RAI or its affiliates or indemnitees, see note 9 to condensed consolidated financial statements (unaudited).

State Settlement Agreements

RJR Tobacco and SFNTC are participants in the MSA, and RJR Tobacco is a participant in the other state settlement agreements with the states of Mississippi, Florida, Texas and Minnesota. Their obligations and the related expense charges under these agreements are subject to adjustments based upon, among other things, the volume of cigarettes sold by the operating subsidiaries, their relative market share and inflation. Since relative market share is based on cigarette shipments, the best estimate of the allocation of charges to RJR Tobacco and SFNTC under these agreements is recorded in cost of products sold as the products are shipped. Included in these adjustments is an NPM Adjustment that potentially reduces the annual payment obligation of RJR Tobacco, SFNTC and the other PMs. Adjustments to these estimates are recorded in the period that the change becomes probable and the amount can be reasonably estimated. American Snuff Co. is not a participant in the State Settlement Agreements. For additional

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information related to historical and expected settlement expenses and payments under the State Settlement Agreements, see “—Litigation Affecting the Cigarette Industry — Health-Care Cost Recovery Cases — State Settlement Agreements” and “— State Settlement Agreements—Enforcement and Validity; Adjustments” in note 9 to condensed consolidated financial statements (unaudited).

Pension and Postretirement Benefits

RAI sponsors a number of non-contributory defined benefit pension plans covering most of the employees of RAI and certain of its subsidiaries, and also provides certain health and life insurance benefits for most of their retired employees and their dependents. These benefits are generally no longer provided to employees hired on or after January 1, 2004.

Because pension and other postretirement obligations ultimately will be settled in future periods, the determination of annual expense and liabilities is subject to estimates and assumptions. RAI reviews these assumptions annually based on historical experience and expected future trends or coincidental with a major event and modifies them as needed. Demographic assumptions such as termination of employment, mortality or retirement are reviewed periodically as expectations change.

Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. RAI immediately recognizes actuarial gains and losses in its operating results in the year in which they occur, to the extent such gains and losses are in excess of 10% of the greater of the fair value of the plan assets or the plan’s benefit obligation, referred to as the corridor. Actuarial gains and losses outside the corridor are recognized annually as of December 31, or when the plans are remeasured during an interim period, and are recorded as an MTM adjustment. Additionally, for the purpose of calculating the expected return on plan assets, RAI uses the actual fair value of plan assets.

Prior service costs of pension benefits, which are changes in benefit obligations due to plan amendments, are amortized on a straight-line basis over the average remaining service period for active employees, or average remaining life expectancies for inactive employees if most of the plan obligations are due to inactive employees. Prior service costs of postretirement benefits, which are changes in benefit obligations due to plan amendments, are amortized on a straight-line basis over the expected service period to full eligibility age for active employees, or average remaining life expectancies for inactive employees if most of the plan obligations are due to inactive employees.

Actual results have varied from actuarial assumptions. In particular, pension and postretirement obligations are impacted by changes in the discount rates. These changes can result in gains or losses to other comprehensive loss. The Pension Protection Act of 2006 may require additional cash funding of the pension obligations in the future.

Intangible Assets

Intangible assets include goodwill, trademarks and other intangible assets. Goodwill, trademarks and other intangible assets with indefinite lives are tested for impairment annually in the fourth quarter. Goodwill, trademarks and other intangible assets are tested more frequently if events and circumstances indicate that the asset might be impaired. The determination of fair value involves considerable estimates and judgment. For goodwill, the determination of the fair value of a reporting unit involves, among other things, RAI’s market capitalization, and application of the income approach, which includes developing forecasts of future cash flows and determining an appropriate discount rate. If goodwill impairment is implied, the fair values of individual assets and liabilities, including unrecorded intangibles, must be determined. Although RAI believes it has based impairment testing and impairment charges of its intangibles on reasonable estimates and assumptions, the use of different estimates and assumptions could result in materially different results. If there is a significant adverse change in the legal and regulatory environment, or the business or competitive climate worsens, or RAI’s operating companies’ strategic initiatives adversely affect their financial performance, the fair value of goodwill, trademarks and other intangible assets could be impaired in future periods.

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Fair Value Measurement

RAI determines fair value of assets and liabilities using a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market participant assumptions based on the best information available in the circumstances.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price. The levels of the fair value hierarchy are:

Level 1: inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

Income Taxes

Tax law requires certain items to be excluded or included in taxable income at different times than is required for book reporting purposes. These differences may be permanent or temporary in nature.

RAI determines its annual effective income tax rate based on forecasted pre-tax book income and forecasted permanent book and tax differences. The rate is established at the beginning of the year and is evaluated on a quarterly basis. Any changes to the forecasted information may cause the effective rate to be adjusted. Additional tax, interest and penalties associated with uncertain tax positions are recognized in tax expense on a quarterly basis.

To the extent that any book and tax differences are temporary in nature, that is, the book realization will occur in a different period than the tax realization, a deferred tax asset or liability is established. To the extent that a deferred tax asset is created, management evaluates RAI’s ability to realize this asset. RAI maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. This allowance is attributable to deferred tax assets established for capital loss carryforwards.

The financial statements reflect management’s best estimate of RAI’s current and deferred tax liabilities and assets. Future events, including, but not limited to, additional resolutions with taxing authorities could have an impact on RAI’s current estimate of tax liabilities, realization of tax assets and effective income tax rate.

Recently Issued Accounting Pronouncements

For information relating to recently issued accounting pronouncements, see note 1 to condensed consolidated financial statements (unaudited).

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Results of Operations

	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2014			2013			% Change			2014			2013			% Change
Net sales(1):
RJR Tobacco	$	1,736		$	1,792			(3.1	)%	$	3,299		$	3,350			(1.5	)%
American Snuff		195			194			0.5	%		379			361			5.0	%
Santa Fe		168			148			13.5	%		303			263			15.2	%
All Other		63			45			40.0	%		116			88			31.8	%
Net sales		2,162			2,179			(0.8	)%		4,097			4,062			0.9	%
Cost of products sold(1)(2)		959			999			(4.0	)%		1,889			1,693			11.6	%
Selling, general and administrative expenses		364			380			(4.2	)%		777			681			14.1	%
Amortization expense		3			2			50.0	%		5			3			66.7	%
Operating income (loss):
RJR Tobacco		726			663			9.5	%		1,208			1,421			(15.0	)%
American Snuff		110			107			2.8	%		212			200			6.0	%
Santa Fe		84			72			16.7	%		149			126			18.3	%
All Other		(49	)		(19	)		NM	(3)		(88	)		(23	)		NM	(3)
Corporate expense		(35	)		(25	)		(40.0	)%		(55	)		(39	)		(41.0	)%
Operating income	$	836		$	798			4.8	%	$	1,426		$	1,685			(15.4	)%

⁽¹⁾ Excludes excise taxes of:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
RJR Tobacco	$	787	$	857	$	1,506	$	1,605
American Snuff		13		14		26		26
Santa Fe		54		50		98		90
All Other		73		62		143		117
	$	927	$	983	$	1,773	$	1,838

⁽²⁾ See below for further information related to the State Settlement Agreements, federal tobacco quota buyout and FDA user fees included in cost of products sold.

⁽³⁾ Percentage of change not meaningful.

In the following discussion, the amounts presented in the operating companies’ shipment volume and share tables are rounded on an individual basis and, accordingly, may not sum in the aggregate. Percentages are calculated on unrounded numbers.

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RJR Tobacco

Net Sales

Domestic cigarette shipment volume, in billions of units for RJR Tobacco and the industry, was as follows:

	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2014			2013			% Change			2014			2013			% Change
RJR Tobacco:
Growth brands:
CAMEL		5.2			5.5			(4.4	)%		10.2			10.3			(1.2	)%
PALL MALL		5.3			5.6			(6.0	)%		10.1			10.4			(3.3	)%
		10.5			11.1			(5.2	)%		20.3			20.7			(2.3	)%
Other		5.1			5.9			(14.0	)%		9.7			11.2			(13.5	)%
Total RJR Tobacco domestic cigarette shipment volume		15.6			17.0			(8.3	)%		29.9			31.9			(6.2	)%
Total premium		9.1			9.9			(7.9	)%		17.4			18.5			(5.9	)%
Total value		6.5			7.2			(8.8	)%		12.5			13.4			(6.6	)%
Premium/total mix		58.2	%		58.0	%					58.3	%		58.1	%
Industry(1):
Premium		48.6			50.9			(4.7	)%		92.1			95.6			(3.7	)%
Value		19.0			20.5			(7.5	)%		36.5			38.6			(5.5	)%
Total industry domestic cigarette shipment volume		67.5			71.5			(5.5	)%		128.6			134.2			(4.2	)%
Premium/total mix		71.9	%		71.3	%					71.6	%		71.2	%

⁽¹⁾ Based on information from Management Science Associates, Inc., referred to as MSAi.

RJR Tobacco’s net sales are dependent upon its cigarette shipment volume in a declining market, premium versus value-brand mix and list pricing, offset by promotional spending, trade incentives and federal excise taxes.

RJR Tobacco’s net sales for the three months ended June 30, 2014, decreased compared with the prior-year quarter, primarily due to $145 million attributable to lower domestic cigarette volume and $11 million attributable to unfavorable premium-to-value mix, partially offset by higher net pricing of $116 million. RJR Tobacco’s net sales for the six months ended June 30, 2014, decreased compared with the prior-year period, primarily due to $202 million attributable to lower domestic cigarette volume and $27 million attributable to unfavorable premium-to-value mix, partially offset by higher net pricing of $189 million.

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Market Share

The shares of RJR Tobacco’s cigarette brands as a percentage of total share of U.S. retail cigarette sales, based on data collected by SymphonyIRI Group, Inc. and Capstone Research Inc., collectively referred to as IRI/Capstone, and processed and managed by MSAi⁽¹⁾⁽²⁾, were as follows:

	For the Three Months Ended
	June 30, 2014			March 31, 2014			Share Point Change			June 30, 2013			Share Point Change
Growth brands:
CAMEL		10.2	%		10.0	%		0.2			9.8	%		0.4
PALL MALL		9.3	%		9.4	%		(0.1	)		9.3	%		0.1
Total growth brands		19.5	%		19.4	%		0.1			19.0	%		0.5
Other		7.0	%		7.2	%		(0.2	)		7.6	%		(0.6	)
Total RJR Tobacco domestic cigarette retail share of market		26.5	%		26.6	%		(0.1	)		26.6	%		(0.1	)

⁽¹⁾ Retail share of U.S. cigarette sales data is included in this document because it is used by RJR Tobacco primarily as an indicator of the relative performance of industry participants, brands and market trends. You should not rely on the market share data reported by IRI/Capstone as being a precise measurement of actual market share because IRI/Capstone uses a sample methodology that does not track all volume and trade channels. Accordingly, the retail share of the U.S. cigarette market of RJR Tobacco and its brands as reported by IRI/Capstone may overstate or understate their actual market share. Moreover, you should be aware that in a product market experiencing overall declining consumption, a particular product can experience increasing market share relative to competing products, yet still be subject to declining consumption volumes.

⁽²⁾  Effective in the first quarter of 2014, retail share results are based on a revised, more efficient, IRI/Capstone model which measures retail share in stores representing trade channels where the majority of tobacco industry products are sold and resource investments are made. Retail share results reported by the new IRI/Capstone model cannot be meaningfully compared to previously reported share results provided by the previous model. All retail share results for 2013 have been restated to reflect the new IRI/Capstone model. In the second quarter of 2014, at the request of RJR Tobacco, the IRI/Capstone model was revised to better reflect retail sales through these trade channels. All data reflects this revision.

The retail share of market of CAMEL, at 10.2 share points, was up 0.4 share points compared with the prior-year quarter. CAMEL’s cigarette market share continued to be favorably impacted by its innovative capsule technology offered in CAMEL Crush and CAMEL menthol styles. CAMEL Crush styles provide adult smokers the choice of switching from non-menthol to menthol. CAMEL menthol styles allow adult smokers to choose the level of menthol flavor on demand. CAMEL’s second quarter of 2014 menthol market share, including CAMEL Crush styles, increased 0.3 share points from the second quarter of 2013 to 4.3 percent.

CAMEL Snus, a smoke-free tobacco product, continues to lead the growing U.S. snus category, maintaining a market share of approximately 80%.

PALL MALL, a product that offers a high quality, longer-lasting cigarette at a value price, continues to attract interest from adult tobacco consumers. PALL MALL’s second-quarter market share of 9.3% was up 0.1 share points compared with the prior-year quarter despite continued competitive pressure. PALL MALL’s menthol portfolio is providing the brand’s incremental growth.

The combined share of market of RJR Tobacco’s growth brands during the second quarter of 2014 increased by 0.5 share points over the same period in 2013. RJR Tobacco’s total cigarette market share was down slightly from the prior-year quarter, mainly driven by increases in the company’s growth brands, more than offset by decreases in the support and non-support brands, consistent with its strategy of focusing on growth brands.

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Operating Income

RJR Tobacco’s operating income for the three-month period ended June 30, 2014, was favorably impacted by higher cigarette pricing, partially offset by lower cigarette volume and unfavorable premium-to-value mix. In addition, RJR Tobacco’s operating income was favorably impacted by the partial settlement of certain NPM Adjustment claims, related to the Term Sheet, of $124 million and $89 million for the three months ended June 30, 2014 and 2013, respectively.

RJR Tobacco’s operating income for the six-month period ended June 30, 2014, decreased due to lower cigarette volume, increased litigation claims, unfavorable premium-to-value mix and increased promotional spending, partially offset by higher cigarette pricing. In addition, RJR Tobacco’s operating income was favorably impacted by the partial settlement of certain NPM Adjustment claims, related to the Term Sheet, of $186 million and $348 million for the six months ended June 30, 2014 and 2013, respectively.

RJR Tobacco’s expenses under the State Settlement Agreements, federal tobacco quota buyout and FDA user fees, included in cost of products sold were:

	For the Three Months Ended June 30,				For the Six Months  Ended June 30,
	2014		2013		2014		2013
State Settlement Agreements	$	429	$	496	$	862	$	746
Federal tobacco quota buyout		48		50		99		99
FDA user fees		30		29		62		59

Expenses under the State Settlement Agreements are expected to be approximately $1.8 billion in 2014, subject to adjustment for changes in volume and other factors. Pursuant to the Term Sheet, RJR Tobacco will receive credits with respect to its NPM Adjustment claims for the period from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period, which commenced with the April 2013 payment. RJR Tobacco’s MSA expenses were reduced by approximately $15 million and $217 million for the three and six months ended June 30, 2013, respectively.

In June 2014, two additional states agreed to settle the NPM Adjustment disputes on similar terms as set forth in the Term Sheet, except for certain provisions related to the determination of credits to be received by the PMs. RJR Tobacco will receive credits, currently estimated to total approximately $169 million, with respect to its NPM Adjustment claims from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period effectively beginning with the April 2014 MSA payment related to the addition of these two states. As a result, expenses for the MSA were reduced by approximately $34 million for the three and six months ended June 30, 2014.

In addition, as a result of meeting the performance requirements associated with the Term Sheet, RJR Tobacco recognized additional credits of $90 million and $74 million for the three months ended June 30, 2014 and 2013, respectively; and $152 million and $131 million for the six months ended June 30, 2014 and 2013, respectively. RJR Tobacco expects to recognize additional credits through 2017.

For additional information, see “— Cost of Products Sold” in note 1 and “— Litigation Affecting the Cigarette Industry — Health-Care Cost Recovery Cases — State Settlement Agreements” and “— State Settlement Agreements—Enforcement and Validity; Adjustments” in note 9 to condensed consolidated financial statements (unaudited).

Expenses for the federal tobacco quota buyout assessment, which expires in September 2014, are expected to be approximately $150 million to $160 million in 2014. Expenses for FDA user fees are expected to be approximately $120 million to $130 million in 2014. For additional information, see “— Tobacco Buyout Legislation” in note 9 to condensed consolidated financial statements (unaudited) and “— Governmental Activity” below.

Selling, general and administrative expenses include the costs of litigating and administering product liability claims, as well as other legal expenses. RJR Tobacco’s product liability defense costs were $47 million and $39 million for the three months ended June 30, 2014 and 2013, respectively; and $93 million and $89 million for the six months ended June 30, 2014 and 2013, respectively.

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“Product liability” cases generally include the following types of smoking and health related cases:

• Individual Smoking and Health;

• West Virginia IPIC;

• Engle Progeny;

• Broin II;

• Class Actions; and

• Health-Care Cost Recovery Claims.

“Product liability defense costs” include the following items:

• direct and indirect compensation, fees and related costs, and expenses for internal legal and related administrative staff administering the defense of product liability claims;

• fees and cost reimbursements paid to outside attorneys;

• direct and indirect payments to third party vendors for litigation support activities;

• expert witness costs and fees; and

• payments to fund legal defense costs for the now dissolved Council for Tobacco Research — U.S.A.

Numerous factors affect product liability defense costs. The most important factors are the number of cases pending and the number of cases in trial or in preparation for trial, that is, with active discovery and motions practice. See “— Litigation Affecting the Cigarette Industry — Overview” in note 9 to condensed consolidated financial statements (unaudited) for detailed information regarding the number and type of cases pending, and “— Litigation Affecting the Cigarette Industry — Overview — Scheduled Trials” in note 9 to condensed consolidated financial statements (unaudited) for detailed information regarding the number and nature of cases in trial and scheduled for trial through June 30, 2015.

RJR Tobacco expects that the factors described above will continue to have the primary impact on its product liability defense costs in the future. Given the level of activity in RJR Tobacco’s pending cases, including the number of cases in trial and scheduled for trial, particularly with respect to Engle Progeny cases, RJR Tobacco’s product liability defense costs continue to remain at a high level. See “— Litigation Affecting the Cigarette Industry — Engle and Engle Progeny Cases” in note 9 to condensed consolidated financial statements (unaudited) for additional information.

In addition, it is possible that other adverse developments in the factors discussed above, as well as other circumstances beyond the control of RJR Tobacco, could have a material adverse effect on the consolidated results of operations, cash flows or financial position of RAI or its subsidiaries. Those other circumstances beyond the control of RJR Tobacco include the results of present and future trials and appeals, and the development of possible new theories of liability by plaintiffs and their counsel.

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American Snuff

Net Sales

The moist snuff shipment volume, in millions of cans, for American Snuff was as follows:

	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2014		2013		% Change			2014		2013		% Change
GRIZZLY		109.4		109.6		(0.1	)%		215.8		204.5		5.6	%
Other		11.8		12.2		(3.6	)%		22.3		22.9		(2.7	)%
Total American Snuff moist snuff shipment volume		121.2		121.8		(0.5	)%		238.1		227.3		4.7	%

American Snuff’s net sales for the three-month period ended June 30, 2014, increased compared with the prior-year period primarily due to higher net pricing, partially offset by lower moist snuff volume. American Snuff’s net sales for the six-month period ended June 30, 2014, increased compared with the prior-year period primarily due to higher moist snuff volume and higher net pricing.

Market Share

Moist snuff has been the key driver to American Snuff’s overall growth and profitability within the U.S. smokeless tobacco market. Moist snuff accounted for approximately 89% of American Snuff’s revenue for the three and six months ended June 30, 2014, compared with approximately 88% for the three and six months ended June 30, 2013. U.S. moist snuff industry retail shipment volume grew by approximately 4% in the second quarter of 2014 compared with the same period in 2013.

The shares of American Snuff’s moist snuff brands as a percentage of total share of U.S. retail moist snuff sales according to IRI/Capstone⁽¹⁾⁽²⁾, were as follows:

	For the Three Months Ended
	June 30, 2014			March 31, 2014			Share Point Change			June 30, 2013			Share Point Change
GRIZZLY		31.4	%		31.6	%		(0.2	)		30.6	%		0.7
Other		3.0	%		3.1	%		(0.1	)		3.2	%		(0.2	)
Total American Snuff moist snuff retail share of market		34.4	%		34.7	%		(0.3	)		33.8	%		0.5

⁽¹⁾ Retail share of U.S. moist snuff sales data is included in this document because it is used by American Snuff primarily as an indicator of the relative performance of industry participants, brands and market trends. You should not rely on the market share data reported by IRI/Capstone as being a precise measurement of actual market share because IRI/Capstone uses a sample methodology that does not track all volume and trade channels.

⁽²⁾ Effective in the first quarter of 2014, retail share results are based on a revised, more efficient, IRI/Capstone model which measures retail share in stores representing trade channels where the majority of tobacco industry products are sold and resource investments are made. Retail share results reported by the new IRI/Capstone model cannot be meaningfully compared to previously reported share results provided by the previous model. All retail share results for 2013 have been restated to reflect the new IRI/Capstone model. In the second quarter of 2014, at the request of American Snuff, the IRI/Capstone model was revised to better reflect retail sales through these trade channels. All data reflects this revision.

GRIZZLY, the leading U.S. moist snuff brand, grew 0.7 share points in the second quarter of 2014, compared with the second quarter of 2013. GRIZZLY’s increase in second quarter market share was driven by growth in the wintergreen and pouch offerings. In January 2014, American Snuff expanded the distribution of GRIZZLY Wide Cut Wintergreen nationwide. The wide cut offers adult tobacco consumers a long-lasting wintergreen flavor and easy packing.

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Operating Income

American Snuff’s operating income for the three-month period ended June 30, 2014, increased as compared with the prior-year period primarily due to higher net pricing, partially offset by additional marketing expenses. American Snuff’s operating income for the six-month period ended June 30, 2014, increased as compared with the prior-year period primarily due to higher moist snuff volume and net pricing, partially offset by additional marketing expenses.

Santa Fe

Net Sales

Domestic cigarette shipment volume, in billions of units for Santa Fe, was as follows:

	For the Three Months Ended June 30,							For the Six Months  Ended June 30,
	2014		2013		% Change			2014		2013		% Change
NATURAL AMERICAN SPIRIT		1.0		0.9		7.9	%		1.8		1.7		9.2	%

Santa Fe’s net sales for the three- and six-month periods ended June 30, 2014, increased compared with the prior-year period, primarily due to higher volume and net pricing.

Market Share

The shares of Santa Fe’s NATURAL AMERICAN SPIRIT brand as a percentage of total share of U.S. retail cigarette sales according to data from IRI/Capstone⁽¹⁾⁽²⁾, were as follows:

	For the Three Months Ended
	June 30, 2014			March 31, 2014			Share Point Change		June 30, 2013			Share Point Change
NATURAL AMERICAN SPIRIT		1.6	%		1.5	%		0.1		1.4	%		0.2

⁽¹⁾ Retail share of U.S. cigarette sales data is included in this document because it is used by Santa Fe primarily as an indicator of the relative performance of industry participants, brands and market trends. You should not rely on the market share data reported by IRI/Capstone as being a precise measurement of actual market share because IRI/Capstone uses a sample methodology that does not track all volume and trade channels. Accordingly, the retail share of the U.S. cigarette market of Santa Fe’s NATURAL AMERICAN SPIRIT as reported by IRI/Capstone may overstate or understate its actual market share. Moreover, you should be aware that in a product market experiencing overall declining consumption, a particular product can experience increasing market share relative to competing products, yet still be subject to declining consumption volumes.

⁽²⁾  Effective in the first quarter of 2014, retail share results are based on a revised, more efficient, IRI/Capstone model which measures retail share in stores representing trade channels where the majority of tobacco industry products are sold and resource investments are made. Retail share results reported by the new IRI/Capstone model cannot be meaningfully compared to previously reported share results provided by the previous model. All retail share results for 2013 have been restated to reflect the new IRI/Capstone model. In the second quarter of 2014, at the request of Santa Fe, the IRI/Capstone model was revised to better reflect retail sales through these trade channels. All data reflects this revision.

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Operating Income

Santa Fe’s operating income for the three- and six-month periods ended June 30, 2014, increased as compared with the prior-year period primarily due to higher volume and net pricing partially offset by additional marketing expenses.

Santa Fe’s expenses under the MSA, federal tobacco quota buyout and FDA user fees, included in cost of products sold were:

	For the Three Months Ended June 30,				For the Six Months  Ended June 30,
	2014		2013		2014		2013
MSA	$	28	$	24	$	49	$	41
Federal tobacco quota buyout		3		3		6		5
FDA user fees		2		2		4		3

Expenses under the MSA are expected to be approximately $105 million to $115 million in 2014, subject to adjustment for changes in volume and other factors. Pursuant to the Term Sheet, SFNTC will receive credits with respect to its NPM Adjustment claims for the period from 2003 to 2012. These credits will be applied against annual payments under the MSA over a four-year period, which commenced with the April 2013 payment. Santa Fe’s MSA expenses were reduced by $2 million for the six months ended June 30, 2013.

In June 2014, two additional states agreed to settle the NPM Adjustment disputes on similar terms as set forth in the Term Sheet, except for certain provisions related to the determination of credits to be received by the PMs. SFNTC will receive credits, currently estimated to total approximately $1 million, with respect to its NPM Adjustment claims from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period effectively beginning with the April 2014 MSA payment related to the addition of these two states.

In addition, as a result of meeting the performance requirements associated with the Term Sheet, Santa Fe recognized additional credits of $1 million for each of the three months ended June 30, 2014 and 2013; and $2 million and $1 million for the six months ended June 30, 2014 and 2013, respectively. Santa Fe expects to recognize additional credits through 2016.

For additional information, see “— Cost of Products Sold” in note 1 and “— Litigation Affecting the Cigarette Industry — Health-Care Cost Recovery Cases — State Settlement Agreements” and “— State Settlement Agreements—Enforcement and Validity; Adjustments” in note 9 to condensed consolidated financial statements (unaudited).

All Other

RJR Vapor expanded the distribution of VUSE digital vapor cigarettes to retail outlets throughout Colorado in 2013 and into Utah in the first quarter of 2014. The initial phase of the national expansion of VUSE began in June 2014, and the next wave of distribution is scheduled for the third quarter of 2014. The expansion is expected to continue in phases through March 2015, when VUSE will be available in most retail outlets. VUSE’s innovative digital technology is designed to deliver a consistent flavor and vapor experience.

Niconovum AB, is a marketer of nicotine replacement therapy products in Sweden under the ZONNIC brand name. Niconovum USA, Inc., is in lead markets in Iowa and Nebraska with ZONNIC, a nicotine replacement therapy gum.

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RAI Consolidated

Interest and debt expense was $62 million and $121 million for the three and six months ended June 30, 2014, respectively, compared with $65 million and $127 million for the three and six months ended June 30, 2013, respectively, due to lower average interest rates in 2014.

Provision for income taxes was $283 million, for an effective rate of 36.5%, for the three months ended June 30, 2014, compared with $271 million, for an effective rate of 37.0%, for the three months ended June 30, 2013. The provision for income taxes was $476 million, for an effective rate of 36.4%, for the six months ended June 30, 2014, compared with $592 million, for an effective rate of 37.9%, for the six months ended June 30, 2013. The effective tax rate for the three and six months ended June 30, 2014, as compared to the same prior-year periods, was favorably impacted by a decrease in tax attributable to the reversal of tax reserves and interest related to a federal audit settlement and an increase in the domestic production activities deduction of the American Jobs Creation Act of 2004. The effective tax rate for each period differed from the federal statutory rate of 35% due to the impact of state taxes and certain nondeductible items.

Income from discontinued operations, net of tax was $25 million for the six months ended June 30, 2014. The audit of the 2010 and 2011 tax years by the Internal Revenue Service was closed on February 27, 2014. A tax benefit of $25 million attributable to the reversal of tax reserves was recorded in discontinued operations.

Liquidity and Financial Condition

Liquidity

The principal sources of liquidity for RAI’s operating subsidiaries’ business and operating needs are internally generated funds from their operations and intercompany loans and advances. The principal sources of liquidity for RAI, in turn, are proceeds from issuances of debt securities and the Credit Agreement described below under “— Borrowing Arrangements,” as well as intercompany dividends and distributions. Cash flows from operating activities are believed to be sufficient for the foreseeable future to enable the operating subsidiaries to meet their obligations under the State Settlement Agreements, to fund their capital expenditures and to make payments to RAI that, when combined with RAI’s cash balances, proceeds from any financings and loans under the Credit Agreement, will enable RAI to make its required debt-service payments, to pay dividends to its shareholders and purchase shares under its share repurchase program.

The negative impact, if any, on the sources of liquidity that could result from a decrease in demand for products due to short-term inventory adjustments by wholesale and retail distributors, changes in competitive pricing, accelerated declines in consumption, particularly from increases in regulation or excise taxes, or adverse impacts from financial markets, cannot be predicted. RAI cannot predict its cash requirements or those of its subsidiaries related to any future settlements or judgments, including cash required to be held in escrow or to bond any appeals, if necessary, and RAI makes no assurance that it or its subsidiaries will be able to meet all of those requirements.

RAI’s operating companies monitor the liquidity of key suppliers and customers, and where liquidity concerns are identified, appropriate contingency or response plans are developed. To date, no business interruptions have occurred due to key supplier liquidity, and no liquidity issues were identified involving significant suppliers or customers.

RAI’s excess cash may be invested in money market funds, commercial paper, U.S. treasuries, U.S. government agencies and time deposits in major institutions to minimize investment risk. At present, RAI primarily invests cash in U.S. treasuries.

As of June 30, 2014, RAI held investments primarily in auction rate securities and a mortgage-backed security totaling $91 million. Adverse changes in financial markets caused the auction rate securities and the mortgage-backed security to revalue lower than carrying value and become less liquid. The auction rate securities and mortgage-backed security will not become liquid until a successful auction occurs or a buyer is found. RAI intends, and has the ability, to hold these auction rate securities and mortgage-backed security for a period of time sufficient to allow for sale, redemption or anticipated recovery in fair value. For additional information on these investments, see note 2 to condensed consolidated financial statements (unaudited).

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The Proposed Transactions represent a material change in RAI’s contractual obligations. RAI currently intends to finance the cash portion of the purchase price for the Lorillard acquisition, and fees and expenses associated with the Proposed Transactions using proceeds from the issuance of additional debt securities, proceeds from the asset sale to Imperial, proceeds from the issuance of common stock to BAT, up to $500 million in borrowings under its existing revolving credit facility, available cash and, only to the extent necessary, borrowings under the unsecured term loan bridge facility pursuant to the terms of the Commitment Letter. There can be no assurance that RAI will be able to issue the anticipated additional debt securities or that the terms of any such additional debt securities will be consistent with RAI’s current expectations.

Cash Flows

Net cash flows from operating activities were $255 million in the first six months of 2014, compared with $204 million used in the first six months of 2013. This change was driven primarily by lower MSA payments, offset by higher taxes and litigation bonds paid and increases in other working capital.

Net cash flows used in investing activities were $112 million in the first six months of 2014, compared with $14 million in the first six months of 2013. This change was driven primarily by higher capital expenditures in the first six months of 2014 compared to the same period of 2013 due to investments to support expanded production and distribution of the VUSE digital vapor cigarette, and the acquisition of certain assets and liabilities of a research and development company in 2014.

Net cash flows used in financing activities were $329 million in the first six months of 2014, compared with $617 million in the first six months of 2013. This change was primarily the result of increased net borrowings and lower share repurchases during 2014 compared to the same period of 2013, partially offset by higher dividends paid in 2014.

Borrowing Arrangements

RAI Notes

As of June 30, 2014, the principal amount of RAI’s outstanding notes was $5.1 billion, with maturity dates ranging from 2015 to 2043. RAI, at its option, may redeem any or all of its outstanding notes, in whole or in part at any time, subject to the payment of a make-whole premium. At June 30, 2014, RAI had no current maturities of long-term debt.

Credit Agreement

On October 8, 2013, RAI entered into the Credit Agreement with a syndicate of lenders, providing for a four-year $1.35 billion senior unsecured revolving credit facility, which may be increased to $1.6 billion at the discretion of the lenders upon the request of RAI. Certain of RAI’s subsidiaries, including its Material Subsidiaries, as such term is defined in the Credit Agreement, have guaranteed, on an unsecured basis, RAI’s obligations under the Credit Agreement.

During the second quarter of 2014, RAI borrowed $1 billion under the Credit Agreement and used the proceeds for general corporate purposes of RAI and its subsidiaries, including to make payments under the MSA and to purchase shares under RAI’s share repurchase program. RAI repaid $200 million under the Credit Agreement in the second quarter of 2014. As of June 30, 2014, there were $5 million of letters of credit outstanding and $545 million available for additional borrowings under the Credit Agreement.

For additional information on the Credit Agreement, see note 8 to condensed consolidated financial statements (unaudited).

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Other

In connection with its execution of the Lorillard transaction, RAI obtained commitments from certain lenders for a 364-day senior unsecured term loan bridge facility of up to $9.0 billion. For more information relating to the Commitment Letter, see note 15 to condensed consolidated financial statements (unaudited) and “— Transaction Agreements” above.

Concerns about, or lowering of, RAI’s ratings by S&P or Moody’s could have an adverse impact on RAI’s ability to access the debt markets and could increase borrowing costs. However, given the cash balances and operating performance of RAI and its subsidiaries, RAI’s management believes that such concerns about, or lowering of, such ratings would not have a material adverse impact on RAI’s cash flows.

RAI and its affiliates were in compliance with all covenants and restrictions imposed by RAI’s indebtedness at June 30, 2014.

Dividends

Effective February 10, 2014, and on May 8, 2014, RAI’s board of directors declared a quarterly cash dividend of $0.67 per common share. The dividends were paid on April 1, 2014, and July 1, 2014, to shareholders of record as of March 10, 2014 and June 10, 2014, respectively.

On July 17, 2014, RAI’s board of directors declared a quarterly cash dividend of $0.67 per common share. The dividend will be paid on October 1, 2014, to shareholders of record as of September 10, 2014.

On an annualized basis, the dividend rate is $2.68 per common share. The dividend reflects RAI’s current policy of paying dividends to the holders of RAI’s common stock in an aggregate amount that is approximately 80% of RAI’s annual consolidated net income.

Stock Repurchases

On November 14, 2011, the board of directors of RAI authorized the repurchase, from time to time on or before mid-2014, of up to $2.5 billion of outstanding shares of RAI common stock in open-market or privately negotiated transactions.

During the first six months of 2014, under the above-described share repurchase program, RAI repurchased and cancelled 7,715,763 shares for $412 million, resulting in the conclusion of the repurchase program with total repurchases of 55,353,807 shares for $2.5 billion. Due to RAI’s incorporation in North Carolina, which does not recognize treasury shares, the shares are cancelled at the time of repurchase.

Additionally, during 2014, at a cost of $28 million, RAI purchased 554,042 shares that were forfeited and cancelled with respect to tax liabilities associated with restricted stock units vesting under its Omnibus Plan.

For additional information, see note 10 to condensed consolidated financial statements (unaudited).

Capital Expenditures

RAI’s operating subsidiaries recorded cash capital expenditures of $123 million and $50 million for the first six months of 2014 and 2013, respectively. RAI’s operating subsidiaries plan to spend an additional $110 million to $120 million for capital expenditures during the remainder of 2014, which includes investments to support expanded production and distribution of the VUSE digital vapor cigarette. Capital expenditures are funded primarily by cash flows from operations. RAI’s operating subsidiaries’ capital expenditure programs are expected to continue at a level sufficient to support their strategic and operating needs. There were no material long-term commitments for capital expenditures as of June 30, 2014.

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Retirement Benefits

RAI disclosed in its financial statements for the year ended December 31, 2013, that it expected to contribute $109 million to its pension plans in 2014, of which $4 million was contributed during the first six months of 2014.

Litigation and Settlements

RJR Tobacco, American Snuff Co., or their affiliates, including RAI or RJR, or indemnitees, including B&W, have been named in a number of tobacco-related legal actions, proceedings or claims seeking damages in amounts ranging into the hundreds of millions or even billions of dollars. For further discussion of specific cases, see note 9 to condensed consolidated financial statements (unaudited). Unfavorable judgments have been returned in a number of tobacco-related cases and state enforcement actions. As of June 30, 2014, RJR Tobacco had paid approximately $193 million since January 1, 2012, related to unfavorable smoking and health litigation judgments.

As of June 30, 2014, an accrual of $2.4 million has been recorded for the following Engle Progeny cases —$780,000 for compensatory damages and $63,000 for attorneys’ fees and statutory interest for Hiott and Starr-Blundell and $1.56 million for attorneys’ fees and statutory interest for Ward, the judgment of which was paid in January 2014. During the second quarter of 2014, an aggregate payment of $72.4 million ($56.1 million for compensatory and punitive damages and $16.3 million for attorneys’ fees and statutory interest) was made in satisfaction of the adverse judgment in the Jimmie Lee Brown, Koballa, Duke, Walker, Kirkland, Sury, Mack, Emmon Smith, and Townsend cases. For additional information related to this litigation, see “— Litigation Affecting the Cigarette Industry — Engle and Engle Progeny Cases” in note 9 to condensed consolidated financial statements (unaudited).

Also, as of June 30, 2014, an accrual of $10 million is included in the condensed consolidated balance sheet (unaudited) for estimated costs of the corrective communications in connection with the U.S. Department of Justice case. For additional information, see “—Health-Care Cost Recovery Cases — U.S. Department of Justice Case” in note 9 to condensed consolidated financial statements (unaudited).

Litigation is subject to many uncertainties, and generally it is not possible to predict the outcome of the litigation pending against RJR Tobacco, American Snuff Co., or their affiliates or indemnitees, or to reasonably estimate the amount or range of any possible loss, except for the Engle Progeny cases and the U.S. Department of Justice case noted above. Moreover, notwithstanding the quality of defenses available to it and its affiliates in tobacco-related litigation matters, it is possible that RAI’s consolidated results of operations, cash flows or financial position could be materially adversely affected by the ultimate outcome of certain pending or future litigation matters or difficulties in obtaining the bonds required to stay execution of judgments on appeal.

In 1998, RJR Tobacco, B&W and the other major U.S. cigarette manufacturers entered into the MSA with attorneys general representing most U.S. states, territories and possessions. The State Settlement Agreements impose a perpetual stream of future payment obligations on RJR Tobacco and the other major U.S. cigarette manufacturers, and place significant restrictions on their ability to market and sell tobacco products in the future. For more information related to historical and expected settlement expenses and payments under the State Settlement Agreements, see “— Litigation Affecting the Cigarette Industry —State Settlement Agreements—Enforcement and Validity; Adjustments” in note 9 to condensed consolidated financial statements (unaudited). The State Settlement Agreements have materially adversely affected RJR Tobacco’s shipment volumes. RAI believes that these settlement obligations may materially adversely affect the results of operations, cash flows or financial position of RAI and RJR Tobacco in future periods.

RJR Tobacco and certain of the other PMs under the MSA are currently involved in an arbitration with certain of the settling states with respect to the availability for certain market years of a downward adjustment to the annual MSA payment obligation. RJR Tobacco disputed a total of $5.2 billion for the years 2003 through 2013. This amount does not include interest or earnings and does not reflect any reduction as a result of the Term Sheet.

In 2012, RJR Tobacco, certain other PMs, including SFNTC, and certain settling states entered into a Term Sheet that sets forth the terms on which accrued and potential NPM Adjustment claims for 2003 through 2012 could be resolved. The Term Sheet also sets forth a restructured NPM Adjustment process to be applied on a going-forward basis, starting with the 2013 volume year.

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Based on the jurisdictions bound by the Term Sheet through December 31, 2013, RJR Tobacco and SFNTC, collectively, will receive credits, currently estimated to total approximately $1.1 billion, with respect to their NPM Adjustment claims for the period from 2003 to 2012. These credits will be applied against annual payments under the MSA over a five-year period, which commenced with the April 2013 MSA payment. As a result of the Order, expenses for the MSA were reduced by approximately $15 million and $219 million for the three and six months ended June 30, 2013, respectively.

In June 2014, two additional states agreed to settle the NPM Adjustment disputes on similar terms as set forth in the Term Sheet, except for certain provisions related to the determination of credits to be received by the PMs. RJR Tobacco and SFNTC, collectively, will receive credits, currently estimated to total approximately $170 million, with respect to their NPM Adjustment claims from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period effectively beginning with the April 2014 MSA payment related to the addition of these two states. As a result, expenses for the MSA were reduced by approximately $34 million for the three and six months ended June 30, 2014.

In addition, as a result of meeting the performance requirements associated with the Term Sheet, RJR Tobacco and Santa Fe, collectively, recognized additional credits of $91 million and $75 million for the three months ended June 30, 2014 and 2013, respectively; and $154 million and $132 million for the six months ended June 30, 2014 and 2013, respectively. RJR Tobacco expects to recognize additional credits through 2017; and Santa Fe expects to recognize additional credits through 2016.

For additional information related to this litigation and its potential resolution, see “— Cost of Products Sold” in note 1 and “— Litigation Affecting the Cigarette Industry — State Settlement Agreements—Enforcement and Validity; Adjustments”, in note 9 to condensed consolidated financial statements (unaudited).

Governmental Activity

The marketing, sale, taxation and use of tobacco products have been subject to substantial regulation by government and health officials for many years. Various state governments have adopted or are considering, among other things, legislation and regulations that would:

• significantly increase their taxes on tobacco products;

• restrict displays, advertising and sampling of tobacco products;

• raise the minimum age to possess or purchase tobacco products;

• restrict or ban the use of menthol in cigarettes or prohibit mint or wintergreen as a flavor in smokeless tobacco products;

• require the disclosure of ingredients used in the manufacture of tobacco products;

• require the disclosure of nicotine yield information for cigarettes;

• impose restrictions on smoking in public and private areas; and

• restrict the sale of tobacco products directly to consumers or other unlicensed recipients, including by mail or over the Internet.

Together with manufacturers’ price increases in recent years and substantial increases in state and federal taxes on tobacco products, and the granting to the FDA of broad authority over the manufacture, sale, marketing and packaging of tobacco products, these developments have had and will likely continue to have an adverse effect on the sale of tobacco products. Products that are alternatives to traditional tobacco products have also become subject

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to increasing regulation. For example, in addition to the anticipated regulation by the FDA of e-cigarettes, as described below, various states have adopted, or are considering the adoption of, taxes on e-cigarettes as well as restrictions on the promotion and distribution of e-cigarettes.

Cigarettes and other tobacco products are subject to substantial taxes in the United States. On February 4, 2009, President Obama signed into law, effective April 1, 2009, an increase of $0.62 in the excise tax per pack of cigarettes, and significant tax increases on other tobacco products, to fund expansion of the State Children’s Health Insurance Program. Under these federal tax increases:

• the federal excise tax per pack of 20 cigarettes increased to $1.01; and

• the federal excise tax rate for chewing tobacco increased $0.3083 per pound to $0.5033 per pound, and for snuff increased $0.925 per pound to $1.51 per pound.

Currently, there is no federal tax on e-cigarettes.

On March 4, 2014, President Obama released a proposed budget which, if approved by the U.S. Congress, would increase the federal excise tax: on a pack of cigarettes from $1.01 to $1.95; for snuff from $1.51 per pound to $2.93 per pound; and for chewing tobacco from $0.5033 per pound to $0.98 per pound. These proposed tax increases would fund a new initiative for pre-kindergarten education for lower-income children. Although the likelihood of the foregoing federal tax increases becoming law is uncertain, RAI’s management believes that such tax increases, if approved by the U.S. Congress, would have an adverse impact on the sale of tobacco products by RAI’s operating companies and could have a material adverse effect on the results of operations, cash flows or financial position of RAI, including impairment of the value of its operating subsidiaries’ trademarks.

The 2009 federal excise tax increase on tobacco products increased taxes on ready-made cigarettes, such as those made by RJR Tobacco and Santa Fe, at a much higher rate than taxes on loose tobacco. As a result of that tax disparity, the number of retailers selling loose tobacco and operating roll-your-own machines, allowing consumers to convert the loose tobacco into finished cigarettes, greatly increased following the 2009 federal tax hike on tobacco products. On July 6, 2012, President Obama signed into law a provision classifying retailers which operate roll-your-own machines as cigarette manufacturers, and thus requiring those retailers to pay the same tax rate as other cigarette manufacturers. As of June 30, 2014, 25 states also had passed legislation classifying retailers operating roll-your-own machines as cigarette manufacturers.

All states and the District of Columbia currently impose cigarette excise taxes at levels ranging from $0.17 per pack in Missouri to $4.35 per pack in New York. In the second quarter of 2014, one state increased, effective July 1, 2014, its cigarette excise tax. As of June 30, 2014, the weighted average state cigarette excise tax per pack, calculated on a 12-month rolling average basis, was approximately $1.29, compared with the 12-month rolling average of $1.30 as of December 31, 2013. Certain city and county governments, such as New York and Chicago, also impose substantial excise taxes on cigarettes sold in those jurisdictions.

Six states now require NPMs to pay a fee on each pack of cigarettes sold in their respective states, ranging from $0.25 per pack in Alaska to $0.55 per pack in Texas.

The Texas NPM fee has been challenged by a coalition of small tobacco manufacturers. This group asserts that the Texas fee violates the Texas Constitution’s “Equal and Uniform” Clause, as well as the Equal Protection and Due Process Clauses of the U.S. Constitution. On November 15, 2013, a state trial court in Texas declared the NPM fee unconstitutional and enjoined the state from “assessing, collecting, and enforcing” the fee. The State of Texas has appealed the court’s order. In doing so, enforcement of the trial court’s order, including the injunction, is suspended. The coalition has filed a motion for a “hardship exemption” from payment of the fee during the pendency of the state’s appeal. The coalition’s motion was denied on February 12, 2014, with the trial court concluding that it lacked jurisdiction to consider the motion on the merits in light of the State’s appeal of the court’s earlier ruling. The State’s appeal has been fully briefed and oral argument before the Court of Appeals for the Third District took place on July 16, 2014. A decision is now pending.

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Forty-nine states and the District of Columbia also subject smokeless tobacco products to excise taxes. The Commonwealth of Pennsylvania is considering such a tax during its 2014 legislative session, but no decision has been reached. During the second quarter of 2014, one state increased, effective July 1, 2014, its smokeless tobacco tax. As of June 30, 2014:

• 26 states taxed moist snuff on an ad valorem basis, at rates ranging from 5% in South Carolina to 210% in Wisconsin;

• 21 states and the District of Columbia had weight-based taxes on moist snuff, ranging from $0.02 for cans weighing between  ⁵/₈ of an ounce and 1 ⁵/₈ ounces in Alabama to $2.02 per ounce in Maine; and

• two states imposed a unit tax on moist snuff: Kentucky with a tax of $0.19 per unit, and Washington, with a tax of $2.526 per unit for units weighing 1.2 ounces or less and a proportionate amount above that weight. In addition, Minnesota imposed a tax on moist snuff at a rate equal to the greater of (1) 95% of the wholesale price and (2) generally, the tax equal to the rate imposed on a pack of 20 cigarettes.

One state (Minnesota) has a state excise tax on e-cigarettes, with that state taxing e-cigarettes at the same rate as it taxes smokeless tobacco products. A law was signed in North Carolina to tax e-cigarettes at the rate of $0.05 per fluid ounce, effective June 1, 2015. In addition, as of June 30, 2014, bills remain pending in two states to tax e-cigarettes at a similar rate. Further, as of June 30, 2014, 13 states had proposed taxing e-cigarettes on the same basis as other tobacco products, with such legislation failing in ten states, and remaining pending in three states. As of the end of the second quarter, two bills failed that would have exempted e-cigarettes from taxation.

On June 22, 2009, President Obama signed into law the Family Smoking Prevention and Tobacco Control Act, referred to as the FDA Tobacco Act, which grants the FDA broad authority over the manufacture, sale, marketing and packaging of tobacco products.

Pursuant to the FDA Tobacco Act:

• charitable distributions of tobacco products are prohibited;

• statements that would lead consumers to believe that a tobacco product is approved, endorsed, or deemed safe by the FDA are prohibited;

• pre-market approval by the FDA is required for claims made with respect to reduced risk or reduced exposure products;

• the marketing of tobacco products in conjunction with any other class of product regulated by the FDA is prohibited;

• tobacco manufacturers are banned from selling cigarettes with characterizing flavors (other than menthol, which under the FDA Tobacco Act is specifically exempt as a characterizing flavor, but the impact of which on public health is under evaluation by the FDA as discussed below);

• all manufacturers are required to register with the FDA their domestic manufacturing facilities as well as all cigarette and smokeless tobacco products sold in the United States;

• the FDA reissued regulations addressing advertising and marketing restrictions that were originally promulgated in 1996 (including, among other restrictions, prohibitions on: the sale of cigarettes and smokeless tobacco products to persons under the age of 18; the sale of packages of cigarettes with less than 20 cigarettes; the distribution of free samples of cigarettes; and brand name sponsorship of any athletic, musical or other social/cultural events);

• manufacturers were required to produce health-related documents generated from and after June 22, 2009 through December 31, 2009 (the FDA has interpreted the FDA Tobacco Act as establishing an ongoing requirement to submit health-related documents; however, the FDA has not yet established a timetable for further production);

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• manufacturers are required to make by-brand ingredient submissions, place different and larger warnings on packaging and advertising for smokeless tobacco products and eliminate the use of descriptors on tobacco products, such as “low-tar” and “lights”;

• the FDA issued a final regulation for the imposition of larger, graphic health warnings on cigarette packaging and advertising, which was scheduled to take effect September 22, 2012, but the FDA is currently enjoined from enforcing such regulation;

• for certain tobacco products introduced after February 15, 2007 and before March 22, 2011, manufacturers were required to submit to the FDA documentation demonstrating (1) that such products are “substantially equivalent” to products commercially available as of February 15, 2007, or (2) that such products are exempt from the substantial equivalence provision of the FDA Tobacco Act. Products introduced after March 22, 2011 must be determined by the FDA to be exempt from the substantial equivalence provisions, or receive pre-market approval through the new product application process;

• the FDA announced that it would inspect every domestic establishment that manufactured cigarettes, cigarette tobacco, roll-your-own tobacco or smokeless tobacco products once every two-year cycle, beginning October 1, 2011;

• in April 2012, the FDA issued draft guidance on: (1) the reporting of harmful and potentially harmful constituents in tobacco products and tobacco smoke pursuant to Section 904(a)(3) of the FDA Tobacco Act, and (2) preparing and submitting applications for modified risk tobacco products pursuant to Section 911 of the FDA Tobacco Act;

• in June 2013, the FDA issued its first decisions with regard to industry substantial equivalence submissions, authorizing the marketing of 17 new tobacco products and denying the marketing of 13 others, none of which were RAI’s operating subsidiaries’ products; and

• in February 2014, the FDA issued its first orders to stop the further sale and distribution of four tobacco products already in commercial distribution. The four products, none of which were RAI’s operating subsidiaries’ products, were found to be not substantially equivalent to tobacco products commercially marketed as of February 15, 2007, and were ordered to be removed from the market in accordance with the FDA Tobacco Act.

On a going forward basis, various provisions under the FDA Tobacco Act and regulations to be issued under the FDA Tobacco Act will become effective and will:

• require manufacturers to test ingredients and constituents identified by the FDA and disclose this information to the public;

• prohibit use of tobacco containing a pesticide chemical residue at a level greater than allowed under Federal law;

• establish “good manufacturing practices” to be followed at tobacco manufacturing facilities;

• authorize the FDA to place more severe restrictions on the advertising, marketing and sale of tobacco products;

• permit inconsistent state regulation of labeling and advertising and eliminate the existing federal preemption of such regulation;

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• authorize the FDA to require the reduction of nicotine and the reduction or elimination of other constituents; and

• grant the FDA the regulatory authority to impose broad additional restrictions.

The U.S. Congress did limit the FDA’s authority in two areas, prohibiting it from:

• banning all tobacco products; and

• requiring the reduction of nicotine yields of a tobacco product to zero.

In September 2009, a “Center for Tobacco Products” was established within the FDA, funded through quarterly user fees that will be assessed against tobacco product manufacturers and importers based on market share. The total amount of user fees to be collected over the first ten years will be approximately $5.4 billion. The expense related to the FDA user fees of RAI’s operating companies for 2014 will be approximately $135 million.

Within the Center, a Tobacco Products Scientific Advisory Committee, referred to as the TPSAC, was established on March 22, 2010, to provide advice, information and recommendations with respect to the safety, dependence or health issues related to tobacco products. The TPSAC is scheduled to meet periodically to address matters brought to it by the Center as well as those required of it by the Act, including:

• a recommendation on modified risk applications;

• a recommendation as to whether there is a threshold level below which nicotine yields do not produce dependence;

• a report on the impact of the use of menthol in cigarettes on the public health; and

• a report on the impact of dissolvable tobacco products on the public health.

At a meeting held on March 18, 2011, the TPSAC presented its final report on the use of menthol, which concluded that removal of menthol cigarettes from the marketplace would benefit public health in the United States. On July 24, 2013, the FDA issued a report detailing its own preliminary scientific evaluation of public health issues related to the use of menthol in cigarettes, including a determination that there is likely a public health impact of menthol in cigarettes. The FDA’s report found that the weight of the evidence supports the conclusion that menthol in cigarettes is associated with:

• increased initiation among youth and young adults;

• reduced success in smoking cessation; and

• increased dependence.

The report found that menthol in cigarettes is not associated with:

• increased smoke toxicity;

• increased levels of biomarkers of exposure; or

• increased disease risk.

The FDA concurrently published in the Federal Register an Advance Notice of Proposed Rulemaking, referred to as the ANPRM, to obtain information related to the potential regulation of menthol in cigarettes. The ANPRM sought comments from interested stakeholders on the FDA’s preliminary evaluation, as well as any data, research, or other information on various topics, including, but not limited to:

• potential product standards for menthol and the potential period for compliance with such standards;

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• potential restrictions on the sale and/or distribution of menthol products; and

• evidence regarding illicit trade in menthol cigarettes (including the public health impact thereof) should the use of menthol in cigarettes be restricted or banned.

In November 2013, RAI’s operating companies submitted comments on the ANPRM. The FDA will evaluate all comments it has received from interested stakeholders in response to the ANPRM, as the agency considers whether to require additional standards or restrictions with respect to menthol cigarettes. The FDA Tobacco Act does not require the FDA to adopt any such standards or restrictions. Any rule that the FDA may propose will be subject to a 60-day comment period, and may only become effective at least one year after the rule’s adoption.

At a meeting on March 1, 2012, the TPSAC presented to the FDA its final report and recommendations with respect to dissolvable tobacco products. The FDA will consider the report and recommendations and determine what future action, if any, is warranted with respect to dissolvable tobacco products. There is no timeline or statutory requirement for the FDA to act on the TPSAC’s recommendations.

On February 25, 2011, RJR Tobacco, Lorillard, Inc. and Lorillard Tobacco Company jointly filed in the U.S. District Court for the District of Columbia a lawsuit, Lorillard, Inc. v. U.S. Food and Drug Administration, challenging the composition of the TPSAC. For additional information concerning this case, see “— Litigation Affecting the Cigarette Industry — Other Litigation and Developments — FDA Litigation” in note 9 to condensed consolidated financial statements (unaudited).

On April 25, 2014, the FDA issued a proposed deeming regulation that would extend the agency’s authority under the FDA Tobacco Act to other tobacco products not currently regulated by the agency, such as e-cigarettes, cigars, pipe tobacco and hookah. The deeming regulation would, among other things:

• establish minimum age and identification restrictions to prevent underage sales;

• require specific health warnings;

• require registration with FDA and reporting of product and ingredient listings;

• prohibit distribution of free samples of the newly deemed products;

• prohibit most vending machine sales; and

• require FDA review to market new tobacco products introduced after the proposed grandfathered date of February 15, 2007.

The proposed deeming regulation is open to comment from all interested parties through August 8, 2014.

It is likely that the FDA Tobacco Act could result in a decrease in cigarette and smokeless tobacco product sales in the United States, including sales of RJR Tobacco’s, American Snuff Co.’s and SFNTC’s brands, that, together with increased costs incurred by RAI’s operating companies arising from the FDA Tobacco Act, could have a material adverse effect on RAI’s financial condition, results of operations and cash flows. RAI believes that such regulation may adversely affect the ability of its operating subsidiaries to compete against their larger competitor, which may be able to comply more quickly and cost-effectively with these new rules and regulations. Finally, the ability of RAI’s operating companies to gain efficient market clearance for new tobacco products could be adversely affected by FDA rules and regulations.

It is not possible to determine what additional federal, state or local legislation or regulations relating to smoking or cigarettes will be enacted or to predict the effect of new legislation or regulations on RJR Tobacco, SFNTC or the

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cigarette industry in general, but any new legislation or regulations could have an adverse effect on RJR Tobacco, SFNTC or the cigarette industry in general. Similarly, it is not possible to determine what additional federal, state or local legislation or regulations relating to smokeless tobacco products will be enacted or to predict the effect of new regulations on American Snuff Co. or smokeless tobacco products in general, but any new legislation or regulations could have an adverse effect on American Snuff Co. or smokeless tobacco products in general.

Tobacco Buyout Legislation

For information relating to tobacco buyout legislation, see “— Tobacco Buyout Legislation” in note 9 to condensed consolidated financial statements (unaudited).

Other Contingencies

For information relating to other contingencies of RAI, RJR, RJR Tobacco, American Snuff Co. and SFNTC, see “— Other Contingencies” in note 9 to condensed consolidated financial statements (unaudited).

Off-Balance Sheet Arrangements

RAI has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial position, results of operations, liquidity, capital expenditures or capital resources.

Cautionary Information Regarding Forward-Looking Statements

Statements included in this report that are not historical in nature are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this document and in documents incorporated by reference, forward-looking statements include, without limitation, statements regarding financial forecasts or projections, and RAI and its subsidiaries’ expectations, beliefs, intentions or future strategies that are signified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should” and similar expressions. These statements regarding future events or the future performance or results of RAI and its subsidiaries inherently are subject to a variety of risks, contingencies and other uncertainties that could cause actual results, performance or achievements to differ materially from those described in or implied by the forward-looking statements. These risks, contingencies and other uncertainties include:

• the substantial and increasing taxation and regulation of tobacco products, including the regulation of tobacco products by the FDA;

• the possibility that the FDA will issue regulations prohibiting menthol in cigarettes or the possibility that the FDA will require the reduction of nicotine levels or the reduction or elimination of other constituents, especially if RAI completes the Proposed Transactions;

• the possibility that the FDA will issue regulations extending the FDA’s authority over tobacco products to e-cigarettes, subjecting e-cigarettes to restrictions on, among other things, the manufacturing, marketing and sale of such products;

• decreased sales resulting from the future issuance of “corrective communications,” required by the order in the U.S. Department of Justice case on five subjects, including smoking and health, and addiction;

• various legal actions, proceedings and claims relating to the sale, distribution, manufacture, development, advertising, marketing and claimed health effects of tobacco products that are pending or may be instituted against RAI or its subsidiaries;

• the possibility that reports from the U.S. Surgeon General regarding the negative health consequences associated with cigarette smoking and second-hand smoke may result in additional litigation and/or regulation;

• the possibility of being required to pay various adverse judgments in the Engle Progeny and/or other litigation;

• the substantial payment obligations with respect to cigarette sales, and the substantial limitations on the advertising and marketing of cigarettes (and of RJR Tobacco’s smokeless tobacco products) under the State Settlement Agreements;

• the possibility that the Arbitration Panel’s Award reflecting the partial resolution of the NPM Adjustment disputes will be vacated or otherwise modified;

• the possibility that the Arbitration Panel’s Final Award with respect to the states found to be non-diligent in connection with the 2003 NPM Adjustment will be vacated or otherwise modified;

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• the continuing decline in volume in the U.S. cigarette industry and RAI’s dependence on the U.S. cigarette industry;

• concentration of a material amount of sales with a limited number of customers and potential loss of these customers;

• competition from other manufacturers, including industry consolidations or any new entrants in the marketplace, such as Imperial if it acquires the brands and other assets it has agreed to purchase from RAI and Lorillard;

• increased promotional activities by competitors, including manufacturers of deep-discount cigarette brands;

• the success or failure of new product innovations, including the digital vapor cigarette, VUSE;

• the success or failure of acquisitions or dispositions, which RAI or its subsidiaries may engage in from time to time, including RAI’s proposed acquisition of Lorillard and proposed divestiture of certain brands and other assets to Imperial;

• the responsiveness of both the trade and consumers to new products, marketing strategies and promotional programs;

• the reliance on outside suppliers to manage certain non-core business processes;

• the reliance on a limited number of suppliers for certain raw materials;

• the cost of tobacco leaf, and other raw materials and other commodities used in products;

• the passage of new federal or state legislation or regulation;

• the effect of market conditions on interest rate risk, foreign currency exchange rate risk and the return on corporate cash, or adverse changes in liquidity in the financial markets;

• the impairment of goodwill and other intangible assets, including trademarks;

• the effect of market conditions on the performance of pension assets or any adverse effects of any new legislation or regulations changing pension and postretirement benefits accounting or required pension funding levels;

• the substantial amount of RAI debt, including the additional debt expected to be incurred in connection with the Proposed Transactions;

• decreases in the credit ratings assigned to RAI, and to the senior unsecured long-term debt of RAI, including an impact arising out of the additional indebtedness assumed or incurred in connection with the proposed acquisition of Lorillard;

• changes in RAI’s historical dividend policy;

• the restrictive covenants imposed under RAI’s debt agreements;

• the possibility of natural or man-made disasters or other disruptions, including disruptions in information technology systems or security breaches, that may adversely affect manufacturing or other operations and other facilities or data;

• the loss of key personnel or difficulties recruiting and retaining qualified personnel;

• the inability to protect adequately intellectual property rights;

• the significant ownership interest of B&W, RAI’s largest shareholder, in RAI and the rights of B&W under the governance agreement between the companies;

• the expiration of the standstill provisions of the governance agreement on July 30, 2014;

• a termination of the governance agreement or certain of its provisions in accordance with its terms, including the limitations on B&W’s representation on RAI’s Board and its board committees;

• RAI’s shareholder rights plan (which is expected to expire on July 30, 2014 by its terms) not applying to BAT and its subsidiaries, except in limited circumstances;

• the expiration of the non-competition agreement between RAI and BAT on July 30, 2014; and

• additional risks, contingencies and uncertainties associated with the Proposed Transactions that could result in the failure of the Proposed Transactions to be consummated or, if consummated, to have an adverse effect on the results of operations, cash flows and financial position of RJR Tobacco and RAI, including:

^¡   the failure to obtain necessary shareholder approvals for the Proposed Transactions;

^¡   the failure to obtain necessary regulatory or other approvals for the Proposed Transactions;

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^¡   the failure to satisfy required closing conditions or consummate the Proposed Transactions in a timely manner;

^¡   the occurrence of any event giving rise to the right of a party to terminate a Proposed Transaction;

^¡   the obligation to consummate the Proposed Transactions even if financing is not available or is available on terms other than those currently anticipated, including financing less favorable to RAI than its current commitments, due to the absence of a financing condition in connection with the Lorillard transaction;

^¡   the possibility of selling the brands and other assets currently expected to be divested or which otherwise might be divested on terms less favorable than the Imperial transaction, due to the absence of a condition in connection with the Lorillard transaction that the Imperial transaction be consummated;

^¡   the obligation to consummate the Proposed Transactions even if there are adverse governmental developments with respect to menthol in cigarettes;

^¡   the possibility of management distraction as a result of the Proposed Transactions;

^¡   the failure to realize projected synergies and other benefits from the Proposed Transactions;

^¡   RAI’s obligations to indemnify Imperial for specified matters and to retain certain liabilities related to the divested brands and other assets; and

^¡   the effect of the announcement of the Proposed Transactions on the ability to retain customers and retain and hire key personnel, maintain relationships with suppliers, and on operating results and businesses generally.

Due to these risks, contingencies and other uncertainties, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as provided by federal securities laws, RAI is not required to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact the consolidated results of operations, cash flows and financial position due to adverse changes in financial market prices and rates. RAI and its subsidiaries are exposed to interest rate risk directly related to their normal investing and funding activities. In addition, RAI and its subsidiaries have immaterial exposure to foreign currency exchange rate risk related primarily to purchases or foreign operations denominated in euros, British pounds, Swiss francs, Swedish krona, Chinese renminbi and Japanese yen. RAI and its subsidiaries have established policies and procedures to manage their exposure to market risks.

The table below provides information, as of June 30, 2014, about RAI’s financial instruments that are sensitive to changes in interest rates. The table presents notional amounts and weighted average interest rates by contractual maturity dates for the years ending December 31:

	2014			2015			2016		2017			2018			Thereafter			Total			Fair Value(1)
Investments:
Variable-rate	$	1,226		$	12		$	—	$	71		$	—		$	—		$	1,309		$	1,309
Average interest rate		0.1	%		0.5	%		—		2.4	%		—			—			0.2	%		—
Fixed-rate	$	—		$	—		$	—	$	—		$	—		$	8		$	8		$	8
Average interest rate(2)		—			—			—		—			—			4.7	%		4.7	%		—
Debt:
Variable-rate(3)	$	800		$	—		$	—	$	—		$	—		$	—		$	800		$	800
Average interest rate		1.5	%		—			—		—			—			—			1.5	%		—
Fixed-rate	$	—		$	450		$	—	$	700		$	250		$	3,650		$	5,050		$	5,344
Average interest rate(2)		—			1.1	%		—		6.8	%		7.8	%		4.8	%		4.9	%		—

⁽¹⁾ Fair values are based on current market rates available or on rates available for instruments with similar terms and maturities and quoted fair values.

⁽²⁾ Based upon coupon interest rates for fixed-rate instruments.

⁽³⁾ The contractual maturity date of the variable-rate debt is 2017; however, RAI’s current intent is to repay the variable-rate debt in 2014.

RAI’s exposure to foreign currency transactions was not material to its results of operations for the six months ended June 30, 2014, but may become material in future periods in relation to activity associated with RAI’s international operations. RAI currently has no hedges for its exposure to foreign currency.

Item 4. Controls and Procedures

(a) RAI’s chief executive officer and chief financial officer have concluded that RAI’s disclosure controls and procedures were effective as of the end of the period covered by this report, based on their evaluation of these controls and procedures.

(b) There have been no changes in RAI’s internal controls over financial reporting that occurred during the first six months of 2014 that have materially affected, or are reasonably likely to materially affect, RAI’s internal controls over financial reporting.

PART II-Other Information

Item 1. Legal Proceedings

For a discussion of the litigation and legal proceedings pending against RJR Tobacco, American Snuff Co. or their affiliates, including RAI or RJR, or indemnitees, including B&W, see note 9 to condensed consolidated financial statements (unaudited) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Litigation” included in Part I, Item 2.

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Item 1A. Risk Factors

With the exception of the following, there have been no other material changes in our risk factors from those disclosed in Part I, Item 1A of our Form 10-K:

Risk Factors Related to Previously Announced Merger and Related Transactions

Consummation of the previously announced Proposed Transactions with RAI, Lorillard, Imperial and BAT, is subject to customary closing conditions. There are a variety of risks, contingencies and other uncertainties associated with the Proposed Transactions that could result in the failure of the Proposed Transactions to be consummated or, if consummated, to have an adverse effect on the results of operations, cash flows and financial position of RJR Tobacco and RAI.

These risks, contingencies and other uncertainties include:

• failure to satisfy required closing conditions to one or more of the Proposed Transactions, including the failure to obtain necessary shareholder, regulatory or other approvals; the imposition of conditions to required regulatory approvals that are not anticipated, including conditions which could significantly reduce the anticipated benefits of the Proposed Transactions; failure to consummate the Proposed Transactions in a timely manner; the occurrence of any event, change or other circumstances that could give rise to the right of a party to terminate a Proposed Transaction;

• the obligation to consummate the Lorillard transaction even if (1) financing is not available or is available on terms other than those currently anticipated, including financing less favorable to RAI than its current commitments, due to the absence of a financing condition in connection with the Lorillard transaction, or (2) a sale of the brands and other assets currently expected to be divested or which otherwise might be divested is on terms less favorable than the Imperial transaction, due to the absence of a condition in connection with the Lorillard transaction that the Imperial transaction be consummated;

• unanticipated further governmental action or proposals to take action that restricts or prohibits menthol in cigarettes, given (1) RAI’s obligation to consummate the Proposed Transactions regardless of any such governmental action or proposals to take action, and (2) RAI’s increased dependence on menthol cigarettes if the Proposed Transactions are consummated; and

• possible distraction of management from ongoing business operations due to the Proposed Transactions; failure to promptly and effectively integrate the acquired business and to realize the expected synergies and other benefits from the Proposed Transactions; RAI’s obligations to indemnify Imperial for specified matters and to retain certain liabilities related to the divested brands and other assets; and the effect of the announcement of the Proposed Transactions on the ability to retain customers and retain and hire key personnel, maintain relationships with suppliers, and on operating results and businesses generally.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

RAI conducts its business through its subsidiaries and is dependent on the earnings and cash flows of its subsidiaries to satisfy its obligations and other cash needs. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Financial Condition” in Part I, Item 2. RAI believes that the provisions of its Credit Agreement and notes (and the associated guarantees of the foregoing) will not impair its payment of quarterly dividends.

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The following table summarizes RAI’s purchases of its common stock during the second quarter of 2014:

	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced  Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1, 2014 to April 30, 2014		1,370,035	$	54.70		1,370,035	$	192
May 1, 2014 to May 31, 2014		3,405,523		56.38		3,405,523		—
Second Quarter Total		4,775,558	$	55.90		4,775,558	$	—

⁽¹⁾ On November 14, 2011, the board of directors of RAI authorized the repurchase, from time to time on or before mid-2014, of up to $2.5 billion of outstanding shares of RAI common stock. This repurchase program was concluded in May 2014.

Item 6. Exhibits

Exhibit Number	Description
10.1	Performance Share Agreement (one-year vesting), dated May 1, 2014, between Reynolds American Inc. and Susan M. Cameron.
10.2	Retirement and Consulting Agreement, by and between Reynolds American Inc. and Daniel M. Delen, dated April 16, 2014 (incorporated by reference to Exhibit 10.1 to Reynolds American Inc.’s Form 8-K, dated April 16, 2014).
10.3	Offer Letter, by and between Reynolds American Inc. and Susan M. Cameron, dated April 16, 2014 (incorporated by reference to Exhibit 10.2 to Reynolds American Inc.’s Form 8-K, dated April 16, 2014).
10.4	Reynolds American Inc. Amended and Restated 2009 Omnibus Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Reynolds American Inc.’s Form 8-K, dated May 12, 2014).
31.1	Certification of Chief Executive Officer relating to RAI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.
31.2	Certification of Chief Financial Officer relating to RAI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.
32.1*	Certification of Chief Executive Officer and Chief Financial Officer relating to RAI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, pursuant to Section 18 U.S.C. §1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL instance document
101.SCH	XBRL taxonomy extension schema
101.CAL	XBRL taxonomy extension calculation linkbase
101.LAB	XBRL taxonomy extension label linkbase
101.PRE	XBRL taxonomy extension presentation linkbase

* Exhibit is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subjected to the liabilities of that Section. This exhibit shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	REYNOLDS AMERICAN INC.
	(Registrant)
Dated: July 29, 2014	/s/ Thomas R. Adams
	Thomas R. Adams
	Executive Vice President and Chief Financial Officer
	(principal financial officer)

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EX-10.1

Exhibit 10.1

REYNOLDS AMERICAN INC.

LONG-TERM INCENTIVE PROGRAM

PERFORMANCE SHARE AGREEMENT

DATE OF GRANT: May 1, 2014

1. Grant. Pursuant to the provisions of the Reynolds American Inc. 2009 Omnibus Incentive Compensation Plan (the “Plan”), Reynolds American Inc. (the “Company”) on the date set forth above, has granted to

SUSAN M. CAMERON (the “Grantee”),

subject to the terms and conditions which follow and the terms and conditions of the Plan, an initial grant (the “Target Number”) of

149,192 Performance Shares.

A copy of the Plan has been provided to the Grantee and is made part of this Performance Share Agreement (this “Agreement”) with the same force and effect as if set forth in this Agreement itself. All capitalized terms used in this Agreement shall have the meaning set forth in the Plan, unless otherwise defined in this Agreement.

2. Value. Each Performance Share shall be equal in value to one share of common stock, par value $0.0001 per share, of the Company or any security or other consideration into which such share may be changed by reason of any transaction or event of the type referred to in Section 11 of the Plan (each, a “Share”).

3. Scoring. (a) Subject to the terms and conditions of this Agreement, the Performance Shares shall have a one-year performance period, consisting of the twelve-month period beginning May 1, 2014 and ending April 30, 2015 (the “Performance Period”), after which the number of Performance Shares earned (the “Earned Number”) will be determined as provided below, and when vested, will be paid in Shares.

(b) If the Company fails to pay to its shareholders cumulative dividends of at least $2.68 per Share (the “Dividend Threshold”) for the Performance Period (which shall include the dividend paid on each of July 1, 2014, October 1, 2014, January 2, 2015 and April 1, 2015), then the Target Number shall be reduced by an amount equal to three times the percentage of the dividend underpayment for the Performance Period, up to a maximum Target Number reduction of 50% (the “Revised Target Number”).

(c) At the end of the Performance Period, after determining if the Dividend Threshold has been met, the Earned Number shall be determined by multiplying the Target Number, or Revised Target Number if the Dividend Threshold has not been met, by the achievement score for the Performance Period (the “LTI Achievement Score”) determined by the Committee guided by its consideration of the overall performance of RAI and its operating

companies during the Performance Period against the 2014 annual incentive award program metrics, the Grantee’s progress on her succession planning goals, and such other performance factors as the Committee chooses to consider; provided, however, that such percentage shall in no event be greater than 150%; and provided, further, that the value of the Earned Number of Performance Shares that vest as provided in Section 4 of this Agreement, and are paid as provided in Section 5 of this Agreement, shall not exceed any maximum limits set by the Board of Directors pursuant to its resolutions adopted on April 16, 2014, or otherwise contained in the Plan.

(d) Notwithstanding anything in Section 3 of this Agreement to the contrary, in the event of a Change of Control prior to the end of the Performance Period, the Earned Number shall be equal to the product of (i) the Target Number and (ii) the LTI Achievement Score determined by the Committee for the portion of the Performance Period prior to the Change of Control (the “Change of Control Earned Number”).

4. Vesting. (a) Subject to the terms and conditions of this Agreement, the Earned Number of Performance Shares shall vest on May 1, 2015 (the “Normal Vesting Date”) if the Grantee remains employed by the Company or a subsidiary of the Company on such date.

(b) Notwithstanding anything in Section 4(a) of this Agreement to the contrary, in the event of the Grantee’s involuntary Termination of Employment where the Grantee is eligible for and accepts severance benefits under a Company-sponsored severance plan or agreement with the Company (with eligibility for severance benefits to be determined in the sole discretion of the Company), prior to the end of the Performance Period, the number of Performance Shares that will vest on the Normal Vesting Date shall be equal to the product of (x) the Earned Number and (y) a fraction, the numerator of which shall be the number of days between the Date of Grant and the date of the Grantee’s involuntary Termination of Employment, and the denominator of which shall be the number of days between the Date of Grant and the Normal Vesting Date, and the remaining Performance Shares will be forfeited and cancelled on the Normal Vesting Date.

(c) Notwithstanding anything in Section 4(a) of this Agreement to the contrary, in the event of (i) the Grantee’s death while an active employee of the Company or a subsidiary of the Company or (ii) the Grantee’s Permanent Disability (as such term is defined in the Company’s Long-Term Disability Plan), in either case, prior to the end of the Performance Period, the number of Performance Shares that will vest on the date of the Grantee’s death or Permanent Disability, as applicable, shall be equal to the product of (x) the Target Number and (y) a fraction, the numerator of which shall be the number of days between the Date of Grant and the date of the Grantee’s death or Permanent Disability, as applicable, and the denominator of which shall be the number of days between the Date of Grant and the Normal Vesting Date, and the remaining Performance Shares will be forfeited and cancelled on the date of the Grantee’s death or Permanent Disability, as applicable.

(d) Notwithstanding anything in Section 4(a) of this Agreement to the contrary, in the event of a Change of Control prior to the end of the Performance Period, the number of Performance Shares that will vest on the date of such Change of Control shall be equal to the product of (i) the higher of (x) the Target Number and (y) the Change of Control Earned Number, and (ii) a fraction, the numerator of which shall be the number of days between the Date of Grant and the date of the Change of Control, and the denominator of which shall be the number of days between the Date of Grant and the Normal Vesting Date, and the remaining Performance Shares will be forfeited and cancelled on the date of such Change of Control.

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(e) Notwithstanding anything in Section 4 of this Agreement to the contrary, in the event of the Grantee’s (i) voluntary Termination of Employment, (ii) involuntary Termination of Employment where the Grantee is not eligible for severance benefits under a Company-sponsored severance plan or agreement with the Company (including, without limitation, a Termination of Employment for Cause, as such term is defined in the relevant severance plan or agreement) or (iii) involuntary Termination of Employment where the Grantee is eligible for but does not accept the severance benefits under the relevant Company-sponsored severance plan or agreement with the Company, in each case, prior to the end of the Performance Period, the Performance Shares shall be immediately forfeited and cancelled.

5. Payment. (a) Payment of vested Performance Shares shall be made only in Shares. At the Company’s sole discretion, such Shares may be issued in certificated or book-entry form.

(b) Except as set forth in Section 5(c) of this Agreement, no payment of vested Performance Shares shall be made to the Grantee prior to the end of the Performance Period. Except as otherwise provided by this Agreement, payment of vested Performance Shares shall be made as soon as practicable following the Normal Vesting Date, and in any event no later than March 15, 2016.

(c) In the event of a Change of Control, the Grantee’s death while an active employee of the Company or a subsidiary of the Company or the Grantee’s Permanent Disability, in each case prior to the end of the Performance Period, the payment of vested Performance Shares shall be paid as soon as practicable after such event occurs, and in any case no later than March 15 after the end of the year in which such event occurs.

(d) In the event of the death of the Grantee while the Grantee is an active employee of the Company or a subsidiary of the Company, any payment to which the Grantee is entitled under this Agreement shall be made to the beneficiary designated by the Grantee to receive the proceeds of any noncontributory group life insurance coverage provided for the Grantee by the Company or a subsidiary of the Company (such life insurance coverage, “Group Life Insurance Coverage,” and such beneficiary, a “Designated Beneficiary”). If no designation of beneficiary has been made by the Grantee under the Group Life Insurance Coverage, distribution upon the Grantee’s death shall be made in accordance with the provisions of the Group Life Insurance Coverage.

(e) In the event of the death of the Grantee while the Grantee is no longer an active employee of the Company or a subsidiary of the Company, but at a time while the Grantee continues to have Group Life Insurance Coverage, any payment to which the Grantee is entitled under this Agreement shall be made to the Designated Beneficiary. If no designation of beneficiary has been made by the Grantee under the Group Life Insurance Coverage, distribution shall be made in accordance with the provisions of the Group Life Insurance Coverage. In the event of the death of the Grantee while the Grantee is no longer an active employee of the Company or a subsidiary of the Company, and at a time while the Grantee no longer has Group Life Insurance Coverage, distribution shall be made to the Grantee’s estate.

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(f) For purposes of Sections 5(d) and 5(e), (i) if the Designated Beneficiary predeceases the Grantee, distribution shall be made in accordance with the provisions of the Group Life Insurance Coverage, and (ii) if the Designated Beneficiary survives the Grantee but dies before payment is made, distribution shall be made to the Designated Beneficiary’s estate.

6. Termination of Employment. For purposes of this Agreement, the term “Termination of Employment” shall mean termination from active employment with the Company or a subsidiary of the Company; it does not mean the termination of pay and benefits at the end of a period of salary continuation (or other form of severance pay or pay in lieu of salary).

7. Dividend Equivalent Payment. At the time of the payment of the vested Performance Shares, the Grantee shall receive a cash dividend equivalent payment in an amount equal to the product of (a) the Earned Number and (b) the aggregate amount of dividends per share declared and paid to the Company’s shareholders on Shares during the period from the Date of Grant through the date of the payment of the Performance Shares, without interest (the “Actual Dividends Paid”); provided, however, that in the event of the Grantee’s death while an active employee of the Company or a subsidiary of the Company or Permanent Disability or in the event of a Change of Control, the amount of the dividend equivalent payment to the Grantee shall be equal to the product of (i) the Target Number (in the case of death or Permanent Disability) or the Change of Control Earned Number (in the case of a Change of Control), and (ii) the Actual Dividends Paid. Notwithstanding anything in Section 7 of this Agreement to the contrary, to the extent the payment of the vested Performance Shares occurs after both the date a dividend has been declared by the Company and the record date for such dividend, but prior to the dividend payment date related thereto, the amount of the Actual Dividend Paid also shall include such dividend. In the case of a dividend payment to be paid in property, the dividend payment shall be deemed to be the fair market value of the property at the time of distribution of the dividend payment to the Grantee, as determined by the Committee.

8. Rights as a Shareholder. The Grantee shall not be, nor have any of the rights or privileges of, a shareholder of the Company with respect to the Performance Shares unless and until, and to the extent, the Performance Shares vest and Shares have been paid to the Grantee in accordance with Section 5 of this Agreement.

9. Transferability. Other than as specifically provided in this Agreement with regard to the death of the Grantee, this Agreement and any benefit provided or accruing hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge; and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by the Grantee, be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Grantee.

10. No Right to Employment. Neither the execution and delivery of this Agreement nor the granting of the Performance Shares evidenced by this Agreement shall constitute any agreement or understanding, express or implied, on the part of the Company or its subsidiaries to employ the Grantee for any specific period or in any specific capacity or shall prevent the Company or its subsidiaries from terminating the Grantee’s employment at any time with or without cause.

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11. Application of Laws. The granting of Performance Shares under this Agreement shall be subject to all applicable laws, rules and regulations and to such approvals of any governmental agencies as may be required.

12. Notices. Any notices required to be given hereunder to the Company shall be addressed to the Corporate Secretary, Reynolds American Inc., Post Office Box 2990, Winston-Salem, NC 27102-2990, and any notice required to be given hereunder to the Grantee shall be sent to the Grantee’s address as shown on the records of the Company.

13. Taxes. Any taxes required by federal, state or local laws to be withheld by the Company in respect of the grant of Performance Shares or payment of vested Performance Shares hereunder shall be paid to the Company by the Grantee by the time such taxes are required to be paid or deposited by the Company. The Grantee hereby authorizes the necessary withholding of Performance Shares by the Company to satisfy the minimum statutory tax withholding amount prior to delivery of the vested Performance Shares.

14. Administration and Interpretation. In consideration of the grant of Performance Shares hereunder, the Grantee specifically agrees that the Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan and Agreement as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final, conclusive, and binding upon the Grantee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. The Committee may delegate its interpretive authority as permitted by the provisions of the Plan.

15. Compliance with Section 409A of the Code. This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended, and shall be construed and interpreted in accordance with such intent.

16. Amendment. This Agreement is subject to the Plan, a copy of which has been provided to the Grantee. The Board of Directors and the Committee, as applicable, may amend the Plan, and the Committee may amend this Agreement, at any time in any way, except that, other than as otherwise provided by the Plan, any amendment of the Plan or this Agreement that would impair the Grantee’s rights under this Agreement may not be made without the Grantee’s written consent.

17. Litigation Assistance and Non-Disclosure of Confidential Information. (a) In addition to any other obligations of the Grantee under law or any other agreement with any Related Company, in consideration of the grant of Performance Shares hereunder, the Grantee specifically agrees that the Grantee:

(i) if requested by the Company, will personally provide reasonable assistance and cooperation to the Related Companies in activities related to the prosecution or defense of any pending or future lawsuits or claims involving any Related Company;

(ii) will promptly notify the Company’s General Counsel, in writing, upon receipt of any requests from anyone other than an employee or agent of one of the Related

5

Companies for information regarding any Related Company which could reasonably be construed as being proprietary, non-public or confidential, or if the Grantee becomes aware of any potential claim or proposed litigation against any Related Company;

(iii) will refrain from providing any information related to any claim or potential litigation against any Related Company to any person who is not a representative of the Company without the Company’s prior written permission, unless required to provide information pursuant to legal process; and

(iv) will not engage in any activity detrimental to the interests of any Related Company, including an act of dishonesty, moral turpitude or other misconduct that has or could have a detrimental impact on the business or reputation of any Related Company.

(b) In further consideration of the grant of Performance Shares hereunder, the Grantee specifically agrees that, if required by law to provide sworn testimony regarding any matter related to any Related Company: the Grantee will consult with and have Company designated legal counsel present for such testimony (with the Company being responsible for the costs of such designated counsel); the Grantee will cooperate with the Company’s attorneys to assist their efforts, especially on matters the Grantee has been privy to, holding all privileged attorney-client matters in strictest confidence; and if the Grantee desires legal counsel to represent and protect her interests (in addition to the Company’s designated legal counsel provided under this Section 17(b)), the Company will reimburse the Grantee for any reasonable legal expenses (including, but not limited to, the reasonable costs of the Grantee’s counsel) and other reasonable and necessary out-of-pocket expenses the Grantee may incur in relation to such testimony.

(c) The Grantee acknowledges that, given the position(s) that the Grantee has had with one or more of the Related Companies, the Grantee has had access to and has acquired Confidential Information, and will continue to have access to and acquire Confidential Information. The Grantee further acknowledges that the Related Companies have a legitimate and significant business interest in preventing the unauthorized disclosure of the Confidential Information. Accordingly, the Grantee shall not, without the prior written consent of the Company (which consent may be granted only by the Company’s General Counsel), use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity, for any reason or purpose whatsoever, any Confidential Information, except when required to do so by a court of competent jurisdiction or any Governmental Authority, in any case, with jurisdiction to order the Grantee to divulge, disclose or make accessible such information. If the Grantee becomes compelled to disclose any Confidential Information in the circumstances described in the preceding sentence, the Grantee shall: promptly provide the Company’s General Counsel with written notice thereof, so as to permit the Company to seek a protective order or other appropriate remedy, and the Grantee shall cooperate with the Company in the Company’s efforts in connection therewith; and disclose only that portion of the Confidential Information that the Grantee is advised by her counsel (which counsel will be reasonably acceptable to the Company and the reasonable costs and expenses of which will be borne by the Company) the Grantee is legally required to disclose and shall use reasonable efforts to have such disclosed Confidential Information accorded confidential treatment.

18. Noncompetition and Other Prohibited Activities. (a) In addition to any other obligations of the Grantee under law or any other agreement with the Company or any of its subsidiaries, in consideration of the grant of Performance Shares hereunder, the Grantee, during

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the continuation of her employment by any Related Company and during the one-year period commencing upon her Termination of Employment for any reason (or, if the Grantee is receiving benefits under a severance plan or agreement, the period of time set forth in the non-competition agreement entered into by the Grantee in connection with the receipt of such severance benefits), will not, directly or indirectly:

(i) be employed, or retained as an independent contractor, or otherwise provide advisory or consulting services (in each case, whether compensated or not compensated), in a sales-related capacity, marketing role, strategic planning role, financial role, or in a product research and development role for any Competitive Business;

(ii) be employed by, or retained as an independent contractor by, or otherwise provide advisory or consulting services to (in each case, whether compensated or not compensated), any Competitive Business in any sort of position or capacity involving the performance of services that are the same as, or substantially similar to, the services the Grantee performed while an employee of any Related Company (collectively, “Competitive Services”);

(iii) serve (whether compensated or not compensated) as an officer or director of any Competitive Business;

(iv) organize, own (other than owning up to 3% of the outstanding stock of a publicly traded company) or operate any Competitive Business;

(v) (w) be employed, or retained as an independent contractor (in each case, whether compensated or not compensated) by, (x) provide advisory or consulting services (in each case, whether compensated or not compensated) to, (y) organize or operate or (z) serve as a director of (whether compensated or not-compensated) any Anti-Tobacco Organization;

(vi) (x) be employed, or retained as an independent contractor (in each case, whether compensated or not compensated) by, (y) provide advisory or consulting services (in each case, whether compensated or not compensated) to or (z) serve as a director or official of (in each case, whether compensated or non-compensated) any Regulator; or

(vii) solicit, offer employment to, or hire any employee, independent contractor or any other individual providing services to any Related Company (other than secretarial and clerical personnel), who was employed by, or provided services to, any Related Company, at the time of the Grantee’s Termination of Employment, or who was employed by, or provided services to, any Related Company during the 90-day period preceding such date, to become employed by or otherwise provide services to, any person, firm, entity or corporation, or approach any such person for any of the foregoing reasons.

As used in this Agreement, the term “including,” or variations thereof, shall not be a term of limitation, but rather shall be deemed to be followed by the words “without limitation.”

(b) For purposes of Section 17 and Section 18 of this Agreement, the terms set forth below have the following definitions:

(i) “Anti-Tobacco Organization” means any firm, organization, entity, group, or sole proprietorship, the activities or purposes of which include opposing, advocating or lobbying against, or seeking the imposition of restrictions or prohibitions with respect to, any of the Related Companies’ Businesses or the use or consumption of any of the Products.

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(ii) “Competitive Business” means any corporation, limited liability company, partnership, person, firm, organization, entity, enterprise, business or activity that is engaged in any of the Related Companies’ Businesses in the Territory or seeking to engage in any of the Related Companies’ Businesses in the Territory.

(iii) “Confidential Information” means all data, materials and information (whether in the form of samples or in written, graphic, electronic or other form, and whether marked or identified as confidential or proprietary) concerning the business, operations or affairs of any Related Company including, without limitation, information concerning any of the Related Companies’ policies, plans, strategies, trade secrets, know-how, processes, systems, business methods, business or marketing plans, research and development initiatives, products, customers, suppliers and personnel, except that Confidential Information shall not include information that (A) is or becomes generally known to the public other than by reason of the Grantee’s breach of either the provisions of this Agreement or any other duty or obligation (whether arising by contract, statute or otherwise) the Grantee owes to any Related Company, (B) was known by the Grantee at the time of the disclosure to the Grantee by any Related Company, as evidenced by the Grantee’s written records in existence prior to such disclosure, or (C) is disclosed to the Grantee after the Date of Grant by a third party who has a legal right to make such disclosure, and who is subject to no confidentiality obligation to any Related Company.

(iv) “Governmental Authority” means the government of the United States of America, any other nation or political subdivision thereof, whether state or local, and any agency, authority, administration, instrumentality, regulatory body, court or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

(v) “Regulator” means: (x) the U.S. Food and Drug Administration (the “FDA”), the Center for Tobacco Products established within the FDA (the “CTP”), the Tobacco Products Scientific Advisory Committee established within the CTP, or any other office, division, branch, committee, department or other body (collectively, an “Organizational Body”) established by the FDA or by an Organizational Body; or (y) any other Governmental Authority having the authority to regulate, or make recommendations regarding any proposed regulations affecting, any part of any of the Related Companies’ Businesses.

(vi) “Related Companies’ Businesses” means the businesses of manufacturing, distributing, advertising, promoting, marketing or selling any of the following products (collectively, “Products”): (w) any cigarette, cigar, little cigar, “roll-your-own” tobacco, smokeless or smoke-free tobacco product (including moist snuff, dry snuff, snus, loose leaf, plug and twist tobacco and any other smokeless or smoke-free tobacco, including dissolvable products, that may be invented through the date of Grantee’s Termination of Employment); (x) any nicotine replacement therapy products, including nicotine gum, mouth spray and pouches, and any products otherwise marketed or intended to be used as part of a smoking cessation program; (y) any product commonly referred to as an “e-cigarette”; and (z) any other product, including any tobacco or cigarette substitute, that any Related Company invents, develops and/or markets through the date of the Grantee’s Termination of Employment.

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(vii) “Related Company” means any one of the following, individually, and the term “Related Companies” means all of the following, collectively: the Company, R. J. Reynolds Tobacco Company, R.J. Reynolds Vapor Company, RAI International, Inc., American Snuff Company, LLC, RAI Services Company, Santa Fe Natural Tobacco Company, Inc., Niconovum, USA, Inc., Kentucky BioProcessing, Inc., SFR Tobacco International GmbH, and their respective subsidiaries, parents, affiliates (including partnerships and joint ventures in which any Related Company is a partner or joint venturer), successors and assigns.

(viii) “Territory” means (v) the United States of America, its territories, commonwealths and possessions (including duty-free stores or outlets located anywhere in an of the foregoing places); (w) U.S. military installations located anywhere in the world; (x) Western Europe; (y) Japan; and (z) any other location in which any Related Company conducts any of the Related Companies’ Businesses through the date of the Grantee’s Termination of Employment.

(c) The Grantee understands and agrees that:

(i) the purpose of this Section 18 is solely to protect the Related Companies’ legitimate business interests, including, but not limited to, the Related Companies’ Confidential Information, customer relationships and goodwill, all of which contribute to the Related Companies’ competitive advantage in operating the Related Companies’ Businesses in the Territory;

(ii) the Related Companies manufacture, distribute, advertise, promote, market and sell Products in the Territory, and the restrictive covenants contained in this Agreement are necessary to protect the Related Companies’ legitimate business assets and interests, and they are reasonable in time, territory, and scope, and in all other respects;

(iii) the restrictive covenants contained in this Agreement constitute a material inducement to RAI entering this Agreement, without which the Company would not have entered into this Agreement; and

(iv) the covenants set forth in this Section 18 are essential elements of this Agreement and shall be construed as agreements independent of any other provision in this Agreement, and the existence of any claim or cause of action of the Grantee against the Company or any other Related Company, whether predicated on this Agreement or otherwise, shall not excuse the Grantee’s breach, or constitute a defense to the enforcement by the Related Companies, of these restricted covenants. The Company and the Grantee have had the opportunity to independently consult with their respective counsel for advice in all respects concerning the reasonableness and propriety of such covenants, with specific regard to the nature of the businesses conducted by the Related Companies.

(d) The Grantee agrees that any breach of the covenants contained in Section 18 of this Agreement would irreparably injure the Related Companies and that their remedies at law would be inadequate. Accordingly, in the event of any breach or threatened breach of Section 18 of this Agreement, the Related Companies, in addition to any other rights and remedies available at law or in equity, shall be entitled to an injunction (and/or other equitable relief), restraining such breach or threatened breach, and be entitled to the reimbursement of court costs, attorneys’ fees

9

and other costs and expenses incurred in connection with enforcing this Agreement. The existence of any claim or cause of action on the part of the Grantee against any Related Company shall not constitute a defense to the enforcement of these provisions. This Agreement shall be enforceable by any Related Company, either alone or together with any other Related Company or Related Companies. The rights and remedies hereunder provided to the Related Companies shall be cumulative and shall be in addition to any other rights or remedies available at law, in equity or under this Agreement.

(e) If any of the provisions of Section 18 of this Agreement are determined by a court of law to be excessively broad, whether as to geographical area, time, scope or otherwise, such provision shall be reduced to whatever extent is reasonable and shall be enforced as so modified. Any provisions of Section 18 of this Agreement not so modified shall remain in full force and effect.

19. Recoupment Provisions. (a) Subject to the clawback provisions of the Sarbanes-Oxley Act of 2002, the Committee may, in its sole discretion, direct that the Company recoup, and upon demand by the Company the Grantee agrees to return to the Company, all or a portion of any Shares paid to the Grantee hereunder computed using financial information or performance metrics later found to be materially inaccurate. The number of Shares to be recovered shall be equal to the excess of the number of Shares paid out over the number of Shares that would have been paid out had such financial information or performance metric been fairly stated at the time the payout was made.

(b) The Committee may direct recoupment of Shares pursuant to Section 19(a) of this Agreement whether or not it directs recoupment of related annual incentive award payouts. The Committee also may amend a yearly LTI Achievement Score for purposes of recoupment of Shares under this Agreement without directing recoupment of related annual incentive award payouts.

(c) If the Company reasonably determines that the Grantee has materially violated any of the Grantee’s obligations under Section 17 or 18 of this Agreement, then effective the date on which such violation began, (i) any Performance Shares that have not yet vested and been paid to the Grantee under this Agreement shall be forfeited and cancelled, and (ii) the Company may, in its sole discretion, recoup any and all of the Shares previously paid to the Grantee under this Agreement.

(d) If, after a demand for recoupment of Shares under Section 19 of this Agreement, the Grantee fails to return such Shares to the Company, the Grantee acknowledges that the Company (or the Company through the actions of any of its subsidiaries employing the Grantee, if applicable) has the right to effect the recovery of the then current value of such Shares and the amount of its court costs, attorneys’ fees and other costs and expenses incurred in connection with enforcing this Agreement by (i) deducting (subject to applicable law and the terms and conditions of the Plan) from any amounts the Company (and if applicable, any subsidiary of the Company employing the Grantee) owes to the Grantee (including, but not limited to, wages or other compensation), (ii) withholding payment of future increases in compensation (including the payment of any discretionary bonus amount) or grants of compensatory awards that otherwise would have been made in accordance with the Company’s or any of its subsidiaries’ otherwise applicable compensation practices, or (iii) any combination of the foregoing. The right of recoupment set forth in the preceding sentence shall not be the exclusive remedy of the Company, and the Company may exercise each and every other remedy available to it under applicable law.

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20. Qualified Performance-Based Awards. If the Grantee is a “Covered Employee” within the meaning of Section 162(m) of the Internal Revenue Code, the grant of Performance Shares evidenced by this Agreement shall be considered a Qualified Performance-Based Award. In furtherance thereof, and notwithstanding anything in this Agreement or the Plan to the contrary, the Earned Number of Performance Shares that the Grantee may earn for the Performance Period pursuant to the grant evidenced by this Agreement (the “Earned Shares”) shall be determined by the Committee based on, and must have a value (the “Earned Shares Value”) that in no event exceeds a value equal to, the percentage of the Company’s cumulative Cash Net Income (as defined below) for the Performance Period previously established by the Board of Directors of the Company in resolutions adopted on April 16, 2014 to apply with respect to the Grantee for the Performance Period (the “Award Pool Value”). Notwithstanding the prior sentence, the Committee shall have the power and authority, in its sole and absolute exercise of negative discretion, to reduce the Earned Shares such that the Earned Shares Value will be less than the Award Pool Value, which reduction may be made by taking into account the factors described above under Section 3 of this Agreement or any other criteria the Committee deems appropriate. The reductions in Earned Shares Value, if any, shall not result in any increases in the value of performance shares earned by any other awardee. For purposes of this Agreement, the term “Cash Net Income” shall mean the Company’s net income from continuing operations in the consolidated statement of income adjusted for the impact of non-cash items, such as depreciation, amortization, unrealized gains and losses, intangible asset impairments and other non-cash gains/losses included in net income (as reported in the Company’s quarterly and annual reports for the period from April 1, 2014 through March 31, 2015).

21. Electronic Signature. This Agreement is delivered electronically. The Grantee consents to using an electronic signature to sign this Agreement and be legally bound to her acceptance or rejection of the grant. By electronically signing the Agreement, the Grantee also consents to entering into this Agreement in electronic form. The Grantee acknowledges that her electronic signature will have the same legal force and effect as a handwritten signature. The Grantee’s electronic signature, including date and time of signing will be stored electronically with the Performance Share grant record.

22. GOVERNING LAWS. THE LAWS OF THE STATE OF NORTH CAROLINA SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT, REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAWS. EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION 22, ANY CONTROVERSY OR DISPUTE ARISING OUT OF OR RELATED TO THIS AGREEMENT SHALL BE SETTLED EXCLUSIVELY IN THE COURTS (FEDERAL AND STATE) SITUATED IN THE STATE OF NORTH CAROLINA, FORSYTH COUNTY. THE GRANTEE CONSENTS TO PERSONAL JURISDICTION IN THE STATE OF NORTH CAROLINA AND IN THE COURTS THEREOF FOR THE ENFORCEMENT OF THIS AGREEMENT, AND WAIVES ANY RIGHTS THE GRANTEE OTHERWISE MAY HAVE UNDER THE LAWS OF ANY JURISDICTION TO OBJECT ON ANY BASIS TO JURISDICTION OR VENUE WITHIN THE STATE OF NORTH CAROLINA TO ENFORCE THIS AGREEMENT. IN ADDITION, AND NOTWITHSTANDING THE FOREGOING, THE COMPANY MAY ELECT, IN ITS DISCRETION, TO SEEK A TEMPORARY RESTRAINING ORDER OR PRELIMINARY OR

11

PERMANENT INJUNCTIVE (OR SIMILAR) RELIEF TO ENFORCE ITS RIGHTS UNDER SECTIONS 17 AND 18 OF THIS AGREEMENT IN ANY JURISDICTION OR COURT ANYWHERE IN THE WORLD THAT THE COMPANY DETERMINES TO BE APPROPRIATE, AND THE GRANTEE HEREBY CONSENTS TO VENUE IN ANY SUCH JURISDICTION OR COURT IN SUCH EVENT.

IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Grantee have executed this Agreement as of the Date of Grant first above written.

REYNOLDS AMERICAN INC.
	By:	/s/ Lisa J. Caldwell
		Authorized Signature

/s/ Susan M. Cameron
Grantee’s Signature
Print Name:	Susan M. Cameron

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EX-31.1

Exhibit 31.1

I, Susan M. Cameron, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Reynolds American Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 29, 2014

/s/ Susan M. Cameron

Susan M. Cameron

President and

Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Thomas R. Adams, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Reynolds American Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 29, 2014

/s/ Thomas R. Adams

Thomas R. Adams

Executive Vice President and

Chief Financial Officer

EX-32.1

Exhibit 32.1

REYNOLDS AMERICAN INC.

Certification Pursuant to 18 U.S.C. §1350

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned, Susan M. Cameron, Chief Executive Officer, and Thomas R. Adams, Chief Financial Officer, of Reynolds American Inc. (“RAI”), hereby certifies, to her or his knowledge, that:

1) RAI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in RAI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, fairly presents, in all material respects, the financial condition and results of operations of RAI.

EXECUTED this 29^th day of July, 2014.

/s/ Susan M. Cameron

Susan M. Cameron, President and

Chief Executive Officer of Reynolds American Inc.

/s/ Thomas R. Adams

Thomas R. Adams, Executive Vice President and

Chief Financial Officer of Reynolds American Inc.

XML

Business and Summary of Significant Accounting Policies - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
NPM Adjustment credits			$ 170		$ 1,100
NPM historical adjustment	34	15	34	219
NPM performance adjustment	91	75	154	132
Defined benefit plan corridor percentage			10.00%
Expected pension contributions, next fiscal year					109
Pension contributions			$ 4

XML

Components of Calculation of Income Per Share (Detail) (USD $) In Millions, except Share data in Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Net Income Per Share [Line Items]
Income from continuing operations	$ 492	$ 461	$ 830	$ 969
Income from discontinued operations			25
Net income	$ 492	$ 461	$ 855	$ 969
Basic weighted average shares, in thousands	533,311	546,320	535,037	548,837
Effect of dilutive potential shares:
Restricted stock units	1,454	1,682	1,787	1,889
Diluted weighted average shares, in thousands	534,765	548,002	536,824	550,726

XML

Carrying Amount and Changes of Trademarks and Other Assets (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014 Trademarks	Jun. 30, 2014 Other	Jun. 30, 2014 RJR Tobacco Trademarks	Jun. 30, 2014 RJR Tobacco Other	Jun. 30, 2014 American Snuff Trademarks	Dec. 31, 2013 American Snuff Trademarks
Finite-Lived Intangible Assets [Line Items]
Balance as of December 31, 2013			$ 46		$ 26	$ 20	$ 18	$ 20	$ 8	$ 8
Amortization	(3)	(2)	(5)	(3)	(3)	(2)	(3)	(2)
Balance as of June 30, 2014	$ 41		$ 41		$ 23	$ 18	$ 15	$ 18	$ 8	$ 8

XML

Shareholders' Equity - Additional Information (Detail) (USD $)	6 Months Ended						1 Months Ended	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	May 08, 2014 Quarterly Dividend	Feb. 10, 2014 Quarterly Dividend	Jun. 10, 2014 Annualized Dividend	Mar. 10, 2014 Annualized Dividend	Jun. 30, 2014 Stock Repurchase Program	Jun. 30, 2014 Stock Repurchase Program
Shareholders Equity [Line Items]
Outstanding shares of RAI common stock	$ 2,500,000,000
Ownership percentage of RAI's common stock	42.00%
Decrease in ownership percentage of RAI's common stock	25.00%
Shares repurchased and cancelled							55,353,807	7,715,763
Common stock repurchased	440,000,000	475,000,000					2,500,000,000	412,000,000
Issuance of shares of RAI common stock on settlement	1,468,294
Cost of shares purchased that forfeited with respect to tax liabilities associated with restricted stock vesting	$ 28,000,000
Number of shares purchased that forfeited with respect to tax liabilities associated with restricted stock vesting under its LTIP	554,042
Cash dividend per share, declared			$ 0.67	$ 0.67	$ 2.68	$ 2.68

XML

Components of Inventories (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Inventory [Line Items]
Leaf tobacco	$ 921	$ 1,049
Other raw materials	78	66
Work in process	67	70
Finished products	166	130
Other	31	18
Total	1,263	1,333
Less LIFO allowance	204	206
Inventory Net	$ 1,059	$ 1,127

XML

Condensed Consolidating Statements of Comprehensive Income (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Condensed Financial Statements, Captions [Line Items]
Net income (loss)	$ 492	$ 461	$ 855	$ 969
Other comprehensive income (loss), net of tax:
Retirement benefits, net of tax (benefit) expense	6	(10)		(15)
Unrealized gain on long-term investments	1	1	2	3
Amortization of realized loss on hedging instruments	1	1	1	1
Cumulative translation adjustment and other	(3)	3	(2)	(12)
Comprehensive income (loss)	497	456	856	946
RAI
Condensed Financial Statements, Captions [Line Items]
Net income (loss)	492	461	855	969
Other comprehensive income (loss), net of tax:
Retirement benefits, net of tax (benefit) expense	6	(10)		(15)
Unrealized gain on long-term investments	1	1	2	3
Amortization of realized loss on hedging instruments	1	1	1	1
Cumulative translation adjustment and other	(3)	3	(2)	(12)
Comprehensive income (loss)	497	456	856	946
Guarantors
Condensed Financial Statements, Captions [Line Items]
Net income (loss)	579	513	1,012	1,062
Other comprehensive income (loss), net of tax:
Retirement benefits, net of tax (benefit) expense	7	(13)	1	(18)
Unrealized gain on long-term investments	1	1	2	3
Cumulative translation adjustment and other	(2)	3	(1)	(12)
Comprehensive income (loss)	585	504	1,014	1,035
Non-Guarantors
Condensed Financial Statements, Captions [Line Items]
Net income (loss)	(36)	(15)	(63)	(17)
Other comprehensive income (loss), net of tax:
Retirement benefits, net of tax (benefit) expense		(1)		(1)
Cumulative translation adjustment and other	(2)	4	(2)	(6)
Comprehensive income (loss)	(38)	(12)	(65)	(24)
Eliminations
Condensed Financial Statements, Captions [Line Items]
Net income (loss)	(543)	(498)	(949)	(1,045)
Other comprehensive income (loss), net of tax:
Retirement benefits, net of tax (benefit) expense	(7)	14	(1)	19
Unrealized gain on long-term investments	(1)	(1)	(2)	(3)
Cumulative translation adjustment and other	4	(7)	3	18
Comprehensive income (loss)	$ (547)	$ (492)	$ (949)	$ (1,011)

XML

Changes in Carrying Amounts of Goodwill by Segment (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Goodwill [Line Items]
Goodwill		$ 11,802
Asset acquisition	7
Accumulated impairment charges		(3,791)
Net goodwill balance	8,018	8,011
RJR Tobacco
Goodwill [Line Items]
Goodwill		9,065
Accumulated impairment charges		(3,763)
Net goodwill balance	5,302	5,302
American Snuff
Goodwill [Line Items]
Goodwill		2,501
Accumulated impairment charges		(28)
Net goodwill balance	2,473	2,473
Santa Fe
Goodwill [Line Items]
Goodwill		197
Net goodwill balance	197	197
All Other
Goodwill [Line Items]
Goodwill		39
Asset acquisition	7
Net goodwill balance	$ 46	$ 39

XML

Commitments and Contingencies (Tables)

6 Months Ended

Jun. 30, 2014

U.S. Tobacco-related Cases Pending Against RJR Tobacco or its Affiliates or Indemnities

The following table lists the categories of the U.S. tobacco-related cases pending against RJR Tobacco or its affiliates or indemnitees as of June 30, 2014, compared with the number of cases pending against RJR Tobacco, its affiliates or indemnitees as of March 31, 2014, as reported in RAI’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2014, filed with the SEC on April 23, 2014, and a cross-reference to the discussion of each case type.

Case Type	RJR Tobacco’s U.S. Case  Numbers as of June 30, 2014	Change in Number of Cases Since March 31,  2014 Increase/(Decrease)	Page Reference
Individual Smoking and Health	99	4	27
West Virginia IPIC (Number of Plaintiffs)*	1 (approx. 564)	No change	27
Engle Progeny (Number of Plaintiffs)**	4,865 (app. 5,973)	(115) (140)	28
Broin II	2,572	No change	42
Class Action	8	No change	42
Health-Care Cost Recovery	2	No change	45
State Settlement Agreements—Enforcement and Validity; Adjustments	30	No change	52
Antitrust	1	No change	56
Other Litigation and Developments	13	(1)	57

* Includes as one case the approximately 564 cases pending as a consolidated action In Re: Tobacco Litigation Individual Personal Injury Cases, sometimes referred to as West Virginia IPIC cases, described below. The West Virginia IPIC cases have been separated from the Individual Smoking and Health cases for reporting purposes.

** The Engle Progeny cases have been separated from the Individual Smoking and Health cases for reporting purposes. The number of cases has decreased as the result of many of the federal and state court cases being dismissed or duplicate actions being consolidated.

Verdicts in Individual Engle Progeny Cases that have been Tried and Remain Pending

The following chart reflects the details related to Hiott and Starr-Blundell:

Plaintiff Case Name	RJR Tobacco Allocation of Fault		Compensatory Damages (as adjusted)(1)		Punitive Damages		Appeal Status
Hiott		40%	$	730,000	$	—	Notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Starr-Blundell		10%		50,000		—	Pending — First DCA
Totals			$	780,000	$	—

⁽¹⁾  Compensatory damages are adjusted to reflect the reduction required by the allocation of fault. Punitive damages are not adjusted and reflect the amount of the final judgment(s) signed by the trial court judge(s). The amounts listed above do not include attorneys’ fees or statutory interest that apply to the judgments.

The following chart reflects verdicts in all other individual Engle Progeny cases, pending as of June 30, 2014, in which a verdict has been returned against RJR Tobacco or B&W, or both, and has not been set aside on appeal. No liability for any of these cases has been recorded in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014. This chart does not include the mistrials or verdicts returned in favor of RJR Tobacco or B&W, or both.

Plaintiff Case Name	RJR Tobacco Allocation of Fault		Compensatory Damages (as adjusted)(1)		Punitive Damages		Appeal Status
Cohen		33.3%	$	3,300,000	$	—	Punitive damages set aside; remanded for partial new trial; notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Putney		30%		—		—	Reversed and remanded for further proceedings; notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Buonomo		77.5%		4,060,000		—	Punitive damages set aside; remanded for new trial; notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Webb		90%		—		—	Reversed and remanded for new trial on damages; new trial scheduled for November 3, 2014
Soffer		40%		2,000,000		—	Pending — Florida Supreme Court

Ciccone	30	%		1,000,000			—	Pending — Florida Supreme Court
Hallgren	25	%		500,000			750,000	Notice to invoke jurisdiction of Florida Supreme Court pending; stayed
Calloway	27	%		16,100,000	(2)		17,250,000	Pending — Fourth DCA
Hancock	5	%		700			—	Pending — Fourth DCA
Sikes	51	%		3,520,000			2,000,000	Notice to invoke jurisdiction of Florida Supreme Court pending
James Smith	55	%		600,000	(2)		20,000	Pending — Eleventh Circuit
Schlenther	50	%		5,030,000	(2)		2,500,000	Pending — Second DCA
Ballard	55	%		5,000,000			—	Pending — Third DCA
Williams	85	%		4,250,000			—	Pending — Third DCA
Evers	60	%		1,938,000			—	Punitive damages reversed; pending — Second DCA
Schoeff	75	%		7,875,000			30,000,000	Pending — Fourth DCA
Marotta	58	%		3,480,000			—	Pending — Fourth DCA
Searcy	30	%		1,000,000	(2)		1,670,000	Pending — Eleventh Circuit
Aycock	72.5	%		4,277,000			—	Pending — Eleventh Circuit
Graham	20	%		550,000			—	Pending — Eleventh Circuit
Odum	50	%		100,000			—	Pending — First DCA
Skolnick	30	%		767,000			—	Pending — Fourth DCA
Thibault	70	%		1,750,000	(2)		1,275,000	Pending — First DCA
Grossman	75	%		15,350,000	(2)		22,500,000	Pending — Fourth DCA
Gafney	33	%		1,914,000			—	Pending — Fourth DCA
Crawford	70	%		9,000,000			1,000,000	Pending — Third DCA
Harford	18	%		59,000			—	Post-trial motions are pending(3)
Cheeley	50	%		1,500,000			2,000,000	Pending — Fourth DCA
Goveia	35	%		297,500			2,250,000	Pending — Fifth DCA
Clayton	10	%		60,000			—	Final judgment has not been entered
Bowden	30	%		1,500,000			—	Pending — First DCA
Burkhart	25	%		2,500,000	(2)		1,250,000	Post-trial motions are pending(3)
Bakst	75	%		4,503,000			14,000,000	Post-trial motions are pending(3)
Robinson	70.5	%		16,900,000		$	23,600,000,000	Post-trial motions are pending(3)
Totals			$	120,681,200		$	23,698,465,000

⁽¹⁾  Unless otherwise noted, compensatory damages in these cases are adjusted to reflect the jury’s allocation of comparative fault. Punitive damages are not so adjusted. The amounts listed above do not include attorneys’ fees or statutory interest that may apply to the judgments.

⁽²⁾  The court did not apply comparative fault in the final judgment.

⁽³⁾  Should the pending post-trial motions be denied, RJR Tobacco will likely file a notice of appeal with the appropriate appellate court.

Commitments and Contingencies Related to Settlements

Set forth below is the unadjusted tobacco industry settlement payment schedule for 2012 and beyond:

	2012		2013		2014		2015		2016		2017		Thereafter
First Four States’ Settlements:(1)
Mississippi Annual Payment	$	136	$	136	$	136	$	136	$	136	$	136	$	136
Florida Annual Payment		440		440		440		440		440		440		440
Texas Annual Payment		580		580		580		580		580		580		580
Minnesota Annual Payment		204		204		204		204		204		204		204
Remaining Jurisdictions’ Settlement:
Annual Payments(1)		8,004		8,004		8,004		8,004		8,004		8,004		8,004
Total	$	9,364	$	9,364	$	9,364	$	9,364	$	9,364	$	9,364	$	9,364

⁽¹⁾ Subject to adjustments for changes in sales volume, inflation and other factors. All payments are to be allocated among the companies on the basis of relative market share. For further information, see “— State Settlement Agreements—Enforcement and Validity; Adjustments” below.

RAI’s operating subsidiaries expenses and payments under the State Settlement Agreements for 2012 and 2013, and the projected expenses and payments for 2014 and beyond are set forth below ⁽²⁾.

	2012		2013		2014		2015		2016		2017		Thereafter
Settlement expenses	$	2,370	$	1,819		—		—		—		—		—
Settlement cash payments	$	2,414	$	2,582		—		—		—		—		—
Projected settlement expenses					$	>1,800	$	>1,900	$	>1,800	$	>2,000	$	>2,000
Projected settlement cash payments					$	>1,900	$	>1,900	$	>1,900	$	>1,800	$	>2,000

⁽²⁾ Amounts beginning in 2013 reflect the impact of the Term Sheet described below under “—State Settlement Agreements – Enforcement and Validity; Adjustments- Partial Settlement of Certain NPM Adjustment Claims” .

Disputed Portion of MSA Payment Obligation

The approximate maximum principal amounts of RJR Tobacco’s share of the disputed NPM Adjustments for the years 2004 through 2011, as currently calculated by the Independent Auditor, are as follows (the amounts shown below do not include the interest or earnings thereon to which RJR Tobacco believes it would be entitled under the MSA and do not reflect any reduction as a result of the Term Sheet described below):

Year for which NPM Adjustment calculated		2004		2005		2006		2007		2008		2009		2010		2011
Year in which deduction for NPM Adjustment was taken		2007		2008		2009		2010		2011		2012		2013		2014
RJR Tobacco’s approximate share of disputed NPM Adjustment (millions)	$	562	$	445	$	419	$	435	$	468	$	472	$	470	$	421

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Reclassification Out of Accumulated Other Comprehensive Loss and Affected Line Items in Condensed Consolidating Statements of Income (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2014		Jun. 30, 2013		Jun. 30, 2014		Jun. 30, 2013
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Cost of products sold	$ (959)	[1]	$ (999)	[1]	$ (1,889)	[1]	$ (1,693)	[1]
Interest and debt expense	(62)		(65)		(121)		(127)
Selling, general and administrative expenses	(364)		(380)		(777)		(681)
Income (loss) from continuing operations before income taxes	775		732		1,306		1,561
Provision for income taxes	(283)		(271)		(476)		(592)
Net income	492		461		855		969
RAI
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Interest and debt expense	(62)		(63)		(121)		(124)
Selling, general and administrative expenses	(17)		(3)		(20)		(6)
Income (loss) from continuing operations before income taxes	(57)		(39)		(97)		(75)
Provision for income taxes	20		14		34		27
Net income	492		461		855		969
Guarantors
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Cost of products sold	(921)		(993)		(1,826)		(1,684)
Interest and debt expense	(20)		(30)		(43)		(60)
Selling, general and administrative expenses	(287)		(334)		(644)		(602)
Income (loss) from continuing operations before income taxes	899		808		1,524		1,689
Provision for income taxes	(323)		(297)		(546)		(634)
Net income	579		513		1,012		1,062
Reclassification out of Accumulated Other Comprehensive Income
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Net income	(5)		(5)		(11)		(11)
Reclassification out of Accumulated Other Comprehensive Income | Accumulated Defined Benefit Plans Adjustment
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Cost of products sold	(5)		(5)		(10)		(10)
Selling, general and administrative expenses	(4)		(5)		(9)		(9)
Income (loss) from continuing operations before income taxes	(9)		(10)		(19)		(19)
Provision for income taxes	3		4		7		7
Net income	(6)		(6)		(12)		(12)
Reclassification out of Accumulated Other Comprehensive Income | Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Interest and debt expense	1		1		1		1
Net income	1		1		1		1
Reclassification out of Accumulated Other Comprehensive Income | RAI
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Net income	(5)		(5)		(11)		(11)
Reclassification out of Accumulated Other Comprehensive Income | RAI | Accumulated Defined Benefit Plans Adjustment
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Cost of products sold	(5)		(5)		(10)		(10)
Selling, general and administrative expenses	(4)		(5)		(9)		(9)
Income (loss) from continuing operations before income taxes	(9)		(10)		(19)		(19)
Provision for income taxes	3		4		7		7
Net income	(6)		(6)		(12)		(12)
Reclassification out of Accumulated Other Comprehensive Income | RAI | Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Interest and debt expense	1		1		1		1
Net income	1		1		1		1
Reclassification out of Accumulated Other Comprehensive Income | Guarantors
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Net income	(6)		(6)		(12)		(12)
Reclassification out of Accumulated Other Comprehensive Income | Guarantors | Accumulated Defined Benefit Plans Adjustment
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Cost of products sold	(5)		(5)		(10)		(10)
Selling, general and administrative expenses	(4)		(5)		(9)		(9)
Income (loss) from continuing operations before income taxes	(9)		(10)		(19)		(19)
Provision for income taxes	3		4		7		7
Net income	(6)		(6)		(12)		(12)
Eliminations
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Cost of products sold	11		10		19		19
Interest and debt expense	22		28		46		57
Income (loss) from continuing operations before income taxes	(11)		(10)		(22)		(21)
Net income	(543)		(498)		(949)		(1,045)
Eliminations | Reclassification out of Accumulated Other Comprehensive Income
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Net income	6		6		12		12
Eliminations | Reclassification out of Accumulated Other Comprehensive Income | Accumulated Defined Benefit Plans Adjustment
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Cost of products sold	5		5		10		10
Selling, general and administrative expenses	4		5		9		9
Income (loss) from continuing operations before income taxes	9		10		19		19
Provision for income taxes	(3)		(4)		(7)		(7)
Net income	$ 6		$ 6		$ 12		$ 12

[1] Excludes excise taxes of $927 million and $983 million for the three months ended June 30, 2014 and 2013, respectively; and $1,773 million and $1,838 million for the six months ended June 30, 2014 and 2013, respectively.

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Segment Information (Parenthetical) (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended	12 Months Ended	3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 RJR Tobacco Operating Segments	Jun. 30, 2013 RJR Tobacco Operating Segments	Jun. 30, 2014 RJR Tobacco Operating Segments	Jun. 30, 2013 RJR Tobacco Operating Segments	Jun. 30, 2014 Santa Fe Operating Segments	Jun. 30, 2013 Santa Fe Operating Segments	Jun. 30, 2014 Santa Fe Operating Segments	Jun. 30, 2013 Santa Fe Operating Segments
Segment Reporting Information [Line Items]
NPM Adjustment credits	$ 170	$ 1,100	$ 124	$ 89	$ 186	$ 348	$ 1	$ 1	$ 2	$ 3

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Income Taxes - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2014
Income Tax [Line Items]
Federal statutory rate	35.00%	35.00%
Income (loss) from discontinued operations		$ 25

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RAI Guaranteed Unsecured Notes - Condensed Consolidating Financial Statements (Detail) (RAI, USD $) In Billions, unless otherwise specified	Dec. 31, 2013
RAI
Condensed Financial Statements, Captions [Line Items]
RAI's unsecured notes	$ 5.1

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Condensed Consolidating Balance Sheets (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013	Dec. 31, 2012
Assets
Cash and cash equivalents	$ 1,313	$ 1,500	$ 1,664	$ 2,502
Accounts receivable	98	106
Accounts receivable, related party	66	56
Notes receivable	1	37
Other receivables	11	16
Inventories	1,059	1,127
Deferred income taxes, net	637	606
Prepaid expenses and other	273	207
Total current assets	3,458	3,655
Property, plant and equipment, net	1,177	1,074
Trademarks and other intangible assets, net	2,412	2,417
Goodwill	8,018	8,011
Other assets and deferred charges	236	245
Total assets	15,301	15,402
Liabilities and shareholders' equity
Accounts payable	137	185
Tobacco settlement accruals	1,248	1,727
Due to related party	1
Deferred revenue, related party	17	48
Revolving credit facility borrowings	800	0
Other current liabilities	1,120	1,116
Total current liabilities	3,323	3,076
Long-term debt (less current maturities)	5,091	5,099
Deferred income taxes, net	710	658
Long-term retirement benefits (less current portion)	1,158	1,221
Other noncurrent liabilities	124	181
Shareholders' equity	4,895	5,167	5,096	5,257
Total liabilities and shareholders' equity	15,301	15,402
RAI
Assets
Cash and cash equivalents	500	444	336	755
Other receivables	127	76
Prepaid expenses and other	60	29
Total current assets	687	549
Property, plant and equipment, net	4	5
Long-term intercompany notes receivable	1,700	1,842
Investment in subsidiaries	10,092	9,736
Other assets and deferred charges	94	94
Total assets	12,577	12,226
Liabilities and shareholders' equity
Accounts payable	1	1
Revolving credit facility borrowings	800
Other current liabilities	1,525	601
Total current liabilities	2,326	602
Long-term intercompany notes payable	201	1,295
Long-term debt (less current maturities)	5,091	5,099
Long-term retirement benefits (less current portion)	40	38
Other noncurrent liabilities	24	25
Shareholders' equity	4,895	5,167
Total liabilities and shareholders' equity	12,577	12,226
Guarantors
Assets
Cash and cash equivalents	374	696	929	1,420
Accounts receivable	59	74
Accounts receivable, related party	66	56
Notes receivable	1	1
Other receivables	1,101	198
Inventories	966	1,069
Deferred income taxes, net	649	614
Prepaid expenses and other	211	172
Total current assets	3,427	2,880
Property, plant and equipment, net	983	986
Trademarks and other intangible assets, net	2,408	2,413
Goodwill	7,999	7,999
Long-term intercompany notes receivable	201	1,295
Investment in subsidiaries	481	473
Other assets and deferred charges	179	187
Total assets	15,678	16,233
Liabilities and shareholders' equity
Accounts payable	111	169
Tobacco settlement accruals	1,248	1,727
Due to related party	1
Deferred revenue, related party	17	48
Other current liabilities	745	744
Total current liabilities	2,122	2,688
Long-term intercompany notes payable	1,380	1,700
Deferred income taxes, net	764	710
Long-term retirement benefits (less current portion)	1,109	1,172
Other noncurrent liabilities	100	156
Shareholders' equity	10,203	9,807
Total liabilities and shareholders' equity	15,678	16,233
Non-Guarantors
Assets
Cash and cash equivalents	439	360	399	327
Accounts receivable	39	32
Notes receivable		36
Other receivables	2	6
Inventories	94	59
Deferred income taxes, net	1	1
Prepaid expenses and other	4	7
Total current assets	579	501
Property, plant and equipment, net	190	83
Trademarks and other intangible assets, net	4	4
Goodwill	19	12
Other assets and deferred charges	19	18
Total assets	811	618
Liabilities and shareholders' equity
Accounts payable	25	15
Other current liabilities	85	46
Total current liabilities	110	61
Long-term intercompany notes payable	320	142
Deferred income taxes, net	2	2
Long-term retirement benefits (less current portion)	9	11
Shareholders' equity	370	402
Total liabilities and shareholders' equity	811	618
Eliminations
Assets
Other receivables	(1,219)	(264)
Inventories	(1)	(1)
Deferred income taxes, net	(13)	(9)
Prepaid expenses and other	(2)	(1)
Total current assets	(1,235)	(275)
Long-term intercompany notes receivable	(1,901)	(3,137)
Investment in subsidiaries	(10,573)	(10,209)
Other assets and deferred charges	(56)	(54)
Total assets	(13,765)	(13,675)
Liabilities and shareholders' equity
Other current liabilities	(1,235)	(275)
Total current liabilities	(1,235)	(275)
Long-term intercompany notes payable	(1,901)	(3,137)
Deferred income taxes, net	(56)	(54)
Shareholders' equity	(10,573)	(10,209)
Total liabilities and shareholders' equity	$ (13,765)	$ (13,675)

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Condensed Consolidating Statements of Income (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2014		Jun. 30, 2013		Jun. 30, 2014		Jun. 30, 2013
Condensed Financial Statements, Captions [Line Items]
Net sales	$ 2,071	[1]	$ 2,087	[1]	$ 3,920	[1]	$ 3,889	[1]
Net sales, related party	91		92		177		173
Net sales	2,162		2,179		4,097		4,062
Cost of products sold	959	[1]	999	[1]	1,889	[1]	1,693	[1]
Selling, general and administrative expenses	364		380		777		681
Amortization expense	3		2		5		3
Operating income (loss)	836	[2],[3]	798	[2],[3]	1,426	[2],[3]	1,685	[2],[3]
Interest and debt expense	62		65		121		127
Interest income	(1)		(1)		(2)		(3)
Other (income) expense, net			2		1
Income (loss) from continuing operations before income taxes	775		732		1,306		1,561
Provision for (benefit from) income taxes	283		271		476		592
Income (loss) from continuing operations	492		461		830		969
Income from discontinued operations					25
Net income	492		461		855		969
RAI
Condensed Financial Statements, Captions [Line Items]
Selling, general and administrative expenses	17		3		20		6
Operating income (loss)	(17)		(3)		(20)		(6)
Interest and debt expense	62		63		121		124
Interest income	(22)		(28)		(46)		(57)
Other (income) expense, net			1		2		2
Income (loss) from continuing operations before income taxes	(57)		(39)		(97)		(75)
Provision for (benefit from) income taxes	(20)		(14)		(34)		(27)
Equity income (loss) from subsidiaries	529		486		918		1,017
Income (loss) from continuing operations					855
Net income	492		461		855		969
Guarantors
Condensed Financial Statements, Captions [Line Items]
Net sales	2,029		2,063		3,843		3,840
Net sales, related party	91		92		177		173
Net sales	2,120		2,155		4,020		4,013
Cost of products sold	921		993		1,826		1,684
Selling, general and administrative expenses	287		334		644		602
Amortization expense	3		2		5		3
Operating income (loss)	909		826		1,545		1,724
Interest and debt expense	20		30		43		60
Interest income					(1)		(1)
Other (income) expense, net	(10)		(12)		(21)		(24)
Income (loss) from continuing operations before income taxes	899		808		1,524		1,689
Provision for (benefit from) income taxes	323		297		546		634
Equity income (loss) from subsidiaries	3		2		9		7
Income (loss) from continuing operations					987
Income from discontinued operations					25
Net income	579		513		1,012		1,062
Non-Guarantors
Condensed Financial Statements, Captions [Line Items]
Net sales	54		34		97		68
Net sales	54		34		97		68
Cost of products sold	49		16		82		28
Selling, general and administrative expenses	60		43		113		73
Operating income (loss)	(55)		(25)		(98)		(33)
Interest and debt expense	2				3
Interest income	(1)		(1)		(1)		(2)
Other (income) expense, net			3		(1)		1
Income (loss) from continuing operations before income taxes	(56)		(27)		(99)		(32)
Provision for (benefit from) income taxes	(20)		(12)		(36)		(15)
Income (loss) from continuing operations					(63)
Net income	(36)		(15)		(63)		(17)
Eliminations
Condensed Financial Statements, Captions [Line Items]
Net sales	(12)		(10)		(20)		(19)
Net sales	(12)		(10)		(20)		(19)
Cost of products sold	(11)		(10)		(19)		(19)
Operating income (loss)	(1)				(1)
Interest and debt expense	(22)		(28)		(46)		(57)
Interest income	22		28		46		57
Other (income) expense, net	10		10		21		21
Income (loss) from continuing operations before income taxes	(11)		(10)		(22)		(21)
Equity income (loss) from subsidiaries	(532)		(488)		(927)		(1,024)
Income (loss) from continuing operations					(949)
Net income	$ (543)		$ (498)		$ (949)		$ (1,045)

[1] Excludes excise taxes of $927 million and $983 million for the three months ended June 30, 2014 and 2013, respectively; and $1,773 million and $1,838 million for the six months ended June 30, 2014 and 2013, respectively.

[2] Includes NPM Adjustment credits of $124 million and $89 million for the three months ended June 30, 2014 and 2013, respectively; and $186 million and $348 million for the six months ended June 30, 2014 and 2013, respectively, see "- Cost of Products Sold" in note 1.

[3] Includes NPM Adjustment credits of $1 million for each of the three months ended June 30, 2014 and 2013; and $2 million and $3 million for the six months ended June 30, 2014 and 2013, respectively see "- Cost of Products Sold" in note 1.

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Stock Plans - Additional Information (Detail) (USD $)	0 Months Ended	6 Months Ended
	May 01, 2014	Jun. 30, 2014	May 01, 2014
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Shares available for grant under the Omnibus Plan	149,192	1,049,348
Restricted stock unit award adjustment upper end of range	150.00%	150.00%
Weighted average grant date fair value outstanding		$ 53.29	$ 60.35
Cumulative dividend threshold	$ 2.68	$ 8.04
Restricted stock unit award adjustment	50.00%	50.00%

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Business and Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2014

Certain Component of Cost of Products Sold

Cost of products sold includes the expenses for the Master Settlement Agreement, referred to as the MSA, and other settlement agreements with the states of Mississippi, Florida, Texas and Minnesota, which together with the MSA are collectively referred to as the State Settlement Agreements; the federal tobacco quota buyout; and the user fees charged by the U.S. Food and Drug Administration, referred to as the FDA, which were as follows:

	For the Three  Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
State Settlement Agreements	$	456	$	521	$	912	$	789
Federal tobacco quota buyout		51		54		106		106
FDA user fees		33		31		67		63

Components of Pension Benefits and Postretirement Benefits

The components of the pension benefits and the postretirement benefits are set forth below:

	For the Three Months Ended June 30,												For the Six Months Ended June 30,
	Pension Benefits						Postretirement Benefits						Pension Benefits						Postretirement Benefits
	2014			2013			2014			2013			2014			2013			2014			2013
Service cost	$	6		$	7		$	—		$	—		$	11		$	12		$	1		$	1
Interest cost		67			62			13			13			133			124			27			25
Expected return on plan assets		(91	)		(88	)		(3	)		(2	)		(181	)		(176	)		(6	)		(5	)
Amortization of prior service cost (credit)		1			1			(10	)		(11	)		2			2			(21	)		(21	)
Total benefit cost (credit)	$	(17	)	$	(18	)	$	—		$	—		$	(35	)	$	(38	)	$	1		$	—

XML

Details of Finite-Lived Intangible Assets (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Finite-Lived Intangible Assets [Line Items]
Gross	$ 265	$ 265
Accumulated Amortization	224	219
Net	41	46
Contract manufacturing agreements
Finite-Lived Intangible Assets [Line Items]
Gross	151	151
Accumulated Amortization	133	131
Net	18	20
Trademarks
Finite-Lived Intangible Assets [Line Items]
Gross	114	114
Accumulated Amortization	91	88
Net	$ 23	$ 26

XML

Fair Value - Additional Information (Detail) (USD $)	1 Months Ended	6 Months Ended	12 Months Ended						6 Months Ended				12 Months Ended
	Sep. 30, 2011	Jun. 30, 2014	Dec. 31, 2013	Oct. 31, 2012	May 01, 2012	Jun. 30, 2014 1.05% guaranteed, notes due 2015	Jun. 30, 2014 3.25% guaranteed, notes due 2022	Jun. 30, 2014 4.75% guaranteed, notes due 2042	Jun. 30, 2014 7.625% guaranteed, notes due 2016	Jun. 30, 2014 Debt Covered by Interest Rate Swap Agreement	Dec. 31, 2013 Debt Covered by Interest Rate Swap Agreement	Dec. 31, 2009 Floating to Fixed	Dec. 31, 2009 Floating to Fixed Minimum	Dec. 31, 2009 Floating to Fixed Maximum	Dec. 31, 2009 Fixed to Floating
Derivative [Line Items]
Fair value transfers between levels		$ 0	$ 0
Estimated fair value of RAI's and RJR's outstanding debt		6,100,000,000	5,200,000,000
Debt weighted average interest rate		4.10%	4.50%
Notional amount, interest rate contracts					1,000,000,000							1,500,000,000			1,500,000,000
Debt instrument maturity date													Jun. 01, 2012	Jun. 15, 2017
Proceeds from termination of interest rate swaps	186,000,000
Outstanding principle amount of debt redeemed									775,000,000	450,000,000
Debt instrument interest rate						1.05%	3.25%	4.75%	7.625%
Debt covered by fixed interest rate										700,000,000	700,000,000
Derivative fixed rate of interest										3.80%	3.80%
Total RAI debt				2,550,000,000		450,000,000	1,100,000,000	1,000,000,000
Associated losses settled with cash payments		$ (23,000,000)	$ (23,000,000)

XML

Summary of Balances and Transactions (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Related Party Transaction [Line Items]
Accounts receivable, related party	$ 66		$ 66		$ 56
Due to related party	1		1
Deferred revenue, related party	17		17		48
Net sales	91	92	177	173
Purchases	4	6	13	9
RAI common stock purchases from B&W	114	62	155	170
Capsule royalty income	$ 3	$ 1	$ 6	$ 4

XML

RAI Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements (Tables)

6 Months Ended

Jun. 30, 2014

Condensed Consolidating Statements of Income

Condensed Consolidating Statements of Income

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Three Months Ended June 30, 2014
Net sales	$	—		$	2,029		$	54		$	(12	)	$	2,071
Net sales, related party		—			91			—			—			91
Net sales		—			2,120			54			(12	)		2,162
Cost of products sold		—			921			49			(11	)		959
Selling, general and administrative expenses		17			287			60			—			364
Amortization expense		—			3			—			—			3
Operating income (loss)		(17	)		909			(55	)		(1	)		836
Interest and debt expense		62			20			2			(22	)		62
Interest income		(22	)		—			(1	)		22			(1	)
Other income, net		—			(10	)		—			10			—
Income (loss) before income taxes		(57	)		899			(56	)		(11	)		775
Provision for (benefit from) income taxes		(20	)		323			(20	)		—			283
Equity income from subsidiaries		529			3			—			(532	)		—
Net income (loss)	$	492		$	579		$	(36	)	$	(543	)	$	492
For the Three Months Ended June 30, 2013
Net sales	$	—		$	2,063		$	34		$	(10	)	$	2,087
Net sales, related party		—			92			—			—			92
Net sales		—			2,155			34			(10	)		2,179
Cost of products sold		—			993			16			(10	)		999
Selling, general and administrative expenses		3			334			43			—			380
Amortization expense		—			2			—			—			2
Operating income (loss)		(3	)		826			(25	)		—			798
Interest and debt expense		63			30			—			(28	)		65
Interest income		(28	)		—			(1	)		28			(1	)
Other (income) expense, net		1			(12	)		3			10			2
Income (loss) before income taxes		(39	)		808			(27	)		(10	)		732
Provision for (benefit from) income taxes		(14	)		297			(12	)		—			271
Equity income from subsidiaries		486			2			—			(488	)		—
Net income (loss)	$	461		$	513		$	(15	)	$	(498	)	$	461

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2014
Net sales	$	—		$	3,843		$	97		$	(20	)	$	3,920
Net sales, related party		—			177			—			—			177
Net sales		—			4,020			97			(20	)		4,097
Cost of products sold		—			1,826			82			(19	)		1,889
Selling, general and administrative expenses		20			644			113			—			777
Amortization expense		—			5			—			—			5
Operating income (loss)		(20	)		1,545			(98	)		(1	)		1,426
Interest and debt expense		121			43			3			(46	)		121
Interest income		(46	)		(1	)		(1	)		46			(2	)
Other (income) expense, net		2			(21	)		(1	)		21			1
Income (loss) from continuing operations before income taxes		(97	)		1,524			(99	)		(22	)		1,306
Provision for (benefit from) income taxes		(34	)		546			(36	)		—			476
Equity income from subsidiaries		918			9			—			(927	)		—
Income (loss) from continuing operations		855			987			(63	)		(949	)		830
Income from discontinued operations		—			25			—			—			25
Net income (loss)	$	855		$	1,012		$	(63	)	$	(949	)	$	855
For the Six Months Ended June 30, 2013
Net sales	$	—		$	3,840		$	68		$	(19	)	$	3,889
Net sales, related party		—			173			—			—			173
Net sales		—			4,013			68			(19	)		4,062
Cost of products sold		—			1,684			28			(19	)		1,693
Selling, general and administrative expenses		6			602			73			—			681
Amortization expense		—			3			—			—			3
Operating income (loss)		(6	)		1,724			(33	)		—			1,685
Interest and debt expense		124			60			—			(57	)		127
Interest income		(57	)		(1	)		(2	)		57			(3	)
Other (income) expense, net		2			(24	)		1			21			—
Income (loss) before income taxes		(75	)		1,689			(32	)		(21	)		1,561
Provision for (benefit from) income taxes		(27	)		634			(15	)		—			592
Equity income from subsidiaries		1,017			7			—			(1,024	)		—
Net income (loss)	$	969		$	1,062		$	(17	)	$	(1,045	)	$	969

Condensed Consolidating Statements of Comprehensive Income

Condensed Consolidating Statements of Comprehensive Income

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Three Months Ended June 30, 2014
Net income (loss)	$	492		$	579		$	(36	)	$	(543	)	$	492
Other comprehensive income (loss), net of tax:
Retirement benefits		6			7			—			(7	)		6
Unrealized gain on long-term investments		1			1			—			(1	)		1
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		(3	)		(2	)		(2	)		4			(3	)
Comprehensive income (loss)	$	497		$	585		$	(38	)	$	(547	)	$	497
For the Three Months Ended June 30, 2013
Net income (loss)	$	461		$	513		$	(15	)	$	(498	)	$	461
Other comprehensive income (loss), net of tax:
Retirement benefits		(10	)		(13	)		(1	)		14			(10	)
Unrealized gain on long-term investments		1			1			—			(1	)		1
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		3			3			4			(7	)		3
Comprehensive income (loss)	$	456		$	504		$	(12	)	$	(492	)	$	456
For the Six Months Ended June 30, 2014
Net income (loss)	$	855		$	1,012		$	(63	)	$	(949	)	$	855
Other comprehensive income (loss), net of tax:
Retirement benefits		—			1			—			(1	)		—
Unrealized gain on long-term investments		2			2			—			(2	)		2
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		(2	)		(1	)		(2	)		3			(2	)
Comprehensive income (loss)	$	856		$	1,014		$	(65	)	$	(949	)	$	856
For the Six Months Ended June 30, 2013
Net income (loss)	$	969		$	1,062		$	(17	)	$	(1,045	)	$	969
Other comprehensive income (loss), net of tax:
Retirement benefits		(15	)		(18	)		(1	)		19			(15	)
Unrealized gain on long-term investments		3			3			—			(3	)		3
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		(12	)		(12	)		(6	)		18			(12	)
Comprehensive income (loss)	$	946		$	1,035		$	(24	)	$	(1,011	)	$	946

Reclassification Out of Accumulated Other Comprehensive Income Net of Tax

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the three months ended June 30, 2014, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(5	)	$	(5	)	$	—	$	5		$	(5	)	Cost of products sold
Amortization of prior service costs		(4	)		(4	)		—		4			(4	)	Selling, general and administrative expenses
		(9	)		(9	)		—		9			(9	)
Deferred taxes		3			3			—		(3	)		3		Provision for income taxes
Net of tax	$	(6	)	$	(6	)	$	—	$	6		$	(6	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(5	)	$	(6	)	$	—	$	6		$	(5	)	Net income (loss)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the three months ended June 30, 2013, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(5	)	$	(5	)	$	—	$	5		$	(5	)	Cost of products sold
Amortization of prior service costs		(5	)		(5	)		—		5			(5	)	Selling, general and administrative expenses
		(10	)		(10	)		—		10			(10	)
Deferred taxes		4			4			—		(4	)		4		Provision for income taxes
Net of tax	$	(6	)	$	(6	)	$	—	$	6		$	(6	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(5	)	$	(6	)	$	—	$	6		$	(5	)	Net income (loss)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the six months ended June 30, 2014, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(10	)	$	(10	)	$	—	$	10		$	(10	)	Cost of products sold
Amortization of prior service costs		(9	)		(9	)		—		9			(9	)	Selling, general and administrative expenses
		(19	)		(19	)		—		19			(19	)
Deferred taxes		7			7			—		(7	)		7		Provision for income taxes
Net of tax	$	(12	)	$	(12	)	$	—	$	12		$	(12	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(11	)	$	(12	)	$	—	$	12		$	(11	)	Net income (loss)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the six months ended June 30, 2013, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(10	)	$	(10	)	$	—	$	10		$	(10	)	Cost of products sold
Amortization of prior service costs		(9	)		(9	)		—		9			(9	)	Selling, general and administrative expenses
		(19	)		(19	)		—		19			(19	)
Deferred taxes		7			7			—		(7	)		7		Provision for income taxes
Net of tax	$	(12	)	$	(12	)	$	—	$	12		$	(12	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(11	)	$	(12	)	$	—	$	12		$	(11	)	Net income (loss)

Condensed Consolidating Statements of Cash Flows

Condensed Consolidating Statements of Cash Flows

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2014
Cash flows from (used in) operating activities	$	326		$	635		$	(44	)	$	(662	)	$	255
Cash flows from (used in) investing activities:
Capital expenditures		—			(41	)		(86	)		4			(123	)
Proceeds from termination of joint venture		—			—			35			—			35
Contributions to intercompany investments		(32	)		—			—			32			—
Other, net		143			41			(33	)		(175	)		(24	)
Net cash flows from (used in) investing activities		111			—			(84	)		(139	)		(112	)
Cash flows from (used in) financing activities:
Dividends paid on common stock		(699	)		(637	)		—			637			(699	)
Repurchase of common stock		(440	)		—			—			—			(440	)
Principal borrowings under revolving credit facility		1,000			—			—			—			1,000
Repayments under revolving credit facility		(200	)		—			—			—			(200	)
Excess tax benefit on stock-based compensation plans		10			—			—			—			10
Dividends paid on preferred stock		(21	)		—			—			21			—
Receipt of equity		—			—			32			(32	)		—
Other, net		(31	)		(320	)		176			175			—
Net cash flows from (used in) financing activities		(381	)		(957	)		208			801			(329	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(1	)		—			(1	)
Net change in cash and cash equivalents		56			(322	)		79			—			(187	)
Cash and cash equivalents at beginning of period		444			696			360			—			1,500
Cash and cash equivalents at end of period	$	500		$	374		$	439		$	—		$	1,313

Condensed Consolidating Statements of Cash Flows

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2013
Cash flows from (used in) operating activities	$	199		$	(356	)	$	(23	)	$	(24	)	$	(204	)
Cash flows from (used in) investing activities:
Capital expenditures		—			(33	)		(20	)		3			(50	)
Proceeds from termination of joint venture		—			—			31			—			31
Other, net		31			18			—			(44	)		5
Net cash flows from (used in) investing activities		31			(15	)		11			(41	)		(14	)
Cash flows from (used in) financing activities:
Dividends paid on common stock		(650	)		—			—			—			(650	)
Repurchase of common stock		(475	)		—			—			—			(475	)
Principal borrowings under term-loan facility		500			—			—			—			500
Excess tax benefit on stock-based compensation plans		11			—			—			—			11
Dividends paid on preferred stock		(21	)		—			—			21			—
Debt issuance costs and financing fees		(3	)		—			—			—			(3	)
Other, net		(11	)		(120	)		87			44			—
Net cash flows from (used in) financing activities		(649	)		(120	)		87			65			(617	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(3	)		—			(3	)
Net change in cash and cash equivalents		(419	)		(491	)		72			—			(838	)
Cash and cash equivalents at beginning of period		755			1,420			327			—			2,502
Cash and cash equivalents at end of period	$	336		$	929		$	399		$	—		$	1,664

Condensed Consolidating Balance Sheets

Condensed Consolidating Balance Sheets

(Dollars in Millions)

	Parent Issuer		Guarantors		Non- Guarantors		Eliminations			Consolidated
June 30, 2014
Assets
Cash and cash equivalents	$	500	$	374	$	439	$	—		$	1,313
Accounts receivable		—		59		39		—			98
Accounts receivable, related party		—		66		—		—			66
Notes receivable		—		1		—		—			1
Other receivables		127		1,101		2		(1,219	)		11
Inventories		—		966		94		(1	)		1,059
Deferred income taxes, net		—		649		1		(13	)		637
Prepaid expenses and other		60		211		4		(2	)		273
Total current assets		687		3,427		579		(1,235	)		3,458
Property, plant and equipment, net		4		983		190		—			1,177
Trademarks and other intangible assets, net		—		2,408		4		—			2,412
Goodwill		—		7,999		19		—			8,018
Long-term intercompany notes receivable		1,700		201		—		(1,901	)		—
Investment in subsidiaries		10,092		481		—		(10,573	)		—
Other assets and deferred charges		94		179		19		(56	)		236
Total assets	$	12,577	$	15,678	$	811	$	(13,765	)	$	15,301
Liabilities and shareholders’ equity
Accounts payable	$	1	$	111	$	25	$	—		$	137
Tobacco settlement accruals		—		1,248		—		—			1,248
Due to related party		—		1		—		—			1
Deferred revenue, related party		—		17		—		—			17
Revolving credit facility borrowings		800		—		—		—			800
Other current liabilities		1,525		745		85		(1,235	)		1,120
Total current liabilities		2,326		2,122		110		(1,235	)		3,323
Long-term intercompany notes payable		201		1,380		320		(1,901	)		—
Long-term debt (less current maturities)		5,091		—		—		—			5,091
Deferred income taxes, net		—		764		2		(56	)		710
Long-term retirement benefits (less current portion)		40		1,109		9		—			1,158
Other noncurrent liabilities		24		100		—		—			124
Shareholders’ equity		4,895		10,203		370		(10,573	)		4,895
Total liabilities and shareholders’ equity	$	12,577	$	15,678	$	811	$	(13,765	)	$	15,301

Condensed Consolidating Balance Sheets

(Dollars in Millions)

	Parent Issuer		Guarantors		Non- Guarantors		Eliminations			Consolidated
December 31, 2013
Assets
Cash and cash equivalents	$	444	$	696	$	360	$	—		$	1,500
Accounts receivable		—		74		32		—			106
Accounts receivable, related party		—		56		—		—			56
Notes receivable		—		1		36		—			37
Other receivables		76		198		6		(264	)		16
Inventories		—		1,069		59		(1	)		1,127
Deferred income taxes, net		—		614		1		(9	)		606
Prepaid expenses and other		29		172		7		(1	)		207
Total current assets		549		2,880		501		(275	)		3,655
Property, plant and equipment, net		5		986		83		—			1,074
Trademarks and other intangible assets, net		—		2,413		4		—			2,417
Goodwill		—		7,999		12		—			8,011
Long-term intercompany notes receivable		1,842		1,295		—		(3,137	)		—
Investment in subsidiaries		9,736		473		—		(10,209	)		—
Other assets and deferred charges		94		187		18		(54	)		245
Total assets	$	12,226	$	16,233	$	618	$	(13,675	)	$	15,402
Liabilities and shareholders’ equity
Accounts payable	$	1	$	169	$	15	$	—		$	185
Tobacco settlement accruals		—		1,727		—		—			1,727
Deferred revenue, related party		—		48		—		—			48
Other current liabilities		601		744		46		(275	)		1,116
Total current liabilities		602		2,688		61		(275	)		3,076
Long-term intercompany notes payable		1,295		1,700		142		(3,137	)		—
Long-term debt (less current maturities)		5,099		—		—		—			5,099
Deferred income taxes, net		—		710		2		(54	)		658
Long-term retirement benefits (less current portion)		38		1,172		11		—			1,221
Other noncurrent liabilities		25		156		—		—			181
Shareholders’ equity		5,167		9,807		402		(10,209	)		5,167
Total liabilities and shareholders’ equity	$	12,226	$	16,233	$	618	$	(13,675	)	$	15,402

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Restructuring Charges - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Percentage of workforce declination	10.00%
Completion date of all cash payments related to restructuring	Dec. 31, 2015
Restructuring charge, amount utilized	$ 99
Other current liabilities	30
Other noncurrent liabilities	$ 20

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Shareholders Equity (Parenthetical) (Detail) (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Stockholders Equity Note Disclosure [Line Items]
Tax expense (benefit), retirement benefits	$ 4	$ (7)		$ 10
Tax expense (benefit), unrealized gains (losses) on investments			1	2
Tax expense (benefit), cumulative translation adjustment	$ (1)	$ 1	$ (1)	$ 6
Dividends, per share	$ 0.67	$ 0.63	$ 1.34	$ 1.22

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Categories of U.S. Tobacco-Related Cases Pending against RJR Tobacco (Detail)	6 Months Ended
	Jun. 30, 2014 LegalMatter
Individual Smoking And Health Cases
Contingent Liabilities [Line Items]
RJR Tobacco's U.S. Case Numbers as of June 30, 2014	99
Change in Number of Cases Since March 31, 2014 Increase/(Decrease)	4
West Virginia Ipic
Contingent Liabilities [Line Items]
RJR Tobacco's U.S. Case Numbers as of June 30, 2014	1	[1]
Number of Plaintiffs	564	[1]
March 31, 2014 Increase/(Decrease)	No change	[1]
Engle
Contingent Liabilities [Line Items]
RJR Tobacco's U.S. Case Numbers as of June 30, 2014	4,865	[2]
Number of Plaintiffs	5,973	[2]
Change in Number of Cases Since March 31, 2014 Increase/(Decrease)	(115)	[2]
Increase/ (Decrease) in Number of Plaintiffs	(140)	[2]
Broin II
Contingent Liabilities [Line Items]
RJR Tobacco's U.S. Case Numbers as of June 30, 2014	2,572
March 31, 2014 Increase/(Decrease)	No change
Class Action
Contingent Liabilities [Line Items]
RJR Tobacco's U.S. Case Numbers as of June 30, 2014	8
March 31, 2014 Increase/(Decrease)	No change
Healthcare Cost Recovery Cases
Contingent Liabilities [Line Items]
RJR Tobacco's U.S. Case Numbers as of June 30, 2014	2
March 31, 2014 Increase/(Decrease)	No change
State Settlement Agreements Enforcement And Validity Adjustments
Contingent Liabilities [Line Items]
RJR Tobacco's U.S. Case Numbers as of June 30, 2014	30
March 31, 2014 Increase/(Decrease)	No change
Antitrust
Contingent Liabilities [Line Items]
RJR Tobacco's U.S. Case Numbers as of June 30, 2014	1
March 31, 2014 Increase/(Decrease)	No change
Other Litigation And Developments
Contingent Liabilities [Line Items]
RJR Tobacco's U.S. Case Numbers as of June 30, 2014	13
Change in Number of Cases Since March 31, 2014 Increase/(Decrease)	(1)

[1] Includes as one case the approximately 564 cases pending as a consolidated action In Re: Tobacco Litigation Individual Personal Injury Cases, sometimes referred to as West Virginia IPIC cases, described below. The West Virginia IPIC cases have been separated from the Individual Smoking and Health cases for reporting purposes.

[2] The Engle Progeny cases have been separated from the Individual Smoking and Health cases for reporting purposes. The number of cases has decreased as the result of many of the federal and state court cases being dismissed or duplicate actions being consolidated.

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Intangible Assets - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
Intangible Assets Disclosure [Line Items]
Cash paid to acquire business	$ 31

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Business and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Business and Summary of Significant Accounting Policies

Note 1 — Business and Summary of Significant Accounting Policies

Overview

The condensed consolidated financial statements (unaudited) include the accounts of Reynolds American Inc., referred to as RAI, and its wholly owned subsidiaries. RAI’s wholly owned operating subsidiaries include R. J. Reynolds Tobacco Company; American Snuff Company, LLC, referred to as American Snuff Co.; Santa Fe Natural Tobacco Company, Inc., referred to as SFNTC; R. J. Reynolds Vapor Company, referred to as RJR Vapor; Niconovum AB; and Niconovum USA, Inc.

RAI was incorporated as a holding company in the state of North Carolina in 2004, and its common stock is listed on the NYSE under the symbol “RAI.” RAI was created to facilitate the business combination of the U.S. business of Brown & Williamson Holdings, Inc., referred to as B&W, an indirect wholly owned subsidiary of British American Tobacco p.l.c., referred to as BAT, with R. J. Reynolds Tobacco Company on July 30, 2004, with such combination referred to as the B&W business combination.

References to RJR Tobacco prior to July 30, 2004, relate to R. J. Reynolds Tobacco Company, a New Jersey corporation and a wholly owned subsidiary of R.J. Reynolds Tobacco Holdings, Inc., referred to as RJR. References to RJR Tobacco on and subsequent to July 30, 2004, relate to the combined U.S. assets, liabilities and operations of B&W and R. J. Reynolds Tobacco Company, a North Carolina corporation.

RAI’s reportable operating segments are RJR Tobacco, American Snuff and Santa Fe. The RJR Tobacco segment consists principally of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. The Santa Fe segment consists of the domestic operations of SFNTC. Included in All Other are RJR Vapor, Niconovum AB, Niconovum USA, Inc., and various international operations, among other RAI subsidiaries. The segments were identified based on how RAI’s chief operating decision maker allocates resources and assesses performance. Certain of RAI’s operating subsidiaries have entered into intercompany agreements for products or services with other subsidiaries. As a result, certain activities of an operating subsidiary may be included in a different segment of RAI.

RAI’s operating subsidiaries primarily conduct their businesses in the United States.

Basis of Presentation

The accompanying interim condensed consolidated financial statements (unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America, referred to as GAAP, for interim financial information and, in management’s opinion, contain all adjustments, consisting only of normal recurring items, necessary for a fair presentation of the results for the periods presented. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All material intercompany balances have been eliminated. For interim reporting purposes, certain costs and expenses are charged to operations in proportion to the estimated total annual amount expected to be incurred primarily based on sales volumes. The results for the interim period ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The condensed consolidated financial statements (unaudited) should be read in conjunction with the consolidated financial statements and related footnotes, which appear in RAI’s Annual Report on Form 10-K for the year ended December 31, 2013. Certain reclassifications were made to conform prior years’ financial statements to the current presentation. Certain amounts presented in note 9 are rounded in the aggregate and may not sum from the individually presented components. All dollar amounts, other than per share amounts, are presented in millions, except for amounts set forth in note 9 and as otherwise noted.

Cost of Products Sold

Cost of products sold includes the expenses for the Master Settlement Agreement, referred to as the MSA, and other settlement agreements with the states of Mississippi, Florida, Texas and Minnesota, which together with the MSA are collectively referred to as the State Settlement Agreements; the federal tobacco quota buyout; and the user fees charged by the U.S. Food and Drug Administration, referred to as the FDA, which were as follows:

	For the Three  Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
State Settlement Agreements	$	456	$	521	$	912	$	789
Federal tobacco quota buyout		51		54		106		106
FDA user fees		33		31		67		63

In 2012, RJR Tobacco and certain other participating manufacturers, referred to as the PMs, including SFNTC, entered into a term sheet, referred to as the Term Sheet, with 17 states, the District of Columbia and Puerto Rico to settle certain claims related to the MSA non-participating manufacturer adjustment, referred to as the NPM Adjustment. The Term Sheet resolves claims related to volume years from 2003 through 2012 and puts in place a revised method to determine future adjustments from 2013 forward as to jurisdictions that join the agreement. The Term Sheet was not binding on the parties at the time it was executed. On March 12, 2013, a single, nationwide arbitration panel of three former federal judges, referred to as the Arbitration Panel, hearing the dispute related to the 2003 NPM Adjustment (and related matters) issued an order, referred to as the Order, authorizing the implementation of the Term Sheet. In addition, after the Order, one additional state signed the Term Sheet on April 12, 2013; and, two additional states signed the Term Sheet on May 24, 2013. As a result of the Order, the Term Sheet is now binding on all signatories.

Based on the jurisdictions bound by the Term Sheet through December 31, 2013, RJR Tobacco and SFNTC, collectively, will receive credits, currently estimated to total approximately $1.1 billion, with respect to their NPM Adjustment claims for the period from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period, which commenced with the April 2013 MSA payment. As a result of this binding Order, expenses for the MSA were reduced by approximately $15 million and $219 million for the three and six months ended June 30, 2013, respectively.

In June 2014, two additional states agreed to settle the NPM Adjustment disputes on similar terms as set forth in the Term Sheet, except for certain provisions related to the determination of credits to be received by the PMs. RJR Tobacco and SFNTC, collectively, will receive credits, currently estimated to total approximately $170 million, with respect to their NPM Adjustment claims from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period effectively beginning with the April 2014 MSA payment related to the addition of these two states. As a result, expenses for the MSA were reduced by approximately $34 million for the three and six months ended June 30, 2014.

In addition, as a result of meeting the performance requirements associated with the Term Sheet, RJR Tobacco and Santa Fe, collectively, recognized additional credits of $91 million and $75 million for the three months ended June 30, 2014 and 2013, respectively; and $154 million and $132 million for the six months ended June 30, 2014 and 2013, respectively. RJR Tobacco expects to recognize additional credits through 2017; and Santa Fe expects to recognize additional credits through 2016.

For additional information related to the NPM Adjustment settlement, see “— Litigation Affecting the Cigarette Industry —State Settlement Agreements — Enforcement and Validity; Adjustments” in note 9.

Pension and Postretirement

Pension and postretirement benefits require balance sheet recognition of the net asset or liability for the overfunded or underfunded status of defined benefit pension and other postretirement benefit plans, on a plan-by-plan basis, and recognition of changes in the funded status in the year in which the changes occur.

Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. Differences between actual results and actuarial assumptions are accumulated and recognized in the year in which they occur as a mark-to-market adjustment, referred to as an MTM adjustment, to the extent such net gains and losses are in excess of 10% of the greater of the fair value of plan assets or the plan’s benefit obligation, referred to as the corridor. Actuarial gains and losses outside the corridor are generally recognized annually as of December 31, or when the plans are remeasured during an interim period.

Prior service costs of pension benefits, which are changes in benefit obligations due to plan amendments, are amortized on a straight-line basis over the average remaining service period for active employees, or average remaining life expectancies for inactive employees if most of the plan obligations are due to inactive employees. Prior service costs of postretirement benefits, which are changes in benefit obligations due to plan amendments, are amortized on a straight-line basis over the expected service period to full eligibility age for active employees, or average remaining life expectancies for inactive employees if most of the plan obligations are due to inactive employees.

The components of the pension benefits and the postretirement benefits are set forth below:

	For the Three Months Ended June 30,												For the Six Months Ended June 30,
	Pension Benefits						Postretirement Benefits						Pension Benefits						Postretirement Benefits
	2014			2013			2014			2013			2014			2013			2014			2013
Service cost	$	6		$	7		$	—		$	—		$	11		$	12		$	1		$	1
Interest cost		67			62			13			13			133			124			27			25
Expected return on plan assets		(91	)		(88	)		(3	)		(2	)		(181	)		(176	)		(6	)		(5	)
Amortization of prior service cost (credit)		1			1			(10	)		(11	)		2			2			(21	)		(21	)
Total benefit cost (credit)	$	(17	)	$	(18	)	$	—		$	—		$	(35	)	$	(38	)	$	1		$	—

RAI disclosed in its financial statements for the year ended December 31, 2013, that it expects to contribute $109 million to its pension plans in 2014, of which $4 million was contributed during the first six months of 2014.

Fair Value Measurement

RAI determines fair value of assets and liabilities, if any, using a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market participant assumptions based on the best information available in the circumstances.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price.

The levels of the fair value hierarchy are:

Level 1: inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

RAI evaluates its investments for possible impairment based on current economic conditions, credit loss experience and other criteria on a quarterly basis. The evaluation of investments for impairment requires significant judgments, including:

• the identification of potentially impaired securities;

• the determination of their estimated fair value;

• the assessment of whether any decline in estimated fair value is other-than-temporary; and

• the likelihood of selling before recovery.

If there is a decline in a security’s net realizable value that is other-than-temporary and it is not likely to be sold before recovery, the decline is separated into the amount of impairment related to credit loss and the amount of impairment related to all other factors. The decline related to the credit loss is recognized in earnings, while the decline related to all other factors is recognized in accumulated other comprehensive loss.

Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board, referred to as the FASB, issued guidance for discontinued operations, which changes the criteria for determining which disposals should be presented as discontinued operations and modifies related disclosure requirements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted, but only for those disposals that have not been reported in financial statements previously issued or available for guidance. The adoption of the amendment is not expected to have a material impact on RAI’s results of operations, cash flows or financial position.

In May 2014, the FASB issued amended guidance that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This amended guidance will replace most existing GAAP revenue recognition guidance and is effective for RAI for interim and annual reporting periods beginning on January 1, 2017. Early adoption is prohibited. RAI is evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures.

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Categories of U.S. Tobacco-Related Cases Pending against RJR Tobacco (Parenthetical) (Detail)	Jun. 30, 2014 LegalMatter	Jun. 30, 2013 LegalMatter
Contingent Liabilities [Line Items]
Number of cases pending	170	159
West Virginia Ipic
Contingent Liabilities [Line Items]
Number of cases pending	564

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Financial Assets Classified as Level 3 Investments (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014		Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
Cost	$ 118		$ 119
Gross Unrealized Loss	(27)	[1]	(30)	[1]
Estimated Fair Value	91		89
Auction Rate Securities
Schedule of Available-for-sale Securities [Line Items]
Cost	99		99
Gross Unrealized Loss	(20)	[1]	(23)	[1]
Estimated Fair Value	79		76
Mortgage Backed Securities
Schedule of Available-for-sale Securities [Line Items]
Cost	19		20
Gross Unrealized Loss	(7)	[1]	(7)	[1]
Estimated Fair Value	$ 12		$ 13

[1] (1) Unrealized losses, net of tax, are reported in accumulated other comprehensive loss in RAI's condensed consolidated balance sheet (unaudited) as of June 30, 2014, and consolidated balance sheet as of December 31, 2013.

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Income Per Share (Tables)

6 Months Ended

Jun. 30, 2014

Components of Calculation of Income Per Share

The components of the calculation of income per share were as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Income from continuing operations	$	492	$	461	$	830	$	969
Income from discontinued operations		—		—		25		—
Net income	$	492	$	461	$	855	$	969
Basic weighted average shares, in thousands		533,311		546,320		535,037		548,837
Effect of dilutive potential shares:
Restricted stock units		1,454		1,682		1,787		1,889
Diluted weighted average shares, in thousands		534,765		548,002		536,824		550,726

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Restructuring (Tables)

6 Months Ended

Jun. 30, 2014

Changes in Restructuring Liability

The changes in the restructuring liability were as follows:

	Employee Severance and Benefits
Balance as of December 31, 2012	$	71
Utilized in 2013		(14	)
Balance as of December 31, 2013		57
Utilized in 2014		(7	)
Balance as of June 30, 2014	$	50

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Provision for income Taxes from Continuing Operations (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Provision For Income Taxes [Line Items]
Provision for income taxes from continuing operations	$ 283	$ 271	$ 476	$ 592
Effective tax rate	36.50%	37.00%	36.40%	37.90%

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Changes in Level 3 Investments (Detail) (USD $) In Millions, unless otherwise specified			6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 Auction Rate Securities	Jun. 30, 2014 Mortgage Backed Securities
Schedule of Available-for-sale Securities [Line Items]
Cost, Beginning Balance	$ 118	$ 119	$ 99	$ 20
Redemptions				(1)
Unrealized gain			0
Cost, Ending Balance	118	119	99	19
Estimated Fair Value, Beginning Balance	91	89	76	13
Redemptions				(1)
Estimated Fair Value, Ending Balance	91	89	79	12
Gross Gain (Loss), Beginning Balance			(23)	(7)
Unrealized gain			3
Gross Gain (Loss), Ending Balance			(20)	(7)
Unrealized gain			$ 3

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Inventories (Tables)

6 Months Ended

Jun. 30, 2014

Components of Inventories

The major components of inventories were as follows:

	June 30, 2014		December 31, 2013
Leaf tobacco	$	921	$	1,049
Other raw materials		78		66
Work in process		67		70
Finished products		166		130
Other		31		18
Total		1,263		1,333
Less LIFO allowance		204		206
	$	1,059	$	1,127

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Income Taxes (Tables)

6 Months Ended

Jun. 30, 2014

Provision for income Taxes from Continuing Operations

The provision for income taxes from continuing operations was as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Provision for income taxes from continuing operations	$	283		$	271		$	476		$	592
Effective tax rate		36.5	%		37.0	%		36.4	%		37.9	%

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Millions, except Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Accumulated depreciation	$ 1,592	$ 1,579
Common stock, shares issued	531,283,513	538,053,024

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Borrowing Arrangements (Tables)

6 Months Ended

Jun. 30, 2014

Summary of Borrowings and Repayments under Revolving Credit Facility

A summary of the borrowings and repayments under the revolving credit facility are shown below:

	Amount			Interest Rate
Balance as of December 31, 2013	$	—
April 2014 borrowings		750			1.46	%
Repayments of April 2014 borrowings		(200	)
June 2014 borrowings		250			1.45	%
Balance as of June 30, 2014	$	800

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Components of Pension Benefits and Postretirement Benefits (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Pension Benefits
Defined Benefit Plan Disclosure [Line Items]
Service cost	$ 6	$ 7	$ 11	$ 12
Interest cost	67	62	133	124
Expected return on plan assets	(91)	(88)	(181)	(176)
Amortization of prior service cost (credit)	1	1	2	2
Total benefit cost (credit)	(17)	(18)	(35)	(38)
Postretirement Benefit
Defined Benefit Plan Disclosure [Line Items]
Service cost			1	1
Interest cost	13	13	27	25
Expected return on plan assets	(3)	(2)	(6)	(5)
Amortization of prior service cost (credit)	(10)	(11)	(21)	(21)
Total benefit cost (credit)	$ 0	$ 0	$ 1	$ 0

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Components of Restructuring Charge Accrued and Utilized (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Restructuring Cost and Reserve [Line Items]
Beginning Balance	$ 57	$ 71
Utilized	(7)	(14)
Ending Balance	$ 50	$ 57

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Segment Information (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2014		Jun. 30, 2013		Jun. 30, 2014		Jun. 30, 2013
Segment Reporting Information [Line Items]
Net sales	$ 2,162		$ 2,179		$ 4,097		$ 4,062
Operating income (loss)	836	[1],[2]	798	[1],[2]	1,426	[1],[2]	1,685	[1],[2]
Interest and debt expense	62		65		121		127
Interest income	(1)		(1)		(2)		(3)
Other expense, net			2		1
Income (loss) from continuing operations before income taxes	775		732		1,306		1,561
RJR Tobacco
Segment Reporting Information [Line Items]
Net sales	1,736		1,792		3,299		3,350
American Snuff
Segment Reporting Information [Line Items]
Net sales	195		194		379		361
Santa Fe
Segment Reporting Information [Line Items]
Net sales	168		148		303		263
All Other
Segment Reporting Information [Line Items]
Net sales	63		45		116		88
Operating Segments | RJR Tobacco
Segment Reporting Information [Line Items]
Operating income (loss)	726	[1]	663	[1]	1,208	[1]	1,421	[1]
Operating Segments | American Snuff
Segment Reporting Information [Line Items]
Operating income (loss)	110		107		212		200
Operating Segments | Santa Fe
Segment Reporting Information [Line Items]
Operating income (loss)	84	[2]	72	[2]	149	[2]	126	[2]
Operating Segments | All Other
Segment Reporting Information [Line Items]
Operating income (loss)	(49)		(19)		(88)		(23)
Corporate, Non-Segment
Segment Reporting Information [Line Items]
Operating income (loss)	$ (35)		$ (25)		$ (55)		$ (39)

[1] Includes NPM Adjustment credits of $124 million and $89 million for the three months ended June 30, 2014 and 2013, respectively; and $186 million and $348 million for the six months ended June 30, 2014 and 2013, respectively, see "- Cost of Products Sold" in note 1.

[2] Includes NPM Adjustment credits of $1 million for each of the three months ended June 30, 2014 and 2013; and $2 million and $3 million for the six months ended June 30, 2014 and 2013, respectively see "- Cost of Products Sold" in note 1.

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CONSOLIDATED STATEMENTS OF INCOME (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2014		Jun. 30, 2013		Jun. 30, 2014		Jun. 30, 2013
Net sales	$ 2,071	[1]	$ 2,087	[1]	$ 3,920	[1]	$ 3,889	[1]
Net sales, related party	91		92		177		173
Net sales	2,162		2,179		4,097		4,062
Costs and expenses:
Cost of products sold	959	[1]	999	[1]	1,889	[1]	1,693	[1]
Selling, general and administrative expenses	364		380		777		681
Amortization expense	3		2		5		3
Operating income	836	[2],[3]	798	[2],[3]	1,426	[2],[3]	1,685	[2],[3]
Interest and debt expense	62		65		121		127
Interest income	(1)		(1)		(2)		(3)
Other expense, net			2		1
Income (loss) from continuing operations before income taxes	775		732		1,306		1,561
Provision for income taxes	283		271		476		592
Income (loss) from continuing operations	492		461		830		969
Income from discontinued operations, net of tax					25
Net income	$ 492		$ 461		$ 855		$ 969
Basic income per share:
Income from continuing operations	$ 0.92		$ 0.84		$ 1.55		$ 1.77
Income from discontinued operations					$ 0.05
Net income	$ 0.92		$ 0.84		$ 1.60		$ 1.77
Diluted income per share:
Income from continuing operations	$ 0.92		$ 0.84		$ 1.55		$ 1.76
Income from discontinued operations					$ 0.04
Net income	$ 0.92		$ 0.84		$ 1.59		$ 1.76
Dividends declared per share	$ 0.67		$ 0.63		$ 1.34		$ 1.22

[1] Excludes excise taxes of $927 million and $983 million for the three months ended June 30, 2014 and 2013, respectively; and $1,773 million and $1,838 million for the six months ended June 30, 2014 and 2013, respectively.

[2] Includes NPM Adjustment credits of $124 million and $89 million for the three months ended June 30, 2014 and 2013, respectively; and $186 million and $348 million for the six months ended June 30, 2014 and 2013, respectively, see "- Cost of Products Sold" in note 1.

[3] Includes NPM Adjustment credits of $1 million for each of the three months ended June 30, 2014 and 2013; and $2 million and $3 million for the six months ended June 30, 2014 and 2013, respectively see "- Cost of Products Sold" in note 1.

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Amortization of Derivative Instruments Impacted Income Statement (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Derivative Instruments, Gain (Loss) [Line Items]
Interest and debt expense	$ (4)	$ (7)	$ (8)	$ (13)

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from (used in) operating activities:
Net income	$ 855	$ 969
Income from discontinued operations, net of tax	(25)
Adjustments to reconcile to net cash flows from (used in) continuing operating activities:
Depreciation and amortization	51	55
Restructuring charge, net of cash payments	(7)	(8)
Deferred income tax expense	15	158
Pension and postretirement	(63)	(60)
Tobacco settlement	(480)	(1,386)
Other, net	(91)	68
Net cash flows from (used in) operating activities	255	(204)
Cash flows from (used in) investing activities:
Capital expenditures	(123)	(50)
Proceeds from termination of joint venture	35	31
Other, net	(24)	5
Net cash flows from (used in) investing activities	(112)	(14)
Cash flows from (used in) financing activities:
Dividends paid on common stock	(699)	(650)
Repurchase of common stock	(440)	(475)
Principal borrowings under revolving credit facility	1,000
Repayments under revolving credit facility	(200)
Principal borrowings under term-loan facility		500
Excess tax benefit on stock-based compensation plans	10	11
Debt issuance costs and financing fees		(3)
Net cash flows used in financing activities	(329)	(617)
Effect of exchange rate changes on cash and cash equivalents	(1)	(3)
Net change in cash and cash equivalents	(187)	(838)
Cash and cash equivalents at beginning of period	1,500	2,502
Cash and cash equivalents at end of period	1,313	1,664
Income taxes paid, net of refunds	499	364
Interest paid	$ 125	$ 135

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Summary of Borrowings and Repayments under Revolving Credit Facility (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
Line of Credit Facility [Line Items]
Balance as of December 31, 2013	$ 0
Revolving credit facility, borrowed amount	1,000
Repayments under revolving credit facility	(200)
Balance as of June 30, 2014	800
April 2014 Borrowings
Line of Credit Facility [Line Items]
Revolving credit facility, interest rate	1.46%
Revolving credit facility, borrowed amount	750
Repayments under revolving credit facility	(200)
June 2014 Borrowings
Line of Credit Facility [Line Items]
Revolving credit facility, interest rate	1.45%
Revolving credit facility, borrowed amount	$ 250

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Segment Information (Tables)

6 Months Ended

Jun. 30, 2014

Segment Information Related to Sales, Income, and Assets

Segment Data:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Net sales:
RJR Tobacco	$	1,736		$	1,792		$	3,299		$	3,350
American Snuff		195			194			379			361
Santa Fe		168			148			303			263
All Other		63			45			116			88
Consolidated net sales	$	2,162		$	2,179		$	4,097		$	4,062
Operating income (loss):
RJR Tobacco(1)	$	726		$	663		$	1,208		$	1,421
American Snuff		110			107			212			200
Santa Fe(2)		84			72			149			126
All Other		(49	)		(19	)		(88	)		(23	)
Corporate expense		(35	)		(25	)		(55	)		(39	)
Consolidated operating income	$	836		$	798		$	1,426		$	1,685
Reconciliation to income from continuing operations before income taxes:
Consolidated operating income(1)(2)	$	836		$	798		$	1,426		$	1,685
Interest and debt expense		62			65			121			127
Interest income		(1	)		(1	)		(2	)		(3	)
Other expense, net		—			2			1			—
Income from continuing operations before income taxes	$	775		$	732		$	1,306		$	1,561

⁽¹⁾  Includes NPM Adjustment credits of $124 million and $89 million for the three months ended June 30, 2014 and 2013, respectively; and $186 million and $348 million for the six months ended June 30, 2014 and 2013, respectively, see “— Cost of Products Sold” in note 1.

⁽²⁾  Includes NPM Adjustment credits of $1 million for each of the three months ended June 30, 2014 and 2013; and $2 million and $3 million for the six months ended June 30, 2014 and 2013, respectively see “— Cost of Products Sold” in note 1.

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Commitments and Contingencies (Details 1) (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
State Settlement Payment Expense [Line Items]
Year for which NPM Adjustment calculated year one	2004
Year for which NPM Adjustment calculated year two	2005
Year for which NPM Adjustment calculated year three	2006
Year for which NPM Adjustment calculated year four	2007
Year for which NPM Adjustment Calculated year five	2008
Year for which NPM Adjustment calculated year six	2009
Year for which NPM Adjustment calculated year seven	2010
Year for which NPM Adjustment calculated year eight	2011
Year in which deduction for NPM Adjustment was taken year one	2007
Year in which deduction for NPM Adjustment was taken year two	2008
Year in which deduction for NPM Adjustment was taken year three	2009
Year in which deduction for NPM Adjustment was taken year four	2010
Year in which deduction for NPM Adjustment was taken year five	2011
Year in which deduction for NPM Adjustment was taken year six	2012
Year in which deduction for NPM Adjustment was taken year seven	2013
Year in which deduction for NPM Adjustment was taken year eight	2014
RJR Tobacco's approximate share of disputed NPM adjustment amount year one	$ 562
RJR Tobacco's approximate share of disputed NPM adjustment amount year two	445
RJR Tobacco's approximate share of disputed NPM adjustment amount year three	419
RJR Tobacco's approximate share of disputed NPM adjustment amount year four	435
RJR Tobacco's approximate share of disputed NPM adjustment amount year five	468
RJR Tobacco's approximate share of disputed NPM adjustment amount year six	472
RJR Tobacco's approximate share of disputed NPM adjustment amount year seven	470
RJR Tobacco's approximate share of disputed NPM adjustment amount year eight	$ 421

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RAI Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements

6 Months Ended

Jun. 30, 2014

RAI Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements

Note 14 — RAI Guaranteed, Unsecured Notes — Condensed Consolidating Financial Statements

The following condensed consolidating financial statements relate to the guaranties of RAI’s $5.1 billion unsecured notes. Certain of RAI’s direct, wholly owned subsidiaries and certain of its indirectly owned subsidiaries have fully and unconditionally, and jointly and severally, guaranteed these notes. The following condensed consolidating financial statements include: the accounts and activities of RAI, the parent issuer; RJR, RJR Tobacco, American Snuff Co., SFNTC, and certain of RAI’s other subsidiaries, the Guarantors; other direct and indirect subsidiaries of RAI that are not Guarantors; and elimination adjustments.

Condensed Consolidating Statements of Income

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Three Months Ended June 30, 2014
Net sales	$	—		$	2,029		$	54		$	(12	)	$	2,071
Net sales, related party		—			91			—			—			91
Net sales		—			2,120			54			(12	)		2,162
Cost of products sold		—			921			49			(11	)		959
Selling, general and administrative expenses		17			287			60			—			364
Amortization expense		—			3			—			—			3
Operating income (loss)		(17	)		909			(55	)		(1	)		836
Interest and debt expense		62			20			2			(22	)		62
Interest income		(22	)		—			(1	)		22			(1	)
Other income, net		—			(10	)		—			10			—
Income (loss) before income taxes		(57	)		899			(56	)		(11	)		775
Provision for (benefit from) income taxes		(20	)		323			(20	)		—			283
Equity income from subsidiaries		529			3			—			(532	)		—
Net income (loss)	$	492		$	579		$	(36	)	$	(543	)	$	492
For the Three Months Ended June 30, 2013
Net sales	$	—		$	2,063		$	34		$	(10	)	$	2,087
Net sales, related party		—			92			—			—			92
Net sales		—			2,155			34			(10	)		2,179
Cost of products sold		—			993			16			(10	)		999
Selling, general and administrative expenses		3			334			43			—			380
Amortization expense		—			2			—			—			2
Operating income (loss)		(3	)		826			(25	)		—			798
Interest and debt expense		63			30			—			(28	)		65
Interest income		(28	)		—			(1	)		28			(1	)
Other (income) expense, net		1			(12	)		3			10			2
Income (loss) before income taxes		(39	)		808			(27	)		(10	)		732
Provision for (benefit from) income taxes		(14	)		297			(12	)		—			271
Equity income from subsidiaries		486			2			—			(488	)		—
Net income (loss)	$	461		$	513		$	(15	)	$	(498	)	$	461

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2014
Net sales	$	—		$	3,843		$	97		$	(20	)	$	3,920
Net sales, related party		—			177			—			—			177
Net sales		—			4,020			97			(20	)		4,097
Cost of products sold		—			1,826			82			(19	)		1,889
Selling, general and administrative expenses		20			644			113			—			777
Amortization expense		—			5			—			—			5
Operating income (loss)		(20	)		1,545			(98	)		(1	)		1,426
Interest and debt expense		121			43			3			(46	)		121
Interest income		(46	)		(1	)		(1	)		46			(2	)
Other (income) expense, net		2			(21	)		(1	)		21			1
Income (loss) from continuing operations before income taxes		(97	)		1,524			(99	)		(22	)		1,306
Provision for (benefit from) income taxes		(34	)		546			(36	)		—			476
Equity income from subsidiaries		918			9			—			(927	)		—
Income (loss) from continuing operations		855			987			(63	)		(949	)		830
Income from discontinued operations		—			25			—			—			25
Net income (loss)	$	855		$	1,012		$	(63	)	$	(949	)	$	855
For the Six Months Ended June 30, 2013
Net sales	$	—		$	3,840		$	68		$	(19	)	$	3,889
Net sales, related party		—			173			—			—			173
Net sales		—			4,013			68			(19	)		4,062
Cost of products sold		—			1,684			28			(19	)		1,693
Selling, general and administrative expenses		6			602			73			—			681
Amortization expense		—			3			—			—			3
Operating income (loss)		(6	)		1,724			(33	)		—			1,685
Interest and debt expense		124			60			—			(57	)		127
Interest income		(57	)		(1	)		(2	)		57			(3	)
Other (income) expense, net		2			(24	)		1			21			—
Income (loss) before income taxes		(75	)		1,689			(32	)		(21	)		1,561
Provision for (benefit from) income taxes		(27	)		634			(15	)		—			592
Equity income from subsidiaries		1,017			7			—			(1,024	)		—
Net income (loss)	$	969		$	1,062		$	(17	)	$	(1,045	)	$	969

Condensed Consolidating Statements of Comprehensive Income

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Three Months Ended June 30, 2014
Net income (loss)	$	492		$	579		$	(36	)	$	(543	)	$	492
Other comprehensive income (loss), net of tax:
Retirement benefits		6			7			—			(7	)		6
Unrealized gain on long-term investments		1			1			—			(1	)		1
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		(3	)		(2	)		(2	)		4			(3	)
Comprehensive income (loss)	$	497		$	585		$	(38	)	$	(547	)	$	497
For the Three Months Ended June 30, 2013
Net income (loss)	$	461		$	513		$	(15	)	$	(498	)	$	461
Other comprehensive income (loss), net of tax:
Retirement benefits		(10	)		(13	)		(1	)		14			(10	)
Unrealized gain on long-term investments		1			1			—			(1	)		1
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		3			3			4			(7	)		3
Comprehensive income (loss)	$	456		$	504		$	(12	)	$	(492	)	$	456
For the Six Months Ended June 30, 2014
Net income (loss)	$	855		$	1,012		$	(63	)	$	(949	)	$	855
Other comprehensive income (loss), net of tax:
Retirement benefits		—			1			—			(1	)		—
Unrealized gain on long-term investments		2			2			—			(2	)		2
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		(2	)		(1	)		(2	)		3			(2	)
Comprehensive income (loss)	$	856		$	1,014		$	(65	)	$	(949	)	$	856
For the Six Months Ended June 30, 2013
Net income (loss)	$	969		$	1,062		$	(17	)	$	(1,045	)	$	969
Other comprehensive income (loss), net of tax:
Retirement benefits		(15	)		(18	)		(1	)		19			(15	)
Unrealized gain on long-term investments		3			3			—			(3	)		3
Amortization of realized loss on hedging instruments		1			—			—			—			1
Cumulative translation adjustment and other		(12	)		(12	)		(6	)		18			(12	)
Comprehensive income (loss)	$	946		$	1,035		$	(24	)	$	(1,011	)	$	946

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the three months ended June 30, 2014, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(5	)	$	(5	)	$	—	$	5		$	(5	)	Cost of products sold
Amortization of prior service costs		(4	)		(4	)		—		4			(4	)	Selling, general and administrative expenses
		(9	)		(9	)		—		9			(9	)
Deferred taxes		3			3			—		(3	)		3		Provision for income taxes
Net of tax	$	(6	)	$	(6	)	$	—	$	6		$	(6	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(5	)	$	(6	)	$	—	$	6		$	(5	)	Net income (loss)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the three months ended June 30, 2013, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(5	)	$	(5	)	$	—	$	5		$	(5	)	Cost of products sold
Amortization of prior service costs		(5	)		(5	)		—		5			(5	)	Selling, general and administrative expenses
		(10	)		(10	)		—		10			(10	)
Deferred taxes		4			4			—		(4	)		4		Provision for income taxes
Net of tax	$	(6	)	$	(6	)	$	—	$	6		$	(6	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(5	)	$	(6	)	$	—	$	6		$	(5	)	Net income (loss)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the six months ended June 30, 2014, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(10	)	$	(10	)	$	—	$	10		$	(10	)	Cost of products sold
Amortization of prior service costs		(9	)		(9	)		—		9			(9	)	Selling, general and administrative expenses
		(19	)		(19	)		—		19			(19	)
Deferred taxes		7			7			—		(7	)		7		Provision for income taxes
Net of tax	$	(12	)	$	(12	)	$	—	$	12		$	(12	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(11	)	$	(12	)	$	—	$	12		$	(11	)	Net income (loss)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidating statements of income (unaudited) for the six months ended June 30, 2013, were as follows:

Components	Amounts Reclassified														Affected Line Item
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(10	)	$	(10	)	$	—	$	10		$	(10	)	Cost of products sold
Amortization of prior service costs		(9	)		(9	)		—		9			(9	)	Selling, general and administrative expenses
		(19	)		(19	)		—		19			(19	)
Deferred taxes		7			7			—		(7	)		7		Provision for income taxes
Net of tax	$	(12	)	$	(12	)	$	—	$	12		$	(12	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	—		$	—	$	—		$	1		Interest and debt expense
Deferred taxes		—			—			—		—			—		Provision for income taxes
Net of tax	$	1		$	—		$	—	$	—		$	1
Total reclassifications	$	(11	)	$	(12	)	$	—	$	12		$	(11	)	Net income (loss)

Condensed Consolidating Statements of Cash Flows

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2014
Cash flows from (used in) operating activities	$	326		$	635		$	(44	)	$	(662	)	$	255
Cash flows from (used in) investing activities:
Capital expenditures		—			(41	)		(86	)		4			(123	)
Proceeds from termination of joint venture		—			—			35			—			35
Contributions to intercompany investments		(32	)		—			—			32			—
Other, net		143			41			(33	)		(175	)		(24	)
Net cash flows from (used in) investing activities		111			—			(84	)		(139	)		(112	)
Cash flows from (used in) financing activities:
Dividends paid on common stock		(699	)		(637	)		—			637			(699	)
Repurchase of common stock		(440	)		—			—			—			(440	)
Principal borrowings under revolving credit facility		1,000			—			—			—			1,000
Repayments under revolving credit facility		(200	)		—			—			—			(200	)
Excess tax benefit on stock-based compensation plans		10			—			—			—			10
Dividends paid on preferred stock		(21	)		—			—			21			—
Receipt of equity		—			—			32			(32	)		—
Other, net		(31	)		(320	)		176			175			—
Net cash flows from (used in) financing activities		(381	)		(957	)		208			801			(329	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(1	)		—			(1	)
Net change in cash and cash equivalents		56			(322	)		79			—			(187	)
Cash and cash equivalents at beginning of period		444			696			360			—			1,500
Cash and cash equivalents at end of period	$	500		$	374		$	439		$	—		$	1,313

Condensed Consolidating Statements of Cash Flows

(Dollars in Millions)

	Parent Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2013
Cash flows from (used in) operating activities	$	199		$	(356	)	$	(23	)	$	(24	)	$	(204	)
Cash flows from (used in) investing activities:
Capital expenditures		—			(33	)		(20	)		3			(50	)
Proceeds from termination of joint venture		—			—			31			—			31
Other, net		31			18			—			(44	)		5
Net cash flows from (used in) investing activities		31			(15	)		11			(41	)		(14	)
Cash flows from (used in) financing activities:
Dividends paid on common stock		(650	)		—			—			—			(650	)
Repurchase of common stock		(475	)		—			—			—			(475	)
Principal borrowings under term-loan facility		500			—			—			—			500
Excess tax benefit on stock-based compensation plans		11			—			—			—			11
Dividends paid on preferred stock		(21	)		—			—			21			—
Debt issuance costs and financing fees		(3	)		—			—			—			(3	)
Other, net		(11	)		(120	)		87			44			—
Net cash flows from (used in) financing activities		(649	)		(120	)		87			65			(617	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(3	)		—			(3	)
Net change in cash and cash equivalents		(419	)		(491	)		72			—			(838	)
Cash and cash equivalents at beginning of period		755			1,420			327			—			2,502
Cash and cash equivalents at end of period	$	336		$	929		$	399		$	—		$	1,664

Condensed Consolidating Balance Sheets

(Dollars in Millions)

	Parent Issuer		Guarantors		Non- Guarantors		Eliminations			Consolidated
June 30, 2014
Assets
Cash and cash equivalents	$	500	$	374	$	439	$	—		$	1,313
Accounts receivable		—		59		39		—			98
Accounts receivable, related party		—		66		—		—			66
Notes receivable		—		1		—		—			1
Other receivables		127		1,101		2		(1,219	)		11
Inventories		—		966		94		(1	)		1,059
Deferred income taxes, net		—		649		1		(13	)		637
Prepaid expenses and other		60		211		4		(2	)		273
Total current assets		687		3,427		579		(1,235	)		3,458
Property, plant and equipment, net		4		983		190		—			1,177
Trademarks and other intangible assets, net		—		2,408		4		—			2,412
Goodwill		—		7,999		19		—			8,018
Long-term intercompany notes receivable		1,700		201		—		(1,901	)		—
Investment in subsidiaries		10,092		481		—		(10,573	)		—
Other assets and deferred charges		94		179		19		(56	)		236
Total assets	$	12,577	$	15,678	$	811	$	(13,765	)	$	15,301
Liabilities and shareholders’ equity
Accounts payable	$	1	$	111	$	25	$	—		$	137
Tobacco settlement accruals		—		1,248		—		—			1,248
Due to related party		—		1		—		—			1
Deferred revenue, related party		—		17		—		—			17
Revolving credit facility borrowings		800		—		—		—			800
Other current liabilities		1,525		745		85		(1,235	)		1,120
Total current liabilities		2,326		2,122		110		(1,235	)		3,323
Long-term intercompany notes payable		201		1,380		320		(1,901	)		—
Long-term debt (less current maturities)		5,091		—		—		—			5,091
Deferred income taxes, net		—		764		2		(56	)		710
Long-term retirement benefits (less current portion)		40		1,109		9		—			1,158
Other noncurrent liabilities		24		100		—		—			124
Shareholders’ equity		4,895		10,203		370		(10,573	)		4,895
Total liabilities and shareholders’ equity	$	12,577	$	15,678	$	811	$	(13,765	)	$	15,301

Condensed Consolidating Balance Sheets

(Dollars in Millions)

	Parent Issuer		Guarantors		Non- Guarantors		Eliminations			Consolidated
December 31, 2013
Assets
Cash and cash equivalents	$	444	$	696	$	360	$	—		$	1,500
Accounts receivable		—		74		32		—			106
Accounts receivable, related party		—		56		—		—			56
Notes receivable		—		1		36		—			37
Other receivables		76		198		6		(264	)		16
Inventories		—		1,069		59		(1	)		1,127
Deferred income taxes, net		—		614		1		(9	)		606
Prepaid expenses and other		29		172		7		(1	)		207
Total current assets		549		2,880		501		(275	)		3,655
Property, plant and equipment, net		5		986		83		—			1,074
Trademarks and other intangible assets, net		—		2,413		4		—			2,417
Goodwill		—		7,999		12		—			8,011
Long-term intercompany notes receivable		1,842		1,295		—		(3,137	)		—
Investment in subsidiaries		9,736		473		—		(10,209	)		—
Other assets and deferred charges		94		187		18		(54	)		245
Total assets	$	12,226	$	16,233	$	618	$	(13,675	)	$	15,402
Liabilities and shareholders’ equity
Accounts payable	$	1	$	169	$	15	$	—		$	185
Tobacco settlement accruals		—		1,727		—		—			1,727
Deferred revenue, related party		—		48		—		—			48
Other current liabilities		601		744		46		(275	)		1,116
Total current liabilities		602		2,688		61		(275	)		3,076
Long-term intercompany notes payable		1,295		1,700		142		(3,137	)		—
Long-term debt (less current maturities)		5,099		—		—		—			5,099
Deferred income taxes, net		—		710		2		(54	)		658
Long-term retirement benefits (less current portion)		38		1,172		11		—			1,221
Other noncurrent liabilities		25		156		—		—			181
Shareholders’ equity		5,167		9,807		402		(10,209	)		5,167
Total liabilities and shareholders’ equity	$	12,226	$	16,233	$	618	$	(13,675	)	$	15,402

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Related Party Transactions (Tables)

6 Months Ended

Jun. 30, 2014

Summary of Balances and Transactions

A summary of balances and transactions with such BAT affiliates is as follows:

Balances:

	June 30, 2014		December 31, 2013
Accounts receivable, related party	$	66	$	56
Due to related party		1		—
Deferred revenue, related party		17		48

Significant transactions:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Net sales	$	91	$	92	$	177	$	173
Purchases		4		6		13		9
RAI common stock purchases from B&W		114		62		155		170
Capsule royalty income		3		1		6		4

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Business and Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Overview

Overview

The condensed consolidated financial statements (unaudited) include the accounts of Reynolds American Inc., referred to as RAI, and its wholly owned subsidiaries. RAI’s wholly owned operating subsidiaries include R. J. Reynolds Tobacco Company; American Snuff Company, LLC, referred to as American Snuff Co.; Santa Fe Natural Tobacco Company, Inc., referred to as SFNTC; R. J. Reynolds Vapor Company, referred to as RJR Vapor; Niconovum AB; and Niconovum USA, Inc.

RAI was incorporated as a holding company in the state of North Carolina in 2004, and its common stock is listed on the NYSE under the symbol “RAI.” RAI was created to facilitate the business combination of the U.S. business of Brown & Williamson Holdings, Inc., referred to as B&W, an indirect wholly owned subsidiary of British American Tobacco p.l.c., referred to as BAT, with R. J. Reynolds Tobacco Company on July 30, 2004, with such combination referred to as the B&W business combination.

References to RJR Tobacco prior to July 30, 2004, relate to R. J. Reynolds Tobacco Company, a New Jersey corporation and a wholly owned subsidiary of R.J. Reynolds Tobacco Holdings, Inc., referred to as RJR. References to RJR Tobacco on and subsequent to July 30, 2004, relate to the combined U.S. assets, liabilities and operations of B&W and R. J. Reynolds Tobacco Company, a North Carolina corporation.

RAI’s reportable operating segments are RJR Tobacco, American Snuff and Santa Fe. The RJR Tobacco segment consists principally of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. The Santa Fe segment consists of the domestic operations of SFNTC. Included in All Other are RJR Vapor, Niconovum AB, Niconovum USA, Inc., and various international operations, among other RAI subsidiaries. The segments were identified based on how RAI’s chief operating decision maker allocates resources and assesses performance. Certain of RAI’s operating subsidiaries have entered into intercompany agreements for products or services with other subsidiaries. As a result, certain activities of an operating subsidiary may be included in a different segment of RAI.

RAI’s operating subsidiaries primarily conduct their businesses in the United States.

Basis of Presentation

Basis of Presentation

The accompanying interim condensed consolidated financial statements (unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America, referred to as GAAP, for interim financial information and, in management’s opinion, contain all adjustments, consisting only of normal recurring items, necessary for a fair presentation of the results for the periods presented. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All material intercompany balances have been eliminated. For interim reporting purposes, certain costs and expenses are charged to operations in proportion to the estimated total annual amount expected to be incurred primarily based on sales volumes. The results for the interim period ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The condensed consolidated financial statements (unaudited) should be read in conjunction with the consolidated financial statements and related footnotes, which appear in RAI’s Annual Report on Form 10-K for the year ended December 31, 2013. Certain reclassifications were made to conform prior years’ financial statements to the current presentation. Certain amounts presented in note 9 are rounded in the aggregate and may not sum from the individually presented components. All dollar amounts, other than per share amounts, are presented in millions, except for amounts set forth in note 9 and as otherwise noted.

Cost of Products Sold

Cost of Products Sold

Cost of products sold includes the expenses for the Master Settlement Agreement, referred to as the MSA, and other settlement agreements with the states of Mississippi, Florida, Texas and Minnesota, which together with the MSA are collectively referred to as the State Settlement Agreements; the federal tobacco quota buyout; and the user fees charged by the U.S. Food and Drug Administration, referred to as the FDA, which were as follows:

	For the Three  Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
State Settlement Agreements	$	456	$	521	$	912	$	789
Federal tobacco quota buyout		51		54		106		106
FDA user fees		33		31		67		63

In 2012, RJR Tobacco and certain other participating manufacturers, referred to as the PMs, including SFNTC, entered into a term sheet, referred to as the Term Sheet, with 17 states, the District of Columbia and Puerto Rico to settle certain claims related to the MSA non-participating manufacturer adjustment, referred to as the NPM Adjustment. The Term Sheet resolves claims related to volume years from 2003 through 2012 and puts in place a revised method to determine future adjustments from 2013 forward as to jurisdictions that join the agreement. The Term Sheet was not binding on the parties at the time it was executed. On March 12, 2013, a single, nationwide arbitration panel of three former federal judges, referred to as the Arbitration Panel, hearing the dispute related to the 2003 NPM Adjustment (and related matters) issued an order, referred to as the Order, authorizing the implementation of the Term Sheet. In addition, after the Order, one additional state signed the Term Sheet on April 12, 2013; and, two additional states signed the Term Sheet on May 24, 2013. As a result of the Order, the Term Sheet is now binding on all signatories.

Based on the jurisdictions bound by the Term Sheet through December 31, 2013, RJR Tobacco and SFNTC, collectively, will receive credits, currently estimated to total approximately $1.1 billion, with respect to their NPM Adjustment claims for the period from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period, which commenced with the April 2013 MSA payment. As a result of this binding Order, expenses for the MSA were reduced by approximately $15 million and $219 million for the three and six months ended June 30, 2013, respectively.

In June 2014, two additional states agreed to settle the NPM Adjustment disputes on similar terms as set forth in the Term Sheet, except for certain provisions related to the determination of credits to be received by the PMs. RJR Tobacco and SFNTC, collectively, will receive credits, currently estimated to total approximately $170 million, with respect to their NPM Adjustment claims from 2003 through 2012. These credits will be applied against annual payments under the MSA over a five-year period effectively beginning with the April 2014 MSA payment related to the addition of these two states. As a result, expenses for the MSA were reduced by approximately $34 million for the three and six months ended June 30, 2014.

In addition, as a result of meeting the performance requirements associated with the Term Sheet, RJR Tobacco and Santa Fe, collectively, recognized additional credits of $91 million and $75 million for the three months ended June 30, 2014 and 2013, respectively; and $154 million and $132 million for the six months ended June 30, 2014 and 2013, respectively. RJR Tobacco expects to recognize additional credits through 2017; and Santa Fe expects to recognize additional credits through 2016.

For additional information related to the NPM Adjustment settlement, see “— Litigation Affecting the Cigarette Industry —State Settlement Agreements — Enforcement and Validity; Adjustments” in note 9.

Pension and Postretirement

Pension and Postretirement

Pension and postretirement benefits require balance sheet recognition of the net asset or liability for the overfunded or underfunded status of defined benefit pension and other postretirement benefit plans, on a plan-by-plan basis, and recognition of changes in the funded status in the year in which the changes occur.

Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. Differences between actual results and actuarial assumptions are accumulated and recognized in the year in which they occur as a mark-to-market adjustment, referred to as an MTM adjustment, to the extent such net gains and losses are in excess of 10% of the greater of the fair value of plan assets or the plan’s benefit obligation, referred to as the corridor. Actuarial gains and losses outside the corridor are generally recognized annually as of December 31, or when the plans are remeasured during an interim period.

Prior service costs of pension benefits, which are changes in benefit obligations due to plan amendments, are amortized on a straight-line basis over the average remaining service period for active employees, or average remaining life expectancies for inactive employees if most of the plan obligations are due to inactive employees. Prior service costs of postretirement benefits, which are changes in benefit obligations due to plan amendments, are amortized on a straight-line basis over the expected service period to full eligibility age for active employees, or average remaining life expectancies for inactive employees if most of the plan obligations are due to inactive employees.

The components of the pension benefits and the postretirement benefits are set forth below:

	For the Three Months Ended June 30,												For the Six Months Ended June 30,
	Pension Benefits						Postretirement Benefits						Pension Benefits						Postretirement Benefits
	2014			2013			2014			2013			2014			2013			2014			2013
Service cost	$	6		$	7		$	—		$	—		$	11		$	12		$	1		$	1
Interest cost		67			62			13			13			133			124			27			25
Expected return on plan assets		(91	)		(88	)		(3	)		(2	)		(181	)		(176	)		(6	)		(5	)
Amortization of prior service cost (credit)		1			1			(10	)		(11	)		2			2			(21	)		(21	)
Total benefit cost (credit)	$	(17	)	$	(18	)	$	—		$	—		$	(35	)	$	(38	)	$	1		$	—

RAI disclosed in its financial statements for the year ended December 31, 2013, that it expects to contribute $109 million to its pension plans in 2014, of which $4 million was contributed during the first six months of 2014.

Fair Value Measurement

Fair Value Measurement

RAI determines fair value of assets and liabilities, if any, using a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market participant assumptions based on the best information available in the circumstances.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price.

The levels of the fair value hierarchy are:

Level 1: inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

RAI evaluates its investments for possible impairment based on current economic conditions, credit loss experience and other criteria on a quarterly basis. The evaluation of investments for impairment requires significant judgments, including:

• the identification of potentially impaired securities;

• the determination of their estimated fair value;

• the assessment of whether any decline in estimated fair value is other-than-temporary; and

• the likelihood of selling before recovery.

If there is a decline in a security’s net realizable value that is other-than-temporary and it is not likely to be sold before recovery, the decline is separated into the amount of impairment related to credit loss and the amount of impairment related to all other factors. The decline related to the credit loss is recognized in earnings, while the decline related to all other factors is recognized in accumulated other comprehensive loss.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board, referred to as the FASB, issued guidance for discontinued operations, which changes the criteria for determining which disposals should be presented as discontinued operations and modifies related disclosure requirements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted, but only for those disposals that have not been reported in financial statements previously issued or available for guidance. The adoption of the amendment is not expected to have a material impact on RAI’s results of operations, cash flows or financial position.

In May 2014, the FASB issued amended guidance that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This amended guidance will replace most existing GAAP revenue recognition guidance and is effective for RAI for interim and annual reporting periods beginning on January 1, 2017. Early adoption is prohibited. RAI is evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures.

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Components of Accumulated Other Comprehensive Loss Net of Tax (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	$ (56)	$ (311)
Other comprehensive income (loss) before reclassifications	12	(12)
Amounts reclassified from accumulated other comprehensive income (loss)	(11)	(11)
Net current-period other comprehensive income (loss)	1	(23)
Ending balance	(55)	(334)
Accumulated Defined Benefit Plans Adjustment
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(17)	(265)
Other comprehensive income (loss) before reclassifications	12	(3)
Amounts reclassified from accumulated other comprehensive income (loss)	(12)	(12)
Net current-period other comprehensive income (loss)		(15)
Ending balance	(17)	(280)
Accumulated Net Unrealized Investment Gain (Loss)
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(16)	(21)
Other comprehensive income (loss) before reclassifications	2	3
Net current-period other comprehensive income (loss)	2	3
Ending balance	(14)	(18)
Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(13)	(14)
Amounts reclassified from accumulated other comprehensive income (loss)	1	1
Net current-period other comprehensive income (loss)	1	1
Ending balance	(12)	(13)
Accumulated Translation Adjustment and Other
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(10)	(11)
Other comprehensive income (loss) before reclassifications	(2)	(12)
Net current-period other comprehensive income (loss)	(2)	(12)
Ending balance	$ (12)	$ (23)

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 1,313	$ 1,500
Accounts receivable	98	106
Accounts receivable, related party	66	56
Notes receivable	1	37
Other receivables	11	16
Inventories	1,059	1,127
Deferred income taxes, net	637	606
Prepaid expenses and other	273	207
Total current assets	3,458	3,655
Property, plant and equipment, net of accumulated depreciation (2014 - $1,592; 2013 - $1,579)	1,177	1,074
Trademarks and other intangible assets, net of accumulated amortization	2,412	2,417
Goodwill	8,018	8,011
Other assets and deferred charges	236	245
Total assets	15,301	15,402
Current liabilities:
Accounts payable	137	185
Tobacco settlement accruals	1,248	1,727
Due to related party	1
Deferred revenue, related party	17	48
Revolving credit facility borrowings	800	0
Other current liabilities	1,120	1,116
Total current liabilities	3,323	3,076
Long-term debt (less current maturities)	5,091	5,099
Deferred income taxes, net	710	658
Long-term retirement benefits (less current portion)	1,158	1,221
Other noncurrent liabilities	124	181
Commitments and contingencies:
Shareholders' equity:
Common stock (shares issued: 2014 - 531,283,513; 2013 - 538,053,024)
Paid-in capital	6,162	6,571
Accumulated deficit	(1,212)	(1,348)
Accumulated other comprehensive loss	(55)	(56)
Total shareholders' equity	4,895	5,167
Total liabilities and shareholders' equity	$ 15,301	$ 15,402

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CONSOLIDATED STATEMENTS OF INCOME (Parenthetical) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Excise taxes	$ 927	$ 983	$ 1,773	$ 1,838

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies

Note 9 — Commitments and Contingencies

Tobacco Litigation — General

Introduction

Various legal proceedings or claims, including litigation claiming that cancer and other diseases, as well as addiction, have resulted from the use of, or exposure to, RAI’s operating subsidiaries’ products, are pending or may be instituted against RJR Tobacco, American Snuff Co. or their affiliates, including RAI and RJR, or indemnitees, including B&W. These pending legal proceedings include claims relating to cigarette products manufactured by RJR Tobacco or certain of its affiliates and indemnitees, as well as claims relating to smokeless tobacco products manufactured by American Snuff Co. A discussion of the legal proceedings relating to cigarette products is set forth below under the heading “— Litigation Affecting the Cigarette Industry.” All of the references under that heading to tobacco-related litigation, smoking and health litigation and other similar references are references to legal proceedings relating to cigarette products and are not references to legal proceedings involving smokeless tobacco products, and case numbers under that heading include only cases involving cigarette products. The legal proceedings relating to the smokeless tobacco products manufactured by American Snuff Co. are discussed separately under the heading “— Smokeless Tobacco Litigation” below.

In connection with the B&W business combination, RJR Tobacco has agreed to indemnify B&W and its affiliates, including its indirect parent, BAT, against certain liabilities, costs and expenses incurred by B&W or its affiliates arising out of the U.S. cigarette and tobacco business of B&W. As a result of this indemnity, RJR Tobacco has assumed the defense of pending B&W-specific tobacco-related litigation, has paid the judgments and costs related to certain pre-business combination tobacco-related litigation of B&W, and has posted bonds on behalf of B&W, where necessary, in connection with cases decided since the B&W business combination.

Certain Terms and Phrases

Certain terms and phrases used in this disclosure may require some explanation. The term “judgment” or “final judgment” refers to the final decision of the court resolving the dispute and determining the rights and obligations of the parties. At the trial court level, for example, a final judgment generally is entered by the court after a jury verdict and after post-verdict motions have been decided. In most cases, the losing party can appeal a verdict only after a final judgment has been entered by the trial court.

The term “damages” refers to the amount of money sought by a plaintiff in a complaint, or awarded to a party by a jury or, in some cases, by a judge. “Compensatory damages” are awarded to compensate the prevailing party for actual losses suffered, if liability is proved. In cases in which there is a finding that a defendant has acted willfully, maliciously or fraudulently, generally based on a higher burden of proof than is required for a finding of liability for compensatory damages, a plaintiff also may be awarded “punitive damages.” Although damages may be awarded at the trial court stage, a losing party generally may be protected from paying any damages until all appellate avenues have been exhausted by posting a supersedeas bond. The amount of such a bond is governed by the law of the relevant jurisdiction and generally is set at the amount of damages plus some measure of statutory interest, modified at the discretion of the appropriate court or subject to limits set by court or statute.

The term “per curiam” refers to an opinion entered by a court. In most cases, it is used to indicate that the opinion entered is a brief announcement of the court’s decision and is not accompanied by a written opinion.

The term “settlement” refers to certain types of cases in which cigarette manufacturers, including RJR Tobacco and B&W, have agreed to resolve disputes with certain plaintiffs without resolving the case through trial. The principal terms of certain settlements entered into by RJR Tobacco and B&W are explained below under “— Accounting for Tobacco-Related Litigation Contingencies.”

Theories of Recovery

The plaintiffs seek recovery on a variety of legal theories, including negligence, strict liability in tort, design defect, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, medical monitoring and violations of state and federal antitrust laws. In certain of these cases, the plaintiffs claim that cigarette smoking exacerbated injuries caused by exposure to asbestos.

The plaintiffs seek various forms of relief, including compensatory and, where available, punitive damages, treble or multiple damages and statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and other equitable relief. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.

Defenses

The defenses raised by RJR Tobacco, American Snuff Co. and their affiliates and indemnitees include, where applicable and otherwise appropriate, preemption by the Federal Cigarette Labeling and Advertising Act of some or all claims arising after 1969, or by the Comprehensive Smokeless Tobacco Health Education Act for claims arising after 1986, the lack of any defect in the product, assumption of the risk, contributory or comparative fault, lack of proximate cause, remoteness, lack of standing and statutes of limitations or repose. RAI and RJR have asserted additional defenses, including jurisdictional defenses, in many of the cases in which they are named.

Accounting for Tobacco-Related Litigation Contingencies

In accordance with GAAP, RAI and its subsidiaries, including RJR Tobacco, American Snuff Co. and SFNTC, as applicable, record any loss concerning litigation at such time as an unfavorable outcome becomes probable and the amount can be reasonably estimated on an individual case-by-case basis. For the reasons set forth below, RAI’s management continues to conclude that the loss of any particular pending smoking and health tobacco litigation claim against RJR Tobacco or its affiliates or indemnitees, or the loss of any particular claim concerning the use of smokeless tobacco products against American Snuff Co., when viewed on an individual basis, is not probable, except for the Engle Progeny cases noted below.

RJR Tobacco and its affiliates believe that they have valid defenses to the smoking and health tobacco litigation claims against them, as well as valid bases for appeal of adverse verdicts against them. RAI, RJR Tobacco and their affiliates and indemnitees have, through their counsel, filed pleadings and memoranda in pending smoking and health tobacco litigation that set forth and discuss a number of grounds and defenses that they and their counsel believe have a valid basis in law and fact. With the exception of Engle Progeny cases, described below, RJR Tobacco and its affiliates and indemnitees continue to win the majority of smoking and health tobacco litigation claims that reach trial, and a very high percentage of the tobacco-related litigation claims brought against them continue to be dismissed at or before trial. Based on their experience in the smoking and health tobacco litigation against them and the strength of the defenses available to them in such litigation, RJR Tobacco and its affiliates believe that their successful defense of smoking and health tobacco litigation in the past will continue in the future.

An accrual of $12.4 million has been recorded in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014. This amount includes $2.4 million for compensatory damages, attorneys’ fees and statutory interest for the following Engle Progeny cases – $780,000 for compensatory damages and $63,000 for attorneys’ fees and statutory interest for Hiott and Starr-Blundell and $1.56 million for attorneys’ fees and statutory interest for Ward, the judgment of which was paid in January 2014, and $10 million for estimated costs in connection with the U.S. Department of Justice case, described below. During the second quarter of 2014, an aggregate payment of $72.4 million ($56.1 million for compensatory and punitive damages and $16.3 million for attorneys’ fees and statutory interest) was made in satisfaction of the adverse judgments in nine Engle Progeny cases – Jimmie Lee Brown, Koballa, Duke, Walker, Kirkland, Sury, Mack, Emmon Smith, and Townsend, described below. No other liabilities for pending smoking and health litigation have been recorded as of June 30, 2014. As other cases proceed through the appellate process, RAI will evaluate the need for further accruals on an individual case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.

It is the policy of RJR Tobacco and its affiliates to vigorously defend all tobacco-related litigation claims. Generally, RJR Tobacco and its affiliates and indemnitees have not settled any smoking and health tobacco litigation claims. Other than actions taken pursuant to “offer of judgment” statutes, as described below in “—Litigation Affecting the Cigarette Industry,” RJR Tobacco and its affiliates do not intend to settle such claims.

With respect to smoking and health tobacco litigation claims, the only significant settlements reached by RJR Tobacco and B&W involved:

• the State Settlement Agreements and the funding by various tobacco companies of a $5.2 billion trust fund contemplated by the MSA to benefit tobacco growers; and

• the original Broin flight attendant case discussed below under “— Litigation Affecting the Cigarette Industry — Broin II Cases.”

The circumstances surrounding the State Settlement Agreements and the funding of a trust fund to benefit the tobacco growers are readily distinguishable from the current categories of smoking and health cases involving RJR Tobacco or its affiliates and indemnitees. The claims underlying the State Settlement Agreements were brought on behalf of the states to recover funds paid for health care and medical and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. The State Settlement Agreements settled all the health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions and contain releases of various additional present and future claims. In accordance with the MSA, various tobacco companies agreed to fund a $5.2 billion trust fund to be used to address the possible adverse economic impact of the MSA on tobacco growers. A discussion of the State Settlement Agreements, and a table depicting the related payment schedule, is set forth below under “—Litigation Affecting the Cigarette Industry — Health-Care Cost Recovery Cases.”

The states were a unique set of plaintiffs and are not involved in any of the smoking and health cases remaining against RJR Tobacco or its affiliates and indemnitees. Although RJR Tobacco and certain of its affiliates and indemnitees continue to be defendants in health-care cost recovery cases similar in theory to the state cases but involving other plaintiffs, such as Native American tribes and foreign governments, the vast majority of such cases have been dismissed on legal grounds. RJR Tobacco and its affiliates, including RAI, believe that the same legal principles that have resulted in dismissal of health-care cost recovery cases either at the trial court level or on appeal should compel dismissal of the similar pending cases.

As with claims that were resolved by the State Settlement Agreements, the other cases settled by RJR Tobacco can be distinguished from existing cases pending against RJR Tobacco and its affiliates and indemnitees. The original Broin case, discussed below under “— Litigation Affecting the Cigarette Industry — Broin II Cases,” was settled in the middle of trial during negotiations concerning a possible nation-wide settlement of claims similar to those underlying the State Settlement Agreements.

In 2010, RJR Tobacco entered into a comprehensive agreement with the Canadian federal, provincial and territorial governments, which resolved all civil claims related to the movement of contraband tobacco products in Canada during the period 1985 through 1999 that the Canadian governments could assert against RJR Tobacco and its affiliates. These claims were separate from any smoking and health tobacco litigation.

Likewise, in 2004, RJR Tobacco and B&W separately settled the antitrust case DeLoach v. Philip Morris Cos., Inc., which was brought by a unique class of plaintiffs: a class of all tobacco growers and tobacco allotment holders. The plaintiffs asserted that the defendants conspired to fix the price of tobacco leaf and to destroy the federal government’s tobacco quota and price support program. Despite legal defenses they believed to be valid, RJR Tobacco and B&W separately settled this case to avoid a long and contentious trial with the tobacco growers. The DeLoach case and the antitrust case currently pending against RJR Tobacco and B&W involve different types of plaintiffs and different theories of recovery under the antitrust laws than the smoking and health cases pending against RJR Tobacco and its affiliates and indemnitees.

Finally, as discussed under “— Litigation Affecting the Cigarette Industry — State Settlement Agreements—Enforcement and Validity; Adjustments,” RJR Tobacco and B&W each has settled certain cases brought by states concerning the enforcement of State Settlement Agreements. Despite legal defenses believed to be valid, these cases were settled to avoid further contentious litigation with the states involved. These enforcement actions involve alleged breaches of State Settlement Agreements based on specific actions taken by particular defendants. Accordingly, any future enforcement actions involving State Settlement Agreements will be reviewed by RJR Tobacco on the merits and should not be affected by the settlement of prior enforcement cases.

American Snuff Co. also believes that it has valid defenses to the smokeless tobacco products litigation against it. American Snuff Co. asserted and will continue to assert some or all of these defenses in each case at the time and in the manner deemed appropriate by American Snuff Co. and its counsel. No verdict or judgment has been returned or entered against American Snuff Co. on any claim for personal injuries allegedly resulting from the use of smokeless tobacco products. American Snuff Co. intends to defend vigorously all smokeless tobacco litigation claims asserted against it. No liability for pending smokeless tobacco litigation was recorded in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014.

Cautionary Statement

Even though RAI’s management continues to conclude that the loss of particular pending smoking and health tobacco litigation claims against RJR Tobacco or its affiliates or indemnitees, or the loss of any particular case concerning the use of smokeless tobacco against American Snuff Co., when viewed on an individual case-by-case basis, is not probable (except for the Engle Progeny cases described below), the possibility of material losses related to such litigation is more than remote. Litigation is subject to many uncertainties, and generally, it is not possible to predict the outcome of any particular litigation pending against RJR Tobacco, American Snuff Co. or their affiliates or indemnitees, or to reasonably estimate the amount or range of any possible loss.

Although RJR Tobacco believes that it has valid bases for appeals of adverse verdicts in its pending cases, and RJR Tobacco and RAI believe they have valid defenses to all actions, and intend to defend all actions vigorously, it is possible that there could be further adverse developments in pending cases, and that additional cases could be decided unfavorably against RAI, RJR Tobacco or their affiliates or indemnitees. Determinations of liability or adverse rulings in such cases or in similar cases involving other cigarette manufacturers as defendants, even if such judgments are not final, could have a material adverse effect on the litigation against RJR Tobacco or its affiliates or indemnitees and could encourage the commencement of additional tobacco-related litigation. In addition, a number of political, legislative, regulatory and other developments relating to the tobacco industry and cigarette smoking have received wide media attention. These developments may negatively affect the outcomes of tobacco-related legal actions and encourage the commencement of additional similar litigation.

Although it is impossible to predict the outcome of such events on pending litigation and the rate new lawsuits are filed against RJR Tobacco or its affiliates or indemnitees, a significant increase in litigation or in adverse outcomes for tobacco defendants, or difficulties in obtaining the bonding required to stay execution of judgments on appeal, could have a material adverse effect on any or all of these entities. Moreover, notwithstanding the quality of defenses available to RJR Tobacco and its affiliates and indemnitees in litigation matters, it is possible that RAI’s results of operations, cash flows or financial position could be materially adversely affected by the ultimate outcome of certain pending litigation matters against RJR Tobacco or its affiliates or indemnitees.

Similarly, smokeless tobacco litigation is subject to many uncertainties. Notwithstanding the quality of defenses available to American Snuff Co., it is possible that RAI’s results of operations, cash flows or financial position could be materially adversely affected by the ultimate outcome of certain pending litigation matters against American Snuff Co.

Litigation Affecting the Cigarette Industry

Overview

Introduction. In connection with the B&W business combination, RJR Tobacco agreed to indemnify B&W and its affiliates against, among other things, certain litigation liabilities, costs and expenses incurred by B&W or its affiliates arising out of the U.S. cigarette and tobacco business of B&W. Accordingly, the cases discussed below include cases brought solely against RJR Tobacco and its affiliates, including RAI and RJR; cases brought against both RJR Tobacco, its affiliates and B&W; and cases brought solely against B&W and assumed by RJR Tobacco in the B&W business combination.

During the second quarter of 2014, eight tobacco-related cases were served against RJR Tobacco or its affiliates or indemnitees. On June 30, 2014, there were 170 cases pending against RJR Tobacco or its affiliates or indemnitees: 154 in the United States and 16 in Canada, as compared with 159 total cases on June 30, 2013. The U.S. case number does not include the approximately 564 individual smoker cases pending in West Virginia state court as a consolidated action, 4,865 Engle Progeny cases, involving approximately 5,973 individual plaintiffs, and 2,572 Broin II cases (as hereinafter defined), pending in the United States against RJR Tobacco or its affiliates or indemnitees. Of the U.S. cases pending on June 30, 2014, 16 are pending in federal court, 137 in state court and 1 in tribal court, primarily in the following states: Maryland (28 cases); Florida (25 cases); Missouri (19 cases); New York (14 cases); and Louisiana (10 cases).

The following table lists the categories of the U.S. tobacco-related cases pending against RJR Tobacco or its affiliates or indemnitees as of June 30, 2014, compared with the number of cases pending against RJR Tobacco, its affiliates or indemnitees as of March 31, 2014, as reported in RAI’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2014, filed with the SEC on April 23, 2014, and a cross-reference to the discussion of each case type.

Case Type	RJR Tobacco’s U.S. Case  Numbers as of June 30, 2014	Change in Number of Cases Since March 31,  2014 Increase/(Decrease)	Page Reference
Individual Smoking and Health	99	4	27
West Virginia IPIC (Number of Plaintiffs)*	1 (approx. 564)	No change	27
Engle Progeny (Number of Plaintiffs)**	4,865 (app. 5,973)	(115) (140)	28
Broin II	2,572	No change	42
Class Action	8	No change	42
Health-Care Cost Recovery	2	No change	45
State Settlement Agreements—Enforcement and Validity; Adjustments	30	No change	52
Antitrust	1	No change	56
Other Litigation and Developments	13	(1)	57

* Includes as one case the approximately 564 cases pending as a consolidated action In Re: Tobacco Litigation Individual Personal Injury Cases, sometimes referred to as West Virginia IPIC cases, described below. The West Virginia IPIC cases have been separated from the Individual Smoking and Health cases for reporting purposes.

** The Engle Progeny cases have been separated from the Individual Smoking and Health cases for reporting purposes. The number of cases has decreased as the result of many of the federal and state court cases being dismissed or duplicate actions being consolidated.

The following cases against RJR Tobacco and B&W have attracted significant attention: the Florida state court class-action case,Engle v. R. J. Reynolds Tobacco Co. and the related Engle Progeny cases; and the case brought by the U.S. Department of Justice under the federal Racketeer Influenced and Corrupt Organizations Act, referred to as RICO.

In 2000, a jury in Engle v. Liggett Group, a class action brought against the major U.S. cigarette manufacturers by Florida smokers allegedly harmed by their addiction to nicotine, rendered a $145 billion punitive damages verdict in favor of the class. In 2006, the Florida Supreme Court set aside that award, prospectively decertified the class, and preserved several of the Engle jury findings for use in subsequent individual actions to be filed within one year of its decision. The preserved findings include jury determinations that smoking causes various diseases, that nicotine is addictive, and that each defendant sold cigarettes that were defective and unreasonably dangerous, committed unspecified acts of negligence and individually and jointly concealed unspecified information about the health risks of smoking.

In the wake of Engle, thousands of individual progeny actions were filed in federal and state courts in Florida. Such actions are commonly referred to as “Engle Progeny” cases. As of June 30, 2014, 1,744 Engle Progeny cases were pending in federal court, and 3,121 of them were pending in state court. These cases include approximately 5,973 plaintiffs. In addition, as of June 30, 2014, RJR Tobacco was aware of 17 additional Engle Progeny cases that had been filed but not served. Ninety-nine Engle Progeny cases have been tried in Florida state and federal courts since 2011, and numerous state court trials are scheduled for 2014. The number of pending cases fluctuates for a variety of reasons, including voluntary and involuntary dismissals. Voluntary dismissals include cases in which a plaintiff accepts an “offer of judgment,” referred to in Florida statutes as “proposals for settlement,” from RJR Tobacco and/or its affiliates. An offer of judgment, if rejected by the plaintiff, preserves RJR Tobacco’s right to recover attorneys’ fees under Florida law in the event of a verdict favorable to RJR Tobacco. Such offers are sometimes made through court-ordered mediations.

In Engle Progeny cases tried to date, a central issue has been the proper use of the preserved Engle findings. RJR Tobacco has argued that use of the Engle findings to establish individual elements of progeny claims (such as defect, negligence and concealment) is a violation of federal due process. In 2013, however, both the Florida Supreme Court and the U.S. Court of Appeals for the Eleventh Circuit, referred to as the Eleventh Circuit, rejected that argument. In addition to this global due process argument, RJR Tobacco raises many other factual and legal defenses as appropriate in each case. These defenses may include, among other things, arguing that the plaintiff is not a proper member of theEngle class, that the plaintiff did not rely on any statements by any tobacco company, that the trial was conducted unfairly, that some or all claims are barred by applicable statutes of limitation or statutes of repose, or that any injury was caused by the smoker’s own conduct.

Twenty-four Engle Progeny cases have become final to date. These cases resulted in aggregate payments by RJR Tobacco of $186.4 million ($140.1 million for compensatory and punitive damages and $46.3 million for attorneys’ fees and statutory interest). During the second quarter of 2014, an aggregate payment of $72.4 million ($56.1 million for compensatory and punitive damages and $16.3 million for attorneys’ fees and statutory interest) was made in satisfaction of the adverse judgments in the Jimmie Lee Brown, Koballa, Duke, Walker, Kirkland, Sury, Mack, Emmon Smith and Townsend cases, described below. Based on RJR Tobacco’s evaluation, an accrual of $2.4 million ($780,000 for compensatory damages and $63,000 for attorneys’ fees and statutory interest for Hiott and Starr-Blundell and $1.56 million for attorneys’ fees and statutory interest for Ward, the judgment of which was paid in January 2014) was recorded in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014. The following chart reflects the details related to Hiott and Starr-Blundell:

Plaintiff Case Name	RJR Tobacco Allocation of Fault		Compensatory Damages (as adjusted)(1)		Punitive Damages		Appeal Status
Hiott		40%	$	730,000	$	—	Notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Starr-Blundell		10%		50,000		—	Pending — First DCA
Totals			$	780,000	$	—

⁽¹⁾  Compensatory damages are adjusted to reflect the reduction required by the allocation of fault. Punitive damages are not adjusted and reflect the amount of the final judgment(s) signed by the trial court judge(s). The amounts listed above do not include attorneys’ fees or statutory interest that apply to the judgments.

The following chart reflects verdicts in all other individual Engle Progeny cases, pending as of June 30, 2014, in which a verdict has been returned against RJR Tobacco or B&W, or both, and has not been set aside on appeal. No liability for any of these cases has been recorded in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014. This chart does not include the mistrials or verdicts returned in favor of RJR Tobacco or B&W, or both.

Plaintiff Case Name	RJR Tobacco Allocation of Fault		Compensatory Damages (as adjusted)(1)		Punitive Damages		Appeal Status
Cohen		33.3%	$	3,300,000	$	—	Punitive damages set aside; remanded for partial new trial; notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Putney		30%		—		—	Reversed and remanded for further proceedings; notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Buonomo		77.5%		4,060,000		—	Punitive damages set aside; remanded for new trial; notice to invoke jurisdiction of Florida Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.
Webb		90%		—		—	Reversed and remanded for new trial on damages; new trial scheduled for November 3, 2014
Soffer		40%		2,000,000		—	Pending — Florida Supreme Court

Ciccone	30	%		1,000,000			—	Pending — Florida Supreme Court
Hallgren	25	%		500,000			750,000	Notice to invoke jurisdiction of Florida Supreme Court pending; stayed
Calloway	27	%		16,100,000	(2)		17,250,000	Pending — Fourth DCA
Hancock	5	%		700			—	Pending — Fourth DCA
Sikes	51	%		3,520,000			2,000,000	Notice to invoke jurisdiction of Florida Supreme Court pending
James Smith	55	%		600,000	(2)		20,000	Pending — Eleventh Circuit
Schlenther	50	%		5,030,000	(2)		2,500,000	Pending — Second DCA
Ballard	55	%		5,000,000			—	Pending — Third DCA
Williams	85	%		4,250,000			—	Pending — Third DCA
Evers	60	%		1,938,000			—	Punitive damages reversed; pending — Second DCA
Schoeff	75	%		7,875,000			30,000,000	Pending — Fourth DCA
Marotta	58	%		3,480,000			—	Pending — Fourth DCA
Searcy	30	%		1,000,000	(2)		1,670,000	Pending — Eleventh Circuit
Aycock	72.5	%		4,277,000			—	Pending — Eleventh Circuit
Graham	20	%		550,000			—	Pending — Eleventh Circuit
Odum	50	%		100,000			—	Pending — First DCA
Skolnick	30	%		767,000			—	Pending — Fourth DCA
Thibault	70	%		1,750,000	(2)		1,275,000	Pending — First DCA
Grossman	75	%		15,350,000	(2)		22,500,000	Pending — Fourth DCA
Gafney	33	%		1,914,000			—	Pending — Fourth DCA
Crawford	70	%		9,000,000			1,000,000	Pending — Third DCA
Harford	18	%		59,000			—	Post-trial motions are pending(3)
Cheeley	50	%		1,500,000			2,000,000	Pending — Fourth DCA
Goveia	35	%		297,500			2,250,000	Pending — Fifth DCA
Clayton	10	%		60,000			—	Final judgment has not been entered
Bowden	30	%		1,500,000			—	Pending — First DCA
Burkhart	25	%		2,500,000	(2)		1,250,000	Post-trial motions are pending(3)
Bakst	75	%		4,503,000			14,000,000	Post-trial motions are pending(3)
Robinson	70.5	%		16,900,000		$	23,600,000,000	Post-trial motions are pending(3)
Totals			$	120,681,200		$	23,698,465,000

⁽¹⁾  Unless otherwise noted, compensatory damages in these cases are adjusted to reflect the jury’s allocation of comparative fault. Punitive damages are not so adjusted. The amounts listed above do not include attorneys’ fees or statutory interest that may apply to the judgments.

⁽²⁾  The court did not apply comparative fault in the final judgment.

⁽³⁾  Should the pending post-trial motions be denied, RJR Tobacco will likely file a notice of appeal with the appropriate appellate court.

As of June 30, 2014, outstanding judgments in favor of the Engle Progeny plaintiffs have been entered and remain outstanding against RJR Tobacco in the amount of $120,681,200 in compensatory damages (as adjusted) and in the amount of $23,698,465,000 in punitive damages, for a total of $23,819,146,200. Excluding the Robinson case, where a jury awarded $16.9 million in compensatory damages and $23.6 billion in punitive damages and where post-trial motions are pending before the trial court, outstanding judgments in favor of the EngleProgeny plaintiffs have been entered and remain outstanding against RJR Tobacco in the amount of $103,781,200 in compensatory damages (as adjusted) and in the amount of $98,465,000 in punitive damages, for a total of $202,246,200. All of these verdicts are at various stages in the appellate process. RJR Tobacco continues to believe that it has valid defenses in these cases, including case-specific issues beyond the due process issue discussed above. It is the policy of RJR Tobacco and its affiliates to vigorously defend all smoking and health claims, including in Engle Progeny cases.

Should RJR Tobacco not prevail in any particular individual Engle Progeny case or determine that in any individual Engle Progeny case an unfavorable outcome has become probable and the amount can be reasonably estimated, a loss would be recognized, which could have a material adverse effect on earnings and cash flows of RAI in a particular quarter or year. This position on loss recognition for Engle Progeny cases as of June 30, 2014, is consistent with RAI’s and RJR Tobacco’s historic position on loss recognition for other smoking and health litigation. It is also the policy of RJR Tobacco to record any loss concerning litigation at such time as an unfavorable outcome becomes probable and the amount can be reasonably estimated on an individual case-by-case basis.

In the U.S. Department of Justice case, brought in 1999 in the U.S. District Court for the District of Columbia, the government sought, among other forms of relief, the disgorgement of profits pursuant to the civil provisions of RICO. The U.S. Court of Appeals for the District of Columbia ruled in 2005 that disgorgement is not an available remedy in the case. The bench trial ended in June 2005, and the court, in August 2006, issued its ruling, among other things, finding certain defendants, including RJR Tobacco and B&W, liable for the RICO claims, imposing no direct financial penalties on the defendants, but ordering the defendants to make certain “corrective communications” in a variety of media and enjoining the defendants from using certain brand descriptors. Both sides appealed to the U.S. Court of Appeals for the District of Columbia. In May 2009, the U.S. Court of Appeals largely affirmed the findings against the tobacco company defendants and remanded to the trial court for further proceedings. The U.S. Supreme Court denied the parties’ petitions for writ of certiorari in June 2010. In June 2014, the district court issued an implementation order for the corrective-statements remedy. That order stays implementation until the exhaustion of the defendants’ appeal challenging the constitutionality of the corrective statements. Additional remand proceedings remain ongoing.

For a detailed description of these cases, see “— Engle and Engle Progeny Cases” and “— Health-Care Cost Recovery Cases — U.S. Department of Justice Case” below.

In November 1998, the major U.S. cigarette manufacturers, including RJR Tobacco and B&W, entered into the MSA with 46 U.S. states, Washington, D.C. and certain U.S. territories and possessions. These cigarette manufacturers previously settled four other cases, brought on behalf of Mississippi, Florida, Texas and Minnesota, by separate agreements with each state. These State Settlement Agreements:

• settled all health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions;

• released the major U.S. cigarette manufacturers from various additional present and potential future claims;

• imposed future payment obligations in perpetuity on RJR Tobacco, B&W and other major U.S. cigarette manufacturers; and

• placed significant restrictions on their ability to market and sell cigarettes and smokeless tobacco products.

Payments under the State Settlement Agreements are subject to various adjustments for, among other things, the volume of cigarettes sold, relevant market share and inflation. See “— Health-Care Cost Recovery Cases — State Settlement Agreements” below for a detailed discussion of the State Settlement Agreements, including RAI’s operating subsidiaries’ monetary obligations under these agreements. RJR Tobacco records the allocation of settlement charges as products are shipped.

Scheduled Trials. Trial schedules are subject to change, and many cases are dismissed before trial. It is likely that RJR Tobacco and other cigarette manufacturers will have an increased number of tobacco-related trials in 2014. There are five cases, exclusive of EngleProgeny cases, scheduled for trial as of June 30, 2014 through June 30, 2015, for RJR Tobacco or its affiliates and indemnitees: one non-smoking and health case, three individual smoking and health cases and one class action. There are 67 Engle Progeny cases against RJR Tobacco and/or B&W set for trial through June 30, 2015, but it is not known how many of these cases will actually be tried.

Trial Results. From January 1, 2011 through June 30, 2014, 105 smoking and health, Engle Progeny and health-care cost recovery cases in which RJR Tobacco or B&W were defendants were tried, including six trials for cases where mistrials were declared in the original proceedings. Verdicts in favor of RJR Tobacco, B&W and, in some cases, RJR Tobacco, B&W and other defendants, were returned in 54 cases, including 14 mistrials, tried in Florida (51), Missouri (1) and West Virginia (2). Verdicts in favor of the plaintiffs were returned in 47 cases tried in Florida and one in New York. Three cases in Florida were dismissed during trial.

In the second quarter of 2014, five Engle Progeny cases in which RJR Tobacco was a defendant were tried:

• In Dupre v. Philip Morris USA, Inc., the court declared a mistrial because the jury was unable to reach a unanimous verdict.

• In Burkhart v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the plaintiff, found the plaintiff to be 50% at fault, RJR Tobacco to be 25% at fault, and the remaining defendants to collectively be 25% at fault, and awarded $5 million in compensatory damages. The jury also awarded $1.25 million in punitive damages against RJR Tobacco and $1.25 million collectively against the remaining defendants.

• In Starbuck v. R. J. Reynolds Tobacco Co., the court declared a mistrial because the jury was unable to reach a unanimous verdict.

• In Bakst v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the plaintiff, found the decedent, Juanita Thurston, to be 25% at fault and RJR Tobacco to be 75% at fault, and awarded $6 million in compensatory damages plus $4,209 for funeral expenses. The jury also awarded $14 million in punitive damages.

• In Davis v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the defendants, including RJR Tobacco.

In addition, since the end of the second quarter of 2014, decisions were entered in the following Engle Progeny case:

• In Robinson v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the plaintiff, found the decedent, Michael Johnson, Sr., to be 29.5% at fault and RJR Tobacco to be 70.5% at fault and awarded $16.9 million in compensatory damages and $23.6 billion in punitive damages.

For a detailed description of the above-described cases, see “— Engle and Engle Progeny Cases” below.

In the second quarter of 2014, no non-Engle Progeny individual smoking and health cases in which RJR Tobacco was a defendant were tried.

The following chart reflects the verdicts in the smoking and health cases or health-care cost recovery cases that have been tried and remain pending as of June 30, 2014, in which verdicts have been returned against RJR Tobacco or B&W, or both. For information on the verdicts in the Engle Progeny cases that have been tried and remain pending as of June 30, 2014, in which verdicts have been returned against RJR Tobacco or B&W, or both, see the Engle Progeny cases chart above. For information on the post-trial status of individual smoking and health cases and the governmental health-care cost recovery case, see “— Individual Smoking and Health Cases,” and “—Health-Care Cost Recovery Cases – U.S. Department of Justice Case,” respectively, below:

Date of Verdict	Case Name/Type	Jurisdiction	Verdict
August 17, 2006	United States v. Philip Morris USA, Inc. [Governmental Health-Care Cost Recovery]	U.S. District Court, District of Columbia (Washington, DC)	RJR Tobacco and B&W were found liable for civil RICO claims; were enjoined from using certain brand descriptors and from making certain misrepresentations; and were ordered to make corrective communications on five subjects, including smoking and health and addiction, to reimburse the U.S. Department of Justice appropriate costs associated with the lawsuit, and to maintain document web sites.
May 26, 2010	Izzarelli v. R. J. Reynolds Tobacco Co. [Individual]	U.S. District Court, District of Connecticut, (Bridgeport, CT)	$13.9 million in compensatory damages; 58% of fault assigned to RJR Tobacco, which reduced the award to $8.08 million against RJR Tobacco; $3.97 million in punitive damages.

Individual Smoking and Health Cases

As of June 30, 2014, 99 individual cases were pending in the United States against RJR Tobacco, B&W, as its indemnitee, or both. This category of cases includes smoking and health cases alleging personal injury brought by or on behalf of individual plaintiffs, but does not include the Broin II, Engle Progeny or West Virginia IPIC cases discussed below. A total of 97 of the individual cases are brought by or on behalf of individual smokers or their survivors, while the remaining two cases are brought by or on behalf of individuals or their survivors alleging personal injury as a result of exposure to environmental tobacco smoke, referred to as ETS.

Below is a description of the individual smoking and health cases against RJR Tobacco or B&W, or both, which went to trial or were decided during the period from January 1, 2014 to June 30, 2014, or remained on appeal as of June 30, 2014.

On May 26, 2010, the jury returned a verdict in favor of the plaintiff in Izzarelli v. R. J. Reynolds Tobacco Co., a case filed in December 1999 in the U.S. District Court for the District of Connecticut. The plaintiff sought to recover damages for personal injuries that the plaintiff alleges she sustained as a result of unsafe and unreasonably dangerous cigarette products and for economic losses she sustained as a result of unfair trade practices of the defendant. The jury found RJR Tobacco to be 58% at fault and the plaintiff to be 42% at fault, awarded $13.9 million in compensatory damages and found the plaintiff to be entitled to punitive damages. In December 2010, the court awarded the plaintiff $3.97 million in punitive damages. Final judgment was entered in December 2010, in the amount of $11.95 million. The court granted the plaintiff’s motion for offer of judgment interest, and awarded the plaintiff $15.8 million for the period of December 6, 1999 up to and including December 5, 2010, and approximately $4,000 per day thereafter until an amended judgment was entered. The amended judgment was entered in the amount of approximately $28.1 million in March 2011. RJR Tobacco filed a notice of appeal in September 2011, and the plaintiff thereafter cross appealed with respect to the punitive damages award. In September 2013, the U.S. Court of Appeals for the Second Circuit issued an opinion that certified the following question to the Connecticut Supreme Court: “Does Comment i to section 402A of the Restatement (Second) of Torts preclude a suit premised on strict products liability against a cigarette manufacturer based on evidence that the defendant purposefully manufactured cigarettes to increase daily consumption without regard to the resultant increase in exposure to carcinogens, but in the absence of evidence of any adulteration or contamination?” Subsequently, the plaintiff submitted a motion to the U.S. Court of Appeals for the Second Circuit to amend the certification order to add a second question to the Connecticut Supreme Court: “Does Comment i to section 402A of the Restatement (Second) of Torts preclude a claim under the [Connecticut Products Liability Act] against a cigarette manufacturer for negligence (in the design of its cigarette products)?” The Second Circuit denied the plaintiff’s motion. The Connecticut Supreme Court accepted the certified question and denied the plaintiff’s request to amend the question with the same additional question that the plaintiff proposed to the Second Circuit. The deadline for the plaintiff to submit her brief is July 31, 2014, and RJR Tobacco’s brief will be due 30 days thereafter. The Second Circuit has retained jurisdiction over the parties’ appeals and will decide the case after the Connecticut Supreme Court has completed its proceedings.

On June 19, 2013, in Whitney v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of the defendants, including RJR Tobacco. The case was filed in January 2011, in the Circuit Court, Alachua County, Florida. The plaintiff alleged that as a result of using the defendants’ products, she suffers from lung cancer and emphysema. Final judgment was entered in July 2013. The plaintiff filed a notice of appeal to the First District Court of Appeal, and the defendants filed a notice of cross appeal in August 2013. Briefing is underway.

West Virginia IPIC

In re: Tobacco Litigation Individual Personal Injury Cases began in 1999, in West Virginia state court, as a series of roughly 1,200 individual plaintiff cases making claims with respect to cigarettes manufactured by Philip Morris, Lorillard, RJR Tobacco, B&W and The American Tobacco Company. The cases were consolidated for a Phase I trial on various defense conduct issues, to be followed in Phase II by individual trials of any claims left standing. Over the years, approximately 600 individual plaintiff claims were dismissed for failure to comply with the case management order, leaving 564 individual cases pending as of April 2013. On April 15, 2013, the Phase I jury trial began and ended with a virtually complete defense verdict on May 15, 2013. The jury found that cigarettes were not defectively designed, were not defective due to a failure to warn prior to July 1, 1969, that defendants were not negligent, did not breach warranties and did not engage in conduct which would warrant punitive damages. The only claim remaining after the verdict was the jury’s finding that all ventilated filter cigarettes manufactured and sold between 1964 and July 1, 1969 were defective for a failure to instruct. The defendants believe that there are only 30 plaintiffs remaining who arguably claim to have smoked a ventilated filter cigarette during the relevant period. The court initially entered judgment on the verdict identifying the 30 plaintiffs remaining, but vacated those orders as premature (leaving to a later day the task of identifying the plaintiffs who might be able to assert a ventilated filter failure to instruct claim during the narrow relevant period). The court entered a new judgment in October 2013, dismissing all claims lost by the plaintiffs and purporting to make those claims and all of the jury rulings immediately subject to appeal. The plaintiffs filed a notice of appeal to the West Virginia Supreme Court of Appeals in November 2013. Briefing is complete. The defendants reserved the right to challenge the ventilated filter claim in the event any plaintiff pursues and succeeds on such a claim.

Engle and Engle Progeny Cases

Trial began in July 1998 in Engle v. R. J. Reynolds Tobacco Co., a class action filed in Circuit Court, Miami-Dade County, Florida. TheEngle class consisted of Florida citizens and residents, and their survivors, who suffer from or have died from diseases or medical conditions caused by an addiction to smoking. The action was brought against the major U.S. cigarette manufacturers, including RJR Tobacco and B&W. In July 1999, the Engle jury found against RJR Tobacco, B&W and the other defendants in the initial phase of the trial, which addressed alleged common issues related to the defendants’ conduct, general causation, the addictiveness of cigarettes, and potential entitlement to punitive damages.

On July 14, 2000, in the second phase of the trial, the jury returned a punitive damages verdict in favor of the class of approximately $145 billion, including verdicts of $36.3 billion and $17.6 billion against RJR Tobacco and B&W, respectively.

On appeal, the Florida Supreme Court prospectively decertified the class, and it set aside the punitive damages award as both premature and excessive. However, the court preserved a number of findings from Phase I of the trial, including findings that cigarettes can cause certain diseases, that nicotine is addictive, and that defendants placed defective cigarettes on the market, breached duties of care, and concealed health-related information about cigarettes. The court authorized former class members to file individual lawsuits within one year, and it stated that the preserved findings would have res judicata effect in those actions.

In the wake of the Florida Supreme Court ruling, thousands of individuals filed separate lawsuits seeking to benefit from the Englefindings. As of June 30, 2014, RJR Tobacco was a defendant in 4,865 Engle Progeny cases in both state and federal courts in Florida. These cases include approximately 5,973 plaintiffs. Many of these cases are in active discovery or nearing trial.

In Engle Progeny cases tried to date, a central issue is the proper use of the preserved Engle findings. RJR Tobacco has argued that use of the Engle findings to establish individual elements of progeny claims (such as defect, negligence and concealment) is a violation of federal due process. In 2013, however, both the Florida Supreme Court and the Eleventh Circuit rejected that argument.

In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applied to all Engle Progeny cases in the aggregate. In May 2011, Florida removed the provision that would have allowed it to expire on December 31, 2012. The bond cap for any given individual Engle Progeny case varies depending on the number of judgments in effect at a given time, but never exceeds $5 million per case. The legislation, which became effective in June 2009 and 2011, applies to judgments entered after the original 2009 effective date.

Below is a description of the Engle Progeny cases against RJR Tobacco or B&W, or both, which went to trial or were decided during the period from January 1, 2014 to June 30, 2014, or remained on appeal as of June 30, 2014.

On May 20, 2009, in Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., a case filed in March 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff. The plaintiff alleged that the decedent, Roger Brown, developed smoking-related diseases, which resulted in his death. The plaintiff sought compensatory damages and an unspecified amount of punitive damages. The jury later returned a verdict that the decedent was 50% at fault for his injuries and awarded compensatory damages of $1.2 million. No punitive damages were awarded. RJR Tobacco’s post-trial motions were denied, and the court entered final judgment in the amount of $600,000. RJR Tobacco filed a notice of appeal to the Fourth DCA, and posted a supersedeas bond in the amount of approximately $700,000. The Fourth DCA affirmed the trial court’s judgment in September 2011. In November 2011, RJR Tobacco filed a notice to invoke discretionary jurisdiction of the Florida Supreme Court. In May 2013, the Florida Supreme Court accepted jurisdiction based on express and direct conflict. In February 2014, upon further consideration, the court determined that it should exercise discretion and discharge jurisdiction, and, accordingly, dismissed RJR Tobacco’s petition for review. In March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco raised the issue of whether generic findings from the decertified Engle class action – findings the Florida Supreme Court deemed “useless” for issue preclusion purposes – may be used to excuse thousands of plaintiffs in follow-on cases from proving essential elements of their claims without violating the defendants’ due process rights. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending its disposition of the petition for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and then dispose of it consistent with its ruling in that case. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $3.1 million in satisfaction of the judgment on June 27, 2014.

On February 25, 2010, in Grossman v. R. J. Reynolds Tobacco Co., a case filed in December 2007 in the Circuit Court, Broward County, Florida, the court declared a mistrial due to the jury’s inability to reach a decision. The plaintiff alleged that as a result of an addiction to cigarettes, the decedent, Laura Grossman, developed lung cancer and died. The plaintiff sought damages in excess of $15,000 and all taxable costs and interest. Retrial began in March 2010. In April 2010, the jury returned a verdict in favor of the plaintiff in Phase I, and in Phase II awarded $1.9 million in compensatory damages and no punitive damages. The jury also found RJR Tobacco to be 25% at fault, the decedent to be 70% at fault and the decedent’s spouse to be 5% at fault. Final judgment was entered in June 2010, in the amount of $483,682. RJR Tobacco filed a notice of appeal to the Fourth DCA, and posted a supersedeas bond in the amount of approximately $484,000. The plaintiff filed a notice of cross appeal. In June 2012, the Fourth DCA entered an opinion that affirmed the trial court’s judgment, but remanded the case for a new trial on all Phase II issues. In October 2012, RJR Tobacco filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2014, the Florida Supreme Court declined to accept jurisdiction of the appeal of the original verdict. Retrial began on July 11, 2013. On July 31, 2013, the jury returned a verdict in favor of the plaintiff, found the decedent to be 25% at fault and RJR Tobacco to be 75% at fault, and awarded $15.35 million in compensatory damages and $22.5 million in punitive damages. Final judgment was entered in August 2013 and did not include a reduction for comparative fault. RJR Tobacco filed a notice of appeal to the Fourth DCA and the plaintiff filed a notice of cross appeal in October 2013. RJR Tobacco’s original bond was returned, and RJR Tobacco posted a new bond in the amount of $5 million. Briefing is underway.

On March 10, 2010, in Cohen v. R. J. Reynolds Tobacco Co., a case filed in May 2007 in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff. The plaintiff alleged that the decedent, Nathan Cohen, developed lung cancer as a result of using the defendants’ products, and sought in excess of $15,000 compensatory damages and unspecified punitive damages. On March 24, 2010, the jury awarded the plaintiff $10 million in compensatory damages, and found the decedent to be 33.3% at fault, RJR Tobacco to be 33.3% at fault and the remaining defendant to be 33.3% at fault. The jury also awarded $20 million in punitive damages, of which $10 million was assigned to RJR Tobacco. In July 2010, the court entered final judgment against RJR Tobacco in the amount of $3.33 million in compensatory damages and $10 million in punitive damages. The court entered an amended judgment in September 2010 to include interest from the date of the verdict. RJR Tobacco filed a notice of appeal to the Fourth DCA and posted a supersedeas bond in the amount of $2.5 million. In September 2012, the Fourth DCA affirmed the liability finding and the compensatory damages award, but reversed the finding of entitlement to punitive damages, and remanded the case for a retrial limited to the issue of liability for concealment and conspiracy. The defendants and the plaintiff filed separate notices to invoke the discretionary jurisdiction of the Florida Supreme Court in January 2013. In February 2014, the Florida Supreme Court, on its own motion, consolidated the petitions for review filed by the plaintiff and RJR Tobacco and stayed the petitions pending disposition by the court of Hess v. Philip Morris USA, Inc., which deals with the application of the statute of repose as an affirmative defense to claims of fraudulent concealment and conspiracy to commit fraudulent concealment.

On April 21, 2010, in Townsend v. R. J. Reynolds Tobacco Co., a case filed in December 2007 in the Circuit Court, Alachua County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 51% at fault and the decedent, Frank Townsend, to be 49% at fault, and awarded $10.8 million in compensatory damages and $80 million in punitive damages. The plaintiff alleged that the decedent died from lung cancer as a result of his addiction to the defendant’s products, and sought an unspecified amount of compensatory and punitive damages. The trial court entered judgment in the amount of $5.5 million in compensatory damages and $40.8 million in punitive damages, which represents 51% of the original damages verdicts. RJR Tobacco appealed to the First DCA, which affirmed the compensatory damages award, but remanded the case to the trial court with instructions to remit the punitive damages award or grant a new trial on punitive damages. On remand, the trial court remitted the punitive damages award to $20 million. The plaintiff consented to the remittitur, but RJR Tobacco refused to consent and insisted on a new trial on punitive damages. Nonetheless, the trial court entered a final judgment of $5.5 million in compensatory damages and $20 million in punitive damages. RJR Tobacco again appealed. In the second appeal, the First DCA held that the remitted punitive award was not excessive and that RJR Tobacco could not reject the remittitur and insist on a new trial. Following the denial of its post decision motions in the First DCA, RJR Tobacco filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court in September 2013. In February 2014, the Florida Supreme Court declined to accept jurisdiction. In March 2014, RJR Tobacco posted a supersedeas bond in the amount of $15 million. This bond replaces the original $5 million bond posted. Also in March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $32.7 million in satisfaction of the judgment on June 20, 2014.

On April 26, 2010, in Putney v. R. J. Reynolds Tobacco Co., a case filed in December 2007 in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Margot Putney, to be 35% at fault, RJR Tobacco to be 30% at fault and the remaining defendants to be 35% at fault, and awarded $15.1 million in compensatory damages and $2.5 million in punitive damages each against RJR Tobacco and the remaining defendants. The plaintiff alleged that the decedent suffered from nicotine addiction and lung cancer as a result of using the defendants’ products and sought an unspecified amount of compensatory and punitive damages. In August 2010, final judgment was entered against RJR Tobacco in the amount of $4.5 million in compensatory damages, and $2.5 million in punitive damages. RJR Tobacco filed a notice of appeal and the plaintiff filed a notice of cross appeal. In December 2010, the court entered an amended final judgment to provide that interest would run from April 26, 2010. The defendants filed a joint notice of appeal to the Fourth DCA of the amended final judgment, and RJR Tobacco posted a supersedeas bond in the amount of approximately $2.4 million. In June 2013, the Fourth DCA held that the court erred in denying the defendants’ motion for remittitur of the compensatory damages for loss of consortium and in striking the defendants’ statute of repose affirmative defenses. As a result, the verdict was reversed, and the case was remanded for further proceedings. The plaintiff’s motion for rehearing, written opinion on one issue, or certification of conflict to the Florida Supreme Court was denied in August 2013. The defendants and the plaintiff filed separate notices to invoke the discretionary jurisdiction of the Florida Supreme Court in September 2013. In December 2013, the Florida Supreme Court consolidated the petitions for review filed by the plaintiff and the defendants and stayed the petitions pending disposition of Hess v. Philip Morris USA Inc., described above.

On May 20, 2010, in Buonomo v. R. J. Reynolds Tobacco Co., a case filed in October 2007 in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 77.5% at fault and the decedent, Matthew Buonomo, to be 22.5% at fault, and awarded $5.2 million in compensatory damages and $25 million in punitive damages. The plaintiff alleged that the decedent was addicted to cigarettes and, as a result, developed one or more smoking-related medical conditions and/or diseases and sought an unspecified amount of compensatory and punitive damages. Post-trial motions were denied, but the court, in accordance with the Florida statutory limitation on punitive damage awards, ordered the punitive damage award of $25 million be reduced to $15.7 million – three times the compensatory damages award of $5.2 million. In August 2010, the court entered final judgment in the amount of $4.06 million in compensatory damages and $15.7 million in punitive damages. RJR Tobacco filed a notice of appeal to the Fourth DCA and posted a supersedeas bond in the amount of $5 million. The plaintiff also filed a notice of appeal. In September 2013, the Fourth DCA affirmed the final judgment and damages award to the plaintiff on strict liability and negligence. However, the court reversed the judgment entered for the plaintiff on the claims for fraudulent concealment and conspiracy to commit fraud by concealment due to the erroneous striking of RJR Tobacco’s statute of repose defense. As a result, the punitive damages award was set aside and remanded for a new trial. In December 2013, the Fourth DCA denied RJR Tobacco’s motion for rehearing. In January 2014, RJR Tobacco and the plaintiff filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court. In June 2014, the Florida Supreme Court stayed the petitions for review pending disposition by the court of Hess v. Philip Morris USA Inc., described above.

On October 15, 2010, in Frazier v. Philip Morris USA Inc., now known as Russo v. Philip Morris USA Inc., a case filed in December 2007 in the Circuit Court, Miami-Dade County, Florida, the jury returned a verdict in favor of the defendants. The plaintiff alleged that as a result of smoking defendants’, including RJR Tobacco’s, products she developed chronic obstructive pulmonary disease, and sought in excess of $15,000 in compensatory damages and unspecified punitive damages. Final judgment was entered in February 2011. The plaintiff filed a notice of appeal to the Third DCA, and the defendants filed a notice of cross appeal. In April 2012, the Third DCA reversed the trial court’s judgment, directed entry of judgment in the plaintiff’s favor and ordered a new trial. In July 2012, the defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. The Florida Supreme Court accepted jurisdiction of the case in September 2013. Oral argument in the Florida Supreme Court occurred on April 30, 2014. A decision is pending. The new trial is scheduled for October 13, 2014.

On October 29, 2010, in Koballa v. Philip Morris USA Inc., a case filed in December 2007, in the Circuit Court, Volusia County, Florida against tobacco industry defendants, including RJR Tobacco, the court declared a mistrial after the jury informed the court that they were unable to reach a verdict. The plaintiff alleged that as a result of the use of the defendants’ defective and unreasonably dangerous tobacco products, she suffers from, or has suffered from, nicotine addiction, lung cancer and other smoking-related medical conditions and/or diseases, and sought an unspecified amount of compensatory and punitive damages. Retrial began on March 21, 2011, and on March 31, 2011, the jury returned an inconsistent verdict. The jury found that RJR Tobacco was not liable for the plaintiff’s injuries, but found that her past injuries were worth $1 million with the plaintiff being 70% at fault and RJR Tobacco 30% at fault. The court entered final judgment in August 2011. RJR Tobacco filed a notice of appeal to the Fifth DCA, and posted a supersedeas bond in the amount of $300,000. In September 2012, the Fifth DCA affirmed the trial court’s judgment, per curiam. In November 2012, RJR Tobacco filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. The Florida Supreme Court declined to accept jurisdiction in February 2014. RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court on March 28, 2014. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $349,000 in satisfaction of the judgment on June 20, 2014.

On November 15, 2010, in Webb v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Levy County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 90% at fault and the decedent, James Horner, to be 10% at fault, and awarded $8 million in compensatory damages and $72 million in punitive damages. The plaintiff alleged that as a result of smoking the defendant’s products, the decedent developed one or more smoking-related diseases, and sought in excess of $15,000 in compensatory and unspecified punitive damages. The court entered judgment, and RJR Tobacco appealed to the First DCA and posted a supersedeas bond in the amount of $5 million. That court affirmed the liability verdict, but ordered a remittitur or a new trial on damages. On remand, the trial court remitted the compensatory damages award to $4 million and the punitive damages award to $25 million. The plaintiff consented to the remitted judgment, and RJR Tobacco rejected the remittitur and demanded a new trial on damages. Nonetheless, the trial court entered the remitted judgment. RJR Tobacco again appealed to the First DCA. In the second appeal, the First DCA found that the trial court erred in concluding that only the plaintiff had the right to choose between accepting the remittitur and proceeding with a new trial. The First DCA thus ordered a new trial on damages. The new trial on damages is scheduled for November 3, 2014.

On February 10, 2011, in Kirkland v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Hillsborough County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 10% at fault and the plaintiff to be 90% at fault, and awarded $100,000 in compensatory damages. The jury also awarded the plaintiff $250,000 in punitive damages. The plaintiff alleged that he was addicted to cigarettes, and as a result, developed larynx cancer and other smoking-related medical conditions and/or diseases, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered in March 2011. The plaintiff filed a notice of appeal to the Second DCA in April 2011. RJR Tobacco filed a notice of cross appeal and posted a supersedeas bond in the amount of $260,000. In January 2012, the plaintiff voluntarily dismissed his appeal. In December 2013, the Second DCA affirmed the trial court’s judgment, per curiam. RJR Tobacco’s motion for a written opinion was denied in January 2014. In March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $464,000 in satisfaction of the judgment on June 16, 2014.

On March 18, 2011, in Mack v. R. J. Reynolds Tobacco Co., a case filed in June 2008, in the Circuit Court, Alachua County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 51% at fault and the decedent, Peter Mack, Sr., to be 49% at fault, and awarded $1 million in compensatory damages. No punitive damages were awarded. The plaintiff alleged that due to the decedent’s addiction to cigarettes, he developed bronchitis and lung cancer, and sought an unspecified amount of compensatory and punitive damages. In April 2011, final judgment was entered in favor of the plaintiff. RJR Tobacco appealed, and the First DCA reversed the trial court’s judgment and remanded the case for a new trial. Retrial began on December 3, 2012. On December 14, 2012, the jury returned a verdict in favor of the plaintiff, found the decedent to be 35% at fault and RJR Tobacco to be 65% at fault and awarded $2.9 million in compensatory damages. Final judgment was entered in December 2012. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of $1.9 million. In March 2014, the First DCA affirmed the judgment of the trial court, per curiam. In March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $4.2 million in satisfaction of the judgment in June 2014.

On April 13, 2011, in Tullo v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of RJR Tobacco and the plaintiff, but against the remaining defendants. The jury awarded $4.5 million in compensatory damages and no punitive damages. The jury found the decedent, Dominick Tullo, to be 45% at fault and the remaining defendants cumulatively to be 55% at fault. The plaintiff alleged that the decedent was addicted to cigarettes manufactured by the defendants, and as a result, developed chronic obstructive pulmonary disease and other smoking-related illnesses and/or diseases. The plaintiff sought in excess of $15,000 against each defendant, taxable costs and interest. Final judgment was entered in April 2011. The remaining defendants filed an appeal to the Fourth DCA, and the plaintiff filed a cross appeal. The plaintiff also filed a notice of appeal of the order denying the plaintiff’s motion for new trial against RJR Tobacco. RJR Tobacco filed a cross appeal of the same order. In August 2013, the Fourth DCA affirmed the final judgment entered by the trial court, including the jury’s verdict of no liability to RJR Tobacco.

On April 26, 2011, in Andy Allen v. R. J. Reynolds Tobacco Co., a case filed in September 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 45% at fault, the decedent, Patricia Allen, to be 40% at fault and the remaining defendant to be 15% at fault, and awarded $6 million in compensatory damages and $17 million in punitive damages against each defendant. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent developed chronic obstructive pulmonary disease, and sought in excess of $15,000 in compensatory damages. Final judgment was entered against RJR Tobacco in the amount of $19.7 million in May 2011. In October 2011, the trial court entered a remittitur of the punitive damages to $8.1 million and denied all other post-trial motions. The defendants filed a joint notice of appeal, RJR Tobacco posted a supersedeas bond in the amount of $3.75 million, and the plaintiff filed a notice of cross appeal in November 2011. In May 2013, the First DCA reversed the trial court’s judgment and remanded the case for a new trial. In August 2013, the plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2014, the Florida Supreme Court declined to accept jurisdiction. Retrial has tentatively been scheduled for November 3, 2014.

On May 20, 2011, in Jewett v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 20% at fault, the decedent, Barbara Jewett, to be 70% at fault and the remaining defendant to be 10% at fault, and awarded $1.1 million in compensatory damages and no punitive damages. The plaintiff alleged that the decedent, Barbara Jewett, was addicted to cigarettes and as a result of her addiction, developed chronic obstructive pulmonary disease, emphysema and respiratory failure, and sought in excess of $15,000 in compensatory damages. Final judgment was entered in June 2011. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of $218,600. In November 2012, the First DCA reversed the judgment and remanded the case for a new trial. The plaintiff and the defendants filed separate notices to invoke the discretionary jurisdiction of the Florida Supreme Court in March 2013. In February 2014, the Florida Supreme Court declined to accept jurisdiction. The new trial has not been scheduled.

On June 16, 2011, in Soffer v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Alachua County, Florida, a jury returned a verdict in favor of the plaintiff, found RJR Tobacco to be 40% at fault, the decedent, Maurice Soffer, to be 60% at fault, and awarded $5 million in compensatory damages and no punitive damages. The plaintiff alleged that the decedent was addicted to cigarettes and, as a result, developed lung cancer and other smoking-related conditions and/or diseases, and sought in excess of $15,000 in compensatory damages. Final judgment was entered against RJR Tobacco in the amount of $2 million. The plaintiff filed a notice of appeal to the First DCA in July 2011. RJR Tobacco filed a notice of cross appeal and posted a supersedeas bond in the amount of $2 million. In October 2012, the First DCA affirmed the trial court’s ruling in full. On the direct appeal, the court held that only intentional torts could support a punitive damages claim and held that Engle Progeny plaintiffs may not seek punitive damages for negligence or strict liability because the original Engle class did not seek punitive damages for those claims. The First DCA certified the question to the Florida Supreme Court as one of great public importance. On the cross appeal, the court rejected RJR Tobacco’s arguments about the use of the Engle findings and the statute of limitations. RJR Tobacco filed a motion for rehearing or for certification to the Florida Supreme Court and the plaintiff filed a motion for rehearing or rehearing en banc. In January 2013, the First DCA granted rehearing on RJR Tobacco’s cross appeal to clarify that the trial court’s application of Engle findings did not violate RJR Tobacco’s due process rights. Otherwise, rehearing, rehearing en banc and certification were denied. RJR Tobacco and the plaintiff both filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2014, the Florida Supreme Court declined to accept jurisdiction of RJR Tobacco’s petition for review and accepted the plaintiff’s petition for review requesting the Florida Supreme Court review the decision of the First DCA. Briefing is underway, and oral argument has not been scheduled.

On July 15, 2011, in Ciccone v. R. J. Reynolds Tobacco Co., a case filed in August 2004, in the Circuit Court, Broward County, Florida, a jury returned a verdict finding the plaintiff is a member of the Engle class. The plaintiff alleged that as a result of the use of the defendant’s tobacco products, the decedent, George Ciccone, suffered from nicotine addiction and one or more smoking-related diseases and/or medical conditions, and sought an unspecified amount of compensatory and punitive damages. On July 21, 2011, the jury awarded approximately $3.2 million in compensatory damages and $50,000 in punitive damages. The jury found the decedent to be 70% at fault and RJR Tobacco to be 30% at fault. Final judgment was entered in September 2011, and RJR Tobacco filed a notice of appeal to the Fourth DCA. RJR Tobacco posted a supersedeas bond in the amount of approximately $1 million on October 17, 2011. In August 2013, the Fourth DCA affirmed the judgment of the trial court, but reversed the punitive damages award and remanded the case to the trial court for entry of a final judgment that eliminates the punitive damages award. RJR Tobacco’s motion for rehearing or rehearing en banc was denied in November 2013. The Florida Supreme Court accepted jurisdiction of the case in June 2014. Briefing is underway.

On September 15, 2011, in Ojeda v. R. J. Reynolds Tobacco Co., a case filed in October 2007, in the Circuit Court, Miami-Dade County, Florida, a jury returned a verdict in favor of RJR Tobacco. The plaintiff alleged that as a result of the use of the defendant’s products, the decedent, Juan Ojeda, suffered from one or more smoking-related medical conditions and/or diseases, and sought an unspecified amount of damages. Final judgment was entered September 26, 2011. The plaintiff filed a notice of appeal to the Third DCA in October 2012. In July 2014, the Third DCA affirmed, per curiam, the trial court’s final judgment.

On November 28, 2011, in Sury v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, William Sury, to be 60% at fault, RJR Tobacco to be 20% at fault, and the remaining defendant to be 20% at fault, and awarded $1 million in compensatory damages and no punitive damages. The plaintiff alleged that as a result of the use of the defendants’ products, the decedent suffered from lung cancer, and sought an unspecified amount of damages. Final judgment was entered in March 2012. The court entered an amended final judgment that held the defendants jointly and severally liable for the entire $1 million, even though the jury had allocated 60% of fault to the plaintiff and 20% of fault to a co-defendant. The defendants filed a notice of appeal to the First DCA on April 20, 2012, and RJR Tobacco posted a supersedeas bond in the amount of $500,000. In June 2013, the First DCA affirmed the final judgment. RJR Tobacco’s motion for rehearing was denied in August 2013. In January 2014, the Florida Supreme Court denied RJR Tobacco’s petition for review of the First DCA’s decision. RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court in March 2014. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $1.7 million in satisfaction of the judgment on June 20, 2014.

On January 24, 2012, in Hallgren v. R. J. Reynolds Tobacco Co., a case filed in April 2007, in the Circuit Court, Highlands County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Claire Hallgren, to be 50% at fault, RJR Tobacco to be 25% at fault, and the remaining defendant to be 25% at fault, and awarded $2 million in compensatory damages and $750,000 in punitive damages against each defendant. The plaintiff alleged that the decedent was addicted to the defendants’ products, and as a result, suffered from lung cancer, and sought in excess of $15,000 in compensatory damages and unspecified punitive damages. In March 2012, the court entered final judgment in the amount of approximately $1 million for which RJR Tobacco and the other defendant are jointly and severally liable; and $750,000 in punitive damages against each defendant. The defendants filed a joint notice of appeal to the Second DCA, and RJR Tobacco posted a supersedeas bond in the amount of approximately $1.3 million in May 2012. The plaintiff filed a notice of cross appeal. In October 2013, the Second DCA affirmed the trial court’s ruling that punitive damages can be awarded for negligence and strict liability claims as well as for the intentional tort claims brought under Engle. The court certified a conflict with the First DCA’s decision in Soffer and the Fourth DCA’s decision in Ciccone. The court also certified the following question to be of great public importance – “Are members of the Engleclass who pursue individual damages actions in accordance with the decision in Engle v. Liggett Group, Inc., entitled to pursue punitive damages under claims for strict liability and negligence?” In November 2013, the defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In June 2014, the Florida Supreme Court stayed the petition pending disposition of Russo v. Philip Morris USA Inc., described above.

On February 29, 2012, in Marotta v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Broward County, Florida, the court declared a mistrial during jury prequalification. The plaintiff alleged that the decedent, Phil Marotta, was addicted to cigarettes and, as a result, suffered from lung cancer. The plaintiff sought compensatory damages in excess of $75,000, including compensatory and punitive damages, costs and pre-judgment interest. Retrial began on March 7, 2013. On March 20, 2013, a jury returned a verdict in favor of the plaintiff, found the decedent to be 42% at fault and RJR Tobacco to be 58% at fault and awarded $6 million in compensatory damages and no punitive damages. Final judgment was entered against RJR Tobacco in the amount of $3.48 million, and RJR Tobacco filed a notice of appeal to the Fourth DCA in April 2013. The plaintiff filed a notice of cross appeal in May 2013. Briefing is underway.

On March 19, 2012, in McCray v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that the decedent, Mercedia Walker, was addicted to the defendants’ tobacco products, and as a result, suffered from one or more smoking-related diseases and/or medical conditions. The plaintiff sought compensatory damages for all injuries and losses, all recoverable costs of the case, and all legally recoverable interest. Final judgment was entered in March 2012. The plaintiff filed a notice of appeal to the Eleventh Circuit in July 2012. Oral argument occurred on March 4, 2014. A decision is pending.

On March 27, 2012, in Emmon Smith v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Jackson County, Florida, a jury returned a verdict in favor of the plaintiff, found Mr. Smith to be 30% at fault and RJR Tobacco to be 70% at fault, and awarded $10 million in compensatory damages. The jury also awarded $20 million in punitive damages. The plaintiff alleged that he was addicted to cigarettes manufactured by the defendant, and as a result, developed lung cancer, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered on April 2, 2012. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of $5 million. In November 2013, the First DCA affirmed the judgment of the trial court, per curiam. RJR Tobacco’s motion for issuance of a written opinion, certification and rehearing en banc was denied in February 2014. In March 2014, RJR Tobacco’s notice to invoke the discretionary jurisdiction of the Florida Supreme Court was dismissed. Also in March 2014, RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court. RJR Tobacco requested the U.S. Supreme Court to grant the petition or hold it pending disposition of the petitions for writ of certiorari filed in Walker v. R. J. Reynolds Tobacco Co., described below, and Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then dispose of it consistent with those cases. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $29.8 million in satisfaction of the judgment on June 20, 2014.

On April 10, 2012, in Duke v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Sarah Duke, to be 75% at fault and RJR Tobacco to be 25% at fault, and awarded $30,705 in compensatory damages and no entitlement to punitive damages. The plaintiff alleged that as a result of the use of the defendant’s products, the decedent developed smoking-related diseases. The plaintiff sought compensatory and punitive damages, including costs and interest. RJR Tobacco filed a notice of appeal to the Eleventh Circuit in September 2012. In November 2012, RJR Tobacco posted a supersedeas bond in the amount of approximately $7,800. In February 2013, the Eleventh Circuit granted the joint motion to consolidate the appeal with the appeal in Walker v. R. J. Reynolds Tobacco Co., discussed below. In September 2013, the Eleventh Circuit affirmed the jury verdict in favor of the plaintiff. RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court in March 2014. In the petition, RJR Tobacco raised the issue of whether full faith and credit principles or due process permit generic findings from the decertified Engle class action – findings the Florida Supreme Court deemed “useless” for issue preclusion purposes – may be used to excuse thousands of plaintiffs in follow-on cases from proving essential elements of their claims. RJR Tobacco requested that the petition be granted or held pending disposition of the petition for writ of certiorari filed in Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then disposed of consistent with its ruling in that case. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $7,700 in satisfaction of the judgment on June 20, 2014.

On May 17, 2012, in Calloway v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Johnnie Calloway, to be 20.5% at fault, RJR Tobacco to be 27% at fault, and the remaining defendants collectively to be 52.5% at fault, and awarded $20.5 million in compensatory damages and $17.25 million in punitive damages against RJR Tobacco and $37.6 million collectively against the remaining defendants. The plaintiff alleged that as a result of using the defendants’ products, the decedent became addicted and developed smoking-related diseases and/or conditions. The plaintiff sought compensatory and punitive damages, including costs and interest. In its ruling on the post-trial motions, the court determined that the jury’s apportionment of comparative fault did not apply to the compensatory damages award. Final judgment was entered in August 2012. In September 2012, the defendants filed a notice of appeal to the Fourth DCA, and RJR Tobacco posted a supersedeas bond in the amount of $1.5 million. The plaintiff filed a notice of cross appeal. Briefing is underway.

On May 21, 2012, in Walker v. R. J. Reynolds Tobacco Co., a case filed in August 2007, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Albert Walker, to be 90% at fault and RJR Tobacco to be 10% at fault, and awarded $275,000 in compensatory damages with no entitlement to punitive damages. The plaintiff alleged that as a result of the use of the defendant’s products, the decedent suffered bodily injury. The plaintiff sought compensatory and punitive damages, including costs and interest. The court entered final judgment in May 2012. RJR Tobacco filed a notice of appeal to the Eleventh Circuit and posted a supersedeas bond in the amount of $27,775. In February 2013, the Eleventh Circuit granted the joint motion to consolidate the appeal with the appeal in Duke v. R. J. Reynolds Tobacco Co., discussed above. RJR Tobacco posted a substitute supersedeas bond in the amount of approximately $45,800 in June 2013. In September 2013, the Eleventh Circuit affirmed the jury verdict in favor of the plaintiff. RJR Tobacco filed a petition for writ of certiorari with the U.S. Supreme Court in March 2014. In the petition, RJR Tobacco raised the issue of whether full faith and credit principles or due process permit generic findings from the decertified Engle class action – findings the Florida Supreme Court deemed “useless” for issue preclusion purposes – may be used to excuse thousands of plaintiffs in follow-on cases from proving essential elements of their claims. RJR Tobacco requested that the petition be granted or held pending disposition of the petition for writ of certiorari filed in Jimmie Lee Brown v. R. J. Reynolds Tobacco Co., described above, and then disposed of consistent with its ruling in that case. On June 9, 2014, the U.S. Supreme Court denied RJR Tobacco’s petition for review. After exhausting its appeals, RJR Tobacco paid approximately $46,100 in satisfaction of the judgment on June 20, 2014.

On August 1, 2012, in Hiott v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Kenneth Hiott, to be 60% at fault and RJR Tobacco to be 40% at fault, and awarded $1.83 million in compensatory damages and no punitive damages. The plaintiff alleged that as a result of using the defendant’s product, the decedent suffered from addiction and smoking-related diseases and/or conditions. The plaintiff sought an unspecified amount of compensatory and punitive damages. In November 2012, final judgment was entered against RJR Tobacco in the amount of $730,000 in compensatory damages. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of $730,000 in December 2012. In January 2014, the First DCA affirmed the trial court’s decision. RJR Tobacco filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court in January 2014. In June 2014, the Florida Supreme Court stayed the petition pending the court’s disposition of Hess v. Philip Morris USA Inc., described above.

On August 10, 2012, in Hancock v. Philip Morris USA, Inc., a case filed in January 2008, in the Circuit Court, Miami-Dade County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Edna Siwieck, to be 90% at fault, RJR Tobacco to be 5% at fault and the remaining defendant to be 5% at fault. However, the jury did not award compensatory damages and found that the plaintiff was not entitled to punitive damages. The court determined that the jury verdict was inconsistent due to the parties previously stipulating to $110,200 in medical expenses, which is subject to the allocation of fault. The defendants agreed to an additur for that amount. The plaintiff alleged that as a result of using the defendants’ products, the decedent suffered from chronic obstructive pulmonary disease. The plaintiff sought an unspecified amount of compensatory and punitive damages, costs and interest. Final judgment was entered against RJR Tobacco in the amount of $705 in October 2012. The stipulated amount was reduced by the defendants’ motion to reduce economic damages by collateral sources. The plaintiff filed a notice of appeal to the Fourth DCA, and the defendants filed a notice of cross appeal in November 2012. Briefing is underway.

On September 19, 2012, in Baker v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of the defendant, RJR Tobacco. The plaintiff alleged that as a result of using the defendant’s products, the decedent, Elmer Baker, suffered from lung cancer. The plaintiff sought compensatory damages in excess of $15,000, costs and interest. Final judgment was entered in January 2013, in favor of RJR Tobacco. The plaintiff filed a notice of appeal to the Fourth DCA, and RJR Tobacco filed a notice of cross appeal in February 2013. Briefing is complete. Oral argument has not been scheduled.

On September 20, 2012, in Sikes v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Jimmie Sikes, to be 49% at fault and RJR Tobacco to be 51% at fault, and awarded $4.1 million in compensatory damages and $2 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s product, the decedent suffered from chronic obstructive pulmonary disease, and sought in excess of $15,000 of compensatory damages. Final judgment was entered against RJR Tobacco in the amount of $6.1 million on June 3, 2013. The court entered a corrected final judgment against RJR Tobacco in the amount of $5.5 million and vacated the June 3, 2013 final judgment. RJR Tobacco filed a notice of appeal to the First DCA, and posted a supersedeas bond in the amount of $5 million in July 2013. In July 2014, the First DCA affirmed the trial court’s decision, per curiam, but following the Hiott case, certified a conflict to the Florida Supreme Court with Hess v. Philip Morris USA Inc., both cases are described above. The deadline for either party to file a notice to invoke the discretionary jurisdiction of the Florida Supreme Court is August 25, 2014.

On October 17, 2012, in James Smith v. R. J. Reynolds Tobacco Co., a case filed in August 2007, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Wanette Smith, to be 45% at fault and RJR Tobacco to be 55% at fault, and awarded $600,000 in compensatory damages and $20,000 in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from lung cancer and chronic obstructive pulmonary disease. The plaintiff sought compensatory and punitive damages, costs and interest. Final judgment was entered against RJR Tobacco in the amount of $620,000. RJR Tobacco filed a notice of appeal to the Eleventh Circuit and posted a supersedeas bond in the amount of approximately $620,000 in September 2013. Briefing is complete. Oral argument has not been scheduled.

On October 18, 2012, in Schlenther v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Hillsborough County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Beverly Schlenther, to be 50% at fault and RJR Tobacco to be 50% at fault, and awarded $5 million in compensatory damages and $2.5 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from chronic obstructive pulmonary disease and heart disease. The plaintiff sought compensatory and punitive damages, costs and interest. In April 2013, the court vacated the punitive damage award, granted a new trial on entitlement to punitive damages and the amount of any such damages and abated the new trial pending the Florida Supreme Court decision in Soffer v. R. J. Reynolds Tobacco Co., described above. The plaintiff filed a notice of appeal to the Second DCA of the order granting RJR Tobacco’s motion for a new trial, and RJR Tobacco filed a notice of cross appeal of the same order. In October 2013, the trial court entered a partial final judgment against RJR Tobacco in the amount of $5.03 million in compensatory damages with no reduction for comparative fault. RJR Tobacco filed a notice of appeal of the partial final judgment. In November 2013, the plaintiff filed a motion to temporarily relinquish jurisdiction to the trial court to permit the trial court to enter a final judgment based on the decision in Hallgren, described above. The Second DCA granted the plaintiff’s motion, and jurisdiction was relinquished for 45 days. In December 2013, the trial court denied the defendant’s post-trial motions, including RJR Tobacco’s motion for a new trial, and entered final judgment against RJR Tobacco in the amount of $5 million for compensatory damages, $29,705 for funeral expenses and $2.5 million in punitive damages. Both parties filed voluntary dismissals of their prior appeals. RJR Tobacco subsequently filed a notice of appeal in December 2013 to the Second DCA of the final judgment and posted a supersedeas bond in the amount of $5 million in January 2014. Oral argument is scheduled for September 3, 2014.

On October 19, 2012, in Ballard v. R. J. Reynolds Tobacco Co., a case filed in September 2007 in the Circuit Court, Miami-Dade County, Florida, a jury returned a verdict in favor of the plaintiff, found the plaintiff to be 45% at fault and RJR Tobacco to be 55% at fault, and awarded $8.55 million in compensatory damages. Punitive damages were not at issue. The plaintiff alleged that as a result of using the defendant’s products, he suffers from bladder cancer and emphysema, and sought an unspecified amount of compensatory and punitive damages. The court entered final judgment against RJR Tobacco in the amount of $4.7 million in October 2012, and in August 2013, the court entered an amended final judgment against RJR Tobacco in the amount of $5 million. RJR Tobacco filed a notice of appeal to the Third DCA and posted a supersedeas bond in the amount of $5 million in October 2013. Briefing is underway.

On December 12, 2012, in Virginia Williams v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Miami-Dade County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Milton Williams, to be 15% at fault and RJR Tobacco to be 85% at fault, and awarded $5 million in compensatory damages. Punitive damages were not sought. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from pharyngeal cancer, and sought an unspecified amount of damages. Final judgment was entered against RJR Tobacco in the amount of $4.25 million in compensatory damages in January 2013. RJR Tobacco filed a notice of appeal to the Third DCA and posted a supersedeas bond in the amount of $4.25 million, and the plaintiff filed a notice of cross appeal in August 2013. Oral argument is scheduled for August 18, 2014.

On February 11, 2013, in Evers v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Hillsborough County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Jacqueline Loyd, to be 31% at fault, RJR Tobacco to be 60% at fault, and the remaining defendant to be 9% at fault, and awarded $3.23 million in compensatory damages and $12.36 million in punitive damages against RJR Tobacco only. The plaintiff alleged that as a result of using the defendants’ products, the decedent became addicted and suffered from smoking-related diseases and/or conditions, and sought an unspecified amount of damages. In March 2013, the court granted the defendants’ post-trial motions for directed verdict on fraudulent concealment, conspiracy and punitive damages. As a result, the $12.36 million punitive damages award was set aside. The plaintiff’s motion to reconsider directed verdict as to concealment, conspiracy and punitive damages was denied on April 8, 2013. The plaintiff filed a notice of appeal to the Second DCA, the defendants filed a notice of cross appeal, and RJR Tobacco posted a supersedeas bond in the amount of $1.77 million in May 2013. Briefing is complete. Oral argument has not been scheduled.

On February 13, 2013, in Schoeff v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, James Schoeff, to be 25% at fault, RJR Tobacco to be 75% at fault, and awarded $10.5 million in compensatory damages and $30 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from addiction and one or more smoking-related diseases and/or conditions, including lung cancer, and sought in excess of $15,000 in damages. In April 2013, final judgment was entered against RJR Tobacco in the amount of $7.88 million in compensatory damages and $30 million in punitive damages. RJR Tobacco filed a notice of appeal to the Fourth DCA, and the plaintiff filed a notice of cross appeal in May 2013. Briefing is underway.

On April 1, 2013, in Searcy v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Carol LaSard, to be 40% at fault, RJR Tobacco to be 30% at fault and the remaining defendant to be 30% at fault, and awarded $6 million in compensatory damages and $10 million in punitive damages against each defendant. The plaintiff alleged that as a result of using the defendants’ products, the decedent suffered from lung cancer, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered against RJR Tobacco in the amount of $6 million in compensatory damages and $10 million in punitive damages. In September 2013, the trial court granted the defendants’ motion for a new trial, or in the alternative, reduction or remittitur of the damages awarded to the extent it sought remittitur of the damages. The compensatory damage award was remitted to $1 million, and the punitive damage award was remitted to $1.67 million against each defendant. The remaining post-trial motions were denied. The plaintiff’s motion to reconsider the trial court’s order granting in part the defendants’ motion for remittitur of the damages award was denied in October 2013. The plaintiff filed a notice of acceptance of remittitur in November 2013, and the court issued an amended final judgment. The defendants filed a joint notice of appeal to the Eleventh Circuit, and RJR Tobacco posted a supersedeas bond in the amount of approximately $2.2 million in November 2013. Briefing is underway.

On April 18, 2013, in Aycock v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Richard Aycock, to be 27.5% at fault and RJR Tobacco to be 72.5% at fault, and awarded $5.9 million in compensatory damages. Punitive damages were not awarded. The plaintiff alleged that the decedent was addicted to cigarettes manufactured by the defendant and, as a result, suffered from lung cancer, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered against RJR Tobacco in the amount of $4.28 million in April 2013. RJR Tobacco filed a notice of appeal to the Eleventh Circuit in September 2013, and posted a supersedeas bond in the amount of $4.32 million in October 2013. Oral argument occurred on June 5, 2014. A decision is pending.

On May 2, 2013, in David Cohen v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Helen Cohen, to be 40% at fault, RJR Tobacco to be 30% at fault, and the remaining defendants collectively to be 30% at fault, and awarded $2.06 million in compensatory damages. The plaintiff alleged that as a result of using the defendants’ products, the decedent became addicted and suffered from one or more smoking-related diseases and/or conditions, and sought in excess of $15,000 in compensatory damages and unspecified punitive damages. Final judgment was entered against RJR Tobacco in the amount of $617,000 in May 2013. In July 2013, the court granted the defendants’ motion for a new trial due to the plaintiff’s improper arguments during closing. The new trial date has not been scheduled. The plaintiff filed a notice of appeal to the Fourth DCA, and the defendants filed a notice of cross appeal. Briefing is underway.

On May 22, 2013, in John Campbell v. R. J. Reynolds Tobacco Co., a case pending in Polk County, Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent, Judy Campbell, became addicted to smoking cigarettes and suffered from unspecified smoking-related conditions and/or diseases, and sought an unspecified amount of damages. The plaintiff’s motion for a new trial was denied and the court entered final judgment in July 2013. The plaintiff filed a notice of appeal to the Second DCA, and the defendants filed a notice of cross appeal in August 2013. Briefing is underway.

On May 23, 2013, in Earl Graham v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Faye Graham, to be 70% at fault, RJR Tobacco to be 20% at fault and the remaining defendant to be 10% at fault, and awarded $2.75 million in compensatory damages. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent became addicted to smoking cigarettes which resulted in her death, and sought an unspecified amount of damages. Final judgment was entered against RJR Tobacco in the amount of $550,000 in May 2013. The defendants filed a joint notice of appeal to the Eleventh Circuit, and RJR Tobacco posted a supersedeas bond in the amount of approximately $556,000 in October 2013. Briefing is complete. Oral argument has not been scheduled.

On June 4, 2013, in Starr-Blundell v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Lucy Mae Starr, to be 80% at fault, RJR Tobacco to be 10% at fault and the remaining defendant to be 10% at fault, and awarded $500,000 in compensatory damages. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent suffered from lung cancer and other smoking relating diseases and/or conditions, and sought in excess of $15,000 in damages. The court entered final judgment in the amount of $50,000 against each defendant in November 2013. The plaintiff filed a notice of appeal to the First DCA, and the defendants filed a notice of cross appeal in December 2013. RJR Tobacco posted a supersedeas bond in the amount of $50,000 in December 2013. Briefing is underway.

On June 7, 2013, in Odum v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Ethelene Hazouri, to be 50% at fault and RJR Tobacco to be 50% at fault, and awarded $200,000 in compensatory damages. The plaintiff alleged that as a result of smoking the defendant’s products, the decedent suffered from lung cancer, and sought an unspecified amount of damages. Final judgment was entered against RJR Tobacco in the amount of $264,000, for damages and taxable costs, in November 2013. RJR Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond in the amount of approximately $264,000 in December 2013. Briefing is underway.

On June 14, 2013, in Skolnick v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Leo Skolnick, to be 40% at fault, RJR Tobacco to be 30% at fault and the remaining defendant to be 30% at fault, and awarded $2.56 million in compensatory damages. The plaintiff alleged that as a result of using the defendants’ products, the decedent suffered from lung cancer, and sought in excess of $15,000 in compensatory damages and unspecified punitive damages. The court entered final judgment against RJR Tobacco in the amount of $766,500 in July 2013. The defendants filed a joint notice of appeal to the Fourth DCA, and the plaintiff filed a notice of cross appeal in December 2013. RJR Tobacco posted a supersedeas bond in the amount of $767,000 in March 2014. Briefing is underway.

On June 19, 2013, in Thibault v. R. J. Reynolds Tobacco Co., a case pending in the Circuit Court, Escambia County, Florida, the jury returned a verdict in favor of the plaintiff, found the decedent, Evelyn Thibault, to be 30% at fault and RJR Tobacco to be 70% at fault, and awarded $1.75 million in compensatory damages and $1.28 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from chronic obstructive pulmonary disease, and sought an unspecified amount of compensatory and punitive damages. The court determined that comparative fault did not apply to reduce the amount of the verdict. In June 2013, the court entered final judgment against RJR Tobacco in the amount of $3.03 million. RJR Tobacco filed a notice of appeal to the First DCA in August 2013. RJR Tobacco posted a supersedeas bond in the amount of $3.03 million in September 2013. Briefing is underway.

On September 20, 2013, in Gafney v. R. J. Reynolds Tobacco Co., a case pending in Palm Beach County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Frank Gafney, to be 34% at fault, RJR Tobacco to be 33% at fault and the remaining defendant to be 33% at fault, and awarded $5.8 million in compensatory damages. Punitive damages were not awarded. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent developed chronic obstructive pulmonary disease, and sought in excess of $15,000 in compensatory damages. Final judgment was entered against RJR Tobacco in the amount of $1.9 million in September 2013. The defendants filed a joint notice of appeal to the Fourth DCA, and RJR Tobacco posted a supersedeas bond in the amount of $1.9 million in November 2013. The plaintiff filed a notice of cross appeal. Briefing is underway.

On September 30, 2013, in Crawford v. R. J. Reynolds Tobacco Co., a case pending in Miami-Dade County, Florida, a jury returned a verdict in favor of the plaintiff, found the plaintiff to be 30% at fault and RJR Tobacco to be 70% at fault, and awarded $9 million in compensatory damages and $1 million in punitive damages. The plaintiff alleged that as a result of smoking the defendant’s products, he suffered from addiction and one or more smoking-related conditions and/or diseases, and sought an unspecified amount of damages. Final judgment was entered against RJR Tobacco in the amount of $9 million in compensatory damages and $1 million in punitive damages in October 2013. RJR Tobacco filed a notice of appeal to the Third DCA and posted a supersedeas bond in the amount of $5 million in November 2013. Oral argument occurred on July 2, 2014. A decision is pending.

On November 15, 2013, in Chamberlain v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that as a result of smoking the defendants’ products, he suffers from chronic obstructive pulmonary disease and lung cancer, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered in favor of the defendants in November 2013. The plaintiff’s motion for a new trial was denied in April 2014. The plaintiff filed a notice of appeal to the Eleventh Circuit on June 27, 2014. Briefing is underway.

On January 9, 2014, in Bush v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Escambia County, Florida, the court declared a mistrial due to the inability to seat a jury. The plaintiff alleged that as a result of his use of the defendants’ products, he suffers from nicotine addiction and one or more smoking-related diseases and/or conditions, and sought an unspecified amount of compensatory damages. A new trial will be scheduled at a later date.

On January 27, 2014, in Harford v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the plaintiff to be 82% at fault and RJR Tobacco to be 18% at fault, and awarded $330,000 in compensatory damages. The plaintiff alleged that as a result of his use of the defendant’s products, he suffers from addiction and lung cancer, and sought an unspecified amount of compensatory and punitive damages. The plaintiff filed a motion for a new trial in February 2014. A decision is pending.

On January 31, 2014, in Cheeley v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Georgia Cheeley, to be 50% at fault and RJR Tobacco to be 50% at fault, and awarded $3 million in compensatory damages and $2 million in punitive damages. The plaintiff alleged that as a result of smoking the defendant’s products, the decedent suffered from one or more smoking-related conditions or diseases, and sought in excess of $15,000 in compensatory damages. The court entered final judgment against RJR Tobacco in the amount of $1.5 million in compensatory damages and $2 million in punitive damages. RJR Tobacco filed a notice of appeal to the Fourth DCA and posted a supersedeas bond in the amount of $3.5 million in April 2014. The plaintiff filed a notice of cross appeal in May 2014. Briefing is underway.

On February 3, 2014, in Deshaies v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of RJR Tobacco. The plaintiff alleged that as a result of smoking the defendant’s products, he suffers from one or more smoking-related conditions or diseases, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered in February 2014. Post-trial motions are pending.

On February 18, 2014, in Goveia v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Orange County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Mary Goveia, to be 30% at fault, RJR Tobacco to be 35% at fault, and the remaining defendant to be 35% at fault, and awarded $850,000 in compensatory damages and $2.25 million in punitive damages against each defendant. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent became addicted and suffered from one or more smoking-related diseases and/or conditions, and sought an unspecified amount of compensatory and punitive damages. Post-trial motions were denied in April 2014. Final judgment was entered in the amount of $297,500 in compensatory damages and $2.25 million in punitive damages against each defendant in April 2014. The defendants filed a joint notice of appeal to the Fifth DCA, and RJR Tobacco posted a supersedeas bond in the amount of $2.5 million in April 2014. Briefing is underway.

On February 27, 2014, in Banks v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that as a result of using the defendants’ products, the decedent, George Banks, developed one or more smoking-related diseases and/or conditions, and sought in excess of $15,000 in compensatory damages. The plaintiff’s motion for a new trial was denied, and the court entered final judgment in favor of RJR Tobacco and the other defendant in May 2014. The plaintiff filed a notice of appeal to the Fourth DCA, and the defendants filed a notice of cross appeal in June 2014. Briefing is underway.

On March 17, 2014, in Clayton v. R. J. Reynolds Tobacco Co., a case filed in November 2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, David Clayton, to be 90% at fault and RJR Tobacco to be 10% at fault and awarded $600,000 in compensatory damages. Punitive damages were not awarded. The plaintiff alleged that as a result of smoking the defendant’s products, the decedent suffered from bodily injury and died, and sought an unspecified amount of damages. Final judgment has not been entered.

On March 26, 2014, in Bowden v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Duval County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, William Bowden, to be 40% at fault, RJR Tobacco to be 30% at fault and the remaining defendant to be 30% at fault, and awarded $5 million in compensatory damages. Punitive damages were not awarded. The plaintiff alleged that as a result of smoking the defendants’ products, the decedent suffered from unspecified injuries which resulted in his death, and sought an unspecified amount of compensatory and punitive damages. Final judgment was entered against each defendant in the amount of $1.5 million in compensatory damages in March 2014. Post-trial motions were denied in May 2014. The defendants filed a joint notice of appeal to the First DCA, the plaintiff filed a notice of cross appeal and RJR Tobacco posted a supersedeas bond in the amount of $1.5 million in June 2014. Briefing is underway.

On April 29, 2014, in Dupre v. Philip Morris USA Inc., a case filed in December 2007, in the Circuit Court, Manatee County, Florida, the court declared a mistrial because the jury was unable to reach a unanimous verdict. The plaintiff alleged that the decedent, Richard Dupre, was addicted to cigarettes manufactured by the defendant, and as a result, developed one or more smoking-related diseases and/or conditions. The plaintiff is seeking compensatory and punitive damages, costs and interest. Retrial has been scheduled for April 27, 2015.

On May 16, 2014, in Burkhart v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the plaintiff, found the plaintiff to be 50% at fault, RJR Tobacco to be 25% at fault, and the remaining defendants to collectively be 25% at fault, and awarded $5 million in compensatory damages and $1.25 million in punitive damages against RJR Tobacco and $1.25 million in punitive damages collectively against the remaining defendants. The plaintiff alleged that she became addicted to smoking cigarettes manufactured by the defendants and suffers from one or more smoking-related diseases and/or conditions. The plaintiff sought an unspecified amount of compensatory and punitive damages, costs and interest. Final judgment was entered on June 11, 2014, and did not include a reduction for comparative fault. Post-trial motions are pending.

On May 19, 2014, in Starbuck v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, the court declared a mistrial because the jury was unable to reach a unanimous verdict. The plaintiff alleged that he suffers from addiction and one or more smoking-related diseases or conditions. The plaintiff is seeking an unspecified amount of compensatory damages. Retrial is scheduled for December 1, 2014.

On June 23, 2014, in Bakst v. R. J. Reynolds Tobacco Co., a case filed in December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Juanita Thurston, to be 25% at fault and RJR Tobacco to be 75% at fault, and awarded $6 million in compensatory damages plus $4,209 for funeral expenses and $14 million in punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from nicotine addiction and one or more smoking-related diseases and/or conditions, including lung cancer. The plaintiff sought in excess of $15,000 in compensatory damages, punitive damages, recoverable costs and interest. Post-trial motions are pending.

On June 25, 2014, in Davis v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the U.S. District Court for the Middle District of Florida, a jury returned a verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged that as a result of smoking the defendants’ products, she suffers from nicotine addiction and one or more smoking-related diseases and/or conditions. The plaintiff sought an unspecified amount of compensatory damages, costs and interest. Final judgment was entered on June 27, 2014. It is unknown if the plaintiff will file post-trial motions or an appeal at this time.

On July 17, 2014, in Robinson v. R. J. Reynolds Tobacco Co., a case filed in January 2008, in the Circuit Court, Escambia County, Florida, a jury returned a verdict in favor of the plaintiff, found the decedent, Michael Johnson, Sr., to be 29.5% at fault and RJR Tobacco to be 70.5% at fault, and awarded $16.9 million in compensatory damages and determined that the plaintiff is entitled to punitive damages. The plaintiff alleged that as a result of using the defendant’s products, the decedent suffered from lung cancer. The plaintiff sought an unspecified amount of damages, costs and interest. On July 18, 2014, the jury awarded $23.6 billion in punitive damages. Post-trial motions are pending.

Broin II Cases

RJR Tobacco, B&W and other cigarette manufacturer defendants settled Broin v. Philip Morris, Inc. in October 1997. This case had been brought in Florida state court on behalf of flight attendants alleged to have suffered from diseases or ailments caused by exposure to ETS in airplane cabins. The settlement agreement required the participating tobacco companies to pay a total of $300 million in three annual $100 million installments, allocated among the companies by market share, to fund research on the early detection and cure of diseases associated with tobacco smoke. It also required those companies to pay a total of $49 million for the plaintiffs’ counsel’s fees and expenses. RJR Tobacco’s portion of these payments was approximately $86 million; B&W’s portion of these payments was approximately $57 million. The settlement agreement bars class members from bringing aggregate claims or obtaining punitive damages and also bars individual claims to the extent that they are based on fraud, misrepresentation, conspiracy to commit fraud or misrepresentation, RICO, suppression, concealment or any other alleged intentional or willful conduct. The defendants agreed that, in any individual case brought by a class member, the defendant will bear the burden of proof with respect to whether ETS can cause certain specifically enumerated diseases, referred to as “general causation.” With respect to all other issues relating to liability, including whether an individual plaintiff’s disease was caused by his or her exposure to ETS in airplane cabins, referred to as “specific causation,” the individual plaintiff will have the burden of proof. On September 7, 1999, the Florida Supreme Court approved the settlement. The Broin II cases arose out of the settlement of this case.

On October 5, 2000, the Broin court entered an order applicable to all Broin II cases that the terms of the Broin settlement agreement do not require the individual Broin II plaintiffs to prove the elements of strict liability, breach of warranty or negligence. Under this order, there is a rebuttable presumption in the plaintiffs’ favor on those elements, and the plaintiffs bear the burden of proving that their alleged adverse health effects actually were caused by exposure to ETS in airplane cabins, that is, specific causation.

As of June 30, 2014, there were 2,572 Broin II lawsuits pending in Florida. There have been no Broin II trials since 2007.

Class-Action Suits

Overview. As of June 30, 2014, eight class-action cases were pending in the United States against RJR Tobacco or its affiliates or indemnitees. In 1996, the Fifth Circuit Court of Appeals in Castano v. American Tobacco Co. overturned the certification of a nation-wide class of persons whose claims related to alleged addiction to tobacco products. Since this ruling by the Fifth Circuit, most class-action suits have sought certification of state-wide, rather than nation-wide, classes. Class-action suits based on claims similar to those asserted inCastano or claims that class members are at a greater risk of injury or injured by the use of tobacco or exposure to ETS are pending against RJR Tobacco and its affiliates and indemnitees in state or federal courts in California, Illinois, Louisiana, Missouri, and West Virginia. All pending class-action cases are discussed below.

The pending class actions against RJR Tobacco or its affiliates or indemnitees include four cases alleging that the use of the term “lights” constitutes unfair and deceptive trade practices under state law or violates the federal RICO statute. Such suits are pending in state or federal courts in Illinois and Missouri and are discussed below under “— ’Lights’ Cases.”

Finally, certain third-party payers have filed health-care cost recovery actions in the form of class actions. These cases are discussed below under “— Health-Care Cost Recovery Cases.”

Few smoker class-action complaints have been certified or, if certified, have survived on appeal. Eighteen federal courts, including two courts of appeals, and most state courts that have considered the issue have rejected class certification in such cases. Apart from the Castanocase discussed above, only two smoker class actions have been certified by a federal court — In re Simon (II) Litigation, and Schwab [McLaughlin] v. Philip Morris USA, Inc., both of which were filed in the U.S. District Court for the Eastern District of New York and ultimately decertified.

California Business and Professions Code Case. In Sateriale v. R. J. Reynolds Tobacco Co., a class action filed in November 2009 in the U.S. District Court for the Central District of California, the plaintiffs brought the case on behalf of all persons who tried unsuccessfully to redeem Camel Cash certificates from 1991 through March 31, 2007, or who held Camel Cash certificates as of March 31, 2007. The plaintiffs allege that in response to the defendants’ action to discontinue redemption of Camel Cash as of March 31, 2007, customers, like the plaintiffs, attempted to exchange their Camel Cash for merchandise and that the defendants, however, did not have any merchandise to exchange for Camel Cash. The plaintiffs allege unfair business practices, deceptive practices, breach of contract and promissory estoppel. The plaintiffs seek injunctive relief, actual damages, costs and expenses. In January 2010, the defendants filed a motion to dismiss, which prompted the plaintiffs to file an amended complaint in February 2010. The class definition changed to a class consisting of all persons who reside in the U.S. and tried unsuccessfully to redeem Camel Cash certificates, from October 1, 2006 (six months before the defendant ended the Camel Cash program) or who held Camel Cash certificates as of March 31, 2007. The plaintiffs also brought the class on behalf of a proposed California subclass, consisting of all California residents meeting the same criteria. In May 2010, RJR Tobacco’s motion to dismiss the amended complaint for lack of jurisdiction over subject matter and, alternatively, for failure to state a claim was granted with leave to amend. The plaintiffs filed a second amended complaint. In July 2010, RJR Tobacco’s motion to dismiss the second amended complaint was granted with leave to amend. The plaintiffs filed a third amended complaint, and RJR Tobacco filed a motion to dismiss in September 2010. In December 2010, the court granted RJR Tobacco’s motion to dismiss with prejudice. Final judgment was entered by the court, and the plaintiffs filed a notice of appeal, in January 2011. In July 2012, the appellate court affirmed the dismissal of the plaintiffs’ claims under the Unfair Competition Law and the Consumer Legal Remedies Acts and reversed the dismissal of the plaintiffs’ claims for promissory estoppel and breach of contract. RJR Tobacco’s motion for rehearing or rehearing en banc was denied in October 2012. RJR Tobacco filed its answer to the plaintiffs’ third amended complaint in December 2012. Trial is scheduled for November 4, 2014.

“Lights” Cases. As noted above, “lights” class-action cases are pending against RJR Tobacco or B&W in Illinois (2) and Missouri (2). The classes in these cases generally seek to recover $50,000 to $75,000 per class member for compensatory and punitive damages, injunctive and other forms of relief, and attorneys’ fees and costs from RJR Tobacco and/or B&W. In general, the plaintiffs allege that RJR Tobacco or B&W made false and misleading claims that “lights” cigarettes were lower in tar and nicotine and/or were less hazardous or less mutagenic than other cigarettes. The cases typically are filed pursuant to state consumer protection and related statutes.

Many of these “lights” cases were stayed pending review of the Good v. Altria Group, Inc. case by the U.S. Supreme Court. In that “lights” class-action case against Altria Group, Inc. and Philip Morris USA, the U.S. Supreme Court decided that these claims are not preempted by the Federal Cigarette Labeling and Advertising Act or by the Federal Trade Commission’s, referred to as FTC, historic regulation of the industry. Since this decision in December 2008, a number of the stayed cases have become active again.

The seminal “lights” class-action case involves RJR Tobacco’s competitor, Philip Morris, Inc. Trial began in Price v. Philip Morris, Inc. in January 2003. In March 2003, the trial judge entered judgment against Philip Morris in the amount of $7.1 billion in compensatory damages and $3 billion in punitive damages. Based on Illinois law, the bond required to stay execution of the judgment was set initially at $12 billion. Philip Morris pursued various avenues of relief from the $12 billion bond requirement. On December 15, 2005, the Illinois Supreme Court reversed the lower court’s decision and sent the case back to the trial court with instructions to dismiss the case. On December 5, 2006, the trial court granted the defendant’s motion to dismiss and for entry of final judgment. The case was dismissed with prejudice the same day. In December 2008, the plaintiffs filed a petition for relief from judgment, stating that the U.S. Supreme Court’s decision in Good v. Altria Group, Inc. rejected the basis for the reversal. The trial court granted the defendant’s motion to dismiss the plaintiffs’ petition for relief from judgment in February 2009. In March 2009, the plaintiffs filed a notice of appeal to the Illinois Appellate Court, Fifth Judicial District, requesting a reversal of the February 2009 order and remand to the circuit court. On February 24, 2011, the appellate court entered an order, concluding that the two-year time limit for filing a petition for relief from a final judgment began to run when the trial court dismissed the plaintiffs’ lawsuit on December 18, 2006. The appellate court therefore found that the petition was timely, reversed the order of the trial court, and remanded the case for further proceedings. Philip Morris filed a petition for leave to appeal to the Illinois Supreme Court. On September 28, 2011, the Illinois Supreme Court denied Philip Morris’s petition for leave to appeal and returned the case to the trial court for further proceedings. In December 2012, the trial court denied the plaintiffs’ petition for relief from the judgment. The plaintiffs filed a notice of appeal to the Illinois Appellate Court, Fifth Judicial District. In April 2014, the appellate court reinstated the 2003 verdict. In May 2014, Philip Morris filed a petition for leave to appeal to the Illinois Supreme Court and a motion for supervisory order. Philip Morris has requested the Illinois Supreme Court to direct the Fifth Judicial District to vacate its April 2014 judgment and to order the Fifth Judicial District to affirm the trial court’s denial of the plaintiff’s petition for relief from the judgment, or in the alternative, grant its petition for leave to appeal. A decision is pending.

In Turner v. R. J. Reynolds Tobacco Co., a case filed in February 2000 in Circuit Court, Madison County, Illinois, a judge certified a class in November 2001. In June 2003, RJR Tobacco filed a motion to stay the case pending Philip Morris’s appeal of the Price v. Philip Morris, Inc. case mentioned above, which the judge denied in July 2003. In October 2003, the Illinois Fifth District Court of Appeals denied RJR Tobacco’s emergency stay/supremacy order request. In November 2003, the Illinois Supreme Court granted RJR Tobacco’s motion for a stay pending the court’s final appeal decision in Price. On October 11, 2007, the Illinois Fifth District Court of Appeals dismissed RJR Tobacco’s appeal of the court’s denial of its emergency stay/supremacy order request and remanded the case to the Circuit Court. A status conference is scheduled for August 20, 2014.

In Howard v. Brown & Williamson Tobacco Corp., another case filed in February 2000 in Circuit Court, Madison County, Illinois, a judge certified a class in December 2001. In June 2003, the trial judge issued an order staying all proceedings pending resolution of thePrice v. Philip Morris, Inc. case mentioned above. The plaintiffs appealed this stay order to the Illinois Fifth District Court of Appeals, which affirmed the Circuit Court’s stay order in August 2005. There is currently no activity in the case.

A “lights” class-action case is pending against each of RJR Tobacco and B&W in Missouri. In Collora v. R. J. Reynolds Tobacco Co., a case filed in May 2000 in Circuit Court, St. Louis County, Missouri, a judge in St. Louis certified a class in December 2003. In April 2007, the court granted the plaintiffs’ motion to reassign Collora and the following cases to a single general division: Craft v. Philip Morris Companies, Inc. and Black v. Brown & Williamson Tobacco Corp., discussed below. In April 2008, the court stayed the case pending U.S. Supreme Court review in Good v. Altria Group, Inc. A nominal trial date of January 10, 2011 was scheduled, but it did not proceed at that time. A status conference is scheduled for February 2, 2015.

Finally, in Black v. Brown & Williamson Tobacco Corp., a case filed in November 2000 in Circuit Court, City of St. Louis, Missouri, B&W removed the case to the U.S. District Court for the Eastern District of Missouri. The plaintiffs filed a motion to remand, which was granted in March 2006. In April 2008, the court stayed the case pending U.S. Supreme Court review in Good v. Altria Group, Inc. A nominal trial date of January 10, 2011, was scheduled, but it did not proceed at that time. A status conference is scheduled for February 2, 2015.

In the event RJR Tobacco and its affiliates or indemnitees lose one or more of the pending “lights” class-action suits, RJR Tobacco, depending upon the amount of any damages ordered, could face difficulties in its ability to pay the judgment or obtain any bond required to stay execution of the judgment which could have a material adverse effect on RJR Tobacco’s, and consequently RAI’s, results of operations, cash flows or financial position.

Other Class Actions. In Young v. American Tobacco Co., Inc., a case filed in November 1997 in Circuit Court, Orleans Parish, Louisiana, the plaintiffs brought an ETS class action against U.S. cigarette manufacturers, including RJR Tobacco and B&W, and parent companies of U.S. cigarette manufacturers, including RJR, on behalf of all residents of Louisiana who, though not themselves cigarette smokers, have been exposed to secondhand smoke from cigarettes which were manufactured by the defendants, and who allegedly suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. In March 2013, the court entered an order staying the case, including all discovery, pending the implementation of the smoking cessation program ordered by the court in Scott v. The American Tobacco Co.

In Parsons v. A C & S, Inc., a case filed in February 1998 in Circuit Court, Ohio County, West Virginia, the plaintiff sued asbestos manufacturers, U.S. cigarette manufacturers, including RJR Tobacco and B&W, and parent companies of U.S. cigarette manufacturers, including RJR, seeking to recover $1 million in compensatory and punitive damages individually and an unspecified amount for the class in both compensatory and punitive damages. The class was brought on behalf of persons who allegedly have personal injury claims arising from their exposure to respirable asbestos fibers and cigarette smoke. The plaintiffs allege that Mrs. Parsons’ use of tobacco products and exposure to asbestos products caused her to develop lung cancer and to become addicted to tobacco. In December 2000, three defendants, Nitral Liquidators, Inc., Desseaux Corporation of North America and Armstrong World Industries, filed bankruptcy petitions in the U.S. Bankruptcy Court for the District of Delaware, In re Armstrong World Industries, Inc. Pursuant to section 362(a) of the Bankruptcy Code, Parsons is automatically stayed with respect to all defendants.

Finally, in Jones v. American Tobacco Co., Inc., a case filed in December 1998 in Circuit Court, Jackson County, Missouri, the defendants removed the case to the U.S. District Court for the Western District of Missouri in February 1999. The action was brought against the major U.S. cigarette manufacturers, including RJR Tobacco and B&W, and parent companies of U.S. cigarette manufacturers, including RJR, by tobacco product users and purchasers on behalf of all similarly situated Missouri consumers. The plaintiffs allege that their use of the defendants’ tobacco products has caused them to become addicted to nicotine. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. The case was remanded to the Circuit Court in February 1999. There is currently no activity in this case.

Health-Care Cost Recovery Cases

Health-care cost recovery cases have been brought by a variety of plaintiffs. Other than certain governmental actions, these cases largely have been unsuccessful on remoteness grounds, which means that one who pays an injured person’s medical expenses is legally too remote to maintain an action against the person allegedly responsible for the injury.

As of June 30, 2014, two health-care cost recovery cases were pending in the United States against RJR Tobacco, B&W, as its indemnitee, or both, as discussed below after the discussion of the State Settlement Agreements. A limited number of claimants have filed suit against RJR Tobacco, its current or former affiliates, B&W and other tobacco industry defendants to recover funds for health care, medical and other assistance paid by foreign provincial governments in treating their citizens. For additional information on these cases, see “— International Cases” below.

State Settlement Agreements. In June 1994, the Mississippi Attorney General brought an action, Moore v. American Tobacco Co., against various industry members, including RJR Tobacco and B&W. This case was brought on behalf of the state to recover state funds paid for health care and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. Most other states, through their attorneys general or other state agencies, sued RJR Tobacco, B&W and other U.S. cigarette manufacturers based on similar theories. The cigarette manufacturer defendants, including RJR Tobacco and B&W, settled the first four of these cases scheduled for trial — Mississippi, Florida, Texas and Minnesota — by separate agreements with each such state.

On November 23, 1998, the major U.S. cigarette manufacturers, including RJR Tobacco and B&W, entered into the Master Settlement Agreement with attorneys general representing the remaining 46 states, the District of Columbia, Puerto Rico, Guam, the Virgin Islands, American Samoa and the Northern Marianas. Effective on November 12, 1999, the MSA settled all the health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions and released various additional present and future claims.

In the settling jurisdictions, the MSA released RJR Tobacco, B&W, and their affiliates and indemnitees, including RAI, from:

• all claims of the settling states and their respective political subdivisions and other recipients of state health-care funds, relating to past conduct arising out of the use, sale, distribution, manufacture, development, advertising, marketing or health effects of, the exposure to, or research, statements or warnings about, tobacco products; and

• all monetary claims of the settling states and their respective political subdivisions and other recipients of state health-care funds, relating to future conduct arising out of the use of or exposure to, tobacco products that have been manufactured in the ordinary course of business.

Set forth below is the unadjusted tobacco industry settlement payment schedule for 2012 and beyond:

	2012		2013		2014		2015		2016		2017		Thereafter
First Four States’ Settlements:(1)
Mississippi Annual Payment	$	136	$	136	$	136	$	136	$	136	$	136	$	136
Florida Annual Payment		440		440		440		440		440		440		440
Texas Annual Payment		580		580		580		580		580		580		580
Minnesota Annual Payment		204		204		204		204		204		204		204
Remaining Jurisdictions’ Settlement:
Annual Payments(1)		8,004		8,004		8,004		8,004		8,004		8,004		8,004
Total	$	9,364	$	9,364	$	9,364	$	9,364	$	9,364	$	9,364	$	9,364

⁽¹⁾ Subject to adjustments for changes in sales volume, inflation and other factors. All payments are to be allocated among the companies on the basis of relative market share. For further information, see “— State Settlement Agreements—Enforcement and Validity; Adjustments” below.

RAI’s operating subsidiaries expenses and payments under the State Settlement Agreements for 2012 and 2013, and the projected expenses and payments for 2014 and beyond are set forth below ⁽²⁾.

	2012		2013		2014		2015		2016		2017		Thereafter
Settlement expenses	$	2,370	$	1,819		—		—		—		—		—
Settlement cash payments	$	2,414	$	2,582		—		—		—		—		—
Projected settlement expenses					$	>1,800	$	>1,900	$	>1,800	$	>2,000	$	>2,000
Projected settlement cash payments					$	>1,900	$	>1,900	$	>1,900	$	>1,800	$	>2,000

⁽²⁾ Amounts beginning in 2013 reflect the impact of the Term Sheet described below under “—State Settlement Agreements – Enforcement and Validity; Adjustments- Partial Settlement of Certain NPM Adjustment Claims” .

The State Settlement Agreements also contain provisions restricting the marketing of tobacco products. Among these provisions are restrictions or prohibitions on the use of cartoon characters, brand-name sponsorships, apparel and other merchandise, outdoor and transit advertising, payments for product placement, free sampling and lobbying. Furthermore, the State Settlement Agreements required the dissolution of three industry-sponsored research and trade organizations.

The State Settlement Agreements have materially adversely affected RJR Tobacco’s shipment volumes. RAI believes that these settlement obligations may materially adversely affect the results of operations, cash flows or financial position of RAI and RJR Tobacco in future periods. The degree of the adverse impact will depend, among other things, on the rate of decline in U.S. cigarette sales in the premium and value categories, RJR Tobacco’s share of the domestic premium and value cigarette categories, and the effect of any resulting cost advantage of manufacturers not subject to the State Settlement Agreements.

U.S. Department of Justice Case. On September 22, 1999, in United States v. Philip Morris USA Inc., the U.S. Department of Justice brought an action against RJR Tobacco, B&W and other tobacco companies in the U.S. District Court for the District of Columbia. The government initially sought to recover federal funds expended by the federal government in providing health care to smokers who developed diseases and injuries alleged to be smoking-related, based on several federal statutes. In addition, the government sought, pursuant to the civil provisions of RICO, disgorgement of profits the government contends were earned as a consequence of a RICO racketeering “enterprise.” In September 2000, the court dismissed the government’s claims asserted under the Medical Care Recovery Act as well as those under the Medicare Secondary Payer provisions of the Social Security Act, but did not dismiss the RICO claims. In February 2005, the U.S. Court of Appeals for the District of Columbia ruled that disgorgement is not an available remedy in this case. The government’s petition for writ of certiorari with the U.S. Supreme Court was denied in October 2005. The non-jury, bench trial began in September 2004, and closing arguments concluded in June 2005.

On August 17, 2006, the court found certain defendants, including RJR Tobacco and B&W, liable for the RICO claims, but did not impose any direct financial penalties. The court instead enjoined the defendants from committing future racketeering acts, participating in certain trade organizations, making misrepresentations concerning smoking and health and youth marketing, and using certain brand descriptors such as “low tar,” “light,” “ultra light,” “mild” and “natural.” The court also ordered defendants to issue “corrective communications” on five subjects, including smoking and health and addiction, and to comply with further undertakings, including maintaining web sites of historical corporate documents and disseminating certain marketing information on a confidential basis to the government. In addition, the court placed restrictions on the ability of the defendants to dispose of certain assets for use in the United States, unless the transferee agrees to abide by the terms of the court’s order, and ordered the defendants to reimburse the U.S. Department of Justice its taxable costs incurred in connection with the case.

Certain defendants, including RJR Tobacco, filed notices of appeal to the U.S. Court of Appeals for the District of Columbia in September 2006. The government filed its notice of appeal in October 2006. In addition, the defendants, including RJR Tobacco, filed joint motions asking the district court to clarify and to stay its order pending the defendants’ appeal. On September 28, 2006, the district court denied the defendants’ motion to stay. On September 29, 2006, the defendants, including RJR Tobacco, filed a motion asking the court of appeals to stay the district court’s order pending the defendants’ appeal. The court granted the motion in October 2006.

In November 2006, the court of appeals stayed the appeals pending the trial court’s ruling on the defendants’ motion for clarification. The defendants’ motion was granted in part and denied in part. The defendants’ motion as to the meaning and applicability of the general injunctive relief of the August 2006 order was denied. The request for clarification as to the scope of the provisions in the order prohibiting the use of descriptors and requiring corrective statements at retail point of sale was granted. The court also ruled that the provisions prohibiting the use of express or implied health messages or descriptors do apply to the actions of the defendants taken outside of the United States.

In May 2009, the U.S. Court of Appeals largely affirmed the finding of liability against the tobacco defendants and remanded to the trial court for dismissal of the trade organizations. The court also largely affirmed the remedial order, including the denial of additional remedies, but vacated the order and remanded for further proceedings as to the following four discrete issues:

• the issue of the extent of Brown & Williamson Holdings, Inc.’s control over tobacco operations was remanded for further fact finding and clarification;

• the remedial order was vacated to the extent that it binds all defendants’ subsidiaries and was remanded to the lower court for determination as to whether inclusion of the subsidiaries and which of the subsidiaries satisfy Rule 65(d) of the Federal Rules of Civil Procedure;

• the court held that the provision found in paragraph four of the injunction, concerning the use of any express or implied health message or health descriptor for any cigarette brand, should not be read to govern overseas sales. The issue was remanded to the lower court with instructions to reformulate it so as to exempt foreign activities that have no substantial, direct and foreseeable domestic effects; and

• the remedial order was vacated regarding “point of sale” displays and remanded for the district court to evaluate and make due provisions for the rights of innocent persons, either by abandoning this part of the remedial order or re-crafting a new version reflecting the rights of third parties.

RJR Tobacco and the other defendants, as well as the Department of Justice, filed petitions for writ of certiorari to the U.S. Supreme Court in February 2010. In June 2010, the U.S. Supreme Court denied the parties’ petitions for writ of certiorari.

Post-remand proceedings are underway to determine the extent to which the original order will be implemented. On December 22, 2010, the trial court dismissed Brown & Williamson Holdings, Inc. from the litigation. On March 3, 2011, the defendants filed a motion for vacatur, in which they moved to vacate the trial court’s injunctions and factual findings and dismiss the case in its entirety. The court denied the motion on June 1, 2011. The defendants filed a notice of appeal. In addition, the parties to the lawsuit entered into an agreement concerning certain technical obligations regarding their public websites. Pursuant to this agreement, RJR Tobacco agreed to deposit $3.125 million over three years into the registry of the district court. In July 2012, the Court of Appeals for the D.C. Circuit affirmed the trial court’s denial of the defendants’ motion to vacate the injunctions. In November 2012, the trial court entered an order wherein the court determined the language to be included in the text of the corrective statements and directed the parties to engage in discussions with the Special Master to implement them. The defendants filed a notice of appeal of that order on January 25, 2013. In February 2013, the appellate court granted the defendants’ motion to hold the case in abeyance pending the District Court’s resolution of corrective-statement implementation issues. The mediation process on implementation issues has concluded, and the trial court entered an implementation order on June 2, 2014. The order stays implementation pending exhaustion of appeals on the corrective-statements remedy. On June 25, 2014, the defendants filed a notice of appeal from the implementation order. On July 2, 2014, the defendants filed an unopposed motion asking the appellate court to consolidate the appeal from the implementation order with the appeal held in abeyance and to set a briefing schedule. In light of the implementation mediation and subsequent order, $10 million has been accrued for the estimated costs of the corrective communications and is included in the condensed consolidated balance sheet (unaudited) as of June 30, 2014.

Native American Tribe Case. As of June 30, 2014, one Native American tribe case was pending before a tribal court against RJR Tobacco and B&W, Crow Creek Sioux Tribe v. American Tobacco Co., a case filed in September 1997 in Tribal Court, Crow Creek Sioux, South Dakota. The plaintiffs seek to recover actual and punitive damages, restitution, funding of a clinical cessation program, funding of a corrective public education program, and disgorgement of unjust profits from sales to minors. The plaintiffs claim that the defendants are liable under the following theories: unlawful marketing and targeting of minors, contributing to the delinquency of minors, unfair and deceptive acts or practices, unreasonable restraint of trade and unfair method of competition, negligence, negligence per se, conspiracy and restitution of unjust enrichment. The case is dormant.

International Cases. Nine health-care reimbursement cases have been filed against RJR Tobacco, its current or former affiliates, or B&W outside the United States, by nine Canadian provinces. The remaining Canadian province, the Province of Nova Scotia, has indicated an intention to file a similar case. In these actions, foreign governments are seeking to recover for health care, medical and other assistance paid and to be paid in treating their citizens for tobacco-related disease. No such actions are pending in the United States. Pursuant to the terms of the 1999 sale of RJR Tobacco’s international tobacco business, RJR Tobacco has tendered the defense of these actions to Japan Tobacco Inc., referred to as JTI. Subject to a reservation of rights, JTI has assumed the defense of RJR Tobacco and its current or former affiliates.

• British Columbia—In 1997, British Columbia enacted a statute, subsequently amended, which created a civil cause of action for the government to recover the costs of health-care benefits incurred for insured populations of British Columbia residents resulting from tobacco-related disease. An action brought on behalf of the Province of British Columbia pursuant to the statute against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and certain of its affiliates, was dismissed in February 2000 when the British Columbia Supreme Court ruled that the legislation was unconstitutional and set aside service ex juris against the foreign defendants for that reason. British Columbia then enacted a revised statute, pursuant to which an action was filed in January 2001 against many of the same defendants, including RJR Tobacco and one of its affiliates, in Supreme Court, British Columbia. In that action, the British Columbia government seeks to recover the present value of its total expenditures for health-care benefits provided for insured persons resulting from tobacco-related disease or the risk of tobacco-related disease caused by alleged breaches of duty by the manufacturers, the present value of its estimated total expenditures for health-care benefits that reasonably could be expected to be provided for those insured persons resulting from tobacco-related disease or the risk of tobacco-related disease in the future, court ordered interest, and costs, or in the alternative, special or increased costs. The government alleges that the defendants are liable under the British Columbia statute by reason of their “tobacco related wrongs,” which are alleged to include: selling defective products, failure to warn, sale of cigarettes to children and adolescents, strict liability, deceit and misrepresentation, violation of trade practice and competition acts, concerted action, and joint liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. RJR Tobacco and its affiliate filed statements of defense in January 2007. Pretrial discovery is ongoing.

• New Brunswick — In March 2008, a case was filed on behalf of Her Majesty the Queen in Right of the Province of New Brunswick, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco’s predecessor and one of RJR Tobacco’s affiliates, in the Trial Division in the Court of Queen’s Bench of New Brunswick. The claim is brought pursuant to New Brunswick legislation enacted in 2008, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the New Brunswick government seeks to recover essentially the same types of damages that are being sought in the British Columbia action described above based on analogous theories of liability. RJR Tobacco and its affiliate filed statements of defense in March 2010. Pretrial discovery is ongoing.

• Ontario — In September 2009, a case was filed on behalf of the Province of Ontario, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Ontario Superior Court of Justice. The claim is brought pursuant to Ontario legislation enacted in 2009, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Ontario government seeks to recover essentially the same types of damages that are being sought in the British Columbia and New Brunswick actions described above based on analogous theories of liability, although the government also asserted claims based on the illegal importation of cigarettes, which claims were deleted in an amended statement of claim filed in August 2010. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Newfoundland and Labrador — In February 2011, a case was filed on behalf of the Province of Newfoundland and Labrador, Canada against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the General Trial Division of the Supreme Court of Newfoundland and Labrador. The claim is brought pursuant to legislation passed in Newfoundland in 2001 and proclaimed in February 2011, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Newfoundland government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Quebec — In June 2012, a case was filed on behalf of the Province of Quebec, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Superior Court of the Province of Quebec, District of Montreal. The claim is brought pursuant to legislation enacted in Quebec in 2009, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Quebec government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. RJR Tobacco and its affiliate have brought a motion challenging the jurisdiction of the Quebec court, which was dismissed. Pretrial discovery is ongoing. Separately, in August 2009, certain Canadian manufacturers filed a constitutional challenge to the Quebec statute, which was dismissed on March 5, 2014. An appeal of that decision has been filed.

• Manitoba — In May 2012, a case was filed on behalf of the Province of Manitoba, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Court of Queen’s Bench, Winnipeg Judicial Centre, Manitoba. The claim is brought pursuant to legislation assented to in 2006 and proclaimed in 2012, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Manitoba government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Saskatchewan — In June 2012, a case was filed on behalf of the Province of Saskatchewan, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Court of Queen’s Bench, Judicial Centre of Saskatoon, Saskatchewan. The claim is brought pursuant to legislation assented to in 2007 and proclaimed in 2012, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Saskatchewan government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Alberta — In June 2012, a case was filed on behalf of the Province of Alberta, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Court of Queen’s Bench of Alberta Judicial Centre, Calgary, Alberta. The claim is brought pursuant to legislation assented to in 2009 and proclaimed in 2012, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Alberta government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

• Prince Edward Island — In September 2012, a case was filed on behalf of the Province of Prince Edward Island, Canada, against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in the Supreme Court of Prince Edward Island (General Section), Charlottetown, Prince Edward Island. The claim is brought pursuant to legislation assented to in 2009 and proclaimed in 2012, which legislation is substantially similar to the revised British Columbia statute described above. In this action, the Prince Edward Island government seeks to recover essentially the same types of damages that are being sought in the British Columbia and other provincial actions described above based on analogous theories of liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary motions are pending.

The following seven putative Canadian class actions were filed against various Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, in courts in the Provinces of Alberta, British Columbia, Manitoba, Nova Scotia, Ontario and Saskatchewan, although the plaintiffs’ counsel have been actively pursuing only the action pending in British Columbia at this time:

• In Adams v. Canadian Tobacco Manufacturers’ Council, a case filed in July 2009 in the Court of Queen’s Bench for Saskatchewan against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging her own addiction and chronic obstructive pulmonary disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals who were alive on July 10, 2009, and who have suffered, or who currently suffer, from chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after having smoked a minimum of 25,000 cigarettes designed, manufactured, imported, marketed or distributed by the defendants, as well as disgorgement of revenues earned by the defendants. RJR Tobacco and its affiliate have brought a motion challenging the jurisdiction of the Saskatchewan court.

• In Dorion v. Canadian Tobacco Manufacturers’ Council, a case filed in June 2009, in the Court of Queen’s Bench of Alberta against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging her own addiction and chronic bronchitis resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, dependents and family members, who purchased or smoked cigarettes designed, manufactured, marketed or distributed by the defendants, as well as restitution of profits and reimbursement of government expenditure for health-care benefits allegedly caused by the use of tobacco products.

• In Kunka v. Canadian Tobacco Manufacturers’ Council, a case filed in 2009 in the Court of Queen’s Bench of Manitoba against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging her own addiction and chronic obstructive pulmonary disease, severe asthma and lung disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, and their dependents and family members, who purchased or smoked cigarettes manufactured by the defendants, as well as restitution of profits and reimbursement of government expenditure for health-care benefits allegedly caused by the use of tobacco products.

• In Semple v. Canadian Tobacco Manufacturers’ Council, a case filed in June 2009 in the Supreme Court of Nova Scotia against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging his own addiction and chronic obstructive pulmonary disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, dependents and family members, who purchased or smoked cigarettes designed, manufactured, marketed or distributed by the defendants for the period from January 1, 1954, to the expiry of the opt-out period as set by the court, as well as restitution of profits and reimbursement of government expenditure for health-care costs allegedly caused by the use of tobacco products.

• In Bourassa v. Imperial Tobacco Canada Limited, a case filed in June 2010 in the Supreme Court of British Columbia against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, the heir to a deceased smoker, alleging that the deceased was addicted to and suffered emphysema resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, who were alive on June 12, 2007, and who have suffered, or who currently suffer from chronic respiratory diseases, after having smoked a minimum of 25,000 cigarettes designed, manufactured, imported, marketed, or distributed by the defendants, as well as disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed. RJR Tobacco and its affiliate have filed a challenge to the jurisdiction of the British Columbia court. The plaintiff filed a motion for certification in April 2012, and filed affidavits in support in August 2013.

• In McDermid v. Imperial Tobacco Canada Limited, a case filed in June 2010 in the Supreme Court of British Columbia against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging his own addiction and heart disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, who were alive on June 12, 2007, and who have suffered, or who currently suffer from heart disease, after having smoked a minimum of 25,000 cigarettes designed, manufactured, imported, marketed, or distributed by the defendants, as well as disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed. RJR Tobacco and its affiliate have filed a challenge to the jurisdiction of the British Columbia court.

• In Jacklin v. Canadian Tobacco Manufacturers’ Council, a case filed in June 2012 in the Ontario Superior Court of Justice against Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and one of its affiliates, the plaintiff, an individual smoker, alleging her own addiction and chronic obstructive pulmonary disease resulting from the use of tobacco products, is seeking compensatory and unspecified punitive damages on behalf of a proposed class comprised of all individuals, including their estates, who were alive on June 12, 2007, and who have suffered, or who currently suffer from chronic obstructive pulmonary disease, heart disease, or cancer, after having smoked a minimum of 25,000 cigarettes designed, manufactured, imported, marketed, or distributed by the defendants, as well as restitution of profits, and reimbursement of government expenditure for health-care benefits allegedly caused by the use of tobacco products.

In each of these seven cases, the plaintiffs allege fraud, fraudulent concealment, breach of warranty, breach of warranty of merchantability and of fitness for a particular purpose, failure to warn, design defects, negligence, breach of a “special duty” to children and adolescents, conspiracy, concert of action, unjust enrichment, market share liability, joint liability, and violations of various trade practices and competition statutes. Pursuant to the terms of the 1999 sale of RJR Tobacco’s international tobacco business, RJR Tobacco has tendered the defense of these seven actions to JTI. Subject to a reservation of rights, JTI has assumed the defense of RJR Tobacco and its current or former affiliates in these actions.

State Settlement Agreements—Enforcement and Validity; Adjustments

As of June 30, 2014, there were 30 cases concerning the enforcement, validity or interpretation of the State Settlement Agreements in which RJR Tobacco or B&W is a party. This number includes those cases, discussed below, relating to disputed payments under the State Settlement Agreements.

In April 2005, the Mississippi Attorney General notified B&W of its intent to seek approximately $3.9 million in additional payments under the Mississippi Settlement Agreement. The Mississippi Attorney General asserts that B&W failed to report in its net operating profit or its shipments, cigarettes manufactured by B&W under contract for Star Tobacco or its parent, Star Scientific, Inc. B&W advised the State that it did not owe the state any money. In August 2005, the Mississippi Attorney General filed in the Chancery Court of Jackson County, Mississippi, a Notice of Violation, Motion to Enforce Settlement Agreement, and Request for an Accounting by Defendant Brown & Williamson Holdings, Inc., formerly known as Brown & Williamson Tobacco Corporation. In this filing, Mississippi estimated that its damages exceeded $5.0 million. On August 24, 2011, the court entered an order finding in favor of the State on the Star contract manufacturing issue, that the total amount of the underpayment from B&W was approximately $3.8 million and that interest on the underpayment was approximately $4.3 million. The court also appointed a Special Master to undertake an accounting of the benefit received by B&W for failure to include its profits from Star contract manufacturing in its net operating profits reported to the State. B&W filed a motion to certify the Star contract issue for interlocutory appeal, pursuant to Rule 54 (b) of the Mississippi Rules of Civil Procedure. On January 9, 2012, that motion was denied. A report from the Special Master on the benefit received by B&W was issued on April 30, 2014. A hearing on the Special Master’s Report and Recommendation was held before the court on July 2, 2014. A ruling from the court is pending.

In February 2010, the Mississippi Attorney General filed a motion alleging that RJR Tobacco had improperly failed to report shipments of certain categories of cigarette volumes, and for certain years had improperly reported its net operating profit. As a result, the State alleges that settlement payments to it were improperly reduced. RJR Tobacco disputes these allegations and is vigorously defending against them. Hearings on these issues were held on January 24-25, 2012, and May 9, 2012. On May 15, 2012, the court entered an order finding in favor of RJR Tobacco on the claim related to RJR Tobacco’s reported net operating profits in the year used as a baseline for future calculations of the State’s net operating profits payment. The State had sought $3.8 million in damages for this issue, with an additional $2.7 million in interest. On June 19, 2012, the court entered an order finding in favor of the State on the remaining issues, holding that the total amount of the underpayment was approximately $3.3 million and that interest on the underpayment was also approximately $3.3 million, though the court also held that this amount should be offset by additional payments previously made by Lorillard Tobacco Company on some of these issues. The court further ordered RJR Tobacco to perform an accounting of its profits and shipments from 1999-2011. On July 10, 2012, RJR Tobacco filed a petition with the Mississippi Supreme Court requesting leave to immediately appeal the court’s ordered accounting and its entry of judgment for the State without first conducting an evidentiary hearing. On August 15, 2012, the request was denied. An independent accountant acceptable to both the State and RJR Tobacco was identified and retained. On August 8, 2013, the final report of the independent accountant was filed with the court. The report generally found that RJR Tobacco’s accounting and reporting of information in connection with settlement payment calculations was correct. In some respects, the report expressly disagreed with findings made earlier by the trial court. On December 13, 2013, the State of Mississippi filed its report as to additional damages due it from RJR Tobacco, challenging in various respects the findings set forth in the final report of the independent accountant and seeking various changes to the damages calculations. Also on December 13, 2013, RJR Tobacco filed a motion to finalize remaining damages of third round issues, and/or reconsider, the June 19, 2012, order requesting that the court implement the findings of the independent accountant in a final order on the damage issues and/or to revisit its earlier rulings “in light of the findings and determinations in the independent accountant’s report.” A hearing on these motions was held on July 2, 2014. A ruling from the court is pending.

Finally, in connection with the actions brought against RJR Tobacco and B&W, the court awarded the State attorneys’ fees and expenses in an amount to be determined. On May 1, 2013, a hearing on attorneys’ fees and expenses was held before the Special Master appointed by the court. On November 19, 2013, the Special Master issued a report and recommendations on application for award of costs and attorneys’ fees. The Special Master ruled that attorneys’ fees are to be paid with respect to the settlement payment claims against B&W and RJR Tobacco at 25% of “total amounts” awarded to the State of Mississippi by the court in its August 24, 2011, ruling. This recommendation would result in an attorneys’ fee award of approximately $3.7 million, plus 25% of accumulated interest. On December 13, 2013, the State of Mississippi filed a statement seeking various clarifications of the Special Master’s ruling. Also on December 13, 2013, B&W and RJR Tobacco filed their objections to the ruling. A hearing on these issues was held on July 2, 2014. A ruling from the court is pending.

In May 2006, the State of Florida filed a motion, in the Circuit Court of the Fifteenth Judicial Circuit, in and for Palm Beach County, Florida, to enforce the Florida Settlement Agreement, for an Accounting by Brown & Williamson Holdings, Inc., and for an Order of Contempt, raising substantially the same issues as raised by the Mississippi Attorney General and seeking approximately $12.4 million in additional payments under the Florida Settlement Agreement, as well as $17.0 million in interest payments. This matter is currently in the discovery phase.

NPM Adjustment Claims. The MSA includes an adjustment that potentially reduces the annual payment obligations of RJR Tobacco and the other PMs. Certain requirements, collectively referred to as the Adjustment Requirements, must be satisfied before the NPM Adjustment for a given year is available:

• an Independent Auditor must determine that the PMs have experienced a market share loss beyond a triggering threshold to those manufacturers that do not participate in the MSA, such non-participating manufacturers, referred to as NPMs; and

• in a binding arbitration proceeding, a firm of independent economic consultants must find that the disadvantages of the MSA were a significant factor contributing to the loss. This finding is known as a significant factor determination.

When the Adjustment Requirements are satisfied, the MSA provides that the NPM Adjustment applies to reduce the annual payment obligation of the PMs. However, an individual settling state may avoid its share of the NPM Adjustment if it had in place and diligently enforced during the entirety of the relevant year a “Qualifying Statute” that imposes escrow obligations on NPMs that are comparable to what the NPMs would have owed if they had joined the MSA. In such event, the state’s share of the NPM Adjustment is reallocated to other settling states, if any, that did not have in place and diligently enforce a Qualifying Statute.

NPM Adjustment Claim for 2003. For 2003, the Adjustment Requirements were satisfied. As a result, in April 2006, RJR Tobacco placed approximately $647 million of its MSA payment into a disputed payments account, in accordance with a procedure established by the MSA. That amount represented RJR Tobacco’s share of the 2003 NPM Adjustment as calculated by the Independent Auditor. In March 2007, the Independent Auditor issued revised calculations that reduced RJR Tobacco’s share of the NPM Adjustment for 2003 to approximately $615 million. As a result, in April 2007, RJR Tobacco instructed the Independent Auditor to release to the settling states approximately $32 million from the disputed payments account.

Following RJR Tobacco’s payment of a portion of its 2006 MSA payment into the disputed payments account, 37 of the settling states filed legal proceedings in their respective MSA courts seeking declaratory orders that they diligently enforced their Qualifying Statutes during 2003 and/or orders compelling RJR Tobacco and the other PMs that placed money in the disputed payments account to pay the disputed amounts to the settling states. In response, RJR Tobacco and other PMs, pursuant to the MSA’s arbitration provisions, moved to compel arbitration of the parties’ dispute concerning the 2003 NPM Adjustment, including the states’ diligent enforcement claims, before an arbitration panel consisting of three retired federal court judges. The settling states opposed these motions, arguing, among other things, that the issue of diligent enforcement must be resolved by MSA courts in each of the 52 settling states and territories.

Forty-seven of the 48 courts that addressed the question whether the dispute concerning the 2003 NPM Adjustment is arbitrable ruled that arbitration is required under the MSA. The Montana Supreme Court ruled that the State of Montana did not agree to arbitrate the question of whether it diligently enforced a Qualifying Statute. Subsequently, Montana and the PMs reached an agreement whereby the PMs agreed not to contest Montana’s claim that it diligently enforced the Qualifying Statute during 2003.

In January 2009, RJR Tobacco and certain other PMs entered into an Agreement Regarding Arbitration, referred to as the Arbitration Agreement, with 45 of the MSA settling states (representing approximately 90% of the allocable share of the settling states) pursuant to which those states agreed to participate in a multistate arbitration of issues related to the 2003 NPM Adjustment. Under the Arbitration Agreement, the signing states had their ultimate liability, if any, with respect to the 2003 NPM Adjustment reduced by 20%, and RJR Tobacco and the other PMs that placed their share of the disputed 2005 NPM Adjustment (discussed below) into the disputed payments account, without releasing or waiving any claims, authorized the release of those funds to the settling states.

The arbitration panel contemplated by the MSA and the Arbitration Agreement, referred to as the Arbitration Panel, was selected, and proceedings before the panel with respect to the 2003 NPM Adjustment claim began in July 2010. Following the completion of document and deposition discovery, on November 3, 2011, RJR Tobacco and the other PMs advised the Arbitration Panel that they were not contesting the “diligent enforcement” of 12 states and the four U.S. territories with a combined allocable share of less than 14%. The “diligent enforcement” of the remaining 33 settling states, the District of Columbia and Puerto Rico was contested and became the subject of further proceedings. A common issues hearing was held in April 2012, and state specific evidentiary hearings with respect to the contested states were initiated.

As a result of the partial settlement of certain NPM Adjustment claims, as described in more detail below, as well as the earlier decisions not to contest the diligent enforcement of 13 states, two of which are participants in the partial settlement, and the four U.S. territories, only 15 contested settling states required state specific diligent enforcement rulings. State specific evidentiary hearings were completed as of the end of May 2013.

On September 11, 2013, the Arbitration Panel issued rulings with respect to the 15 remaining contested states. The Arbitration Panel ruled that six states (representing approximately 14.68% allocable share) – Indiana, Kentucky, Maryland, Missouri, New Mexico and Pennsylvania – had not diligently enforced their Qualifying Statutes in 2003. At that time, RJR Tobacco estimated that as a result of these rulings, it was entitled to the maximum remaining amount with respect to its 2003 NPM Adjustment claim – approximately $266 million, plus interest and earnings. All six states that were found “non-diligent” by the Arbitration Panel filed motions to vacate and/or modify the diligent enforcement rulings on the 2003 NPM Adjustment claim. To date, only the state courts in Pennsylvania and Missouri have entered orders affecting the settlement payment calculations. Both courts modified the judgment reduction method that had been adopted by the Arbitration Panel, the effect of which was to reduce RJR Tobacco’s recovery from these two states by a total of $75 million. The orders in Pennsylvania and Missouri are being appealed.

Separately, two of the states found to be “non-diligent”, Kentucky and Indiana, have joined the Term Sheet on financial terms more favorable to the industry than those received by the original signatory states. That brings the total number of jurisdictions that have joined the Term Sheet to 24, representing 49.87% allocable share. As a result of these two states joining the Term Sheet, RJR Tobacco now estimates that the maximum remaining amount of its claim with respect to the 2003 NPM Adjustment claim is $197 million, plus interest and earnings, and before reduction for the impact of the Pennsylvania and Missouri court orders.

Until such time as the various remaining state motions challenging the rulings of the Arbitration Panel have been resolved, including any necessary appeals, uncertainty exists as to the timing, process and amount of RJR Tobacco’s ultimate recovery with respect to its remaining share of the 2003 NPM Adjustment claim. Due to the uncertainty over the final resolution of the 2003 NPM Adjustment claim, no amounts resulting from the rulings of the Arbitration Panel for the remaining four states have been recognized in the condensed consolidated financial statements (unaudited) as of June 30, 2014.

NPM Adjustment Claims for 2004-2013. From 2006 to 2008, proceedings (including significant factor arbitrations before an independent economic consulting firm) were initiated with respect to the NPM Adjustment for 2004, 2005 and 2006. Ultimately, the Adjustment Requirements were satisfied with respect to each of these NPM Adjustments.

In June 2009, RJR Tobacco, certain other PMs and the settling states entered into an agreement with respect to the 2007, 2008 and 2009 significant factor determinations. This agreement provided that the settling states would not contest that the disadvantages of the MSA were “a significant factor contributing to” the market share loss experienced by the PMs in those years. The stipulation pertaining to each of the three years covered by the agreement became effective in February of the year a final determination by the firm of independent economic consultants would otherwise have been expected (2010, 2011 and 2012, respectively), if the issue had been arbitrated on the merits. RJR Tobacco and the PMs paid a total amount of $5 million into the States’ Antitrust/Consumer Protection Tobacco Enforcement Fund established under Section VIII(c) of the MSA for each year covered by that agreement, with RJR Tobacco paying approximately 47% of such amounts. On January 9, 2012, a new agreement with respect to significant factor determinations pertaining to 2010, 2011 and 2012 was entered into on terms essentially identical to the earlier agreement.

Based on the payment calculations of the Independent Auditor and the agreement described above regarding the 2007, 2008 and 2009 significant factor determinations, the Adjustment Requirements have been satisfied with respect to the NPM Adjustments for 2007, 2008 and 2009. In addition, based on the payment calculations of the Independent Auditor and the agreement described above regarding the 2010, 2011 and 2012 significant factor determinations, the Adjustment Requirements have been satisfied with respect to the NPM Adjustment for 2010 and 2011.

The approximate maximum principal amounts of RJR Tobacco’s share of the disputed NPM Adjustments for the years 2004 through 2011, as currently calculated by the Independent Auditor, are as follows (the amounts shown below do not include the interest or earnings thereon to which RJR Tobacco believes it would be entitled under the MSA and do not reflect any reduction as a result of the Term Sheet described below):

Year for which NPM Adjustment calculated		2004		2005		2006		2007		2008		2009		2010		2011
Year in which deduction for NPM Adjustment was taken		2007		2008		2009		2010		2011		2012		2013		2014
RJR Tobacco’s approximate share of disputed NPM Adjustment (millions)	$	562	$	445	$	419	$	435	$	468	$	472	$	470	$	421

In addition to the NPM Adjustment claims described above, RJR Tobacco has filed dispute notices with respect to its 2012 and 2013 annual MSA payments relating to the NPM Adjustments potentially applicable to those years. The amount at issue for those two years is approximately $880 million in the aggregate.

Preliminary discussions are currently underway with the jurisdictions that have not joined the Term Sheet for the partial settlement of certain NPM Adjustment claims, described below, to initiate arbitration proceedings with respect to the 2004 NPM Adjustment.

Due to the uncertainty over the final resolution of the 2004-2013 NPM Adjustment claims asserted by RJR Tobacco, no assurances can be made related to the amounts, if any, that will be realized or any amounts (including interest) that will be owed, except as described below related to the partial settlement of certain NPM Adjustment claims.

Partial Settlement of Certain NPM Adjustment Claims. On November 14, 2012, RJR Tobacco, certain other PMs and certain settling states entered into a Term Sheet that set forth terms on which accrued and potential NPM Adjustment claims for 2003 through 2014 could be resolved. The Term Sheet also set forth a restructured NPM Adjustment process to be applied on a going-forward basis, starting with the 2013 volume year. The Term Sheet was provided to all of the MSA settling states for their review and consideration. A total of 17 states, the District of Columbia and Puerto Rico, together representing just under 42% allocable share, determined to join the proposed settlement. RJR Tobacco and the other PMs indicated that they were prepared to go forward with the proposed settlement with that level of jurisdictional participation.

The Term Sheet provided that the Arbitration Panel in place to deal with the 2003 NPM Adjustment (and other NPM Adjustment-related matters) must review the proposed settlement and enter an appropriate order to confirm for the Independent Auditor that it should implement, as necessary, the terms of the settlement agreement.

On March 12, 2013, the Arbitration Panel entered a Stipulated Partial Settlement and Award, referred to as the Award, reflecting the financial terms of the Term Sheet. On March 29, 2013, the Independent Auditor issued a notice indicating that it intended to implement the financial provisions of the Term Sheet, and also issued various revised payment calculations pertaining to payment years 2009 through 2012 and final calculations pertaining to payment year 2013 that reflected implementation of the financial provisions of the Term Sheet.

On April 12, 2013, Oklahoma joined the Term Sheet, bringing to 20 the total number of jurisdictions that have joined the settlement, representing approximately 43% allocable share, and the Independent Auditor issued revised payment calculations reflecting the financial impact of Oklahoma’s decision to join the settlement. Subsequently, on May 24, 2013, Connecticut and South Carolina also joined the Term Sheet bringing to 22 the total number of jurisdictions that have joined the settlement, representing approximately 46% allocable share. Efforts by two states, Colorado and Ohio, to obtain injunctions to prevent implementation of the Award were unsuccessful.

On June 10, 2014, Kentucky, and on June 26, 2014, Indiana, joined the Term Sheet, bringing to 24 the total number of jurisdictions that have joined the settlement, representing approximately 49.87% allocable share. These states, both of which were among the states found “non-diligent” by the Arbitration Panel, joined the Term Sheet on financial terms more favorable to the industry than those received by the original signatory states.

As of June 30, 2014, 11 non-settling states have motions pending, in their respective MSA courts, to vacate and/or modify the Award. The motions filed by Idaho and Colorado have been denied.

For additional information related to the Term Sheet and the Award, see “— Cost of Products Sold” in note 1.

Other NPM Matters. Separately, on August 19, 2011, Idaho sent a letter on behalf of itself and 31 other states, stating their intent to initiate arbitration with respect to whether amounts used to measure the domestic cigarette market and to calculate PM payment obligations under the MSA should be the adjusted gross or the net number of cigarettes on which federal excise tax (including arbitrios de cigarillos) is paid. The parties also agreed to arbitrate the Independent Auditor’s calculation of the volume adjustment with respect to the treatment of “roll your own,” referred to as RYO, tobacco. On January 21, 2013, the panel ruled that adjusted gross figures should be used in payment calculations and that, in the calculation of the volume adjustment, the Independent Auditor should use 0.0325 ounces of RYO tobacco to be the equivalent of one cigarette.

Antitrust Case

A number of tobacco wholesalers and consumers have sued U.S. cigarette manufacturers, including RJR Tobacco and B&W, in federal and state courts, alleging that cigarette manufacturers combined and conspired to set the price of cigarettes in violation of antitrust statutes and various state unfair business practices statutes. In these cases, the plaintiffs asked the court to certify the lawsuits as class actions on behalf of other persons who purchased cigarettes directly or indirectly from one or more of the defendants. As of June 30, 2014, all of the federal and state court cases on behalf of indirect purchasers had been dismissed.

In Smith v. Philip Morris Cos., Inc., a case filed in February 2000, and pending in District Court, Seward County, Kansas, the court granted class certification in November 2001, in an action brought against the major U.S. cigarette manufacturers, including RJR Tobacco and B&W, and the parent companies of the major U.S. cigarette manufacturers, including RJR, seeking to recover an unspecified amount in actual and punitive damages. The plaintiffs allege that the defendants participated in a conspiracy to fix or maintain the price of cigarettes sold in the United States. In an opinion dated March 23, 2012, the court granted summary judgment in favor of RJR Tobacco and B&W on the plaintiffs’ claims. On July 18, 2014, the Court of Appeals of the State of Kansas affirmed the granting of summary judgment.

Other Litigation and Developments

JTI Claims for Indemnification. By purchase agreement dated March 9, 1999, amended and restated as of May 11, 1999, referred to as the 1999 Purchase Agreement, RJR and RJR Tobacco sold the international tobacco business to JTI. Under the 1999 Purchase Agreement, RJR and RJR Tobacco retained certain liabilities relating to the international tobacco business sold to JTI. Under its reading of the indemnification provisions of the 1999 Purchase Agreement, JTI has requested indemnification for damages allegedly arising out of these retained liabilities. As previously reported, a number of the indemnification claims between the parties relating to the activities of Northern Brands in Canada have been resolved. The other matters for which JTI has requested indemnification for damages under the indemnification provisions of the 1999 Purchase Agreement are described below:

• In a letter dated March 31, 2006, counsel for JTI stated that JTI would be seeking indemnification under the 1999 Purchase Agreement for any damages it may incur or may have incurred arising out of a Southern District of New York grand jury investigation, a now-terminated Eastern District of North Carolina grand jury investigation, and various actions filed by the European Community and others in the U.S. District Court for the Eastern District of New York, referred to as the EDNY, against RJR Tobacco and certain of its affiliates on November 3, 2000, August 6, 2001, and (as discussed in greater detail below) October 30, 2002, and against JTI on January 11, 2002.

• JTI also has sought indemnification relating to a Statement of Claim filed on April 23, 2010, against JTI Macdonald Corp., referred to as JTI-MC, by the Ontario Flue-Cured Tobacco Growers’ Marketing Board, referred to as the Board, Andy J. Jacko, Brian Baswick, Ron Kichler, and Aprad Dobrenty, proceeding on their own behalf and on behalf of a putative class of Ontario tobacco producers that sold tobacco to JTI-MC during the period between January 1, 1986, and December 31, 1996, referred to as the Class Period, through the Board pursuant to certain agreements. The Statement of Claim seeks recovery for damages allegedly incurred by the class representatives and the putative class for tobacco sales during the Class Period made at the contract price for duty free or export cigarettes with respect to cigarettes that, rather than being sold duty free or for export, purportedly were sold in Canada, which allegedly breached one or more of a series of contracts dated between June 4, 1986, and July 3, 1996. A motion to dismiss was argued in January 2014. The decision has been reserved.

• Finally, JTI has advised RJR and RJR Tobacco of its view that, under the terms of the 1999 Purchase Agreement, RJR and RJR Tobacco are liable for a roughly $1.7 million judgment entered in 1998, plus interest and costs, in an action filed in Brazil by Lutz Hanneman, a former employee of a former RJR Tobacco subsidiary. RJR and RJR Tobacco deny that they are liable for this judgment under the terms of the 1999 Purchase Agreement.

Although RJR and RJR Tobacco recognize that, under certain circumstances, they may have these and other unresolved indemnification obligations to JTI under the 1999 Purchase Agreement, RJR and RJR Tobacco disagree with JTI as to (1) what circumstances relating to any such matters may give rise to indemnification obligations by RJR and RJR Tobacco, and (2) the nature and extent of any such obligation. RJR and RJR Tobacco have conveyed their position to JTI, and the parties have agreed to resolve their differences at a later time.

European Community. On October 30, 2002, the European Community and ten of its member states filed a complaint in the EDNY against RJR, RJR Tobacco and several currently and formerly related companies. The complaint contains many of the same or similar allegations found in an earlier complaint, now dismissed, filed in August 2001 and also alleges that the defendants, together with certain identified and unidentified persons, engaged in money laundering and other conduct violating civil RICO and a variety of common laws. The complaint also alleges that the defendants manufactured cigarettes that were eventually sold in Iraq in violation of U.S. sanctions. The plaintiffs seek compensatory, punitive and treble damages among other types of relief. This matter had been stayed and largely inactive until November 24, 2009, when, with the court’s permission, the European Community and member states filed and served a second amended complaint. The second amended complaint added 16 member states as plaintiffs and RAI, RJR Tobacco and R. J. Reynolds Global Products Inc., referred to as GPI, as defendants. The allegations contained in the second amended complaint are in most respects either identical or similar to those found in the prior complaint, but now add new allegations primarily regarding the activities of RAI, RJR Tobacco and GPI following the B&W business combination. Pursuant to a stipulation and order, the defendants filed a motion to dismiss the plaintiffs’ second amended complaint on February 15, 2010. Ruling on part of the defendants’ motion to dismiss, on March 8, 2011, the court dismissed the plaintiffs’ RICO claims, and reserved decision as to dismissal of the plaintiffs’ state-law claims. Thereafter, on May 13, 2011, the court granted the remaining portion of the defendants’ motion and dismissed the plaintiffs’ state-law claims based on the court’s lack of subject matter jurisdiction. On May 16, 2011, the clerk of court entered a judgment dismissing the action in its entirety. On June 10, 2011, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the Second Circuit, appealing from the May 16, 2011, judgment, as well as the March 8, 2011, and May 13, 2011, orders that respectively resulted in the dismissal of their RICO and state-law claims. Oral argument occurred on February 24, 2012.

On April 23, 2014, a three judge panel of the Second Circuit issued a decision on the appeal, and on April 29, 2014, a corrected decision was issued. The Second Circuit concluded that: (1) as pled, the RICO claims are within the scope of the RICO statute, and (2) the federal court does have subject matter jurisdiction over the state-law claims. Accordingly, the three judge panel of the Second Circuit decided that the judgment of the district court should be vacated, and the case remanded to the district court for further proceedings. On May 7, 2014, the defendants filed in the Second Circuit a petition for panel rehearing, or rehearing en banc, regarding the plaintiffs’ RICO claims. The parties are awaiting a decision on the petition. If the Second Circuit denies further review, it is expected that after remand the district court will consider the remaining grounds for dismissal contained in the defendants’ February 15, 2010 motion to dismiss which have not previously been addressed by the district court or the Second Circuit.

FDA Litigation. On February 25, 2011, RJR Tobacco, Lorillard, Inc., and Lorillard Tobacco Company jointly filed a lawsuit, Lorillard, Inc. v. U.S. Food and Drug Administration, in the U.S. District Court for the District of Columbia, challenging the composition of TPSAC which had been established by the FDA under the FDA Tobacco Act. The complaint alleges that certain members of the TPSAC and certain members of its Constituents Subcommittee have financial and appearance conflicts of interest that are disqualifying under federal ethics law and regulations, and that the TPSAC is not “fairly balanced,” as required by the Federal Advisory Committee Act, referred to as FACA. In March 2011, the plaintiffs filed an amended complaint, which added an additional claim, based on a nonpublic meeting of members of the TPSAC, in violation of the FACA. The court granted the plaintiffs’ unopposed motion to file a second amended complaint adding a count addressing the FDA’s refusal to produce all documents generated by the TPSAC and its subcommittee in preparation of the menthol report. On August 1, 2012, the court denied the FDA’s motion to dismiss. The FDA filed its answer to the complaint on October 12, 2012. The parties participated in a status conference on April 22, 2013, with Lorillard and RJR Tobacco filing an amended complaint the same day. Briefing for summary judgment motions was completed on September 20, 2013. On July 21, 2014, the court granted the plaintiffs’ summary judgment motions finding that three members of the TPSAC Committee had impermissible conflicts of interest. As relief, the court ordered the FDA to reconstitute the committee in conformance with the law and enjoined the agency from using or relying on the TPSAC’s 2011 Menthol Report. The FDA has the right to appeal to the U.S. Court of Appeals for the District of Columbia.

For a detailed description of the FDA Tobacco Act, see “— Governmental Activity” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part I, Item 2.

Other Matters. In Richard Villarreal v. R. J. Reynolds Tobacco Co., a case filed June 6, 2012, the plaintiff filed a collective action complaint against R. J. Reynolds Tobacco Co., Pinstripe, Inc., and CareerBuilder, LLC, in the U.S. District Court, Northern District of Georgia. The complaint alleges unlawful discrimination with respect to the hiring of individuals to fill entry-level regional sales positions in violation of the Age Discrimination in Employment Act (29 U.S.C. §621, et seq.). Although the complaint is currently a single plaintiff case, the complaint seeks collective/class-action status. RJR Tobacco’s and Pinstripe’s motion for partial dismissal was granted on March 6, 2013, thereby eliminating the plaintiff’s disparate impact claim and limiting the relevant time period for both the plaintiff’s claims and potential class claims. RJR Tobacco and Pinstripe filed answers to the remaining disparate treatment claim on March 20, 2013. Defendant CareerBuilder was dismissed with prejudice on September 25, 2012. Discovery is currently proceeding. The plaintiff’s Fed.R.Civ.P. 54(b) motion to certify for immediate appeal the trial court’s prior dismissal of plaintiff’s disparate impact and time-barred claims was granted on May 21, 2014. Final judgment as to certain claims (those claims based on a disparate impact theory of relief and claims challenging hiring decisions made before November 19, 2009) was entered on May 21, 2014. The plaintiff filed a notice of appeal of the final judgment on June 18, 2014. The defendants filed a motion to dismiss the plaintiff’s appeal on July 3, 2014.

Smokeless Tobacco Litigation

As of June 30, 2014, American Snuff Co. was a defendant in six actions brought by individual plaintiffs in West Virginia state court seeking damages in connection with personal injuries allegedly sustained as a result of the usage of American Snuff Co.’s smokeless tobacco products. These actions are pending before the same West Virginia court as the 564 consolidated individual smoker cases against RJR Tobacco, B&W, as RJR Tobacco’s indemnitee, or both. Pursuant to the court’s December 3, 2001, order, the smokeless tobacco claims and defendants remain severed.

Pursuant to a second amended complaint filed in September 2006, American Snuff Co. is a defendant in Vassallo v. United States Tobacco Company, pending in the Eleventh Circuit Court in Miami-Dade County, Florida. The individual plaintiff alleges that he sustained personal injuries, including addiction and cancer, as a result of his use of smokeless tobacco products, allegedly including products manufactured by American Snuff Co. The plaintiff seeks unspecified compensatory and consequential damages in an amount greater than $15,000. There is no punitive damages demand in this case, though the plaintiff retains the right to seek leave of court to add such a demand later. Discovery is underway.

Tobacco Buyout Legislation

In 2004, legislation was passed eliminating the U.S. Government’s tobacco production controls and price support program. The buyout of tobacco quota holders provided for in the Fair and Equitable Tobacco Reform Act, referred to as FETRA, is funded by a direct quarterly assessment on every tobacco product manufacturer and importer, on a market-share basis measured on volume to which federal excise tax is applied. The aggregate cost of the buyout to the industry is approximately $9.9 billion, including approximately $9.6 billion payable to quota tobacco holders and growers through industry assessments over ten years, into 2014, and approximately $290 million for the liquidation of quota tobacco stock. RAI’s operating subsidiaries’ annual expense under FETRA for 2014 is estimated to be approximately $165 million.

RAI’s operating subsidiaries recorded the FETRA assessment on a quarterly basis as cost of goods sold. RAI’s operating subsidiaries estimate that their overall share of the buyout will approximate $2.5 billion prior to the deduction of permitted offsets under the MSA. The FETRA assessment expires in September 2014.

ERISA Litigation

In May 2002, in Tatum v. The R.J.R. Pension Investment Committee of the R. J. Reynolds Tobacco Company Capital Investment Plan, an employee of RJR Tobacco filed a class-action suit in the U.S. District Court for the Middle District of North Carolina, alleging that the defendants, RJR, RJR Tobacco, the RJR Employee Benefits Committee and the RJR Pension Investment Committee, violated the Employee Retirement Income Security Act of 1974, referred to as ERISA. The actions about which the plaintiff complains stem from a decision made in 1999 by RJR Nabisco Holdings Corp., subsequently renamed Nabisco Group Holdings Corp., referred to as NGH, to spin off RJR, thereby separating NGH’s tobacco business and food business. As part of the spin-off, the 401(k) plan for the previously related entities had to be divided into two separate plans for the now separate tobacco and food businesses. The plaintiff contends that the defendants breached their fiduciary duties to participants of the RJR 401(k) plan when the defendants removed the stock funds of the companies involved in the food business, NGH and Nabisco Holdings Corp., referred to as Nabisco, as investment options from the RJR 401(k) plan approximately six months after the spin-off. The plaintiff asserts that a November 1999 amendment (the “1999 Amendment”) that eliminated the NGH and Nabisco funds from the RJR 401(k) plan on January 31, 2000, contained sufficient discretion for the defendants to have retained the NGH and Nabisco funds after January 31, 2000, and that the failure to exercise such discretion was a breach of fiduciary duty. In his complaint, the plaintiff requests, among other things, that the court require the defendants to pay as damages to the RJR 401(k) plan an amount equal to the subsequent appreciation that was purportedly lost as a result of the liquidation of the NGH and Nabisco funds.

In July 2002, the defendants filed a motion to dismiss, which the court granted in December 2003. In December 2004, the U.S. Court of Appeals for the Fourth Circuit reversed the dismissal of the complaint, holding that the 1999 Amendment did contain sufficient discretion for the defendants to have retained the NGH and Nabisco funds as of February 1, 2000, and remanded the case for further proceedings. The court granted the plaintiff leave to file an amended complaint and denied all pending motions as moot. In April 2007, the defendants moved to dismiss the amended complaint. The court granted the motion in part and denied it in part, dismissing all claims against the RJR Employee Benefits Committee and the RJR Pension Investment Committee. The remaining defendants, RJR and RJR Tobacco, filed their answer and affirmative defenses in June 2007. The plaintiff filed a motion for class certification, which the court granted in September 2008. The district court ordered mediation, but no resolution of the case was reached. In September 2008, each of the plaintiffs and the defendants filed motions for summary judgment, and in January 2009, the defendants filed a motion to decertify the class. A second mediation occurred in June 2009, but again no resolution of the case was reached. The district court overruled the motions for summary judgment and the motion to decertify the class.

A non-jury trial was held in January and February 2010. During closing arguments, the plaintiff argued for the first time that certain facts arising at trial showed that the 1999 Amendment was not validly adopted, and then moved to amend his complaint to conform to this evidence at trial. On June 1, 2011, the court granted the plaintiff’s motion to amend his complaint and found that the 1999 Amendment was invalid.

The parties filed their findings of fact and conclusions of law on February 4, 2011. On February 25, 2013, the district court dismissed the case with prejudice. On March 8, 2013, the plaintiffs filed a notice of appeal. Oral argument occurred on March 18, 2014. A decision is pending.

Environmental Matters

RAI and its subsidiaries are subject to federal, state and local environmental laws and regulations concerning the discharge, storage, handling and disposal of hazardous or toxic substances. Such laws and regulations provide for significant fines, penalties and liabilities, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous or toxic substances. In addition, third parties may make claims against owners or operators of properties for personal injuries and property damage associated with releases of hazardous or toxic substances. In the past, RJR Tobacco has been named a potentially responsible party with third parties under the Comprehensive Environmental Response, Compensation and Liability Act with respect to several superfund sites. RAI and its subsidiaries are not aware of any current environmental matters that are expected to have a material adverse effect on the business, results of operations or financial position of RAI or its subsidiaries.

RAI and its operating subsidiaries believe that climate change is an environmental issue primarily driven by carbon dioxide emissions from the use of energy. RAI’s operating subsidiaries are working to reduce carbon dioxide emissions by minimizing the use of energy where cost effective, minimizing waste to landfills and increasing recycling. Climate change is not viewed by RAI’s operating subsidiaries as a significant direct economic risk to their businesses, but rather an indirect risk involving the potential for a longer-term general increase in the cost of doing business. Regulatory changes are difficult to predict, but the current regulatory risks to the business of RAI’s operating subsidiaries with respect to climate change are relatively low. Financial impacts will be driven more by the cost of natural gas and electricity. Efforts are made to anticipate the effect of increases in fuel costs directly impacting RAI’s operating subsidiaries by evaluating natural gas usage and market conditions. Occasionally forward contracts are purchased, limited to a two-year period, for natural gas. In addition, RAI’s operating subsidiaries are continually evaluating energy conservation measures and energy efficient equipment to mitigate impacts of increases in energy costs.

Regulations promulgated by the EPA and other governmental agencies under various statutes have resulted in, and likely will continue to result in, substantial expenditures for pollution control, waste treatment, facility modification and similar activities. RAI and its subsidiaries are engaged in a continuing program to comply with federal, state and local environmental laws and regulations, and dependent upon the probability of occurrence and reasonable estimation of cost, accrue or disclose any material liability. Although it is difficult to reasonably estimate the portion of capital expenditures or other costs attributable to compliance with environmental laws and regulations, RAI does not expect such expenditures or other costs to have a material adverse effect on the business, results of operations, cash flows or financial position of RAI or its subsidiaries.

Other Contingencies

In connection with the sale of the international tobacco business to JTI, pursuant to the 1999 Purchase Agreement, RJR and RJR Tobacco agreed to indemnify JTI against:

• any liabilities, costs and expenses arising out of the imposition or assessment of any tax with respect to the international tobacco business arising prior to the sale, other than as reflected on the closing balance sheet;

• any liabilities, costs and expenses that JTI or any of its affiliates, including the acquired entities, may incur after the sale with respect to any of RJR’s or RJR Tobacco’s employee benefit and welfare plans; and

• any liabilities, costs and expenses incurred by JTI or any of its affiliates arising out of certain activities of Northern Brands.

As described above in “— Litigation Affecting the Cigarette Industry — Other Litigation and Developments — JTI Claims for Indemnification,” RJR Tobacco has received claims for indemnification from JTI, and several of these have been resolved. Although RJR and RJR Tobacco recognize that, under certain circumstances, they may have other unresolved indemnification obligations to JTI under the 1999 Purchase Agreement, RJR and RJR Tobacco disagree what circumstances described in such claims give rise to any indemnification obligations by RJR and RJR Tobacco and the nature and extent of any such obligation. RJR and RJR Tobacco have conveyed their position to JTI, and the parties have agreed to resolve their differences at a later date.

RJR Tobacco, SFNTC and American Snuff Co. have entered into agreements to indemnify certain distributors and retailers from liability and related defense costs arising out of the sale or distribution of their products. Additionally, SFNTC has entered into an agreement to indemnify a supplier from liability and related defense costs arising out of the sale or use of SFNTC’s products. The cost has been, and is expected to be, insignificant. RJR Tobacco, SFNTC and American Snuff Co. believe that the indemnified claims are substantially similar in nature and extent to the claims that they are already exposed to by virtue of their having manufactured those products.

Except as otherwise noted above, RAI is not able to estimate the maximum potential amount of future payments, if any, related to these indemnification obligations.

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Jul. 07, 2014
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Trading Symbol	RAI
Entity Registrant Name	REYNOLDS AMERICAN INC
Entity Central Index Key	0001275283
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		531,283,513

XML

Shareholders' Equity

6 Months Ended

Jun. 30, 2014

Shareholders' Equity

Note 10 — Shareholders’ Equity

	Common Stock		Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance as of December 31, 2012	$	—	$	7,275		$	(1,707	)	$	(311	)	$	5,257
Net income		—		—			969			—			969
Retirement benefits, net of $10 million tax benefit		—		—			—			(15	)		(15	)
Unrealized gain on long-term investments, net of $2 million tax expense		—		—			—			3			3
Amortization of realized loss on hedging instruments, net of tax		—		—			—			1			1
Cumulative translation adjustment and other, net of $6 million tax expense		—		—			—			(12	)		(12	)
Dividends - $1.22 per share		—		—			(673	)		—			(673	)
Common stock repurchased		—		(475	)		—			—			(475	)
Equity incentive award plan and stock-based compensation		—		30			—			—			30
Excess tax benefit on stock-based compensation plans		—		11			—			—			11
Balance as of June 30, 2013	$	—	$	6,841		$	(1,411	)	$	(334	)	$	5,096

	Common Stock		Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance as of December 31, 2013	$	—	$	6,571		$	(1,348	)	$	(56	)	$	5,167
Net income		—		—			855			—			855
Unrealized gain on long-term investments, net of $1 million tax expense		—		—			—			2			2
Amortization of realized loss on hedging instruments, net of tax		—		—			—			1			1
Cumulative translation adjustment and other, net of $1 million tax benefit		—		—			—			(2	)		(2	)
Dividends - $1.34 per share		—		—			(719	)		—			(719	)
Common stock repurchased		—		(440	)		—			—			(440	)
Equity incentive award plan and stock-based compensation		—		21			—			—			21
Excess tax benefit on stock-based compensation plans		—		10			—			—			10
Balance as of June 30, 2014	$	—	$	6,162		$	(1,212	)	$	(55	)	$	4,895

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2013, were as follows:

	Retirement Benefits			Unrealized Gain (Loss) on Long-Term Investments			Realized Loss on Hedging Instruments			Cumulative Translation Adjustment and Other			Total
Balance as of December 31, 2012	$	(265	)	$	(21	)	$	(14	)	$	(11	)	$	(311	)
Other comprehensive income (loss) before reclassifications		(3	)		3			—			(12	)		(12	)
Amounts reclassified from accumulated other comprehensive income (loss)		(12	)		—			1			—			(11	)
Net current-period other comprehensive income (loss)		(15	)		3			1			(12	)		(23	)
Balance as of June 30, 2013	$	(280	)	$	(18	)	$	(13	)	$	(23	)	$	(334	)

The components of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2014, were as follows:

	Retirement Benefits			Unrealized Gain (Loss) on Long-Term Investments			Realized Loss on Hedging Instruments			Cumulative Translation Adjustment and Other			Total
Balance as of December 31, 2013	$	(17	)	$	(16	)	$	(13	)	$	(10	)	$	(56	)
Other comprehensive income (loss) before reclassifications		12			2			—			(2	)		12
Amounts reclassified from accumulated other comprehensive income (loss)		(12	)		—			1			—			(11	)
Net current-period other comprehensive income (loss)		—			2			1			(2	)		1
Balance as of June 30, 2014	$	(17	)	$	(14	)	$	(12	)	$	(12	)	$	(55	)

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidated statement of income (unaudited) for the three months ended June 30, were as follows:

Components	Amounts Reclassified						Affected Line Item
	2014			2013
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(5	)	$	(5	)	Cost of products sold
Amortization of prior service costs		(4	)		(5	)	Selling, general and administrative expenses
		(9	)		(10	)
Deferred taxes		3			4		Provision for income taxes
Net of tax	$	(6	)	$	(6	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	1		Interest and debt expense
Deferred taxes		—			—		Provision for income taxes
Net of tax	$	1		$	1
Total reclassifications	$	(5	)	$	(5	)	Net income

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidated statement of income (unaudited) for the six months ended June 30, were as follows:

Components	Amounts Reclassified						Affected Line Item
	2014			2013
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(10	)	$	(10	)	Cost of products sold
Amortization of prior service costs		(9	)		(9	)	Selling, general and administrative expenses
		(19	)		(19	)
Deferred taxes		7			7		Provision for income taxes
Net of tax	$	(12	)	$	(12	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	1		Interest and debt expense
Deferred taxes		—			—		Provision for income taxes
Net of tax	$	1		$	1
Total reclassifications	$	(11	)	$	(11	)	Net income

Share Repurchases and Other

On November 14, 2011, the board of directors of RAI authorized the repurchase, from time to time on or before mid-2014, of up to $2.5 billion of outstanding shares of RAI common stock in open-market or privately negotiated transactions. In connection with the share repurchase program, RAI and B&W entered into an agreement, pursuant to which B&W agreed to participate in the repurchase program on a basis approximately proportionate with B&W’s 42% ownership of RAI’s common stock. RAI, B&W and BAT also entered into Amendment No. 3 to the governance agreement, pursuant to which RAI has agreed that, so long as B&W’s ownership interest has not dropped below 25%, if RAI issues shares of its common stock or any other RAI equity security to certain designated persons, including its directors, officers or employees, then RAI will repurchase a number of shares of outstanding RAI common stock so that the number of outstanding shares of RAI common stock are not increased, and B&W’s ownership interest is not decreased, by such issuance after taking into account such repurchase.

During the first six months of 2014, RAI repurchased and cancelled 7,715,763 shares for $412 million, resulting in the conclusion of the above-described repurchase program with total repurchases of 55,353,807 shares for $2.5 billion. Due to RAI’s incorporation in North Carolina, which does not recognize treasury shares, the shares are cancelled at the time of repurchase.

Restricted stock units granted in March 2011 under the 2009 Omnibus Incentive Compensation Plan, referred to as the Omnibus Plan, vested in March 2014 and were settled with the issuance of 1,468,294 shares of RAI common stock. In addition, during the first three months of 2014, at a cost of $28 million, RAI purchased 554,042 shares that were forfeited and cancelled with respect to tax liabilities associated with restricted stock units vesting under the Omnibus Plan.

Effective February 10, 2014, and on May 8, 2014, RAI’s board of directors declared a quarterly cash dividend of $0.67 per common share, or $2.68 on an annualized basis, to shareholders of record as of March 10, 2014 and June 10, 2014, respectively.

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Condensed Consolidating Statements of Cash Flows (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Condensed Financial Statements, Captions [Line Items]
Cash flows from (used in) operating activities	$ 255	$ (204)
Cash flows from (used in) investing activities:
Capital expenditures	(123)	(50)
Proceeds from termination of joint venture	35	31
Other, net	(24)	5
Net cash flows from (used in) investing activities	(112)	(14)
Cash flows from (used in) financing activities:
Dividends paid on common stock	(699)	(650)
Repurchase of common stock	(440)	(475)
Principal borrowings under revolving credit facility	1,000
Principal borrowings under term-loan facility		500
Repayments under revolving credit facility	(200)
Excess tax benefit on stock-based compensation plans	10	11
Debt issuance costs and financing fees		(3)
Net cash flows used in financing activities	(329)	(617)
Effect of exchange rate changes on cash and cash equivalents	(1)	(3)
Net change in cash and cash equivalents	(187)	(838)
Cash and cash equivalents at beginning of period	1,500	2,502
Cash and cash equivalents at end of period	1,313	1,664
RAI
Condensed Financial Statements, Captions [Line Items]
Cash flows from (used in) operating activities	326	199
Cash flows from (used in) investing activities:
Contributions to intercompany investments	(32)
Other, net	143	31
Net cash flows from (used in) investing activities	111	31
Cash flows from (used in) financing activities:
Dividends paid on common stock	(699)	(650)
Repurchase of common stock	(440)	(475)
Principal borrowings under revolving credit facility	1,000
Principal borrowings under term-loan facility		500
Repayments under revolving credit facility	(200)
Excess tax benefit on stock-based compensation plans	10	11
Dividends paid on preferred stock	(21)	(21)
Debt issuance costs and financing fees		(3)
Other, net	(31)	(11)
Net cash flows used in financing activities	(381)	(649)
Net change in cash and cash equivalents	56	(419)
Cash and cash equivalents at beginning of period	444	755
Cash and cash equivalents at end of period	500	336
Guarantors
Condensed Financial Statements, Captions [Line Items]
Cash flows from (used in) operating activities	635	(356)
Cash flows from (used in) investing activities:
Capital expenditures	(41)	(33)
Other, net	41	18
Net cash flows from (used in) investing activities		(15)
Cash flows from (used in) financing activities:
Dividends paid on common stock	(637)
Other, net	(320)	(120)
Net cash flows used in financing activities	(957)	(120)
Net change in cash and cash equivalents	(322)	(491)
Cash and cash equivalents at beginning of period	696	1,420
Cash and cash equivalents at end of period	374	929
Non-Guarantors
Condensed Financial Statements, Captions [Line Items]
Cash flows from (used in) operating activities	(44)	(23)
Cash flows from (used in) investing activities:
Capital expenditures	(86)	(20)
Proceeds from termination of joint venture	35	31
Other, net	(33)
Net cash flows from (used in) investing activities	(84)	11
Cash flows from (used in) financing activities:
Receipt of equity	32
Other, net	176	87
Net cash flows used in financing activities	208	87
Effect of exchange rate changes on cash and cash equivalents	(1)	(3)
Net change in cash and cash equivalents	79	72
Cash and cash equivalents at beginning of period	360	327
Cash and cash equivalents at end of period	439	399
Eliminations
Condensed Financial Statements, Captions [Line Items]
Cash flows from (used in) operating activities	(662)	(24)
Cash flows from (used in) investing activities:
Capital expenditures	4	3
Contributions to intercompany investments	32
Other, net	(175)	(44)
Net cash flows from (used in) investing activities	(139)	(41)
Cash flows from (used in) financing activities:
Dividends paid on common stock	637
Dividends paid on preferred stock	21	21
Receipt of equity	(32)
Other, net	175	44
Net cash flows used in financing activities	$ 801	$ 65

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Net income	$ 492	$ 461	$ 855	$ 969
Other comprehensive income (loss), net of tax:
Retirement benefits, net of tax expense (benefit)	6	(10)		(15)
Unrealized gain on long-term investments, net of tax expense	1	1	2	3
Amortization of realized loss on hedging instruments, net of tax	1	1	1	1
Cumulative translation adjustment and other, net of tax expense (benefit)	(3)	3	(2)	(12)
Comprehensive income	$ 497	$ 456	$ 856	$ 946

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Restructuring

6 Months Ended

Jun. 30, 2014

Restructuring

Note 4 — Restructuring

In 2012, RAI announced that it and its subsidiaries, RJR Tobacco and RAI Services Company, had completed a business analysis designed to identify resources to reinvest in their businesses. As a result of this initiative, the total U.S. workforce of RAI and its subsidiaries will decline by a net of approximately 10% upon the completion of the restructuring by the end of 2015. Substantially all cash payments related to the restructuring will be complete by the end of 2015.

As of June 30, 2014, $99 million had been utilized to date. Accordingly, in the condensed consolidated balance sheet (unaudited) as of June 30, 2014, $30 million was included in other current liabilities and $20 million was included in other noncurrent liabilities.

The changes in the restructuring liability were as follows:

	Employee Severance and Benefits
Balance as of December 31, 2012	$	71
Utilized in 2013		(14	)
Balance as of December 31, 2013		57
Utilized in 2014		(7	)
Balance as of June 30, 2014	$	50

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Intangible Assets

6 Months Ended

Jun. 30, 2014

Intangible Assets

Note 3 — Intangible Assets

The changes in the carrying amounts of goodwill by segment were as follows:

	RJR Tobacco			American Snuff			Santa Fe		All Other		Consolidated
Goodwill	$	9,065		$	2,501		$	197	$	39	$	11,802
Accumulated impairment charges		(3,763	)		(28	)		—		—		(3,791	)
Net goodwill balance as of December 31, 2013		5,302			2,473			197		39		8,011
2014 Activity
Asset acquisition		—			—			—		7		7
Net goodwill balance as of June 30, 2014	$	5,302		$	2,473		$	197	$	46	$	8,018

On January 1, 2014, RAI completed its acquisition of certain assets and liabilities of a research and development company, for approximately $31 million in cash. The acquired assets will be used to provide additional research and development support for RAI’s operating companies. The estimated fair value of assets acquired, primarily real and personal property, and liabilities assumed was determined and recognized. The difference between the consideration paid and the acquisition-date value of the identifiable assets acquired and liabilities assumed was recognized as goodwill, as disclosed in the table above. The financial condition and results of operations do not meet the materiality criteria to be reportable and are therefore included in the operating segment All Other.

The carrying amounts and changes therein of trademarks and other intangible assets by segment were as follows:

	RJR Tobacco						American Snuff		Santa Fe		All Other		Consolidated
	Trademarks			Other			Trademarks		Trademarks		Other		Trademarks			Other
Finite-lived:
Balance as of December 31, 2013	$	18		$	20		$	8	$	—	$	—	$	26		$	20
Amortization		(3	)		(2	)		—		—		—		(3	)		(2	)
Balance as of June 30, 2014	$	15		$	18		$	8	$	—	$	—	$	23		$	18
Indefinite-lived:
Balance as of December 31, 2013	$	977		$	99		$	1,136	$	155	$	4	$	2,268		$	103
Balance as of June 30, 2014	$	977		$	99		$	1,136	$	155	$	4	$	2,268		$	103

Details of finite-lived intangible assets were as follows:

	June 30, 2014						December 31, 2013
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Contract manufacturing agreements	$	151	$	133	$	18	$	151	$	131	$	20
Trademarks		114		91		23		114		88		26
	$	265	$	224	$	41	$	265	$	219	$	46

The estimated remaining amortization associated with finite-lived intangible assets is expected to be expensed as follows:

Year	Amount
Remainder of 2014	$	6
2015		9
2016		8
2017		7
2018		6
Thereafter		5
	$	41

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Subsequent Event

6 Months Ended

Jun. 30, 2014

Subsequent Event

Note 15 – Subsequent Event

On July 15, 2014, RAI, a wholly owned subsidiary of RAI, and Lorillard Inc., referred to as Lorillard, entered into a merger agreement pursuant to which RAI agreed to acquire Lorillard in a cash and stock transaction valued at $27.4 billion (based on the closing price of RAI common stock on July 14, 2014), including the assumption of net debt. Upon the consummation of the merger, each share of Lorillard common stock will be converted into the right to receive (1) 0.2909 of a share of RAI common stock plus (2) $50.50 per share in cash.

Also on July 15, 2014, RAI entered into a purchase agreement with a subsidiary of Imperial Tobacco Group PLC, referred to as Imperial, pursuant to which Imperial agreed to purchase the KOOL, SALEM and WINSTON (and, under certain circumstances, DORAL) brands of RJR Tobacco, the MAVERICK and blu eCigs brands of Lorillard, and other assets and, agreed to assume certain liabilities for a total consideration of approximately $7.1 billion. As part of this transaction, Imperial will acquire certain other assets owned by Lorillard, including its manufacturing and research and development facilities, and approximately 2,900 employees, including a national sales force. The closing of the sale of these assets to Imperial is conditioned upon, among other things, RAI’s completion of the acquisition of Lorillard.

BAT and B&W, RAI’s largest shareholder, have agreed that B&W will vote its shares in favor of the issuance of additional RAI shares contemplated by the parties’ subscription agreement and the merger agreement, and that BAT will maintain its 42% beneficial ownership in RAI through a purchase of additional shares of RAI common stock for approximately $4.7 billion.

On July 15, 2014, in connection with the Lorillard transaction, RAI entered into a commitment letter, referred to as the Commitment Letter, with J.P. Morgan Securities LLC, JPMorgan Chase Bank, N.A., and Citigroup Global Markets Inc.. Under the Commitment Letter, subject to the terms and conditions therein, JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc. (or certain of their affiliates) have committed (subject to the satisfaction or waiver of the conditions stated therein) to provide a 364-day senior unsecured term loan bridge facility in an aggregate principal amount of up to $9 billion for the purpose of financing part of the cash portion of the Lorillard transaction, and fees and expenses in connection with the transactions contemplated by the Lorillard transaction.

The proposed transactions, referred to as the Proposed Transactions, are subject to customary closing conditions, including shareholder and regulatory approvals. The merger agreement contains certain other termination rights for each of RAI and Lorillard, including the right of each party to terminate the merger agreement if the merger has not been consummated by July 15, 2015, subject to an automatic six-month extension if, on July 15, 2015, the merger has not yet received antitrust approval or certain specified legal restraints are in place but all other closing conditions have been satisfied. The Proposed Transactions are scheduled to close substantially at the same time.

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Stock Plans

6 Months Ended

Jun. 30, 2014

Stock Plans

Note 11 — Stock Plans

In February 2014, the board of directors of RAI approved a grant to key employees of RAI and its subsidiaries, effective March 3, 2014, of 1,049,348 nonvested restricted stock units under the Omnibus Plan. The restricted stock units generally will vest on March 3, 2017. Upon settlement, each grantee will receive a number of shares of RAI’s common stock equal to the product of the number of vested units and a percentage up to 150% based on the average RAI annual incentive award plan score over the three-year period ending December 31, 2016.

As an equity-based grant, compensation expense relating to the 2014 grant under the Omnibus Plan will take into account the vesting period lapsed and will be calculated based on the per share closing price of RAI common stock on the date of grant, or $53.29. Dividends paid on shares of RAI common stock will accumulate on the restricted stock units and will be paid to the grantee on the vesting date. If RAI fails to pay its shareholders cumulative dividends of at least $8.04 per share for the three-year performance period ending December 31, 2016, then each award will be reduced by an amount equal to three times the percentage of the dividend underpayment, up to a maximum reduction of 50%.

In April 2014, the board of directors of RAI approved a grant to a key employee of RAI, effective May 1, 2014, of 149,192 nonvested restricted stock units under the Omnibus Plan. The restricted stock units generally will vest on May 1, 2015. Upon settlement, the grantee will receive a number of shares of RAI’s common stock equal to the product of the number of vested units and a percentage up to 150% based on the overall performance of RAI and its subsidiaries during the one-year performance period beginning May 1, 2014, and ending April 30, 2015, against RAI’s 2014 annual incentive award program metrics and other performance factors.

As an equity-based grant, compensation expense relating to this 2014 grant under the Omnibus Plan will take into account the vesting period lapsed and will be calculated based on the per share closing price of RAI common stock as of the end of each quarter, which was $60.35 as of June 30, 2014. Dividends paid on shares of RAI common stock will accumulate on the restricted stock units and will be paid to the grantee on the vesting date. If RAI fails to pay its shareholders cumulative dividends of at least $2.68 per share for the one-year performance period ending April 30, 2015, then the award will be reduced by an amount equal to three times the percentage of the dividend underpayment, up to a maximum reduction of 50%.

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Income Taxes

6 Months Ended

Jun. 30, 2014

Income Taxes

Note 7 — Income Taxes

The provision for income taxes from continuing operations was as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Provision for income taxes from continuing operations	$	283		$	271		$	476		$	592
Effective tax rate		36.5	%		37.0	%		36.4	%		37.9	%

The effective tax rate for the three and six months ended June 30, 2014, as compared with the same prior-year periods, was favorably impacted by a decrease in tax attributable to the reversal of tax reserves and interest related to a federal audit settlement and an increase in the domestic production activities deduction of the American Jobs Creation Act of 2004. The effective tax rate for each period differed from the federal statutory rate of 35% due to the impact of state taxes and certain nondeductible items.

The audit of the 2010 and 2011 tax years by the Internal Revenue Service was closed on February 27, 2014. A tax benefit of $25 million attributable to the reversal of tax reserves was recorded in discontinued operations.

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Commitments and Contingencies - Additional Information (Detail) (USD $)	1 Months Ended	3 Months Ended		6 Months Ended											0 Months Ended					6 Months Ended		1 Months Ended		6 Months Ended																		0 Months Ended																																																																																																																3 Months Ended				1 Months Ended																			0 Months Ended																																						6 Months Ended	0 Months Ended	1 Months Ended	6 Months Ended			6 Months Ended					1 Months Ended	6 Months Ended					6 Months Ended							0 Months Ended		0 Months Ended				0 Months Ended			0 Months Ended			1 Months Ended								0 Months Ended					0 Months Ended			0 Months Ended			0 Months Ended											1 Months Ended														1 Months Ended
	Nov. 30, 1998 LegalMatter State	Jun. 30, 2014 LegalMatter		Jun. 30, 2014 LegalMatter		Jun. 23, 2014	Jun. 30, 2013 LegalMatter	Jun. 30, 2014 UNITED STATES LegalMatter	Jun. 30, 2014 Canada LegalMatter	Jun. 30, 2014 Florida LegalMatter	Jun. 30, 2014 Maryland LegalMatter	Jun. 30, 2014 Missouri LegalMatter	Jun. 30, 2014 New York LegalMatter	Jun. 30, 2014 Louisiana LegalMatter	Nov. 19, 2013 Mississippi	Jun. 30, 2014 Mississippi	Jun. 19, 2012 Mississippi	May 15, 2012 Mississippi	Aug. 24, 2011 Mississippi	Jun. 30, 2014 17 States Plus District of Columbia and Puerto Rico	Jun. 30, 2014 Rjr Tobacco Indemnitee or Both LegalMatter	Apr. 30, 2013 West Virginia Ipic LegalMatter	Jun. 30, 2014 West Virginia Ipic Plaintiff LegalMatter	Jun. 30, 2014 Engle LegalMatter Plaintiff	Jun. 30, 2014 Engle Florida LegalMatter	Jun. 30, 2014 Broin II LegalMatter	Jun. 30, 2014 Tribal Court LegalMatter	Jun. 30, 2014 Liggett	Jun. 30, 2014 Nonsmoking And Health Cases LegalMatter	Jun. 30, 2014 Individual Smoking And Health Cases LegalMatter	Jun. 30, 2014 Individual Smoking And Health Cases Rjr Tobacco Indemnitee or Both LegalMatter	Jun. 30, 2014 Class Action LegalMatter	Jun. 30, 2014 Smoking And Health Engle Progeny And Healthcare Cost Recovery Cases LegalMatter	Jun. 30, 2014 Smoking And Health Engle Progeny And Healthcare Cost Recovery Cases Florida LegalMatter	Jun. 30, 2014 Smoking And Health Engle Progeny And Healthcare Cost Recovery Cases Missouri LegalMatter	Jun. 30, 2014 Smoking And Health Engle Progeny And Healthcare Cost Recovery Cases New York LegalMatter	Jun. 30, 2014 Smoking And Health Engle Progeny And Healthcare Cost Recovery Cases West Virginia LegalMatter	Jun. 30, 2014 Burkhart		May 16, 2014 Burkhart	May 16, 2014 Burkhart Other Defendant	Jun. 23, 2014 Bakst	Jun. 30, 2014 Bakst		Jun. 23, 2014 Bakst	Jun. 30, 2014 Environmental Tobacco Smoke Rjr Tobacco Indemnitee or Both LegalMatter	Jun. 30, 2014 Izzarelli	Jun. 30, 2014 Izzarelli RJR Tobacco 2012	Jun. 30, 2014 Grossman		Oct. 31, 2013 Grossman	Dec. 31, 2012 Grossman	Dec. 31, 2012 Grossman Other Defendant	Dec. 31, 2012 Grossman RJR Tobacco 2012	Jun. 30, 2014 Cohen		Dec. 31, 2012 Cohen	Dec. 31, 2012 Cohen Other Defendant	Dec. 31, 2012 Cohen RJR Tobacco 2012	Dec. 31, 2012 Putney	Dec. 31, 2012 Putney Other Defendant	Dec. 31, 2012 Putney RJR Tobacco 2012	Jun. 30, 2014 Buonomo		Dec. 31, 2012 Buonomo	Dec. 31, 2012 Buonomo RJR Tobacco 2012	Dec. 31, 2012 Frazier	Dec. 31, 2012 Webb	Dec. 31, 2012 Webb RJR Tobacco 2012	Dec. 31, 2012 Tullo	Dec. 31, 2012 Tullo Other Defendant	Dec. 31, 2012 Jewett	Dec. 31, 2012 Jewett Other Defendant	Dec. 31, 2012 Jewett RJR Tobacco 2012	Jun. 30, 2014 Soffer		Dec. 31, 2012 Soffer	Dec. 31, 2012 Soffer RJR Tobacco 2012	Jun. 30, 2014 Ciccone		Dec. 31, 2012 Ciccone	Oct. 17, 2011 Ciccone	Dec. 31, 2012 Ciccone RJR Tobacco 2012	Jun. 30, 2014 Hallgren		Mar. 31, 2013 Hallgren	Dec. 31, 2012 Hallgren	May 31, 2012 Hallgren	Dec. 31, 2012 Hallgren Other Defendant	Dec. 31, 2012 Hallgren RJR Tobacco 2012	Jun. 30, 2014 Marotta		Apr. 30, 2013 Marotta	Mar. 20, 2013 Marotta	Dec. 31, 2012 Marotta	Mar. 20, 2013 Marotta RJR Tobacco 2012	Jun. 30, 2014 Calloway		Dec. 31, 2012 Calloway	Sep. 30, 2012 Calloway	Dec. 31, 2012 Calloway Other Defendant	Dec. 31, 2012 Calloway RJR Tobacco 2012	Jun. 30, 2014 Hiott		Dec. 31, 2012 Hiott	Dec. 31, 2012 Hiott RJR Tobacco 2012	Jun. 30, 2014 Hancock		Dec. 31, 2012 Hancock	Dec. 31, 2012 Hancock Other Defendant	Dec. 31, 2012 Hancock RJR Tobacco 2012	Dec. 31, 2012 Baker	Jun. 30, 2014 James Smith		Sep. 30, 2013 James Smith	Dec. 31, 2012 James Smith	Dec. 31, 2012 James Smith RJR Tobacco 2012	Jun. 30, 2014 Ballard		Oct. 31, 2013 Ballard	Aug. 31, 2013 Ballard	Dec. 31, 2012 Ballard	Oct. 31, 2012 Ballard	Dec. 31, 2012 Ballard RJR Tobacco 2012	Jun. 30, 2014 Williams		Jan. 31, 2013 Williams	Dec. 31, 2012 Williams	Dec. 31, 2012 Williams RJR Tobacco 2012	Jun. 30, 2014 Evers		May 31, 2013 Evers	Feb. 11, 2013 Evers	Feb. 11, 2013 Evers Other Defendant	Feb. 11, 2013 Evers RJR Tobacco 2012	Jun. 30, 2014 Schoeff		Apr. 30, 2013 Schoeff	Feb. 13, 2013 Schoeff	Feb. 13, 2013 Schoeff RJR Tobacco 2012	Jun. 30, 2014 Searcy		Nov. 30, 2013 Searcy	Sep. 30, 2013 Searcy	Apr. 02, 2013 Searcy	Apr. 02, 2013 Searcy Other Defendant	Apr. 02, 2013 Searcy RJR Tobacco 2012	Jun. 30, 2014 Aycock		Oct. 31, 2013 Aycock	Apr. 30, 2013 Aycock	Apr. 18, 2013 Aycock	Apr. 18, 2013 Aycock RJR Tobacco 2012	May 31, 2013 David Cohen	May 02, 2013 David Cohen	May 02, 2013 David Cohen Other Defendant	May 02, 2013 David Cohen RJR Tobacco 2012	Nov. 30, 2013 Starr-Blundell	Jun. 30, 2014 Starr-Blundell		Dec. 31, 2013 Starr-Blundell	Jun. 04, 2013 Starr-Blundell	Jun. 04, 2013 Starr-Blundell Other Defendant	Jun. 04, 2013 Starr-Blundell RJR Tobacco 2012	Jun. 30, 2014 Skolnick		Mar. 31, 2014 Skolnick	Jul. 31, 2013 Skolnick	Jun. 14, 2013 Skolnick	Jun. 14, 2013 Skolnick Other Defendant	Jun. 14, 2013 Skolnick RJR Tobacco 2012	Jun. 30, 2014 Thibault		Sep. 30, 2013 Thibault	Jun. 19, 2013 Thibault	Jun. 19, 2013 Thibault RJR Tobacco 2012	Sep. 20, 2013 Gafney	Jun. 30, 2014 Gafney		Sep. 20, 2013 Gafney	Sep. 20, 2013 Gafney Other Defendant	Sep. 20, 2013 Gafney RJR Tobacco 2012	Jun. 30, 2014 Crawford		Sep. 30, 2013 Crawford	Sep. 30, 2013 Crawford RJR Tobacco 2012	Jun. 30, 2014 Harford		Jan. 27, 2014 Harford	Jan. 27, 2014 Harford RJR Tobacco 2012	Jun. 30, 2014 Cheeley		Apr. 30, 2014 Cheeley	Mar. 31, 2014 Cheeley	Jan. 31, 2014 Cheeley	Jan. 31, 2014 Cheeley RJR Tobacco 2012	Jun. 30, 2014 Goveia		Apr. 30, 2014 Goveia	Feb. 18, 2014 Goveia	Feb. 27, 2014 Banks	Jun. 30, 2014 Clayton		Mar. 17, 2014 Clayton	Mar. 17, 2014 Clayton RJR Tobacco 2012	Jun. 30, 2014 Bowden		Mar. 26, 2014 Bowden	Mar. 26, 2014 Bowden Other Defendant	Mar. 26, 2014 Bowden RJR Tobacco 2012	Jun. 30, 2014 Broin	Jun. 30, 2014 Light Case	Jun. 30, 2014 Light Case Philip Morris	Jun. 30, 2014 Parsons	Jun. 30, 2014 DOJ	Nov. 03, 2011 Npm Adjustment Claim For 2003	Sep. 11, 2013 Npm Adjustment Claim For 2003	Jun. 30, 2014 Npm Adjustment Claim For 2003 Case	Dec. 31, 2006 Npm Adjustment Claim For 2003 State	Jun. 30, 2014 Npm Adjustment Claim For 2003 Maximum Case	Jun. 30, 2014 Npm Adjustment Claim For 2009	Jun. 30, 2014 Npm Adjustment Claim For 2011 And 2012	Jun. 30, 2014 Settlement Agreement State	May 24, 2013 Settlement Agreement State	Apr. 12, 2013 Settlement Agreement State	May 24, 2013 Settlement Agreement 20 Jurisdictions Including Oklahoma	Jun. 30, 2014 Settlement Agreement 20 Jurisdictions Including Oklahoma	Jun. 30, 2014 Settlement Agreement Kentucky And Indiana	Jun. 26, 2014 Settlement Agreement Kentucky And Indiana State	Jun. 30, 2014 JTI Judgment	Jun. 30, 2014 Vassallo Minimum	Jun. 30, 2014 FETRA Buyout	Jun. 30, 2014 Robinson		Jul. 18, 2014 Robinson Subsequent Event	Jul. 17, 2014 Robinson Subsequent Event	Jun. 30, 2014 Hiott and Starr-Blundell	Jun. 30, 2014 Ward	Jun. 27, 2014 Jimmie Lee Brown	Dec. 31, 2012 Jimmie Lee Brown	Jun. 20, 2014 Townsend	Mar. 31, 2014 Townsend	Dec. 31, 2012 Townsend	Dec. 31, 2012 Townsend RJR Tobacco 2012	Jun. 20, 2014 Koballa	Dec. 31, 2012 Koballa	Dec. 31, 2012 Koballa RJR Tobacco 2012	Jun. 16, 2014 Kirkland	Dec. 31, 2012 Kirkland	Dec. 31, 2012 Kirkland RJR Tobacco 2012	Jun. 30, 2014 Mack	Dec. 31, 2012 Mack	Mar. 18, 2011 Mack	Dec. 31, 2012 Mack RJR Tobacco 2012	Mar. 18, 2011 Mack RJR Tobacco 2012	Dec. 31, 2012 Andy Allen	Dec. 31, 2012 Andy Allen Other Defendant	Dec. 31, 2012 Andy Allen RJR Tobacco 2012	Jun. 20, 2014 Sury	Dec. 31, 2012 Sury	Apr. 20, 2012 Sury	Dec. 31, 2012 Sury Other Defendant	Dec. 31, 2012 Sury RJR Tobacco 2012	Jun. 20, 2014 Emmon Smith	Dec. 31, 2012 Emmon Smith	Dec. 31, 2012 Emmon Smith RJR Tobacco 2012	Jun. 20, 2014 Duke	Dec. 31, 2012 Duke	Dec. 31, 2012 Duke RJR Tobacco 2012	Jun. 20, 2014 Walker	Jun. 30, 2013 Walker	Dec. 31, 2012 Walker	May 31, 2012 Walker	Dec. 31, 2012 Walker RJR Tobacco 2012	Jun. 30, 2014 Sikes		Jul. 31, 2013 Sikes	Jun. 03, 2013 Sikes	Dec. 31, 2012 Sikes	Dec. 31, 2012 Sikes RJR Tobacco 2012	Dec. 31, 2013 Schlenther	Nov. 30, 2013 Schlenther	Jun. 30, 2014 Schlenther		Oct. 31, 2013 Schlenther	Dec. 31, 2012 Schlenther	Dec. 31, 2012 Schlenther RJR Tobacco 2012	Jun. 30, 2014 Earl Graham		Oct. 31, 2013 Earl Graham	May 31, 2013 Earl Graham	May 23, 2013 Earl Graham	May 23, 2013 Earl Graham Other Defendant	May 23, 2013 Earl Graham RJR Tobacco 2012	Nov. 30, 2013 Odum	Jun. 30, 2014 Odum		Dec. 31, 2013 Odum	Jun. 07, 2013 Odum	Jun. 07, 2013 Odum RJR Tobacco 2012
Loss Contingencies [Line Items]
Amount accrued		$ 12,400,000		$ 12,400,000
Accrual																								2,400,000
Amount accrued for compensatory damages																																																																																																																																																																																																																																													780,000
Amount accrued for attorneys' fees and statutory interest																																																																																																																																																																																																																																													63,000	1,560,000
Accrued estimated cost for corrective communication				10,000,000																																																																																																																																																																																																																			10,000,000
Payment for litigation settlement				186,400,000																				72,400,000
Payment for compensatory damages																								56,100,000
Payment for attorney fees and interest				46,300,000																				16,300,000
Growers Trust Fund		5,200,000,000		5,200,000,000
Number of cases filed		8
Number of cases pending		170		170			159	154	16												99		564	4,865		2,572	1				97															2
Number of plaintiffs																								5,973
Number of cases pending in federal court		16		16																				1,744
Number of cases pending in state court		137		137						25	28	19	14	10										3,121
Punitive damages																								145,000,000,000				145,000,000,000												1,250,000					14,000,000		3,970,000										20,000,000			2,500,000					25,000,000			72,000,000		0											50,000					750,000													17,250,000						0				0							20,000																	12,360,000					30,000,000							10,000,000							0																							1,280,000										1,000,000									2,000,000	2,000,000					2,250,000				0				0					3,000,000,000																				23,600,000,000		23,600,000,000								80,000,000						250,000							17,000,000				0					20,000,000			0				0							2,000,000		2,500,000					2,500,000
Number of cases filed but not served																								17
Number of cases tried																								5	99								105	51	1		2
Payment for compensatory and punitive damages				140,100,000																																																																																																																																																						15,000
Compensatory damages - adjusted		120,681,200	[1]	120,681,200	[1]																			103,781,200														2,500,000	[1],[2]				4,503,000	[1]			8,080,000		15,350,000	[1],[2]		483,682			3,300,000	[1]	3,330,000			4,500,000			4,060,000	[1]	4,060,000										2,000,000	[1]			1,000,000	[1]				500,000	[1]	1,000,000					3,480,000	[1]					16,100,000	[1],[2]					730,000	[3]			700	[1]					600,000	[1],[2]				5,000,000	[1]						4,250,000	[1]				1,938,000	[1]					7,875,000	[1]				1,000,000	[1],[2]						4,277,000	[1]		4,280,000			617,000					50,000	[3]					767,000	[1]		766,500				1,750,000	[1],[2]					1,914,000	[1]				9,000,000	[1]			59,000	[1]			1,500,000	[1]					297,500	[1]				60,000	[1]			1,500,000	[1]	1,500,000																									16,900,000	[1]						600,000			5,500,000																																3,520,000	[1]							5,030,000	[1],[2]				550,000	[1]		550,000					100,000	[1]
Punitive Damages - Adjusted		23,698,465,000		23,698,465,000																				98,465,000														1,250,000					14,000,000						22,500,000								10,000,000			2,500,000					15,700,000																			750,000													17,250,000																20,000																							30,000,000					1,670,000																															1,275,000											1,000,000								2,000,000						2,250,000																																				23,600,000,000										40,800,000													8,100,000																			2,000,000								2,500,000
Engle Outstanding Judgments		23,819,146,200		23,819,146,200																				202,246,200
Compensatory damage																																								5,000,000					6,000,000		13,900,000					1,900,000					10,000,000			15,100,000					5,200,000			8,000,000		4,500,000		1,100,000					5,000,000				3,200,000						2,000,000						3,480,000	6,000,000					20,500,000						1,830,000				110,200							600,000						8,550,000						5,000,000					3,230,000						10,500,000						6,000,000							5,900,000			2,060,000							500,000							2,560,000						1,750,000					5,800,000					9,000,000				330,000					1,500,000	3,000,000					297,500				600,000				5,000,000					7,100,000,000																				16,900,000			16,900,000				1,200,000			10,800,000			1,000,000			100,000			2,900,000	1,000,000			6,000,000				1,000,000					10,000,000			30,705				275,000							4,100,000		5,000,000				5,030,000	5,000,000						2,750,000							200,000
Number of states involved in MSA	46
Previously settled cases	4
Cases scheduled for trial		5		5																				67					1	3		1
Number of mistrials declared																																	6
Verdicts returned for tobacco companies																																	54
Number of verdicts returned for tobacco companies by mistrial																																	14
Verdicts returned for plaintiff																																		47		1
Number of cases dismissed																																		3
Allocation of fault to plaintiff																																								50.00%					25.00%		42.00%					70.00%					33.30%			35.00%					22.50%			10.00%		45.00%		70.00%					60.00%				70.00%						50.00%							42.00%					20.50%						60.00%				90.00%							45.00%						45.00%						15.00%					31.00%						25.00%						40.00%							27.50%			40.00%							80.00%							40.00%						30.00%					34.00%					30.00%				82.00%						50.00%									90.00%				40.00%																												29.50%							49.00%			70.00%			90.00%			35.00%	49.00%			40.00%				60.00%					30.00%			75.00%				90.00%							49.00%							50.00%						70.00%							50.00%
RJR Tobacco Allocation of Fault																																								25.00%	25.00%				75.00%		58.00%	58.00%					5.00%	25.00%				33.30%	33.30%		35.00%	30.00%				77.50%			90.00%		55.00%		10.00%	20.00%				40.00%					30.00%						25.00%	25.00%						58.00%					52.50%	27.00%	40.00%			40.00%				5.00%	5.00%						55.00%							55.00%					85.00%					9.00%	60.00%					75.00%						30.00%	30.00%						72.50%			30.00%	30.00%		10.00%				10.00%	10.00%						30.00%	30.00%					70.00%					33.00%	33.00%				70.00%				18.00%						50.00%									10.00%				30.00%	30.00%																										70.50%				50.00%				51.00%			30.00%			10.00%				65.00%	51.00%		15.00%	45.00%				20.00%	20.00%			70.00%			25.00%					10.00%						51.00%							50.00%						10.00%	20.00%						50.00%
Share of damages																																								1,250,000																																																											37,600,000
Funeral Expenses																																										4,209																																																																																																																																																																																																																																															29,705
Total damages																																															11,950,000																														2,000,000																												730,000				705							620,000											4,250,000											7,880,000																																					3,030,000					1,900,000																															300,000,000																																													19,700,000
Judgment interest awarded																																															15,800,000
Judgment Interest Per Day Awarded																																															4,000
Amended Final Judgment																																															28,100,000																																																																										5,000,000																																																																																																																																																													5,500,000
Number of plaintiff																							30
Number of plaintiff claims dismissed																						600
Lawsuits pending																						564				2,572
Punitive Damages 2																								36,300,000,000
Punitive Damages 3																								17,600,000,000
Florida Bond Cap Total										200,000,000
Florida Bond Cap Per Case										5,000,000
Bond																																																			5,000,000	484,000					2,500,000			2,400,000					5,000,000			5,000,000				218,600					2,000,000					1,000,000						1,300,000												1,500,000					730,000										620,000					5,000,000							4,250,000					1,770,000											2,200,000							4,320,000											50,000						767,000,000,000							3,030,000											5,000,000								3,500,000						2,500,000							1,500,000							12,000,000,000																											700,000		15,000,000				300,000			260,000			1,900,000				3,750,000					500,000				5,000,000			7,800					27,775				5,000,000				5,000,000									556,000								264,000
Approximate payment for litigation settlement																																																																																																																																																																																																																																															3,100,000		32,700,000				349,000			464,000			4,200,000								1,700,000					29,800,000			7,700			46,100
Judgment Sought Against Each Defendant						15,000																																														15,000					15,000										15,000	15,000		15,000		15,000					15,000										15,000								75,000																	15,000																										15,000																								15,000							15,000											15,000															15,000						15,000													1,000,000																	15,000																									15,000																							15,000
Remitted punitive damages																																																																				25,000,000																																																																												1,670,000																																																																																																			20,000,000
Remitted compensatory damages																																																																				4,000,000																																																																												1,000,000
Replacement Case Bond																																																																																																																																																																																																																																																																															45,800
Amount of final judgment																																																																																																																											4,700,000																																																																																																																																																											6,100,000
Relinquishment Period for plaintiff's motion, and jurisdiction granted																																																																																																																																																																																																																																																																																										45 days
Final Judgment																																																																																																																																																														50,000																			1,900,000																																																																																																																						264,000
Annual installment of settlement																																																																																																																																																																																																																			100,000,000
Fees and expenses																																																																																																																																																																																																																			49,000,000
Fees And Expenses 1																																																																																																																																																																																																																			86,000,000
Fees And Expenses 2																																																																																																																																																																																																																			57,000,000
Lower range of damages																																																																																																																																																																																																																				50,000
Upper range of damages																																																																																																																																																																																																																				75,000
Deposit Into Court Registry Regarding Public Website																																																																																																																																																																																																																							3,125,000
Payment Sought Under State Settlement Agreement										12,400,000						3,900,000
Damages state settlement agreement 1																5,000,000
Damages State Settlement Agreement 2																	3,300,000	3,800,000	3,800,000
Interest Payment Sought Under State Settlement Agreement										17,000,000							3,300,000	2,700,000	4,300,000
Attorneys' fees awarded as percentage of total amounts awarded to the State															25.00%
Attorneys' fees awarded															3,700,000
Accumulated interest awarded															25.00%
MSA Disputed Payment																																																																																																																																																																																																																										647,000,000
Adjusted MSA Payment																																																																																																																																																																																																																										615,000,000
Released MSA Payment																																																																																																																																																																																																																										32,000,000
Number of states seeking declaratory orders for Qualifying Statuses																																																																																																																																																																																																																											37
Number of states in arbitration for diligent enforcement																																																																																																																																																																																																																											52
Courts deciding whether dispute is arbitrable																																																																																																																																																																																																																										47		48
Percentage of Allocable shares																																																																																																																																																																																																																										90.00%								46.00%	43.00%	49.87%
Percentage of Reduction in Ultimate Liability																																																																																																																																																																																																																										20.00%
Combined allocable shares percentage maximum																				42.00%																																																																																																																																																																																																				14.00%	14.68%	49.87%
Arbitration Panel ruling																																																																																																																																																																																																																									266,000,000	197,000,000
Reduction in recovery from claims due to modification of judgment reduction method																																																																																																																																																																																																																									(75,000,000)
Antitrust/CPTEF																																																																																																																																																																																																																													5,000,000
Percentage of amount to Fund States' Antitrust/Consumer Protection Tobacco																																																																																																																																																																																																																													47.00%
Disputed Notices																																																																																																																																																																																																																														880,000,000
Number of jurisdictions that have joined the settlement																																																																																																																																																																																																																																22	20				24
Number of non-settling states that motions pending to vacate and/or modify the Award																																																																																																																																																																																																																															11
Judgment Entered Against JTI in Brazil That JTI Believes RJR and RJR Tobacco Liable For																																																																																																																																																																																																																																						1,700,000
Total Cost of FETRA buyout																																																																																																																																																																																																																																								9,900,000,000
FETRA payable to Quota tobacco holders																																																																																																																																																																																																																																								9,600,000,000
Liquidation of Quota tobacco stock																																																																																																																																																																																																																																								290,000,000
Annual expense under FETRA for 2014																																																																																																																																																																																																																																								165,000,000
Share of Fetra buyout																																																																																																																																																																																																																																								$ 2,500,000,000
Assessment expiry date																																																																																																																																																																																																																																								Sep. 30, 2014

[1] Unless otherwise noted, compensatory damages in these cases are adjusted to reflect the jury's allocation of comparative fault. Punitive damages are not so adjusted. The amounts listed above do not include attorneys' fees or statutory interest that may apply to the judgments.

[2] The court did not apply comparative fault in the final judgment.

[3] Compensatory damages are adjusted to reflect the reduction required by the allocation of fault. Punitive damages are not adjusted and reflect the amount of the final judgment(s) signed by the trial court judge(s). The amounts listed above do not include attorneys' fees or statutory interest that apply to the judgments.

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Income Per Share

6 Months Ended

Jun. 30, 2014

Income Per Share

Note 5 — Income Per Share

The components of the calculation of income per share were as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Income from continuing operations	$	492	$	461	$	830	$	969
Income from discontinued operations		—		—		25		—
Net income	$	492	$	461	$	855	$	969
Basic weighted average shares, in thousands		533,311		546,320		535,037		548,837
Effect of dilutive potential shares:
Restricted stock units		1,454		1,682		1,787		1,889
Diluted weighted average shares, in thousands		534,765		548,002		536,824		550,726

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Inventories

6 Months Ended

Jun. 30, 2014

Inventories

Note 6 — Inventories

The major components of inventories were as follows:

	June 30, 2014		December 31, 2013
Leaf tobacco	$	921	$	1,049
Other raw materials		78		66
Work in process		67		70
Finished products		166		130
Other		31		18
Total		1,263		1,333
Less LIFO allowance		204		206
	$	1,059	$	1,127

RJR Tobacco performs its annual LIFO inventory valuation at December 31. Interim periods represent an estimate of the expected annual valuation.

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Borrowing Arrangements

6 Months Ended

Jun. 30, 2014

Borrowing Arrangements

Note 8 — Borrowing Arrangements

RAI Notes

As of June 30, 2014, there were no current maturities of long-term debt.

Credit Agreement

In October 2013, RAI entered into a credit agreement, referred to as the Credit Agreement, with a syndicate of lenders, providing for a four-year $1.35 billion senior unsecured revolving credit facility, which may be increased to $1.6 billion at the discretion of the lenders upon the request of RAI.

The Credit Agreement contains restrictive covenants that:

• limit the ability of RAI and its subsidiaries to (1) pay dividends and repurchase stock, (2) engage in transactions with affiliates, (3) create liens, and (4) engage in sale-leaseback transactions involving a Principal Property, as defined in the Credit Agreement; and

• limit the ability of RAI and its Material Subsidiaries, as such term is defined in the Credit Agreement, to sell or dispose of all or substantially all of their assets and engage in specified mergers or consolidations.

The Credit Agreement also contains a restrictive covenant that limits the amount of debt that may be incurred by non-guarantor subsidiaries, together with certain financial covenants. The restrictive covenants in the Credit Agreement are subject to a number of qualifications and exceptions. The financial covenant levels in the Credit Agreement are 3.00 to 1.00 for the consolidated leverage ratio and 4.00 to 1.00 for the consolidated interest coverage ratio. In addition, the maturity date of the Credit Agreement is October 8, 2017, which date may be extended, with the agreement of the requisite lenders, in two separate one-year increments. The Credit Agreement contains customary events of default, including upon a change in control, as defined therein, that could result in the acceleration of all amounts and cancellation of all commitments outstanding under the Credit Agreement.

RAI is able to use the revolving credit facility under the Credit Agreement for borrowings and issuances of letters of credit at its option, subject to a $300 million sublimit on the aggregate amount of letters of credit. Issuances of letters of credit reduce availability under such revolving credit facility.

Under the terms of the Credit Agreement, RAI is required to pay a facility fee of between 0.125% and 0.30% per annum, based generally on the ratings of RAI’s senior, unsecured, long-term indebtedness, on the lender commitments in respect of the revolving credit facility thereunder.

Borrowings under the Credit Agreement bear interest, at the option of RAI, at a rate equal to an applicable margin, again, based generally on the ratings of RAI’s senior, unsecured, long-term indebtedness, plus:

• the alternate base rate, which is the higher of (1) the federal funds effective rate from time to time plus 0.5%, (2) the prime rate and (3) the reserve adjusted eurodollar rate for a one month interest period plus 1%; or

• the eurodollar rate, which is the reserve adjusted rate at which eurodollar deposits for one, two, three or six months are offered in the interbank eurodollar market.

Overdue principal outstanding under the revolving credit facility under the Credit Agreement bears interest at a rate equal to the rate then in effect with respect to such borrowings, plus 2.0% per annum. Any amount besides principal that becomes overdue bears interest at a rate equal to 2.0% per annum in excess of the rate of interest applicable to base rate loans.

The obligations of RAI under the Credit Agreement are unsecured. Certain of RAI’s subsidiaries, including its Material Subsidiaries, have guaranteed, on an unsecured basis, RAI’s obligations under the Credit Agreement.

A summary of the borrowings and repayments under the revolving credit facility are shown below:

	Amount			Interest Rate
Balance as of December 31, 2013	$	—
April 2014 borrowings		750			1.46	%
Repayments of April 2014 borrowings		(200	)
June 2014 borrowings		250			1.45	%
Balance as of June 30, 2014	$	800

As of June 30, 2014, there were $5 million of letters of credit outstanding under the Credit Agreement.

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Commitments and Contingencies Related to Settlements (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
2012
Remaining Jurisdictions' Settlement:
Annual Payments	$ 8,004	[1]
Total	9,364
Settlement expenses	2,370
Settlement cash payments	2,414
2012 | Mississippi
First Four States' Settlements:
Annual Settlement Payment	136	[1]
2012 | Florida
First Four States' Settlements:
Annual Settlement Payment	440	[1]
2012 | Texas
First Four States' Settlements:
Annual Settlement Payment	580	[1]
2012 | Minnesota
First Four States' Settlements:
Annual Settlement Payment	204	[1]
2013
Remaining Jurisdictions' Settlement:
Annual Payments	8,004	[1]
Total	9,364
Settlement expenses	1,819
Settlement cash payments	2,582
2013 | Mississippi
First Four States' Settlements:
Annual Settlement Payment	136	[1]
2013 | Florida
First Four States' Settlements:
Annual Settlement Payment	440	[1]
2013 | Texas
First Four States' Settlements:
Annual Settlement Payment	580	[1]
2013 | Minnesota
First Four States' Settlements:
Annual Settlement Payment	204	[1]
2014
Remaining Jurisdictions' Settlement:
Annual Payments	8,004	[1]
Total	9,364
2014 | Minimum
Remaining Jurisdictions' Settlement:
Projected settlement expenses	1,800
Projected settlement cash payments	1,900
2014 | Mississippi
First Four States' Settlements:
Annual Settlement Payment	136	[1]
2014 | Florida
First Four States' Settlements:
Annual Settlement Payment	440	[1]
2014 | Texas
First Four States' Settlements:
Annual Settlement Payment	580	[1]
2014 | Minnesota
First Four States' Settlements:
Annual Settlement Payment	204	[1]
2015
Remaining Jurisdictions' Settlement:
Annual Payments	8,004	[1]
Total	9,364
2015 | Minimum
Remaining Jurisdictions' Settlement:
Projected settlement expenses	1,900
Projected settlement cash payments	1,900
2015 | Mississippi
First Four States' Settlements:
Annual Settlement Payment	136	[1]
2015 | Florida
First Four States' Settlements:
Annual Settlement Payment	440	[1]
2015 | Texas
First Four States' Settlements:
Annual Settlement Payment	580	[1]
2015 | Minnesota
First Four States' Settlements:
Annual Settlement Payment	204	[1]
2016
Remaining Jurisdictions' Settlement:
Annual Payments	8,004	[1]
Total	9,364
2016 | Minimum
Remaining Jurisdictions' Settlement:
Projected settlement expenses	1,800
Projected settlement cash payments	1,900
2016 | Mississippi
First Four States' Settlements:
Annual Settlement Payment	136	[1]
2016 | Florida
First Four States' Settlements:
Annual Settlement Payment	440	[1]
2016 | Texas
First Four States' Settlements:
Annual Settlement Payment	580	[1]
2016 | Minnesota
First Four States' Settlements:
Annual Settlement Payment	204	[1]
2017
Remaining Jurisdictions' Settlement:
Annual Payments	8,004	[1]
Total	9,364
2017 | Minimum
Remaining Jurisdictions' Settlement:
Projected settlement expenses	2,000
Projected settlement cash payments	1,800
2017 | Mississippi
First Four States' Settlements:
Annual Settlement Payment	136	[1]
2017 | Florida
First Four States' Settlements:
Annual Settlement Payment	440	[1]
2017 | Texas
First Four States' Settlements:
Annual Settlement Payment	580	[1]
2017 | Minnesota
First Four States' Settlements:
Annual Settlement Payment	204	[1]
Thereafter
Remaining Jurisdictions' Settlement:
Annual Payments	8,004	[1]
Total	9,364
Thereafter | Minimum
Remaining Jurisdictions' Settlement:
Projected settlement expenses	2,000
Projected settlement cash payments	2,000
Thereafter | Mississippi
First Four States' Settlements:
Annual Settlement Payment	136	[1]
Thereafter | Florida
First Four States' Settlements:
Annual Settlement Payment	440	[1]
Thereafter | Texas
First Four States' Settlements:
Annual Settlement Payment	580	[1]
Thereafter | Minnesota
First Four States' Settlements:
Annual Settlement Payment	$ 204	[1]

[1] Subject to adjustments for changes in sales volume, inflation and other factors. All payments are to be allocated among the companies on the basis of relative market share. For further information, see "- State Settlement Agreements-Enforcement and Validity; Adjustments" below.

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Shareholders Equity (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Stockholders Equity Note Disclosure [Line Items]
Beginning Balance			$ 5,167	$ 5,257
Net income	492	461	855	969
Retirement benefits, net of tax (benefit) expense	6	(10)		(15)
Unrealized gain on long-term investments, net of tax expense	1	1	2	3
Amortization of realized loss on hedging instruments, net of tax	1	1	1	1
Cumulative translation adjustment and other, net of tax expense (benefit)	(3)	3	(2)	(12)
Dividends			(719)	(673)
Common stock repurchased			(440)	(475)
Equity incentive award plan and stock-based compensation			21	30
Excess tax benefit on stock-based compensation plans			10	11
Ending Balance	4,895	5,096	4,895	5,096
Paid-in Capital
Stockholders Equity Note Disclosure [Line Items]
Beginning Balance			6,571	7,275
Common stock repurchased			(440)	(475)
Equity incentive award plan and stock-based compensation			21	30
Excess tax benefit on stock-based compensation plans			10	11
Ending Balance	6,162	6,841	6,162	6,841
Accumulated Deficit
Stockholders Equity Note Disclosure [Line Items]
Beginning Balance			(1,348)	(1,707)
Net income			855	969
Dividends			(719)	(673)
Ending Balance	(1,212)	(1,411)	(1,212)	(1,411)
Accumulated Other Comprehensive Income (Loss)
Stockholders Equity Note Disclosure [Line Items]
Beginning Balance			(56)	(311)
Retirement benefits, net of tax (benefit) expense				(15)
Unrealized gain on long-term investments, net of tax expense			2	3
Amortization of realized loss on hedging instruments, net of tax			1	1
Cumulative translation adjustment and other, net of tax expense (benefit)			(2)	(12)
Ending Balance	$ (55)	$ (334)	$ (55)	$ (334)

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Verdicts in Individual Engle Progeny Cases have been Tried and Remain Pending (Detail) (USD $)	Jun. 30, 2014		Jun. 30, 2014 Verdicts In Individual Cases Pending		Jun. 30, 2014 Hiott		Jun. 30, 2014 Starr-Blundell		Jun. 30, 2014 Cohen		Dec. 31, 2012 Cohen	Jun. 30, 2014 Cohen RJR Tobacco	Dec. 31, 2012 Putney	Jun. 30, 2014 Putney RJR Tobacco	Jun. 30, 2014 Buonomo		Dec. 31, 2012 Buonomo	Jun. 30, 2014 Buonomo RJR Tobacco	Jun. 30, 2014 Webb RJR Tobacco	Jun. 30, 2014 Soffer		Jun. 30, 2014 Soffer RJR Tobacco	Jun. 30, 2014 Ciccone		Jun. 30, 2014 Ciccone RJR Tobacco	Jun. 30, 2014 Hallgren		Mar. 31, 2013 Hallgren	Jun. 30, 2014 Hallgren RJR Tobacco	Jun. 30, 2014 Calloway		Jun. 30, 2014 Calloway RJR Tobacco	Jun. 30, 2014 Hancock		Jun. 30, 2014 Hancock RJR Tobacco	Jun. 30, 2014 Sikes		Jun. 30, 2014 Sikes RJR Tobacco	Jun. 30, 2014 James Smith		Jun. 30, 2014 James Smith RJR Tobacco	Jun. 30, 2014 Schlenther		Jun. 30, 2014 Schlenther RJR Tobacco	Jun. 30, 2014 Ballard		Jun. 30, 2014 Ballard RJR Tobacco	Jun. 30, 2014 Williams		Jun. 30, 2014 Williams RJR Tobacco	Jun. 30, 2014 Evers		Jun. 30, 2014 Evers RJR Tobacco	Jun. 30, 2014 Schoeff		Jun. 30, 2014 Schoeff RJR Tobacco	Jun. 30, 2014 Marotta		Jun. 30, 2014 Marotta RJR Tobacco	Jun. 30, 2014 Searcy		Jun. 30, 2014 Searcy RJR Tobacco	Jun. 30, 2014 Aycock		Apr. 30, 2013 Aycock	Jun. 30, 2014 Aycock RJR Tobacco	Jun. 30, 2014 Earl Graham		May 31, 2013 Earl Graham	Jun. 30, 2014 Earl Graham RJR Tobacco	Jun. 30, 2014 Odum		Jun. 30, 2014 Odum RJR Tobacco	Jun. 30, 2014 Skolnick		Jul. 31, 2013 Skolnick	Jun. 30, 2014 Skolnick RJR Tobacco	Jun. 30, 2014 Thibault		Jun. 30, 2014 Thibault RJR Tobacco	Jun. 30, 2014 Grossman		Dec. 31, 2012 Grossman	Jun. 30, 2014 Grossman RJR Tobacco	Jun. 30, 2014 Gafney		Jun. 30, 2014 Gafney RJR Tobacco	Jun. 30, 2014 Crawford		Jun. 30, 2014 Crawford RJR Tobacco	Jun. 30, 2014 Harford		Jun. 30, 2014 Harford RJR Tobacco	Jun. 30, 2014 Cheeley		Jun. 30, 2014 Cheeley RJR Tobacco	Jun. 30, 2014 Goveia		Jun. 30, 2014 Goveia RJR Tobacco	Jun. 30, 2014 Clayton		Jun. 30, 2014 Clayton RJR Tobacco	Jun. 30, 2014 Bowden		Mar. 26, 2014 Bowden	Jun. 30, 2014 Bowden RJR Tobacco	Jun. 30, 2014 Burkhart		May 16, 2014 Burkhart	Jun. 30, 2014 Burkhart RJR Tobacco	Jun. 30, 2014 Bakst		Jun. 23, 2014 Bakst	Jun. 30, 2014 Bakst RJR Tobacco	Jun. 30, 2014 Robinson		Jun. 30, 2014 Robinson RJR Tobacco
Loss Contingencies [Line Items]
RJR Tobacco Allocation of Fault					40.00%		10.00%					33.30%		30.00%				77.50%	90.00%			40.00%			30.00%				25.00%			27.00%			5.00%			51.00%			55.00%			50.00%			55.00%			85.00%			60.00%			75.00%			58.00%			30.00%				72.50%				20.00%			50.00%				30.00%			70.00%				75.00%			33.00%			70.00%			18.00%			50.00%			35.00%			10.00%				30.00%			25.00%	25.00%			75.00%	75.00%			70.50%
Compensatory Damages (as adjusted)	$ 120,681,200	[1]	$ 780,000	[2]	$ 730,000	[2]	$ 50,000	[2]	$ 3,300,000	[1]	$ 3,330,000		$ 4,500,000		$ 4,060,000	[1]	$ 4,060,000			$ 2,000,000	[1]		$ 1,000,000	[1]		$ 500,000	[1]	$ 1,000,000		$ 16,100,000	[1],[3]		$ 700	[1]		$ 3,520,000	[1]		$ 600,000	[1],[3]		$ 5,030,000	[1],[3]		$ 5,000,000	[1]		$ 4,250,000	[1]		$ 1,938,000	[1]		$ 7,875,000	[1]		$ 3,480,000	[1]		$ 1,000,000	[1],[3]		$ 4,277,000	[1]	$ 4,280,000		$ 550,000	[1]	$ 550,000		$ 100,000	[1]		$ 767,000	[1]	$ 766,500		$ 1,750,000	[1],[3]		$ 15,350,000	[1],[3]	$ 483,682		$ 1,914,000	[1]		$ 9,000,000	[1]		$ 59,000	[1]		$ 1,500,000	[1]		$ 297,500	[1]		$ 60,000	[1]		$ 1,500,000	[1]	$ 1,500,000		$ 2,500,000	[1],[3]			$ 4,503,000	[1]			$ 16,900,000	[1]
Punitive Damages	$ 23,698,465,000										$ 10,000,000		$ 2,500,000				$ 15,700,000									$ 750,000				$ 17,250,000						$ 2,000,000			$ 20,000			$ 2,500,000												$ 30,000,000						$ 1,670,000																		$ 1,275,000			$ 22,500,000							$ 1,000,000						$ 2,000,000			$ 2,250,000										$ 1,250,000				$ 14,000,000				$ 23,600,000,000

[1] Unless otherwise noted, compensatory damages in these cases are adjusted to reflect the jury's allocation of comparative fault. Punitive damages are not so adjusted. The amounts listed above do not include attorneys' fees or statutory interest that may apply to the judgments.

[2] Compensatory damages are adjusted to reflect the reduction required by the allocation of fault. Punitive damages are not adjusted and reflect the amount of the final judgment(s) signed by the trial court judge(s). The amounts listed above do not include attorneys' fees or statutory interest that apply to the judgments.

[3] The court did not apply comparative fault in the final judgment.

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Shareholders' Equity (Tables)

6 Months Ended

Jun. 30, 2014

Shareholders' Equity

	Common Stock		Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance as of December 31, 2012	$	—	$	7,275		$	(1,707	)	$	(311	)	$	5,257
Net income		—		—			969			—			969
Retirement benefits, net of $10 million tax benefit		—		—			—			(15	)		(15	)
Unrealized gain on long-term investments, net of $2 million tax expense		—		—			—			3			3
Amortization of realized loss on hedging instruments, net of tax		—		—			—			1			1
Cumulative translation adjustment and other, net of $6 million tax expense		—		—			—			(12	)		(12	)
Dividends - $1.22 per share		—		—			(673	)		—			(673	)
Common stock repurchased		—		(475	)		—			—			(475	)
Equity incentive award plan and stock-based compensation		—		30			—			—			30
Excess tax benefit on stock-based compensation plans		—		11			—			—			11
Balance as of June 30, 2013	$	—	$	6,841		$	(1,411	)	$	(334	)	$	5,096

	Common Stock		Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance as of December 31, 2013	$	—	$	6,571		$	(1,348	)	$	(56	)	$	5,167
Net income		—		—			855			—			855
Unrealized gain on long-term investments, net of $1 million tax expense		—		—			—			2			2
Amortization of realized loss on hedging instruments, net of tax		—		—			—			1			1
Cumulative translation adjustment and other, net of $1 million tax benefit		—		—			—			(2	)		(2	)
Dividends - $1.34 per share		—		—			(719	)		—			(719	)
Common stock repurchased		—		(440	)		—			—			(440	)
Equity incentive award plan and stock-based compensation		—		21			—			—			21
Excess tax benefit on stock-based compensation plans		—		10			—			—			10
Balance as of June 30, 2014	$	—	$	6,162		$	(1,212	)	$	(55	)	$	4,895

Components of Accumulated Other Comprehensive Ioss Net of Tax

The components of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2013, were as follows:

	Retirement Benefits			Unrealized Gain (Loss) on Long-Term Investments			Realized Loss on Hedging Instruments			Cumulative Translation Adjustment and Other			Total
Balance as of December 31, 2012	$	(265	)	$	(21	)	$	(14	)	$	(11	)	$	(311	)
Other comprehensive income (loss) before reclassifications		(3	)		3			—			(12	)		(12	)
Amounts reclassified from accumulated other comprehensive income (loss)		(12	)		—			1			—			(11	)
Net current-period other comprehensive income (loss)		(15	)		3			1			(12	)		(23	)
Balance as of June 30, 2013	$	(280	)	$	(18	)	$	(13	)	$	(23	)	$	(334	)

The components of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2014, were as follows:

	Retirement Benefits			Unrealized Gain (Loss) on Long-Term Investments			Realized Loss on Hedging Instruments			Cumulative Translation Adjustment and Other			Total
Balance as of December 31, 2013	$	(17	)	$	(16	)	$	(13	)	$	(10	)	$	(56	)
Other comprehensive income (loss) before reclassifications		12			2			—			(2	)		12
Amounts reclassified from accumulated other comprehensive income (loss)		(12	)		—			1			—			(11	)
Net current-period other comprehensive income (loss)		—			2			1			(2	)		1
Balance as of June 30, 2014	$	(17	)	$	(14	)	$	(12	)	$	(12	)	$	(55	)

Reclassification Out of Accumulated Other Comprehensive Income Net of Tax

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidated statement of income (unaudited) for the three months ended June 30, were as follows:

Components	Amounts Reclassified						Affected Line Item
	2014			2013
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(5	)	$	(5	)	Cost of products sold
Amortization of prior service costs		(4	)		(5	)	Selling, general and administrative expenses
		(9	)		(10	)
Deferred taxes		3			4		Provision for income taxes
Net of tax	$	(6	)	$	(6	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	1		Interest and debt expense
Deferred taxes		—			—		Provision for income taxes
Net of tax	$	1		$	1
Total reclassifications	$	(5	)	$	(5	)	Net income

Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the condensed consolidated statement of income (unaudited) for the six months ended June 30, were as follows:

Components	Amounts Reclassified						Affected Line Item
	2014			2013
Defined benefit pension and postretirement plans:
Amortization of prior service costs	$	(10	)	$	(10	)	Cost of products sold
Amortization of prior service costs		(9	)		(9	)	Selling, general and administrative expenses
		(19	)		(19	)
Deferred taxes		7			7		Provision for income taxes
Net of tax	$	(12	)	$	(12	)
Loss on hedging instruments:
Amortization of realized loss	$	1		$	1		Interest and debt expense
Deferred taxes		—			—		Provision for income taxes
Net of tax	$	1		$	1
Total reclassifications	$	(11	)	$	(11	)	Net income

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Finite Lived Intangible Assets Future Amortization Expense (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Expected Amortization Expense [Line Items]
Remainder of 2014	$ 6
2015	9
2016	8
2017	7
2018	6
Thereafter	5
Net	$ 41	$ 46

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Related Party Transactions

6 Months Ended

Jun. 30, 2014

Related Party Transactions

Note 13 — Related Party Transactions

RAI and RAI’s operating subsidiaries engage in transactions with affiliates of BAT, which owns approximately 42% of RAI’s outstanding common stock. A summary of balances and transactions with such BAT affiliates is as follows:

Balances:

	June 30, 2014		December 31, 2013
Accounts receivable, related party	$	66	$	56
Due to related party		1		—
Deferred revenue, related party		17		48

Significant transactions:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Net sales	$	91	$	92	$	177	$	173
Purchases		4		6		13		9
RAI common stock purchases from B&W		114		62		155		170
Capsule royalty income		3		1		6		4

RAI’s operating subsidiaries, primarily RJR Tobacco, sell contract-manufactured cigarettes, tobacco leaf and processed tobacco to BAT affiliates. In December 2012, RJR Tobacco entered into an amendment to its contract manufacturing agreement with a BAT affiliate, which amendment, among other things, requires either party to provide three years’ notice to the other party to terminate the agreement without cause, with any such notice to be given no earlier than January 1, 2016. Net sales to BAT affiliates, primarily cigarettes, represented approximately 4% of RAI’s total net sales during the three and six months ended June 30, 2014 and 2013.

RJR Tobacco recorded deferred sales revenue relating to leaf sold to BAT affiliates that had not been delivered as of the end of the respective quarter, given that RJR Tobacco has a legal right to bill the BAT affiliates. Leaf sales revenue to BAT affiliates is recognized when the product is shipped to the customer. RJR Tobacco recorded royalty income from the license of capsule technology to BAT affiliates.

RAI’s operating subsidiaries also purchase unprocessed leaf at market prices, and import cigarettes at prices not to exceed manufacturing costs plus 10%, from BAT affiliates.

In connection with RAI’s share repurchase program, RAI and B&W entered into an agreement on November 14, 2011, pursuant to which B&W agreed to participate in the repurchase program on a basis approximately proportionate with B&W’s 42% ownership of RAI common stock. Under this agreement, which concluded in the second quarter of 2014, RAI repurchased 2,887,715 shares of RAI common stock from B&W during the six months ended June 30, 2014, and 21,702,839 shares in total.

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Fair Value (Tables)

6 Months Ended

Jun. 30, 2014

Fair Value of Financial Assets and Liabilities

Financial assets carried at fair value as of June 30, 2014, were as follows:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash equivalents	$	1,226	$	—	$	—	$	1,226
Other assets and deferred charges:
Auction rate securities		—		—		79		79
Mortgage-backed security		—		—		12		12
Marketable equity security		4		—		—		4

Financial assets carried at fair value as of December 31, 2013, were as follows:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash equivalents	$	1,443	$	—	$	—	$	1,443
Other assets and deferred charges:
Auction rate securities		—		—		76		76
Mortgage-backed security		—		—		13		13
Marketable equity security		4		—		—		4

Financial Assets Classified as level 3 Investments

Financial assets classified as Level 3 investments were as follows:

	June 30, 2014							December 31, 2013
	Cost		Gross Unrealized Loss (1)			Estimated Fair  Value		Cost		Gross Unrealized Loss(1)			Estimated Fair  Value
Auction rate securities	$	99	$	(20	)	$	79	$	99	$	(23	)	$	76
Mortgage-backed security		19		(7	)		12		20		(7	)		13
	$	118	$	(27	)	$	91	$	119	$	(30	)	$	89

⁽¹⁾ Unrealized losses, net of tax, are reported in accumulated other comprehensive loss in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014, and consolidated balance sheet as of December 31, 2013.

Changes In Level 3 Investments

The changes in the Level 3 investments during the six months ended June 30, 2014, were as follows:

	Auction Rate Securities
	Cost		Gross Gain (Loss)			Estimated Fair  Value
Balance as of January 1, 2014	$	99	$	(23	)	$	76
Unrealized gain		—		3			3
Balance as of June 30, 2014	$	99	$	(20	)	$	79

	Mortgage-Backed Security
	Cost			Gross Gain (Loss)			Estimated Fair  Value
Balance as of January 1, 2014	$	20		$	(7	)	$	13
Redemptions		(1	)		—			(1	)
Balance as of June 30, 2014	$	19		$	(7	)	$	12

Amortization of Net Gain Loss upon Termination of Derivative Instruments Impacted Income Statement

The amortization of derivative instruments impacted the condensed consolidated statements of income (unaudited) as follows:

	For the Three  Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Interest and debt expense	$	(4	)	$	(7	)	$	(8	)	$	(13	)

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Carrying Amount and Changes of Trademarks and Other Indefinite Lived Assets (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Trademarks
Indefinite-lived Intangible Assets [Line Items]
Beginning Balance	$ 2,268	$ 2,268
Ending Balance	2,268	2,268
Other
Indefinite-lived Intangible Assets [Line Items]
Beginning Balance	103	103
Ending Balance	103	103
RJR Tobacco | Trademarks
Indefinite-lived Intangible Assets [Line Items]
Beginning Balance	977	977
Ending Balance	977	977
RJR Tobacco | Other
Indefinite-lived Intangible Assets [Line Items]
Beginning Balance	99	99
Ending Balance	99	99
American Snuff | Trademarks
Indefinite-lived Intangible Assets [Line Items]
Beginning Balance	1,136	1,136
Ending Balance	1,136	1,136
Santa Fe | Trademarks
Indefinite-lived Intangible Assets [Line Items]
Beginning Balance	155	155
Ending Balance	155	155
All Other | Other
Indefinite-lived Intangible Assets [Line Items]
Beginning Balance	4	4
Ending Balance	$ 4	$ 4

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Fair Value of Financial Assets (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Cash and cash equivalents:
Cash equivalents	$ 1,226	$ 1,443
Other assets and deferred charges:
Auction rate securities	79	76
Mortgage-backed security	12	13
Marketable equity security	4	4
Level 1
Cash and cash equivalents:
Cash equivalents	1,226	1,443
Other assets and deferred charges:
Marketable equity security	4	4
Level 3
Other assets and deferred charges:
Auction rate securities	79	76
Mortgage-backed security	$ 12	$ 13

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Tax expense (benefit), retirement benefits	$ 4	$ (7)		$ 10
Tax expense (benefit), unrealized gain (loss) on investments			1	2
Tax expense / benefit, cumulative translation adjustment	$ (1)	$ 1	$ (1)	$ 6

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Fair Value

6 Months Ended

Jun. 30, 2014

Fair Value

Note 2 — Fair Value

Financial assets carried at fair value as of June 30, 2014, were as follows:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash equivalents	$	1,226	$	—	$	—	$	1,226
Other assets and deferred charges:
Auction rate securities		—		—		79		79
Mortgage-backed security		—		—		12		12
Marketable equity security		4		—		—		4

Financial assets carried at fair value as of December 31, 2013, were as follows:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash equivalents	$	1,443	$	—	$	—	$	1,443
Other assets and deferred charges:
Auction rate securities		—		—		76		76
Mortgage-backed security		—		—		13		13
Marketable equity security		4		—		—		4

There were no transfers between the levels for the six months ended June 30, 2014, or in the year ended December 31, 2013.

RAI has investments in auction rate securities linked to corporate credit risk, investments in auction rate securities related to financial insurance companies, an investment in a mortgage-backed security and an investment in a marketable equity security. The unrealized gains and losses, net of tax, were included in accumulated other comprehensive loss in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014, and consolidated balance sheet as of December 31, 2013. The funds associated with the auction rate securities will not be accessible until a successful auction occurs or a buyer is found.

In determining if the difference between amortized cost and estimated fair value of the auction rate securities or the mortgage-backed security was deemed either temporarily or other-than-temporarily impaired, RAI evaluated each type of long-term investment using a set of criteria, including decline in value, duration of the decline, period until anticipated recovery, nature of investment, probability of recovery, financial condition and near-term prospects of the issuer, RAI’s intent and ability to retain the investment, attributes of the decline in value, status with rating agencies, status of principal and interest payments and any other issues related to the underlying securities. To assess credit losses, RAI uses historical default rates, debt ratings, credit default swap spreads and recovery rates. RAI has the intent and ability to hold these investments for a period of time sufficient to allow for the recovery in market value.

All of the fair values of the auction rate securities, classified as Level 3, are linked to the longer-term credit risk of a diverse range of corporations, including, but not limited to, manufacturing, financial and insurance sectors. The fair value was determined by utilizing an income approach model, which was based upon the weighted average present value of future cash payments, given the probability of certain events occurring within the market. RAI considers the market for its auction rate securities to be inactive. The income approach model utilized observable inputs, including LIBOR-based interest rate curves, corporate credit spreads and corporate ratings/market valuations. Additionally, unobservable factors incorporated into the model included default probability assumptions based on historical migration tables, various default recovery rates and how these factors changed as ratings on the underlying collateral migrated from one level to another. As related to the unobservable factors, substantial changes, relative to historical trends, of the levels of corporate defaults or default recovery rates would impact the fair value measurement of these securities. Maturity dates for the auction rate securities begin in 2017.

The fair value for the mortgage-backed security, classified as Level 3, utilized a market approach and was based upon the calculation of an overall weighted average valuation, derived from the actual, or modeled, market pricing of the specific collateral. The market approach utilized actual pricing inputs when observable and modeled pricing, based upon changes in observable market pricing, when unobservable. Substantial changes in the observable market pricing would directly impact the unobservable pricing and the fair value measurement of this security. RAI has deemed the market for its mortgage-backed security to be inactive. The maturity of the mortgage-backed security has been extended to March 2015, with the annual option to extend an additional year. Given the underlying collateral and RAI’s intent to continue to extend this security, it is classified as a noncurrent asset.

RAI determined the change in the fair value of the investment in a marketable equity security using quoted market prices as of June 30, 2014.

Financial assets classified as Level 3 investments were as follows:

	June 30, 2014							December 31, 2013
	Cost		Gross Unrealized Loss (1)			Estimated Fair  Value		Cost		Gross Unrealized Loss(1)			Estimated Fair  Value
Auction rate securities	$	99	$	(20	)	$	79	$	99	$	(23	)	$	76
Mortgage-backed security		19		(7	)		12		20		(7	)		13
	$	118	$	(27	)	$	91	$	119	$	(30	)	$	89

⁽¹⁾ Unrealized losses, net of tax, are reported in accumulated other comprehensive loss in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014, and consolidated balance sheet as of December 31, 2013.

The changes in the Level 3 investments during the six months ended June 30, 2014, were as follows:

	Auction Rate Securities
	Cost		Gross Gain (Loss)			Estimated Fair  Value
Balance as of January 1, 2014	$	99	$	(23	)	$	76
Unrealized gain		—		3			3
Balance as of June 30, 2014	$	99	$	(20	)	$	79

	Mortgage-Backed Security
	Cost			Gross Gain (Loss)			Estimated Fair  Value
Balance as of January 1, 2014	$	20		$	(7	)	$	13
Redemptions		(1	)		—			(1	)
Balance as of June 30, 2014	$	19		$	(7	)	$	12

Fair Value of Debt

The estimated fair value of RAI’s outstanding debt, in the aggregate, was $6.1 billion and $5.2 billion, with an effective average annual interest rate of approximately 4.1% and 4.5%, as of June 30, 2014, and December 31, 2013, respectively. The fair values are based on available market quotes, credit spreads and discounted cash flows, as appropriate.

Interest Rate Management

From time to time, RAI and RJR have used interest rate swaps to manage interest rate risk on a portion of their respective debt obligations. In 2009, RAI and RJR entered into offsetting floating to fixed interest rate swap agreements in the notional amount of $1.5 billion with maturity dates ranging from June 1, 2012 to June 15, 2017. The floating to fixed interest rate swap agreements were entered into with the same financial institution that held a notional amount of $1.5 billion of fixed to floating interest rate swaps.

In September 2011, RAI and RJR terminated the original and offsetting interest rate swap agreements, each with a notional amount of $1.5 billion, and received a total of $186 million cash in exchange for foregoing the future cash inflows associated with these swaps. These actions did not change the effective fixed rate of interest associated with the underlying debt.

In September 2013, RAI called for the redemption of, among other RAI notes, the $775 million outstanding principal amount of 7.625% notes due in 2016. Approximately $450 million of this outstanding principal amount was included in the interest rate swap agreements described above. As a result of this action and the maturity of debt in June 2012, RAI had $700 million of previously swapped outstanding fixed rate debt with an effective rate of interest of approximately 3.8%, as of June 30, 2014, and December 31, 2013.

In May 2012, RAI entered into forward starting interest rate contracts with an aggregate notional amount of $1 billion. RAI designated those derivatives as cash flow hedges of a future debt issuance, and they were determined to be highly effective at inception. The forward starting interest rate contracts mitigated RAI’s exposure to changes in the benchmark interest rate from the date of inception until the date of the forecasted transaction. On October 31, 2012, RAI completed the sale of $2.55 billion in aggregate principal amount of senior notes, consisting of $450 million of 1.05% senior notes due October 30, 2015, $1.1 billion of 3.25% senior notes due November 1, 2022, and $1 billion of 4.75% senior notes due November 1, 2042. The forward starting interest rate contracts were terminated, and $23 million in associated losses were settled with cash payments to the counterparties. The effective portion of the losses are recorded in accumulated other comprehensive loss in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2014, and consolidated balance sheet as of December 31, 2013, and will be amortized over the life of the related debt.

The amortization of derivative instruments impacted the condensed consolidated statements of income (unaudited) as follows:

	For the Three  Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Interest and debt expense	$	(4	)	$	(7	)	$	(8	)	$	(13	)

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Borrowing Arrangements - Additional Information (Detail) (USD $)		1 Months Ended
	Jun. 30, 2014	Oct. 31, 2013 Credit Agreement	Oct. 31, 2013 Credit Agreement Federal Funds	Oct. 31, 2013 Credit Agreement Eurodollar	Oct. 31, 2013 Credit Agreement Minimum	Oct. 31, 2013 Credit Agreement Maximum
Line of Credit Facility [Line Items]
Current maturities of long term debt	$ 0
Period of senior unsecured revolving credit facility		4 years
Credit facility under maximum borrowing capacity		1,600,000,000
Credit facility under current borrowing capacity		1,350,000,000
Ratio of debt to EBITDA		3.00 to 1.00
Ratio of EBITDA to interest expense		4.00 to 1.00
Credit facility maturity date		Oct. 08, 2017
Sublimit on the aggregate amount of letters of credit		300,000,000
Pay rate of commitment fee per annum					0.125%	0.30%
Debt instrument, basis spread on variable rate			0.50%	1.00%
Interest Rate		2.00%
Letters of credit outstanding amount	$ 5,000,000

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Subsequent Event - Additional Information (Detail) (USD $)	6 Months Ended	0 Months Ended
	Jun. 30, 2014	Jul. 15, 2014 Subsequent Event Employee	Jul. 15, 2014 Subsequent Event
Subsequent Event [Line Items]
Acquisition		$ 27,400,000,000
Acquisition: shares		0.2909
Acquisition: Cash			$ 50.50
Asset sale		7,100,000,000
Employees transferred		2,900
BAT ownership	42.00%	42.00%
BAT investment		4,700,000,000
Period of senior unsecured term loan		364 days
Term Loan amount			$ 9,000,000,000

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Reclassification Out of Accumulated Other Comprehensive Loss and Affected Line Items in Condensed Consolidated Statement of Income (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2014		Jun. 30, 2013		Jun. 30, 2014		Jun. 30, 2013
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Cost of products sold	$ (959)	[1]	$ (999)	[1]	$ (1,889)	[1]	$ (1,693)	[1]
Interest and debt expense	(62)		(65)		(121)		(127)
Selling, general and administrative expenses	(364)		(380)		(777)		(681)
Income (loss) from continuing operations before income taxes	775		732		1,306		1,561
Provision for income taxes	(283)		(271)		(476)		(592)
Net income	492		461		855		969
Reclassification out of Accumulated Other Comprehensive Income
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Net income	(5)		(5)		(11)		(11)
Reclassification out of Accumulated Other Comprehensive Income | Accumulated Defined Benefit Plans Adjustment
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Cost of products sold	(5)		(5)		(10)		(10)
Selling, general and administrative expenses	(4)		(5)		(9)		(9)
Income (loss) from continuing operations before income taxes	(9)		(10)		(19)		(19)
Provision for income taxes	3		4		7		7
Net income	(6)		(6)		(12)		(12)
Reclassification out of Accumulated Other Comprehensive Income | Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Interest and debt expense	1		1		1		1
Net income	$ 1		$ 1		$ 1		$ 1

[1] Excludes excise taxes of $927 million and $983 million for the three months ended June 30, 2014 and 2013, respectively; and $1,773 million and $1,838 million for the six months ended June 30, 2014 and 2013, respectively.

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Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2014

Changes in Carrying Amounts of Goodwill by Segment

The changes in the carrying amounts of goodwill by segment were as follows:

	RJR Tobacco			American Snuff			Santa Fe		All Other		Consolidated
Goodwill	$	9,065		$	2,501		$	197	$	39	$	11,802
Accumulated impairment charges		(3,763	)		(28	)		—		—		(3,791	)
Net goodwill balance as of December 31, 2013		5,302			2,473			197		39		8,011
2014 Activity
Asset acquisition		—			—			—		7		7
Net goodwill balance as of June 30, 2014	$	5,302		$	2,473		$	197	$	46	$	8,018

Carrying Amounts and Changes of Trademarks and Other Intangible Assets by Segment

The carrying amounts and changes therein of trademarks and other intangible assets by segment were as follows:

	RJR Tobacco						American Snuff		Santa Fe		All Other		Consolidated
	Trademarks			Other			Trademarks		Trademarks		Other		Trademarks			Other
Finite-lived:
Balance as of December 31, 2013	$	18		$	20		$	8	$	—	$	—	$	26		$	20
Amortization		(3	)		(2	)		—		—		—		(3	)		(2	)
Balance as of June 30, 2014	$	15		$	18		$	8	$	—	$	—	$	23		$	18
Indefinite-lived:
Balance as of December 31, 2013	$	977		$	99		$	1,136	$	155	$	4	$	2,268		$	103
Balance as of June 30, 2014	$	977		$	99		$	1,136	$	155	$	4	$	2,268		$	103

Details of Finite-Lived Intangible Assets

Details of finite-lived intangible assets were as follows:

	June 30, 2014						December 31, 2013
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Contract manufacturing agreements	$	151	$	133	$	18	$	151	$	131	$	20
Trademarks		114		91		23		114		88		26
	$	265	$	224	$	41	$	265	$	219	$	46

Finite Lived Intangible Assets Future Amortization Expense

The estimated remaining amortization associated with finite-lived intangible assets is expected to be expensed as follows:

Year	Amount
Remainder of 2014	$	6
2015		9
2016		8
2017		7
2018		6
Thereafter		5
	$	41

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Related Party Transactions - Additional Information (Detail)	3 Months Ended		6 Months Ended			31 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014 RAI	Jun. 30, 2014 RAI
Related Party Transaction [Line Items]
Percentage of RTI's outstanding common stock			42.00%
Revenue percentage from related parties	4.00%	4.00%	4.00%	4.00%
Percentage of maximum purchase price			10.00%
Repurchased stock from B&W					2,887,715	21,702,839

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Certain Component of Cost of Products Sold (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Basis Of Presentation And Significant Accounting Policies [Line Items]
State Settlement Agreements	$ 456	$ 521	$ 912	$ 789
Federal tobacco quota buyout	51	54	106	106
FDA user fees	$ 33	$ 31	$ 67	$ 63

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Segment Information

6 Months Ended

Jun. 30, 2014

Segment Information

Note 12 — Segment Information

RAI’s reportable operating segments are RJR Tobacco, American Snuff and Santa Fe. The RJR Tobacco segment consists principally of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. The Santa Fe segment consists of the domestic operations of SFNTC. Included in All Other are RJR Vapor, Niconovum AB, Niconovum USA, Inc., and various international operations, among other RAI subsidiaries. The segments were identified based on how RAI’s chief operating decision maker allocates resources and assesses performance. Certain of RAI’s operating subsidiaries have entered into intercompany agreements for products or services with other subsidiaries. As a result, certain activities of an operating subsidiary may be included in a different segment of RAI.

RAI’s largest reportable operating segment, RJR Tobacco, is the second largest tobacco company in the United States. RJR Tobacco’s brands include two of the best-selling cigarettes in the United States: CAMEL and PALL MALL. These brands, and its other brands, including WINSTON, KOOL, DORAL, SALEM, MISTY and CAPRI, are manufactured in a variety of styles and marketed in the United States. As part of its total tobacco strategy, RJR Tobacco also offers a smoke-free tobacco product, CAMEL Snus. RJR Tobacco manages contract manufacturing of cigarette and tobacco products through arrangements with BAT affiliates, and manages the export of tobacco products to certain U.S. territories, U.S. duty-free shops and U.S. overseas military bases. RJR Tobacco also manages the super-premium cigarette brands, DUNHILL and STATE EXPRESS 555, which are licensed from BAT.

American Snuff is the second largest smokeless tobacco products manufacturer in the United States. American Snuff’s primary brands include its largest selling moist snuff brands, GRIZZLY and KODIAK.

Santa Fe manufactures and markets cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand in the United States.

RJR Vapor is a manufacturer and distributor of digital vapor cigarettes under the VUSE brand name in the United States. Niconovum AB and Niconovum USA, Inc., are marketers of nicotine replacement therapy products in Sweden and the United States, respectively, under the ZONNIC brand name.

Intersegment revenues and items below the operating income line of the condensed consolidated statements of income (unaudited) are not presented by segment, since they are excluded from the measure of segment profitability reviewed by RAI’s chief operating decision maker. Additionally, information about total assets by segment is not reviewed by RAI’s chief operating decision maker and therefore is not disclosed.

Segment Data:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Net sales:
RJR Tobacco	$	1,736		$	1,792		$	3,299		$	3,350
American Snuff		195			194			379			361
Santa Fe		168			148			303			263
All Other		63			45			116			88
Consolidated net sales	$	2,162		$	2,179		$	4,097		$	4,062
Operating income (loss):
RJR Tobacco(1)	$	726		$	663		$	1,208		$	1,421
American Snuff		110			107			212			200
Santa Fe(2)		84			72			149			126
All Other		(49	)		(19	)		(88	)		(23	)
Corporate expense		(35	)		(25	)		(55	)		(39	)
Consolidated operating income	$	836		$	798		$	1,426		$	1,685
Reconciliation to income from continuing operations before income taxes:
Consolidated operating income(1)(2)	$	836		$	798		$	1,426		$	1,685
Interest and debt expense		62			65			121			127
Interest income		(1	)		(1	)		(2	)		(3	)
Other expense, net		—			2			1			—
Income from continuing operations before income taxes	$	775		$	732		$	1,306		$	1,561

⁽¹⁾  Includes NPM Adjustment credits of $124 million and $89 million for the three months ended June 30, 2014 and 2013, respectively; and $186 million and $348 million for the six months ended June 30, 2014 and 2013, respectively, see “— Cost of Products Sold” in note 1.

⁽²⁾  Includes NPM Adjustment credits of $1 million for each of the three months ended June 30, 2014 and 2013; and $2 million and $3 million for the six months ended June 30, 2014 and 2013, respectively see “— Cost of Products Sold” in note 1.