RAI 401K SAVINGS PLAN

Financial Statements and Supplemental Schedules

December 31, 2018 and 2017

(With Report of Independent Registered Public Accounting Firm Thereon)

RAI 401K SAVINGS PLAN

Table of Contents

Page(s)

Report of Independent Registered Public Accounting Firm		1–2

Financial Statements:

	Statements of Net Assets Available for Benefits as of December 31, 2018 and 2017	3

	Statements of Changes in Net Assets Available for Benefits for the Years ended December 31, 2018 and 2017	4

Notes to Financial Statements		5–13

Supplemental Schedules:

	Form 5500, Schedule H, Line 4a – Schedule of Delinquent Participant Contributions for the Year ended December 31, 2018	14

	Form 5500, Schedule H, Line 4i – Schedule of Assets (Held at End of Year) as of December 31, 2018	15–16

Note:

Supplemental schedules, other than those listed above, are omitted because of the absence of conditions under which they are required by Department of Labor Rules and Regulations for Reporting and Disclosures under the Employee Retirement Income Security Act of 1974.

Report of Independent Registered Public Accounting Firm

To the Plan Participants and Plan Administrator

RAI 401k Savings Plan:

Opinion on the Financial Statements

We have audited the accompanying statements of net assets available for benefits of the RAI 401k Savings Plan (the Plan) as of December 31, 2018 and 2017, the related statements of changes in net assets available for benefits for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 2018 and 2017, and the changes in net assets available for benefits for the years then ended, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Plan in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Accompanying Supplemental Information

The supplemental information in the accompanying schedules of Form 5500, Schedule H, Line 4a – Schedule of Delinquent Participant Contributions for the year ended December 31, 2018 and Form 5500, Schedule H, Line 4i – Schedule of Assets (Held at End of Year) as of December 31, 2018 has been subjected to audit procedures performed in conjunction with the audit of the Plan’s financial statements. The supplemental information is the responsibility of the Plan’s management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the financial statements as a whole.

/s/ KPMG LLP

We have served as the Plan’s auditor since 2002.

Greensboro, North Carolina

June 19, 2019

RAI 401K SAVINGS PLAN

Statements of Net Assets Available for Benefits

December 31, 2018 and 2017

	2018		2017
Assets:
Investments at fair value	$	1,755,824,436	$	2,079,092,307

Receivables:
Participant contributions		882		198
Employer contributions		1,814,439		1,773,235
Due from broker for securities sold		4,888,403		926,340
Interest and dividends		2,840,427		2,857,752
Notes receivable from participants		19,887,626		17,941,137
Total receivables		29,431,777		23,498,662
Total assets		1,785,256,213		2,102,590,969
Liabilities:
Accrued administrative expenses		129,050		156,782
Due to broker for securities purchased		14,009		5,955,865
Total liabilities		143,059		6,112,647
Net assets available for benefits	$	1,785,113,154	$	2,096,478,322

See accompanying notes to financial statements.

RAI 401K SAVINGS PLAN

Statements of Changes in Net Assets Available for Benefits

Years ended December 31, 2018 and 2017

	2018			2017
(Deletions)/Additions:
Investment (loss) income:
Net (depreciation) appreciation in fair value of investments	$	(302,054,968	)	$	241,974,725
Interest and dividends		62,347,576			39,905,445
Total investment (loss) income		(239,707,392	)		281,880,170
Interest income on notes receivable from participants		948,765			755,784
Contributions:
Employer contributions		39,129,643			39,954,353
Participant contributions		47,460,083			48,453,382
Participant rollover contributions		2,951,763			3,788,879
Total contributions		89,541,489			92,196,614
Total (deletions) additions		(149,217,138	)		374,832,568
Deductions:
Benefits paid to participants		167,454,609			193,090,946
Administrative expenses		498,494			543,495
Total deductions		167,953,103			193,634,441
Net (decrease) increase in net assets available for benefits prior to transfers		(317,170,241	)		181,198,127
Transfer in the Retirement Savings Plan for Employees of Louisville Corporate Services, Inc. and Affiliates		5,805,073			—
Net (decrease) increase in net assets available for benefits		(311,365,168	)		181,198,127
Net assets available for benefits at beginning of year		2,096,478,322			1,915,280,195
Net assets available for benefits at end of year	$	1,785,113,154		$	2,096,478,322

See accompanying notes to financial statements.

RAI 401K SAVINGS PLAN

Notes to Financial Statements

December 31, 2018 and 2017

(1)	Plan Description

	The following brief description of the RAI 401k Savings Plan, referred to as the Plan, is provided for general information purposes only. Participants should refer to the Plan document for more complete information.

	(a)	General

		The Plan is a voluntary defined contribution retirement plan for eligible employees of Reynolds American Inc., referred to as RAI or the Company, or one of the participating companies as defined in the Plan document. RAI is the Plan Sponsor. The RAI Employee Benefits Committee, referred to as Plan Administrator or the Committee, controls and manages the operation and administration of the Plan. Fidelity Investments Institutional Operations Company, Inc., referred to as Fidelity Operations serves as the recordkeeper for the Plan. Fidelity Management Trust Company, referred to as Fidelity, serves as the Plan’s trustee. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, referred to as ERISA.

		On January 16, 2017, RAI, British American Tobacco p.l.c., referred to as BAT, BATUS Holdings Inc., a wholly owned subsidiary of BAT, Flight Acquisition Corporation, a wholly owned subsidiary of BAT and referred to as Merger Sub, entered into an Agreement and Plan of Merger, pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub merged with and into RAI, referred to as the merger, with RAI surviving as a wholly owned subsidiary of BAT. The transaction was subject to shareholder approval from both RAI and BAT shareholders, as well as regulatory approvals and other customary closing conditions. The transaction closed on July 25, 2017. The Reynolds Stock Fund in the Plan was replaced by the BAT Stock Fund. The Reynolds Stock Fund received merger consideration of 0.5260 of a BAT American Depository Share, referred to as an ADS, and $29.44 in cash, without interest, for each share of RAI common stock held by the Reynolds Stock Fund. The BAT ADSs were invested in the BAT Stock Fund. The cash portion was invested in the BAT Merger Money Market Fund. The BAT Merger Money Market Fund was opened for 90 days after the Merger Close. During the 90 day period, participants were able to choose to reinvest in the new BAT Stock Fund (thus maintain participant’s cost basis) or invest in any other investment option in the Plan. Any cash proceeds remaining in the BAT Merger Money Market Fund in a participant’s account on the 90th day after the date of the Merger Close were invested in the Plan’s qualified default investment alternative.

		As a result of the merger, RAI maintained the Retirement Savings Plan for Employees of Louisville Corporate Services, Inc. and Affiliates, referred to as the LCSI Plan. Effective December 31, 2018, the LCSI Plan was merged into the Plan to form a single plan under Section 414(I) of the Internal Revenue Code of 1986, as amended. The Vanguard Fiduciary Trust Company, referred to as Vanguard, continued to be the recordkeeper and trustee for the LCSI Plan and participant account balances continued to be invested in the investment options of the LCSI Plan. Effective January 25, 2019, participant account balances were transferred from Vanguard to Fidelity Operations. The LCSI Plan assets were transferred from Vanguard to Fidelity in 2019.

	(b)	Contribution

		Participant Contributions

		Each participant may elect that his employer (i) contribute from 1% to 50% of his non-bonus compensation, as defined in the Plan document, to the Plan as pre-tax contributions and/or Roth contributions in lieu of an equal amount being paid to him as current cash compensation and/or (ii) contribute from 1% to 50% of his bonus compensation, as defined in the Plan document, to the Plan as pre-tax contributions and/or Roth contributions in lieu of an equal amount being paid to him as

RAI 401K SAVINGS PLAN

Notes to Financial Statements

December 31, 2018 and 2017


		current cash bonus compensation. Pre-tax and/or Roth contributions are made through payroll deductions. In the event a participant does not designate whether the contributions elected to be made are pre-tax contributions or Roth contributions, contributions are deemed to be pre-tax contributions. If a participant does not make such elections, he is deemed to have (i) authorized payroll deductions for pre-tax contributions equal to 6% of his non-bonus compensation, and (ii) authorized payroll deductions for pre-tax contributions equal to 10% of his bonus compensation. A participant may at any time elect a different contribution percentage (including 0%) with respect to his non-bonus compensation or his bonus compensation. The first 6% of such pre-tax and/or Roth contributions are referred to as match-eligible contributions and are eligible for employer matching contributions as set forth below.

		Unless a participant elects otherwise, the percentage of non-bonus compensation contributed to the Plan on his behalf as pre-tax contributions shall be automatically increased by one percentage point commencing on or about March 24th at least six (6) months following the date the first contribution is made on behalf of the participant and on each subsequent March 24^th; provided that such percentage shall not be increased above a specified level of the participant’s non-bonus compensation as designated by the Committee from time to time in its sole discretion.

		A participant may make contributions to the Plan on an after-tax basis, either in lieu of or in combination with pre-tax contributions and/or Roth contributions by authorizing (i) after-tax contributions of 1% to 50% of his non-bonus compensation and/or (ii) after-tax contributions of 1% to 50% of his bonus compensation; provided that the combined percentage of compensation for pre-tax, Roth and after-tax contributions (A) is a minimum of 1% and a maximum of 50% and (B) shall in no event exceed the amount of a participant’s after-tax compensation.

		Employer Contributions

		With respect to RAI Employees and certain participating companies, as defined in the Plan document, the appropriate participating company makes matching contributions of 50% of a participant’s match‑eligible contributions with respect to participants who are accruing a benefit under a defined benefit plan sponsored by RAI, and 100% of a participant’s match‑eligible contributions with respect to participants who are not accruing a benefit under a defined benefit plan sponsored by RAI. In addition, the appropriate participating company makes retirement enhancement contributions to accounts of eligible RAI Employees equal to 3% to 9% of such participants’ eligible compensation, depending on the eligible participant’s hire date, age and years of service as of January 1, 2006. The retirement enhancement contribution made to the account of former employees of Lorillard Tobacco Company who became an RAI Employee on June 13, 2015 is equal to 3% of such participant’s eligible compensation.

		With respect to ASC Employees, as defined in the Plan document, ASC makes matching contributions of 100% of a participant’s match‑eligible contributions. In addition, ASC makes retirement enhancement contributions to accounts of eligible ASC Employees equal to 3% or 6% of each such participant’s eligible compensation, depending on the eligible participant’s hire or transfer date.

		With respect to Santa Fe Employees, as defined in the Plan document, Santa Fe makes matching contributions of 100% of a participant’s match‑eligible contributions. In addition, Santa Fe makes retirement enhancement contributions to accounts of eligible Santa Fe Employees equal to 3% of each such participant’s eligible compensation.

		Participating companies may make qualified nonelective contributions to the Plan.

RAI 401K SAVINGS PLAN

Notes to Financial Statements

December 31, 2018 and 2017

	(c)	Participant Accounts

		Each participant’s account is credited with the participant’s contributions and allocations of the appropriate participating company’s contributions and Plan earnings, and charged with the participant’s withdrawals, Plan losses and an allocation of administrative expenses. Allocations are based on participant contributions, account balances, or compensation, as defined in the Plan document. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.

	(d)	Vesting

		Participants are immediately vested in their contributions and earnings thereon. Vesting in employer contributions and earnings thereon made to a participant’s account occurs upon the earlier of the completion of 24 months of service with the Company, and its participating subsidiaries, affiliated companies, or upon the occurrence of certain events as defined in the Plan document.

	(e)	Investment Options

		Plan investments are participant directed. Upon enrollment in the Plan, a participant may direct contributions in 1% increments in a number of investment fund options, or in a self‑directed brokerage account managed by Fidelity. Participants may change or transfer their investment options at any time via telephone or a secure internet website.

	(f)	Notes Receivable from Participants

		Participants may borrow from their account a minimum of $1,000 up to a maximum of the lesser of 50% of their vested account balance, reduced by the highest outstanding loan balance during the preceding 12 months, or $50,000, and limited by certain restrictions in the Plan document. Generally, loan terms shall not be for more than five years, except that certain loans transferred shall continue in effect until paid off or defaulted under the terms of the loan instruments. The loans are secured by the balance in the participant’s account and bear interest at a rate commensurate with prevailing rates as determined by the Plan Administrator. Loans are repaid through payroll deductions. Participants may continue to make loan repayments via electronic funds transfer in order to prevent a default following termination of employment.

	(g)	Payment of Benefits

		Upon termination of service, a participant is entitled to receive a lump sum amount equal to the value of the participant’s vested interest in their account, or, if elected by the participant, monthly installments calculated in accordance with rules set forth in the Plan document. Partial lump sum distributions are also available after termination of service.

	(h)	Expenses

		The expenses of administering the Plan are paid by the Plan, unless paid directly by the Company at its election. Expenses relating to the purchase or sale of investments are included in the cost or deducted from the proceeds, respectively. Direct charges and expenses, including investment manager fees attributable to specific investment funds, may be charged against that investment fund. Administrative expenses such as trustee, auditor, general Plan recordkeeping and Internal Revenue Service user fees may be paid directly from the Plan and are allocated to participant accounts.

RAI 401K SAVINGS PLAN

Notes to Financial Statements

December 31, 2018 and 2017


	(i)	Forfeitures

		Forfeitures are used to reduce future employer contributions. Certain forfeitures may be restored if a participant is reemployed before accruing five consecutive break‑in‑service years, as defined in the Plan document. For the years ended December 31, 2018 and 2017, employer contributions were reduced by $620,000 and $720,000, respectively, by forfeited nonvested accounts. As of December 31, 2018 and 2017, forfeited nonvested accounts totaled $94,584 and $81,768, respectively.

(2)	Summary of Significant Accounting Policies

	(a)	Basis of Accounting

		The accompanying financial statements of the Plan have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

	(b)	Investment Valuation and Income Recognition

		Investments are valued at fair value. See note 3 for discussion of fair value measurement. Purchases and sales of securities are recorded on a trade‑date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex‑dividend date.

	(c)	Valuation of Notes Receivable from Participants

		Notes receivable from participants are valued at amortized cost plus accrued interest.

	(d)	Use of Estimates

		The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The Plan utilizes various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility. The funds held by the Plan invest in securities with contractual cash flows, such as asset backed securities, collateralized mortgage obligations and commercial mortgage backed securities, including securities backed by subprime mortgage loans. The value, liquidity and related income of these securities are sensitive to changes in economic conditions, including real estate value, delinquencies or defaults, or both, and may be adversely affected by shifts in the market’s perceptions of the issuers and changes in interest rates. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the financial statements.

	(e)	Payment of Benefits

		Benefits are recorded when paid.

(3)	Fair Value Measurement

	The fair value of assets and liabilities is determined by 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.

RAI 401K SAVINGS PLAN

Notes to Financial Statements

December 31, 2018 and 2017


	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 three levels of the fair value hierarchy are described as follows:

	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.

	The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

	The following tables set forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of December 31, 2018 and 2017:

	Assets at fair value as of December 31, 2018
	Total		Level 1		Level 2		Level 3
Common/collective trust funds	$	451,243,660	$	—	$	451,243,660	$	—
Money market funds		50,505		50,505		—		—
Mutual funds		710,446,961		710,446,961		—		—
Participant self-directed brokerage account		81,400,185		81,400,185		—		—
BAT Stock Fund:
BAT American Depository Shares		133,101,733		133,101,733		—		—
Fidelity money market fund		1,252,905		1,252,905		—		—
Total BAT Stock Fund		134,354,638		134,354,638		—		—

Stable value collective trust fund		378,328,487		—		378,328,487		—
Total investments at fair value	$	1,755,824,436	$	926,252,289	$	829,572,147	$	—

RAI 401K SAVINGS PLAN

Notes to Financial Statements

December 31, 2018 and 2017

	Assets at fair value as of December 31, 2017
	Total		Level 1		Level 2		Level 3
Common/collective trust funds	$	499,562,946	$	—	$	499,562,946	$	—
Money market funds		56,864		56,864		—		—
Mutual funds		794,088,698		794,088,698		—		—
Participant self-directed brokerage account		81,159,375		81,159,375		—		—
BAT Stock Fund:
BAT American Depository Shares		329,327,028		329,327,028		—		—
Fidelity money market fund		9,813,938		9,813,938		—		—
Total BAT Stock Fund		339,140,966		339,140,966		—		—

Stable value collective trust fund		365,083,458		—		365,083,458		—
Total investments at fair value	$	2,079,092,307	$	1,214,445,903	$	864,646,404	$	—

	Following is a description of the valuation methodologies used for assets measured at fair value:

	Common/collective trust funds – These funds are valued using a net asset value, referred to as NAV, provided by the administrator of the fund. The NAV is the basis for current transactions at fair value. The NAV is based on the value of the underlying assets owned by the fund, less its liabilities, and then divided by the number of shares outstanding. The Plan has the ability to redeem its investments in the funds at the NAV at the valuation date. There are no significant restrictions, redemption terms, or holding periods which would limit the ability of the Plan or the participants to transact at the NAV. Participant transactions may occur daily. If the Plan initiates a large divestment, the issuer reserves the right to require 3 days’ notice.

	Money market funds and mutual funds – Valued at the closing price reported on the active market on which the individual securities are traded.

	Participant self-directed brokerage account – This account consists primarily of mutual funds and common stocks that are valued at the closing price reported on the active market on which the individual securities are traded.

	BAT Stock Fund – The fair value of the BAT Stock Fund is based on the combined year end closing price of British American Tobacco p.l.c. American Depository Shares and monies held in a Fidelity money market fund used to meet daily liquidity needs. Both securities are valued based on the quoted market price of shares trading in active markets held by the Plan at year end. The BAT Stock Fund is tracked on a unitized basis, which allows for daily settling of trades by participants.

	Stable value collective trust fund – This option is composed of a stable value collective trust fund which is valued at the net asset value of units of the collective trust. The net asset value, referred to as NAV, is the basis for current transactions at fair value. The NAV is based on the value of the underlying assets owned by the fund, less its liabilities, and then divided by the number of shares outstanding. The NAV of the fund is calculated daily, and net investment income and realized and unrealized gains on investments are not distributed but rather reinvested and reflected in the net asset value of the fund. There are no significant restrictions, redemption terms, or holding periods which would limit the ability of the Plan or the participants to transact at the NAV. Participant transactions may occur daily. If the plan initiates a full redemption, the

RAI 401K SAVINGS PLAN

Notes to Financial Statements

December 31, 2018 and 2017


	issuer reserves the right to require 12 months’ notification in order to ensure that security liquidations will be carried out in an orderly manner.

	For the years ended December 31, 2018 and 2017, there were no transfers of assets between levels within the fair value hierarchy.

(4)	Related Party and Party in Interest Transactions

	Certain investments, within the Fidelity Brokeragelink and Fidelity Money Market Fund, are managed by Fidelity and, therefore, those transactions qualified as party in interest transactions. Administrative fees paid to Fidelity for the years ended December 31, 2018 and 2017 were $206,518 and $322,525, respectively.

	The participant account balances of the former LCSI Plan were managed by Vanguard. Vanguard was the trustee and recordkeeper for the LCSI Plan and, therefore, those transactions qualified as party in interest transactions.

	The Reynolds Stock Fund was provided as an investment option for participants in the Plan until the merger July 25, 2017. As of the merger close, the Reynolds Stock Fund was replaced with the BAT Stock Fund as an investment option for participants in the Plan. As RAI is the Plan Sponsor and a wholly owned subsidiary of BAT, transactions with the Reynolds Stock Fund and BAT Stock Fund qualify as party in interest transactions. BAT Stock Fund dividends for the year ended December 31, 2018 were $11,886,139. Reynolds Stock Fund and BAT Stock Fund dividends for the year ended December 31, 2017 were $8,554,927 and $6,813,913, respectively. The BAT Stock Fund held 4,177,531 shares of BAT ADSs at $31.86 per share as of December 31, 2018 and 4,915,970 shares of BAT ADSs at $66.99 per share as of December 31, 2017.

(5)	Nonexempt Party-In-Interest Transactions

	For the year ended December 31, 2018, the Company identified late remittances of participant contributions in the aggregate amount of $842.82, which included participant contributions and participant loan repayments. The late remittances were remitted to the Plan in February 2019. The lost earnings of $39.18 pertaining to the contributions were deposited into the trust in June 2019.

	For the year ended December 31, 2017, the Company identified late remittances of participant contributions in the aggregate amount of $197.77. The late remittances were remitted to the Plan in January 2018. The lost earnings of $0.26 pertaining to the contributions were deposited into the trust in February 2018.

(6)	Income Tax Status

	The Plan obtained its latest determination letter dated December 4, 2015, in which the Internal Revenue Service, referred to as IRS, stated that the Plan’s design was in compliance with the applicable requirements of the Internal Revenue Code. The Plan has been amended since receiving this determination letter. The Company believes that the Plan is currently designed and being operated in compliance with the applicable requirements of the Internal Revenue Code, and the Plan and related trust continue to be tax exempt. Therefore, no provision for income taxes has been included in the Plan’s financial statements.

	Accounting principles generally accepted in the United States of America require plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Plan Administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2018 and 2017, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Plan is subject

RAI 401K SAVINGS PLAN

Notes to Financial Statements

December 31, 2018 and 2017


	to routine audits by taxing jurisdictions. The Plan Administrator believes it is no longer subject to income tax examinations for years prior to 2014. The IRS is currently examining the 2014 and 2015 Plan years. RAI agreed to extend the IRS audit of this Plan until April 30, 2020.

(7)	Plan Termination

	Although it has not expressed any intent to do so, the Committee has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of the Plan’s termination, the Plan provides that the net assets are to be distributed to participants in amounts equal to their respective interests in such assets.

(8)	Contingency

	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 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 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 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 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 plaintiff filed a motion for class certification, which the court granted in September 2008.

	A non-jury trial was held in January and February 2010. On February 25, 2013, the district court dismissed the case with prejudice, finding that a hypothetical prudent fiduciary could have made the same decision and thus the Plan’s loss was not caused by the procedural prudence which the court found to have existed. On August 4, 2014, the Fourth Circuit Court of Appeals, referred to as Fourth Circuit, reversed, holding that the district court applied the wrong standard when it held that the defendants did not cause any loss to the Plan, determined the test was whether a hypothetical prudent fiduciary would have made the same decision and remanded the case back to the district court to apply the “would have standard.” On February 18, 2016, the district court dismissed the case with prejudice, finding that the defendants have shown by a preponderance

RAI 401K SAVINGS PLAN

Notes to Financial Statements

December 31, 2018 and 2017


	of the evidence that a fiduciary acting with prudence would have divested the NGH and Nabisco Funds at the time and in the manner that the defendants did. On March 17, 2016, the plaintiff appealed arguing that the district court erred in finding that a hypothetical prudent fiduciary would have divested the NGH and Nabisco Funds at the same time and in the same manner as RJR. On April 28, 2017, the Fourth Circuit affirmed the district court’s judgment in favor of RJR. The plaintiff filed a petition for rehearing en banc on May 12, 2017, which was denied on May 26, 2017. The plaintiff agreed to forgo filing a petition for writ of certiorari with the U.S. Supreme Court in exchange for RJR withdrawing its motion for costs in the district court. Therefore, the matter has concluded.

(9)	Subsequent Events

	Plan management has evaluated subsequent events from the statements of net assets available for benefits date through the date at which the financial statements were issued, and determined there are no other items to disclose.

Exhibit Number		Description
23.1		Consent of KPMG LLP.

99.1		Audited financial statements and supplemental schedules of the RAI 401k Savings Plan for the years ended December 31, 2018 and 2017.

	RAI 401k Savings Plan


Date: June 19, 2019	By:	/s/ Constantine E. Tsipis
		Name:	Constantine E. Tsipis
		Title:	Secretary, RAI Employee Benefits Committee

Exhibit Number		Description
23.1		Consent of KPMG LLP.

99.1		Audited financial statements and supplemental schedules of the RAI 401k Savings Plan for the years ended December 31, 2018 and 2017.

Identity of issue	Maturity	Cost**	Par value or number of units		Current value
Unitized Company Stock Fund:
* BAT Stock Fund-BAT American Depository Shares				4,177,531	$	133,101,733

Mutual funds:
Vanguard Total Stock Fund				5,221,226		282,416,095
Dodge and Cox International Stock				760,643		28,075,346
Vanguard Total International Stock IS				375,644		38,112,793
PIMCO Income Fund Institutional Class				3,357,100		39,647,347
PIMCO Total Return Fund				4,561,572		45,296,413
JP Morgan Disciplined Equity Fund Class R6				6,109,610		143,881,313
T. Rowe Price Institutional Global Growth Equity Fund				1,384,790		32,874,909
Principal Diversified Real Asset Fund Institutional Class				416,069		4,310,475
Harding Loevner Institutional Emerging Markets Portfolio Class I				554,458		10,102,217
WM Blair Small CP Val I				4,449,629		68,969,252
Vanguard Total BD Market Inst				1,116,697		11,669,484
Vanguard U.S. Value Fund				641		10,212
Vanguard Lifest Growth Fund				10,440		313,829
Vanguard Prime Money Mkt EE Deferral				15		15
Vanguard Intl Value Fund				5,011		160,863
Vanguard Lifest Income Fund				5,078		75,514
Vanguard Lifest Conserv Growth				15,148		282,813
Vanguard Lifest Moderate Growth				21,487		532,878
Vanguard Select Value Fund				157		3,527
Vanguard Mid-Cap Growth Fund				6,590		147,410
Vanguard Growth Index Fund				3,013		115,011
Vanguard Growth Index				427		29,493
Vanguard Wellington				3,047		195,291
Vanguard U.S. Growth Fund				1,722		149,712
Vanguard High Yield Corp				11,835		64,262
Vanguard S-T Invest GR				9,998		104,381
Vanguard 500 Index				3,552		822,158
Vanguard SM-Cap Index Fund				458		28,958
Vanguard Primecap				1,070		129,360
Vanguard I-T Invest GR				16,871		158,423
Windsor II Fund				4,391		242,388
Vanguard Int'l Growth Fund				1,815		143,798
Vanguard Total Bond Market Index				17,017		177,830
Vanguard Total Stk Market Index				1,877		116,538
Vanguard Growth and Income				3,967		270,528
Vanguard Extend Mkt Index				1,583		119,807
Vanguard Windsor Admiral				1,826		111,874
Vanguard Cap Oppor ADM Rollover				1,072		141,494
Real Estate IDX Admiral				1,291		136,474
Vanguard Emerg Mkt Stk IX				4,639		147,337
Vanguard Md-Cap Index Fund				46		7,928
VG Sm-Cap Value Index				76		3,706
Vanguard SM-Cap Growth				2,786		147,505
Total mutual funds						710,446,961

Cash management accounts:
Money market funds:
* BAT Stock Fund-Fidelity Money Market Fund	1,252,905		1,252,905
* Fidelity Retirement Money Market Fund	50,505		50,505
Total money market funds			1,303,410

Self-Directed Brokerage Accounts	154,093,032		81,400,185

Common/collective investment trusts:
BTC Lifepath Retirement Growth	2,974,936		40,527,260
BTC Lifepath 2020 G	4,132,618		60,053,549
BTC Lifepath 2025 G	5,524,418		83,811,501
BTC Lifepath 2030 G	3,990,169		62,768,552
BTC Lifepath 2035 G	2,997,243		48,739,073
BTC Lifepath 2040 G	2,727,481		45,627,762
BTC Lifepath 2045 G	2,683,435		45,842,462
BTC Lifepath 2050 G	2,643,342		46,028,250
BTC Lifepath 2055 G	865,000		15,299,861
BTC Lifepath 2060 G	211,876		2,545,390
Wells Fargo Stable Return Fund W (Interest Income Fund)	6,823,886		377,614,731
Retirement Savings Trust	713,756		713,756
Total common/collective investment trusts			829,572,147
Total investments			1,755,824,436
*Notes receivable from participants (1,721 loans with interest rates ranging
from 4.25% to 9.25% and maturity dates ranging from 1/1/2019-11/30/2033).			19,887,626
Total assets		$	1,775,712,062

1.	Not applicable.
2.	Not applicable
3.	Not applicable
4.	The RAI 401k Savings Plan is subject to the requirements of the Employee Retirement Income Security Act of 1974, referred to as ERISA. A copy of the most recent audited financial statements and supplemental schedules, as required, of the RAI 401k Savings Plan, prepared in accordance with the financial reporting requirements of ERISA, is attached as Exhibit 99.1 to this report.

Year ended	Participant contributions transferred late to the Plan*		Contributions not corrected		Contributions corrected outside VFCP		Contributions pending correction in VFCP		Total fully corrected under VFCP and PTE 2002-51

December 31, 2017	$	198	$	—	$	198	$	—	$	—
December 31, 2018	$	843	$	843	$	—	$	—	$	—