EDWARDSVILLE, Ill. -- An Illinois state court judge Monday agreed to reduce the amount of money Philip Morris USA would have to post in order to appeal a recent class-action judgment.

However, the judge stopped short of fully granting Philip Morris' initial request, which had asked for an appeal bond of up to $1.5 billion. New appeal bond terms set by Judge Nicholas Byron were complex, but in essence reduced the amount Philip Morris must pay to appeal to about $7 billion. Earlier, the judge had required a $12 billion bond to appeal the $10.1 billion judgment against the Altria Group Inc. (NYSE:MO - News) unit. Attorneys representing the Illinois smokers said they plan to appeal the judge's order. Under the judge's order, Altria Group will put a $6 billion term note in escrow on behalf of its U.S. tobacco unit. Philip Morris also will make $800 million in payments in four installments of $200 million each. The Illinois judge's order also provides for interest payments. In order to obtain the reduced bonding amount, Philip Morris has agreed not to appeal the order the court issued Monday. The tobacco company also agreed to waive its right to lobby the Illinois state legislature to pass a law capping the amount of appeal bonds in the state. Philip Morris on Monday called Judge Byron's order an "onerous but viable solution" to the issue. "It will allow Philip Morris US to exercise its constitutional right to appeal, and to make this year's payment under the Master Settlement Agreement with the states," William Ohlemeyer, Philip Morris USA vice president and associate general counsel, said. "We look forward to promptly beginning our appeal on the merits of this case, " Mr. Ohlemeyer said. The note Philip Morris will be placing in escrow is a preexisting note issued in April 2002 by its parent as part of an intercompany financing agreement. The note bears interest at the rate of 7%. The principal is due and payable to Philip Morris USA in three equal installments in years 2008, 2009, and 2010. Beginning Oct. 1, Philip Morris will place the $210 million interest received every six months into the escrow account. Interest will accrue on all of the cash deposited into the account, which will be maintained by the Clerk of the Madison County Circuit Court. Philip Morris will deposit the previously mentioned $800 million in payments into the same escrow account as the bond. The four equal quarterly installments will be made between September 2003 and June 2004. If Philip Morris prevails in its appeal, the company will have the money returned to it minus court administrative fees, which will be determined by the court. Some had speculated the company might have to agree to a "leave-behind" fee in order to get the court to reduce the bond, but this isn't the case. Significantly, Monday's court order removes uncertainty about a Philip Morris USA bankruptcy. The order allows Philip Morris to meet its obligations under a 1998 settlement with the state attorneys general. Philip Morris is required to pay 48 states $ 2.5 billion by Tuesday under this settlement. The company had previously said that if it were required to post a $12 billion bond it would be unable to make the upcoming settlement payment. This prompted more than 30 states to file a brief with Madison County Circuit Court's Judge Byron on behalf of Philip Morris. The states argued that if the court failed to lower the appeal bond, and Philip Morris didn't make the payment, vital state services would be jeopardized. It is unclear how much of an effect the state attorneys general had on the judge's decision. "Initially, we view this (order) somewhat positively since it largely removes the bankruptcy uncertainty," said Bonnie Herzog, an analyst at Smith Barney. " However, there is an eight-page order which we need to review completely to make sure the devil isn't in the details." Ms. Herzog, who doesn't own Philip Morris shares, noted Philip Morris agreed not to appeal the bond requirement further. She said this implies the company is comfortable with the court's decision. Smith Barney has an investment-banking relationship with Altria Group. According to Stephen Tillery, an attorney representing the Illinois smokers who brought the case against Philip Morris, the appeal from the state attorneys general played a role in the judge's ultimate decision. "Philip Morris constantly said they would not make those payments," Mr. Tillery said during a conference call Monday. Mr. Tillery plans to appeal Monday's order, which was entered over his objections, to the state's Fifth District Court of appeals. The appeal, he said, will be based on the lack of evidence presented by Philip Morris USA and on the amount of discretion Judge Byron used to adjust the amount of the appeal bond. "The order doesn't protect the plaintiffs," Mr. Tillery said. According to Mr. Tillery, this is particularly true if the appeals process extends longer than three to four years. At least two attorneys general appeared pleased that Philip Morris would be able to make its settlement payments. "This battle wasn't about preserving Philip Morris, it was about holding them legally accountable and protecting Washington taxpayers," said Washington Attorney General Christine Gregoire.Ms. Gregoire had fought against the industry when she helped negotiate the 1998 tobacco settlement, but recently had come out in support of an affordable bond for Philip Morris. Illinois Attorney General Lisa Madigan didn't sign the friend-of-the-court brief filed with Judge Byron last week. However, Ms. Madigan said she viewed the judge's decision Monday as "a reasonable compromise." "The events leading up to this court order serve as a reminder that states must remain vigilant in monitoring the financial condition of the tobacco companies and be prepared to enforce the obligations under the Master Settlement Agreement," Ms. Madigan said. With the judge's decision, the focus on the class-action case will now shift to its merits. Philip Morris plans to appeal the court's decision as well as its class- certification order. "We believe that, once this case is reviewed by an appellate court, this verdict will be overturned because of the errors that occurred during the trial, " said Mr. Ohlemeyer. Philip Morris' opinion is partially based on the lack of success class- actions have had in cigarette cases. But critics of the tobacco industry think there is real merit in challenging what they see as the industry's practice of deceiving consumers into thinking light cigarettes are less harmful than regular cigarette brands. "Philip Morris' deception continues even now as the company today denied that it has ever marketed light cigarettes as less hazardous than regular cigarettes, despite overwhelming evidence to the contrary," said Matthew Myers, president of the Campaign for Tobacco-Free Kids. Separately from Monday's court order, Philip Morris confirmed it plans to remove the low-tar claims from packs of Marlboro Lights immediately. The point was made by company officials in court, according Mr. Tillery. Philip Morris confirmed it's in the process of removing the statements concerning tar from packs of Marlboro Lights, but said the move is unrelated to the Illinois case. According to a Philip Morris spokesman, a November 2001 report by the National Cancer Institute (news - web sites) has prompted a number of moves by the company. Beginning last November, the company included pack inserts for a limited time that warned its light and ultra light cigarettes are no safer than regular smokes. The decision to remove the low-tar references is part of the company's ongoing effort to react to the evolving scientific evidence about the lights cigarettes, according to the spokesman. Ms. Herzog said the high-profile nature of the appeal-bond issue has brought attention to the "lights" issue, and could still mean more cases of this type will be filed by plaintiff's attorneys in other states. However, there is a good chance the case will be thrown out on appeal, she said. Furthermore, Ms. Herzog thought the use of the preexisting bond was a " brilliant" idea on Philip Morris' part. "As structured, there will be no earnings impact, some cash flow impact, but no earnings impact," Ms. Herzog said.

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