FORM 10-K - Zonebourse.com III of this Form 10-K or any amendment to this Form 10-K. Indicate by...

FORM 10-KALTRIA GROUP, INC. - MOFiled: March 15, 2005 (period: December 31, 2004)

Annual report which provides a comprehensive overview of the company for the past year

Table of Contents

10-K - FORM 10-K

PART I

Item 1. Business. Item 2. Properties. Item 3. Legal Proceedings. Item 4. Submission of Matters to a Vote of Security Holders. PART II

Item 5. Market for Registrant s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities.

Item 6. Selected Financial Data. Item 7. Management s Discussion and Analysis of Financial Condition and Results

of Operation.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Item 8. Financial Statements and Supplementary Data. Item 9. Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure.

Item 9A. Controls and Procedures. Item 9B. Other Information. PART III

Item 10. Directors and Executive Officers of the Registrant. Item 11. Executive Compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management. Item 13. Certain Relationships and Related Transactions. Item 14. Principal Accounting Fees and Services. PART IV

Item 15. Exhibits and Financial Statement Schedules. SIGNATURES

EX-10.30 (EX-10.30-DESCRIPTION OF AGREEMENT WITH LOUIS C. CAMILLERI)

EX-10.31 (EX-10.31-AGREEMENT FOR SALE AND PURCHASE (PT HMSAMPOERNA TBK))

EX-12 (EX-12-STATEMENTS RE: COMPUTATION OF RATIOS)

EX-13 (EX-13-PAGES 16 TO 77 OF THE 2004 ANNUAL REPORT)

EX-21 (EX-21-SUBSIDIARIES OF ALG)

EX-23 (EX-23-CONSENT OF INDEPENDENT AUDITORS)

EX-24 (EX-24-POWERS OF ATTORNEY)

EX-31.1 (EX-31.1-CEO SECTION 302 CERTIFICATION)

EX-31.2 (EX-31.2-CFO SECTION 302 CERTIFICATION)

EX-32.1 (EX-32.1-CEO SECTION 906 CERTIFICATION)

EX-32.2 (EX-32.2-CFO SECTION 906 CERTIFICATION)

EX-99.1 (EX-99.1-CERTAIN PENDING LITIGATION MATTERS AND RECENTDEVELOPMENTS)

EX-99.2 (EX-99.2-TRIAL SCHEDULE)

Source: ALTRIA GROUP, INC., 10-K, March 15, 2005

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

� ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

OR

� TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-8940

ALTRIA GROUP, INC.(Exact name of registrant as specified in its charter)

Virginia 13-3260245(State or other jurisdiction ofincorporation or organization) (I.R.S. Employer

Identification No.)

120 Park Avenue,New York, N.Y.

(Address of principal executive offices)

10017(Zip Code)

Registrant’s telephone number, including area code: 917-663-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered

Common Stock, $0.331/3 par value New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange 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 � No � Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K. � Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of1934). Yes � No � The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant, computed by reference to theclosing price of such stock on June 30, 2004, was approximately $103 billion. As of February 28, 2004, there were2,068,300,741 shares of the registrant’s Common Stock outstanding.

Documents Incorporated by Reference Portions of the registrant’s annual report to shareholders for the year ended December 31, 2004 (the “2004 Annual Report”), areincorporated in Part I, Part II and Part IV hereof and made a part hereof. Portions of the registrant’s definitive proxy statement for usein connection with its annual meeting of shareholders to be held on April 28, 2005, filed with the Securities and ExchangeCommission on March 14, 2005, are incorporated in Part III hereof and made a part hereof.


TABLE OF CONTENTS

Page

PART I Item 1. Business 2 Item 2. Properties 16 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 30 PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasesof Equity Securities 30

Item 6. Selected Financial Data 30 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30 Item 8. Financial Statements and Supplementary Data 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31 Item 9A. Controls and Procedures 31 Item 9B. Other Information 31 PART III Item 10. Directors and Executive Officers of the Registrant 32 Item 11. Executive Compensation 33 Item 12. Security Ownership of Certain Beneficial Owners and Management 33 Item 13. Certain Relationships and Related Transactions 33 Item 14. Principal Accounting Fees and Services 33 PART IV Item 15. Exhibits and Financial Statement Schedules 34 Signatures 38 Report of Independent Registered Public Accounting Firm on Financial Statement Schedule S-1 Valuation and Qualifying Accounts S-2 EX-10.30-DESCRIPTION OF AGREEMENT WITH LOUIS C. CAMILLERI EX-10.31-AGREEMENT FOR SALE AND PURCHASE (PT HM SAMPOERNA TBK) EX-12-STATEMENTS RE: COMPUTATION OF RATIOS EX-13-PAGES 16 TO 77 OF THE 2004 ANNUAL REPORT EX-21-SUBSIDIARIES OF ALG EX-23-CONSENT OF INDEPENDENT AUDITORS EX-24-POWERS OF ATTORNEY EX-31.1-CEO SECTION 302 CERTIFICATION EX-31.2-CFO SECTION 302 CERTIFICATION EX-32.1-CEO SECTION 906 CERTIFICATION EX-32.2-CFO SECTION 906 CERTIFICATION EX-99.1-CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS EX-99.2-TRIAL SCHEDULE


Table of Contents

PART I

Item 1. Business.

(a) General Development of Business

General

As used herein, unless the context indicates otherwise, “Altria Group, Inc.” refers to the consolidated financial position, results ofoperations and cash flows of the Altria family of companies and the term “ALG” refers solely to the parent company. ALG’swholly-owned subsidiaries, Philip Morris USA Inc. (“PM USA”) and Philip Morris International Inc. (“PMI”) are engaged in themanufacture and sale of cigarettes and tobacco products. ALG’s majority owned (85.4% ownership with approximately 98% votingpower) subsidiary Kraft Foods Inc. (“Kraft”) is engaged in the manufacture and sale of branded foods and beverages. Philip MorrisCapital Corporation (“PMCC”), another wholly-owned subsidiary, maintains a portfolio of leveraged and direct finance leases. During2003, PMCC shifted its strategic focus from an emphasis on the growth of its portfolio of finance leases through new investments toone of maximizing investment gains and generating cash flows from its existing portfolio of finance assets. Miller Brewing Company(“Miller”), engaged in the manufacture and sale of various beer products, was ALG’s wholly-owned subsidiary prior to the merger ofMiller into South African Breweries plc (“SAB”) on July 9, 2002.

In November 2004, ALG announced that, for significant business reasons, the Board of Directors is looking at a number ofrestructuring alternatives, including the possibility of separating Altria Group, Inc. into two, or potentially three, independent entities.Continuing improvements in the entire litigation environment are a prerequisite to such action by the Board of Directors, and thetiming and chronology of events are uncertain.

PM USA is the largest cigarette company in the United States. PMI is a holding company whose subsidiaries and affiliates andtheir licensees are engaged primarily in the manufacture and sale of tobacco products (mainly cigarettes) internationally. Marlboro,the principal cigarette brand of these companies, has been the world’s largest-selling cigarette brand since 1972.

Kraft is engaged in the manufacture and sale of branded foods and beverages in the United States, Canada, Europe, the MiddleEast and Africa, Latin America and Asia Pacific. Kraft manages and reports operating results through two units, Kraft North AmericaCommercial (“KNAC”) and Kraft International Commercial (“KIC”). Kraft has operations in 68 countries and sells its products inmore than 155 countries.

On November 15, 2004, Kraft announced the sale of substantially all of its sugar confectionery business for approximately$1.5 billion. The transaction, which is subject to regulatory approval, is expected to be completed in the second quarter of 2005. AltriaGroup, Inc. has reflected the results of Kraft’s sugar confectionery business as discontinued operations on the consolidated statementsof earnings for all years presented. The assets related to the sugar confectionery business were reflected as assets of discontinuedoperations held for sale on the consolidated balance sheet at December 31, 2004. Accordingly, historical statements of earningsamounts included in this annual report on Form 10-K have been restated to reflect the discontinued operation.

In January 2004, Kraft announced a multi-year restructuring program with the objectives of leveraging Kraft’s global scale,realigning and lowering its cost structure, and optimizing capacity utilization. As part of this program, Kraft anticipates the closing orsale of up to 20 plants and the elimination of approximately 6,000 positions. From 2004 through 2006, Kraft expects to incur up to$1.2 billion in pre-tax charges for the program, reflecting asset disposals, severance and other implementation costs, including$641 million incurred in 2004. Approximately one-half of the pre-tax charges are expected to require cash payments.

In addition, Kraft expects to incur approximately $140 million in capital expenditures from 2004 through 2006 to implement therestructuring program, including $46 million spent in 2004. Cost savings as a result of the restructuring program were approximately$127 million in 2004, are expected to increase by an incremental amount of between $120 million and $140 million in 2005, and areanticipated to reach

2


Table of Contents

annualized cost savings of approximately $400 million by 2006, all of which are expected to be used in support of brand-buildinginitiatives.

On July 9, 2002, Miller merged into SAB and SAB changed its name to SABMiller plc (“SABMiller”). At closing, ALG received430 million shares of SABMiller valued at approximately $3.4 billion, based upon a share price of 5.12 British pounds per share, inexchange for Miller, which had $2.0 billion of existing debt. ALG’s ownership of SABMiller stock resulted in a 36% economicinterest and a 24.9% voting interest in SABMiller. ALG has the contractual right to convert non-voting shares to voting shares in orderto maintain its 24.9% voting interest in SABMiller. The transaction resulted in a pre-tax gain of $2.6 billion or $1.7 billion after-tax,which was recorded in the third quarter of 2002. During December 2004, ALG’s economic interest in SABMiller declined to 33.9%,as a result of the conversion of SABMiller convertible bonds into equity.

Certain prior years’ amounts have been reclassified to conform with the current year’s presentation, due primarily to the newglobal organization structure at Kraft and the classification of Kraft’s sugar confectionery business as discontinued operations.

Source of Funds — Dividends

Because ALG is a holding company, its principal sources of funds are from the payment of dividends and repayment of debt fromits subsidiaries. Except for minimum net worth requirements, ALG’s principal wholly-owned and majority-owned subsidiariescurrently are not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions withrespect to their common stock.

(b) Financial Information About Segments

Altria Group, Inc.’s reportable segments are domestic tobacco, international tobacco, North American food, international food,beer (prior to July 9, 2002) and financial services. Net revenues and operating companies income* (together with a reconciliation tooperating income) attributable to each such segment for each of the last three years (along with total assets for each of tobacco, foodand financial services at December 31, 2004, 2003 and 2002) are set forth in Note 15 to Altria Group, Inc.’s consolidated financialstatements (“Note 15”), which is incorporated herein by reference to the 2004 Annual Report.

The relative percentages of operating companies income attributable to each reportable segment were as follows:

2004 2003 2002

Domestic tobacco 27.7% 23.5% 29.2%International tobacco 41.2 38.0 33.1 North American food 24.3 28.2 27.2 International food 5.9 8.4 8.6 Beer 1.6 Financial services 0.9 1.9 0.3

100.0% 100.0% 100.0%

* Altria Group, Inc.’s management reviews operating companies income to evaluate segment performance and allocate resources.Operating companies income for the segments excludes general corporate expenses and amortization of intangibles. The accountingpolicies of the segments are the same as those described in Note 2 to Altria Group, Inc.’s consolidated financial statements and areincorporated herein by reference to the 2004 Annual Report.

3


Table of Contents

Changes in the relative percentages above reflect the following:

• In 2003, PM USA took steps to narrow price gaps in the intensely competitive United States cigarette industry. In 2004,domestic tobacco results reflect savings from changes that PM USA made to its trade programs.

• In 2004, North American and international food results reflect charges incurred as part of Kraft’s multi-year restructuringprogram, increased promotional spending and higher commodity and benefit costs.

• Results for the beer segment reflect the 2002 merger of Miller into SABMiller and the subsequent change to equity accountingfor the investment.

• Financial services results include charges taken for leveraged lease exposure to the troubled United States airline industry of$140 million in 2004 and $290 million in 2002.

(c) Narrative Description of Business

Tobacco Products

PM USA manufactures, markets and sells cigarettes in the United States and its territories, and contract manufactures cigarettes forPMI. Subsidiaries and affiliates of PMI and their licensees manufacture, market and sell tobacco products outside the United States.

Acquisitions

On March 12, 2005, a subsidiary of PMI entered into agreements to acquire 40% of the outstanding shares of PT HM SampoernaTbk from its principal shareholders. For a discussion of this transaction, see Item 9B. Other Information.

During 2004, PMI purchased a tobacco business in Finland for a cost of approximately $42 million. Also during 2004, PMIreached an agreement to acquire Coltabaco, the largest tobacco company in Colombia, with a 48% market share. PMI expects to closethe transaction in the beginning of 2005, for approximately $310 million. In October 2004, a subsidiary of PMI purchased a 20% stakein a tobacco company in Pakistan for $60 million, bringing the subsidiary’s aggregate share ownership of the Pakistani company to40%. During 2003, PMI purchased approximately 74.2% of a tobacco business in Serbia for a cost of approximately $486 million, andin 2004, increased its ownership interest to 85.2%. During 2003, PMI also purchased 99% of a tobacco business in Greece forapproximately $387 million and increased its ownership interest in its affiliate in Ecuador from less than 50% to approximately 98%for a cost of $70 million. During 2002, PMI acquired a sales promotion company in Japan for $25 million.

Domestic Tobacco Products

PM USA is the largest tobacco company in the United States, with total cigarette shipments in the United States of 187.1 billionunits in 2004, a decrease of 0.1% from 2003.

PM USA’s major premium brands are Marlboro, Virginia Slims and Parliament. Its principal discount brand is Basic. All of itsbrands are marketed to take into account differing preferences of adult smokers. Marlboro is the largest-selling cigarette brand in theUnited States, with shipments of 150.4 billion units in 2004 (up 1.7% over 2003).

In the premium segment, PM USA’s 2004 shipment volume increased 0.1% over 2003, and its shipment volume in the discountsegment decreased 1.9%. Shipments of premium cigarettes accounted for 91.4% of PM USA’s total 2004 volume, up from 91.3% in2003.

4


Table of Contents

The following table summarizes PM USA’s retail share performance, based on data from the IRI/ Capstone Total Retail Panel,which was developed to measure market share in retail stores selling cigarettes, but was not designed to capture Internet or direct mailsales:

For the Years Ended December 31,

2004 2003

Marlboro 39.5% 38.0%Parliament 1.7 1.7 Virginia Slims 2.4 2.4 Basic 4.2 4.2

Focus on Four Brands 47.8 46.3 Other PM USA 2.0 2.4

Total PM USA 49.8% 48.7%

PM USA cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premiumand discount segments or in PM USA’s shipments or retail market share; however, it believes that PM USA’s results may bematerially adversely affected by price increases related to increased excise taxes and tobacco litigation settlements, as well as by theother items discussed below and in the section captioned “Cautionary Factors That May Affect Future Results.”

As discussed in Note 19 to Altria Group, Inc.’s consolidated financial statements (“Note 19”), which is incorporated herein byreference to the 2004 Annual Report, in connection with obtaining a stay of execution in the Price case, PM USA placed apre-existing 7.0%, $6 billion long-term note from ALG to PM USA into an escrow account with an Illinois financial institution. Sincethis note is the result of an intercompany financing arrangement, it does not appear on the consolidated balance sheet of Altria Group,Inc. In addition, PM USA agreed to make cash deposits with the clerk of the Madison County Circuit Court in the following amounts:beginning October 1, 2003, an amount equal to the interest earned by PM USA on the ALG note ($210 million every six months), anadditional $800 million in four equal quarterly installments between September 2003 and June 2004 and the payments of the principalof the note which are due in equal installments in April 2008, 2009 and 2010. Through December 31, 2004, PM USA made$1.4 billion of the cash deposits due under the judge’s order. Cash deposits into the account are included in other assets on theconsolidated balance sheet. If PM USA prevails on appeal, the escrowed note and all cash deposited with the court will be returned toPM USA, with accrued interest less administrative fees payable to the court.

International Tobacco Products

PMI’s total cigarette shipments increased 3.5% in 2004 to 761.4 billion units. PMI estimates that its share of the internationalcigarette market (which is defined as worldwide cigarette volume excluding the United States and duty-free shipments) wasapproximately 14.5% in 2004 and 2003. PMI estimates that international cigarette market shipments were approximately 5.1 trillionunits in 2004, a 1.5% increase over 2003. PMI’s leading brands — Marlboro, L&M, Philip Morris, Bond Street, Chesterfield,Parliament, Lark, Merit and Virginia Slims — collectively accounted for approximately 11.0% of the international cigarette market in2004 and 2003. Shipments of PMI’s principal brand, Marlboro, decreased 1.3% in 2004, and represented approximately 5.8% and6.0%, respectively, of the international cigarette market in 2004 and 2003.

PMI has a cigarette market share of at least 15%, and in a number of instances substantially more than 15%, in more than 70markets, including Argentina, Australia, Austria, Belgium, the Czech Republic, Finland, France, Germany, Greece, Hong Kong,Hungary, Italy, Japan, Kazakhstan, Mexico, the Netherlands, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia,Serbia, Singapore, Spain, Sweden, Switzerland, Turkey and Ukraine.

5


Table of Contents

In 2004, PMI continued to invest in and expand its international manufacturing base, including significant investments in facilitieslocated in Germany, the Philippines, Poland, Russia, Serbia, Turkey and Ukraine.

Distribution, Competition and Raw Materials

PM USA sells its tobacco products principally to wholesalers (including distributors), large retail organizations, including chainstores, and the armed services. Subsidiaries and affiliates of PMI and their licensees sell their tobacco products worldwide todistributors, wholesalers, retailers, state-owned enterprises and other customers.

The market for tobacco products is highly competitive, characterized by brand recognition and loyalty, with product quality, price,marketing and packaging constituting the significant methods of competition. Promotional activities include, in certain instances andwhere permitted by law, allowances, the distribution of incentive items, price promotions and other discounts. The tobacco products ofALG’s subsidiaries, affiliates and their licensees are advertised and promoted through various media, although television and radioadvertising of cigarettes is prohibited in the United States and is prohibited or restricted in many other countries. In addition, asdiscussed below in Item 3. Legal Proceedings, PM USA and other domestic tobacco manufacturers have agreed to other marketingrestrictions in the United States as part of the settlements of state health care cost recovery actions.

During 2003 and 2002, weak economic conditions with resultant consumer frugality and higher state excise taxes resulted inintense price competition in the United States cigarette industry. These factors significantly affected shipments of PM USA’sproducts, which compete predominantly in the premium category. To address these issues, in 2003, PM USA took actions tosignificantly lower the price gap between its products and its competitors’ products. PM USA believes that its enhanced sales andpromotion programs are having their intended effect, as measured by the improvement in its retail share.

In the United States, under a contract growing program known as the Tobacco Farmers Partnering Program, PM USA purchasesburley and flue-cured leaf tobaccos of various grades and styles directly from tobacco growers. Under the terms of this program, PMUSA agrees to purchase all of the tobacco that participating growers may sell without penalty under the federal tobacco program. PMUSA also purchases its United States tobacco requirements through other sources. In 2003, in connection with the settlement of a suitfiled on behalf of a purported class of tobacco growers and quota-holders against certain manufacturers, including PM USA, and leafdealers, PM USA and certain other defendants reached an agreement with plaintiffs to settle the lawsuit. The agreement includes acommitment by each settling manufacturer defendant, including PM USA, to purchase a certain percentage of its leaf requirementsfrom U.S. tobacco growers over a period of at least ten years. These quantities are subject to adjustment in accordance with the termsof the settlement agreement.

Tobacco production in the United States is subject to government controls, including the tobacco-price support and productioncontrol programs administered by the United States Department of Agriculture (the “USDA”). In October 2004, the Fair and EquitableTobacco Reform Act of 2004 (“FETRA”) was signed into law. FETRA provides for the elimination of the federal tobacco quota andprice support program through an industry funded buy-out of tobacco growers and quota-holders. The cost of the buy-out isapproximately $9.6 billion and will be paid over 10 years by manufacturers and importers of all tobacco products. The cost will beallocated based on the relative market shares of manufacturers and importers of all tobacco products. PM USA expects that its quotabuy-out payments will offset already scheduled payments to the National Tobacco Grower Settlement Trust (the “NTGST”). SeeItem 3. Legal Proceedings, Health Care Cost Recovery Litigation — Settlements of Health Care Cost Recovery Litigation, for adiscussion of the NTGST. Manufacturers and importers of tobacco products are also obligated to cover any losses (up to $500 million)that the government may incur on the disposition of pool stock tobacco accumulated under the previous tobacco price supportprogram. PM USA’s share of tobacco pool stock losses cannot currently be determined, as the calculation of any such losses willdepend on a number of factors, including the extent to which the government can sell such pool tobacco and thereby mitigate or avoidlosses. Altria Group, Inc. does not

6


Table of Contents

anticipate that the quota buy-out will have a material adverse impact on its consolidated results in 2005 and beyond.

In addition, oriental, flue-cured and burley tobaccos are purchased outside the United States. Tobacco production outside theUnited States is subject to a variety of controls and external factors, which may include tobacco subsidies and tobacco productioncontrol programs. All of those controls and programs may substantially affect market prices for tobacco.

PM USA and PMI believe there is an adequate supply of tobacco in the world markets to satisfy their current and anticipatedproduction requirements.

Business Environment

Portions of the information called for by this Item are hereby incorporated by reference to the paragraphs captioned“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Operating Results by BusinessSegment — Tobacco Business Environment” on pages 23 to 26 of the 2004 Annual Report and made a part hereof.

Food Products

Acquisitions and Divestitures

During 2004, Kraft acquired a U.S.-based beverage business for a total cost of $137 million. During 2003, Kraft acquiredtrademarks associated with a small U.S.-based natural foods business and also acquired a biscuits business in Egypt. The total cost ofthese and other smaller businesses purchased by Kraft during 2003 was $98 million. During 2002, Kraft acquired a snacks business inTurkey and a biscuits business in Australia. The total cost of these and smaller businesses purchased by Kraft during 2002 was$122 million.

On November 15, 2004, Kraft announced the sale of substantially all of its sugar confectionery business for approximately$1.5 billion. The proposed sale includes the Life Savers, Creme Savers, Altoids, Trolli and Sugus brands. The transaction, which issubject to regulatory approval, is expected to be completed in the second quarter of 2005. Altria Group, Inc. has reflected the results ofKraft’s sugar confectionery business as discontinued operations on the consolidated statements of earnings for all years presented. Theassets related to the sugar confectionery business were reflected as assets of discontinued operations held for sale on the consolidatedbalance sheet at December 31, 2004. In addition, Kraft anticipates that an additional tax expense of $270 million will be recorded as aloss on sale of discontinued operations in 2005. In accordance with the provisions of Statement of Financial Accounting StandardsNo. 109, the tax expense will be recorded when the transaction is consummated. Pursuant to the sugar confectionery sale agreement,Kraft has agreed to provide certain transition and supply services to the buyer. These service arrangements are primarily for terms ofone year or less, with the exception of one supply arrangement with a term of not more than three years. The expected cash flow fromthis supply arrangement is not significant.

During 2004, Kraft sold a Brazilian snack nuts business and trademarks associated with a candy business in Norway. Theaggregate proceeds received from the sales of these businesses were $18 million, on which pre-tax losses of $3 million were recorded.In December 2004, Kraft announced the sale of its U.K. desserts business for approximately $135 million, which is expected to resultin a gain. The transaction, which is subject to required approvals, is expected to close in the first quarter of 2005, followingcompletion of necessary employee consultation requirements. In addition, in December 2004, Kraft announced the sale of its yogurtbusiness for approximately $59 million, which is expected to result in an after-tax loss of approximately $12 million. The transaction,which is also subject to regulatory approval, is expected to be completed in the first quarter of 2005. During 2003, Kraft sold aEuropean rice business and a branded fresh cheese business in Italy. The aggregate proceeds received from the sales of businesses in2003 were $96 million, on which pre-tax gains of $31 million were recorded. During 2002, Kraft sold several small North Americanfood businesses, most of which were previously classified as businesses held for sale arising from the acquisition of Nabisco HoldingsCorp. In addition, Kraft sold a Latin American yeast and industrial bakery ingredients business for

7


Table of Contents

approximately $110 million and recorded a pre-tax gain of $69 million. The aggregate proceeds received from sales of businessesduring 2002 were $219 million, on which pre-tax gains of $80 million were recorded.

The impact of acquisitions and divestitures, excluding Kraft’s sugar confectionery business, were not material to Altria Group,Inc.’s consolidated financial position, results of operations or cash flows in any of the years presented.

North American Food

KNAC’s principal brands span five consumer sectors and include the following:

Snacks: Oreo, Chips Ahoy!, Newtons, Peak Freans, Nilla, Nutter Butter, Stella D’Oro and SnackWell’s cookies; Ritz,Premium, Triscuit, Wheat Thins, Cheese Nips, Better Cheddars, Honey Maid Grahams and Teddy Grahams crackers; Plantersnuts and salted snacks; Terry’s and Toblerone chocolate confectionery products; Handi-Snacks two-compartment snacks; FruitSnacks sugar confectionery products; and Balance nutrition and energy snacks.

Beverages: Maxwell House, General Foods International Coffees, Starbucks (under license), Yuban, Seattle’s Best (underlicense), Sanka, Nabob and Gevalia coffees; Capri Sun (under license), Tang, Kool-Aid and Crystal Light aseptic juice drinks;Kool-Aid, Tang, Crystal Light and Country Time powdered beverages; Veryfine juices; Tazo teas (under license); and Fruit2Owater.

Cheese: Kraft and Cracker Barrel natural cheeses; Philadelphia cream cheese; Kraft and Velveeta process cheeses; Kraftgrated cheeses; Cheez Whiz process cheese sauce; and Knudsen and Breakstone’s cottage cheese and sour cream.

Grocery: Cool Whip frozen whipped topping; Back to Nature products; Post ready-to-eat cereals; Cream of Wheat and Creamof Rice hot cereals; Kraft peanut butter; Kraft and Miracle Whip spoonable dressings; Kraft salad dressings; A.1. steak sauce; Kraftand Bull’s-Eye barbecue sauces; Grey Poupon premium mustards; Shake ‘N Bake coatings; Jell-O dry packaged desserts andrefrigerated gelatin and pudding snacks; Handi-Snacks shelf-stable pudding snacks; and Milk-Bone pet snacks.

Convenient Meals: DiGiorno, Tombstone, Jack’s, California Pizza Kitchen (under license) and Delissio frozen pizzas; Kraftmacaroni & cheese dinners; Taco Bell Home Originals meal kits (under license); Lunchables lunch combinations; Oscar Mayerand Louis Rich cold cuts, hot dogs and bacon; Boca soy-based meat alternatives; Stove Top stuffing mix; and Minute rice.

International Food

KIC’s principal brands within the five consumer sectors include the following:

Snacks: Milka, Suchard, Côte d’Or, Marabou, Toblerone, Freia, Terry’s, Daim, Figaro, Korona, Poiana, Prince Polo, AlpenGold, Siesta, Pokrov, Lacta and Gallito chocolate confectionery products; Estrella, Maarud, Cipso and Lux salted snacks; andOreo, Chips Ahoy!, Ritz, Terrabusi, Club Social, Cerealitas, Trakinas and Lucky biscuits.

Beverages: Jacobs, Gevalia, Carte Noire, Jacques Vabre, Kaffee HAG, Grand’ Mère, Kenco, Saimaza, Maxim, MaxwellHouse, Dadak, Onko, Samar, Tassimo and Nova Brasilia coffees; Suchard Express, O’Boy, and Kaba chocolate drinks; Tang,Clight, Kool-Aid, Royal, Verao, Fresh, Frisco, Q-Refres-Ko and Ki-Suco powdered beverages; Maguary juice concentrate andready-to-drink beverages; and Capri Sun aseptic juice drinks (under license).

Cheese: Philadelphia cream cheese; Sottilette, Kraft, Dairylea, Osella and El Caserío cheeses; Kraft and Eden processcheeses; and Cheez Whiz process cheese spread.

Grocery: Kraft spoonable and pourable salad dressings; Miracel Whip spoonable dressings; Royal dry packaged desserts;Kraft and ETA peanut butters; and Vegemite yeast spread.

8


Table of Contents

Convenient Meals: Lunchables lunch combinations; Kraft macaroni & cheese dinners; Kraft and Mirácoli pasta dinners andsauces; and Simmenthal canned meats.

Distribution, Competition and Raw Materials

KNAC’s products are generally sold to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers,distributors, convenience stores, gasoline stations, drug stores, value stores and other retail food outlets. In general, the retail trade forfood products is consolidating. Food products are distributed through distribution centers, satellite warehouses, company-operated andpublic cold-storage facilities, depots and other facilities. Most distribution in North America is in the form of warehouse delivery, butbiscuits and frozen pizza are distributed through two direct-store delivery systems. Kraft supports its selling efforts through threeprincipal sets of activities: consumer advertising in broadcast, print and outdoor media; consumer promotions such as coupons andcontests; and trade promotions to support price features, displays and other merchandising of products by customers. Subsidiaries andaffiliates of KIC sell their food products primarily in the same manner and also engage the services of independent sales offices andagents.

Kraft is subject to competitive conditions in all aspects of its business. Competitors include large national and internationalcompanies and numerous local and regional companies. Some competitors may have different profit objectives and some competitorsmay be more or less susceptible to currency exchange rates. In addition, certain international competitors benefit from governmentsubsidies. Kraft’s food products also compete with generic products and private-label products of food retailers, wholesalers andcooperatives. Kraft competes primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing,advertising and price. Substantial advertising and promotional expenditures are required to maintain or improve a brand’s marketposition or to introduce a new product.

Kraft is a major purchaser of milk, cheese, nuts, green coffee beans, cocoa, corn products, wheat, rice, pork, poultry, beef,vegetable oil, and sugar and other sweeteners. It also uses significant quantities of glass, plastic and cardboard to package its products.Kraft continuously monitors worldwide supply and cost trends of these commodities to enable it to take appropriate action to obtainingredients and packaging needed for production.

Kraft purchases a substantial portion of its dairy raw material requirements, including milk and cheese, from independent thirdparties such as agricultural cooperatives and individual processors. The prices for milk and other dairy product purchases aresubstantially influenced by government programs, as well as by market supply and demand. Dairy commodity costs on average werehigher in 2004 than in 2003. Dairy costs rose to historical highs during the first half of 2004, but moderated during the second half of2004.

The most significant cost item in coffee products is green coffee beans, which are purchased on world markets. Green coffee beanprices are affected by the quality and availability of supply, trade agreements among producing and consuming nations, the unilateralpolicies of the producing nations, changes in the value of the United States dollar in relation to certain other currencies and consumerdemand for coffee products. Coffee bean costs on average during 2004 were higher than in 2003.

A significant cost item in chocolate confectionery products is cocoa, which is purchased on world markets, and the price of whichis affected by the quality and availability of supply and changes in the value of the British pound sterling and the United States dollarrelative to certain other currencies. Cocoa bean costs on average during 2004 were lower than in 2003.

The prices paid for raw materials and agricultural materials used in Kraft’s food products generally reflect external factors such asweather conditions, commodity market fluctuations, currency fluctuations and the effects of governmental agricultural programs.Although the prices of the principal raw materials can be expected to fluctuate as a result of these factors, Kraft believes such rawmaterials to be in adequate supply and generally available from numerous sources. Kraft uses hedging techniques to minimize theimpact of price fluctuations in its principal raw materials. However, Kraft does not fully hedge against changes in commodity pricesand these strategies may not protect Kraft from increases in specific raw material costs.

9


Table of Contents

For 2004, Kraft had a negative pre-tax earnings impact from all commodities of approximately $930 million as compared with2003.

Regulation

All of KNAC’s United States food products and packaging materials are subject to regulations administered by the Food and DrugAdministration (the “FDA”) or, with respect to products containing meat and poultry, the USDA. Among other things, these agenciesenforce statutory prohibitions against misbranded and adulterated foods, establish safety standards for food processing, establishingredients and manufacturing procedures for certain foods, establish standards of identity for certain foods, determine the safety offood additives, and establish labeling standards and nutrition labeling requirements for food products.

In addition, various states regulate the business of KNAC’s operating units by licensing dairy plants, enforcing federal and statestandards of identity for selected food products, grading food products, inspecting plants, regulating certain trade practices inconnection with the sale of dairy products and imposing their own labeling requirements on food products.

Many of the food commodities on which KNAC’s United States businesses rely are subject to governmental agricultural programs.These programs have substantial effects on prices and supplies, and are subject to Congressional and administrative review.

Almost all of the activities of Kraft’s operations outside of the United States are subject to local and national regulations similar tothose applicable to KNAC’s United States businesses and, in some cases, international regulatory provisions, such as those of theEuropean Union (the “EU”) relating to labeling, packaging, food content, pricing, marketing and advertising, and related areas.

The EU and certain individual countries require that food products containing genetically modified organisms or classes ofingredients derived from them be labeled accordingly. Other countries may adopt similar regulations. The FDA has concluded thatthere is no basis for similar mandatory labeling under current United States law.


Portions of the information called for by this Item are hereby incorporated by reference to the paragraphs captioned“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Operating Results by BusinessSegment — Food Business Environment” on pages 28 to 29 of the 2004 Annual Report and made a part hereof.

Financial Services

PMCC maintains a portfolio of leveraged and direct finance leases. Total assets of PMCC were $7.8 billion at December 31, 2004,down from $8.5 billion at December 31, 2003, reflecting a decrease in finance assets, net, due to asset sales. During 2003, PMCCshifted its strategic focus from an emphasis on the growth of its portfolio of finance leases through new investments to one ofmaximizing investment gains and generating cash flows from its existing portfolio of finance assets. Accordingly, PMCC’s operatingcompanies income will decrease over time, although there may be fluctuations year to year, as lease investments mature or are sold.PMCC’s finance asset portfolio includes leases in the following investment categories: aircraft, electrical power, real estate,manufacturing, surface transportation and energy industries. Finance assets, net, are comprised of total lease payments receivable andthe residual value of assets under lease, reduced by third-party nonrecourse debt and unearned income. The payment of thenonrecourse debt is collateralized only by lease payments receivable and the leased property, and is nonrecourse to all other assets ofPMCC or Altria Group, Inc. As required by accounting standards generally accepted in the United States of America (“U.S. GAAP”),the third-party nonrecourse debt has been offset against the related rentals receivable and has been presented on a net basis, withinfinance assets, net, in Altria Group, Inc.’s consolidated balance sheets.

10


Table of Contents

During 2004 and 2003, PMCC received proceeds from asset sales and maturities of $644 million and $507 million, respectively,and recorded gains of $112 million and $45 million, respectively, in operating companies income.

Among its leasing activities, PMCC leases a number of aircraft, predominantly to major United States carriers. At December 31,2004, approximately 27%, or $2.2 billion of PMCC’s finance asset balance, related to aircraft. Two of PMCC’s lessees, United AirLines, Inc. (“UAL”) and US Airways Group, Inc. (“US Airways”) are currently under bankruptcy protection and therefore PMCC hasceased recording income on these leases.

PMCC leases 24 Boeing 757 aircraft to UAL with an aggregate finance asset balance of $569 million at December 31, 2004.PMCC has entered into an agreement with UAL to amend 18 direct finance leases subject to UAL’s successful emergence frombankruptcy and assumption of the leases. UAL remains current on lease payments due to PMCC on these 18 amended leases. PMCCcontinues to monitor the situation at UAL with respect to the six remaining aircraft financed under leveraged leases, in which PMCChas an aggregate finance asset balance of $92 million. PMCC has no amended agreement relative to these leases since its interests aresubordinate to those of public debt holders associated with the leveraged leases. Accordingly, since UAL has declared bankruptcy,PMCC has received no lease payments relative to these six aircraft and remains at risk of foreclosure on these aircraft by the seniorlenders under the leveraged leases.

In addition, PMCC leases 16 Airbus A-319 aircraft to US Airways financed under leveraged leases with an aggregate finance assetbalance of $150 million at December 31, 2004. US Airways filed for bankruptcy protection in September 2004. Previously, USAirways emerged from Chapter 11 bankruptcy in March 2003, at which time PMCC’s leveraged leases were assumed pursuant to anagreement with US Airways. Since entering bankruptcy in September 2004, US Airways has entered into agreements with respect toall 16 PMCC aircraft which require US Airways to honor its lease obligations on a going forward basis until it either assumes orrejects the leases. If US Airways rejects the leases on these aircraft, PMCC is at risk of having its interest in these aircraft foreclosedupon by the senior lenders under the leveraged leases.

PMCC has an aggregate finance asset balance of $258 million at December 31, 2004, relating to six Boeing 757, nine Boeing 767and four McDonnell Douglas (MD-88) aircraft leased to Delta Air Lines, Inc. (“Delta”) under long-term leveraged leases. PMCC andmany other aircraft financiers entered into restructuring agreements with Delta in November 2004. As a result of its agreement, PMCCrecorded a charge to the allowance for losses of $40 million. Delta remains current under its lease obligations to PMCC.

In recognition of ongoing concerns within its airline portfolio, PMCC recorded a provision for losses of $140 million in the fourthquarter of 2004. Previously, PMCC had recorded a provision for losses of $290 million in the fourth quarter of 2002 for its airlineindustry exposure. It is possible that further adverse developments in the airline industry may require PMCC to increase its allowancefor losses, which was $497 million at December 31, 2004.


Portions of the information called for by this Item are hereby incorporated by reference to the paragraphs captioned“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Operating Results by BusinessSegment — Financial Services” on page 31 of the 2004 Annual Report and made a part hereof.

Other Matters

Customers

None of the business segments of the Altria family of companies is dependent upon a single customer or a few customers, the lossof which would have a material adverse effect on Altria Group, Inc.’s consolidated results of operations. However, Kraft’s ten largestcustomers accounted for approximately 38% of its net

11


Table of Contents

revenues in 2004 and 2003. One of Kraft’s customers, Wal-Mart Stores, Inc. accounted for approximately 14% and 12% of Kraft’s netrevenues in 2004 and 2003, respectively.

Employees

At December 31, 2004, ALG and its subsidiaries employed approximately 156,000 people worldwide. In January 2004, Kraftannounced a three-year restructuring program that is expected to eliminate approximately 6,000 positions. Specific programsannounced during 2004, as part of the overall restructuring program, will result in the elimination of approximately 3,500 positions.

Trademarks

Trademarks are of material importance to ALG’s consumer products subsidiaries and are protected by registration or otherwise inthe United States and most other markets where the related products are sold.

Environmental Regulation

ALG and its subsidiaries are subject to various federal, state, local and foreign laws and regulations concerning the discharge ofmaterials into the environment, or otherwise related to environmental protection, including the Clean Air Act, the Clean Water Act,the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act(commonly known as “Superfund”), which can impose joint and several liability on each responsible party. In 2004, subsidiaries (orformer subsidiaries) of ALG were involved in approximately 94 active matters subjecting them to potential remediation costs underSuperfund or otherwise. ALG’s subsidiaries expect to continue to make capital and other expenditures in connection withenvironmental laws and regulations. Although it is not possible to predict precise levels of environmental-related expenditures,compliance with such laws and regulations, including the payment of any remediation costs and the making of such expenditures, hasnot had, and is not expected to have, a material adverse effect on Altria Group, Inc.’s consolidated results of operations, capitalexpenditures, financial position, earnings or competitive position.

Cautionary Factors That May Affect Future Results

Forward-Looking and Cautionary Statements

We* may from time to time make written or oral forward-looking statements, including statements contained in filings with theSEC, in reports to stockholders and in press releases and investor webcasts. You can identify these forward-looking statements by useof words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “intends,” “projects,”“goals,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly tohistorical or current facts.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plansand assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known orunknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materiallyfrom those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements andwhether to invest in or remain invested in Altria Group, Inc.’s securities. In connection with the “safe harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actualresults and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement isqualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document,particularly

* This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among ALG and its various operatingsubsidiaries or when any distinction is clear from the context.

12


Table of Contents

in the “Business Environment” sections preceding our discussion of operating results of our subsidiaries’ businesses. You shouldunderstand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be acomplete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we maymake from time to time.

Tobacco-Related Litigation. There is substantial litigation related to tobacco products in the United States and certain foreignjurisdictions. We anticipate that new cases will continue to be filed. Damages claimed in some of the tobacco-related litigation rangeinto the billions of dollars. There are presently 13 cases on appeal in which verdicts were returned against PM USA, including acompensatory and punitive damages verdict totaling approximately $10.1 billion in the Price case in Illinois. Generally, in order toprevent a plaintiff from seeking to collect a judgment while the verdict is being appealed, the defendant must post an appeal bond,frequently in the amount of the judgment or more, or negotiate an alternative arrangement with plaintiffs. In the event of future lossesat trial, we may not always be able to obtain the required bond or to negotiate an acceptable alternative arrangement.

The present litigation environment is substantially uncertain, and it is possible that our business, volume, results of operations,cash flows or financial position could be materially affected by an unfavorable outcome of pending litigation, including certain of theverdicts against us that are on appeal. We intend to continue vigorously defending all tobacco-related litigation, although we mayenter into settlement discussions in particular cases if we believe it is in the best interest of our stockholders to do so. The entirelitigation environment may not improve sufficiently to enable the Board of Directors to implement any contemplated restructuringalternatives. Please see Note 19 for a discussion of pending tobacco-related litigation.

Anti-Tobacco Action in the Public and Private Sectors. Our tobacco subsidiaries face significant governmental action aimed atreducing the incidence of smoking and seeking to hold us responsible for the adverse health effects associated with both smoking andexposure to environmental tobacco smoke. Governmental actions, combined with the diminishing social acceptance of smoking andprivate actions to restrict smoking, have resulted in reduced industry volume, and we expect this decline to continue.

Excise Taxes. Cigarettes are subject to substantial excise taxes in the United States and to substantial taxation abroad. Significantincreases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted within theUnited States, the EU and in other foreign jurisdictions. In addition, in certain jurisdictions, PMI’s products are subject todiscriminatory tax structures, and inconsistent rulings and interpretations on complex methodologies to determine excise and other taxburdens.

These tax increases are expected to continue to have an adverse impact on sales of cigarettes by our tobacco subsidiaries, due tolower consumption levels and to a shift in consumer purchases from the premium to the non-premium or discount segments or to otherlow-priced tobacco products or to counterfeit or contraband products.

Increased Competition in the Domestic Tobacco Market. Settlements of certain tobacco litigation in the United States haveresulted in substantial cigarette price increases. PM USA faces increased competition from lowest priced brands sold by certaindomestic and foreign manufacturers that have cost advantages because they are not parties to these settlements. These manufacturersmay fail to comply with related state escrow legislation or may take advantage of certain provisions in the legislation that permit thenon-settling manufacturers to concentrate their sales in a limited number of states and thereby avoid escrow deposit obligations on themajority of their sales. Additional competition has resulted from diversion into the United States market of cigarettes intended for saleoutside the United States, the sale of counterfeit cigarettes by third parties, the sale of cigarettes by third parties over the Internet andby other means designed to avoid collection of applicable taxes and increased imports of foreign lowest priced brands.

Governmental Investigations. From time to time, ALG and its tobacco subsidiaries are subject to governmental investigations on arange of matters. Ongoing investigations include allegations of contraband shipments of cigarettes, allegations of unlawful pricingactivities within certain international markets and allegations of false and misleading usage of descriptors, such as “Lights” and “UltraLights.” We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is

13


Table of Contents

possible that our business could be materially affected by an unfavorable outcome of pending or future investigations.

New Tobacco Product Technologies. Our tobacco subsidiaries continue to seek ways to develop and to commercialize newproduct technologies that have the objective of reducing the risk of smoking. Their goal is to reduce constituents in tobacco smokeidentified by public health authorities as harmful while continuing to offer adult smokers products that meet their taste expectations.We cannot guarantee that our tobacco subsidiaries will succeed in these efforts. If they do not succeed, but one or more of theircompetitors do, our tobacco subsidiaries may be at a competitive disadvantage.

Foreign Currency. Our international food and tobacco subsidiaries conduct their businesses in local currency and, for purposes offinancial reporting, their results are translated into U.S. dollars based on average exchange rates prevailing during a reporting period.During times of a strengthening U.S. dollar, our reported net revenues and operating income will be reduced because the localcurrency will translate into fewer U.S. dollars.

Competition and Economic Downturns. Each of our consumer products subsidiaries is subject to intense competition, changes inconsumer preferences and local economic conditions. To be successful, they must continue to:

• promote brand equity successfully;

• anticipate and respond to new consumer trends;

• develop new products and markets and to broaden brand portfolios in order to compete effectively with lower priced products;

• improve productivity; and

• respond effectively to changing prices for their raw materials.

The willingness of consumers to purchase premium cigarette brands and premium food and beverage brands depends in part onlocal economic conditions. In periods of economic uncertainty, consumers tend to purchase more private label and other economybrands and the volume of our consumer products subsidiaries could suffer accordingly.

Our finance subsidiary, PMCC, holds investments in finance leases, principally in transportation (including aircraft), powergeneration and manufacturing equipment and facilities. Its lessees are also subject to intense competition and economic conditions. Ifcounterparties to PMCC’s leases fail to manage through difficult economic and competitive conditions, PMCC may have to increaseits allowance for losses, which would adversely affect our profitability.

Grocery Trade Consolidation. As the retail grocery trade continues to consolidate and retailers grow larger and become moresophisticated, they demand lower pricing and increased promotional programs. Further, these customers are reducing their inventoriesand increasing their emphasis on private label products. If Kraft fails to use its scale, marketing expertise, branded products andcategory leadership positions to respond to these trends, its volume growth could slow or it may need to lower prices or increasepromotional support of its products, any of which would adversely affect our profitability.

Continued Need to Add Food and Beverage Products in Faster Growing and More Profitable Categories. The food and beverageindustry’s growth potential is constrained by population growth. Kraft’s success depends in part on its ability to grow its businessfaster than populations are growing in the markets that it serves. One way to achieve that growth is to enhance its portfolio by addingproducts that are in faster growing and more profitable categories. If Kraft does not succeed in making these enhancements, its volumegrowth may slow, which would adversely affect our profitability.

Strengthening Brand Portfolios Through Acquisitions and Divestitures. One element of the growth strategy of our consumerproduct subsidiaries is to strengthen their brand portfolios through active programs of selective acquisitions and divestitures. Thesesubsidiaries are constantly investigating potential acquisition

14


Table of Contents

candidates and from time to time Kraft sells businesses that are outside its core categories or that do not meet its growth orprofitability targets. Acquisition opportunities are limited and acquisitions present risks of failing to achieve efficient and effectiveintegration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will beable to continue to acquire attractive businesses on favorable terms or that all future acquisitions will be quickly accretive to earnings.

Food Raw Material Prices. The raw materials used by our food businesses are largely commodities that experience price volatilitycaused by external conditions, commodity market fluctuations, currency fluctuations and changes in governmental agriculturalprograms. Commodity price changes may result in unexpected increases in raw material and packaging costs, and our operatingsubsidiaries may be unable to increase their prices to offset these increased costs without suffering reduced volume, net revenue andoperating companies income. We do not fully hedge against changes in commodity prices and our hedging strategies may not work asplanned.

Food Safety, Quality and Health Concerns. We could be adversely affected if consumers in Kraft’s principal markets loseconfidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, whether or not valid,may discourage consumers from buying Kraft’s products or cause production and delivery disruptions. Recent publicity concerningthe health implications of obesity and trans-fatty acids could also reduce consumption of certain of Kraft’s products. In addition, Kraftmay need to recall some of its products if they become adulterated or misbranded. Kraft may also be liable if the consumption of anyof its products causes injury. A widespread product recall or a significant product liability judgment could cause products to beunavailable for a period of time and a loss of consumer confidence in Kraft’s food products and could have a material adverse effecton Kraft’s business and results.

Limited Access to Commercial Paper Market. As a result of actions by credit rating agencies during 2003, ALG currently haslimited access to the commercial paper market, and may have to rely on its revolving credit facility.

Asset Impairment. We periodically calculate the fair value of our goodwill and intangible assets to test for impairment. Thiscalculation may be affected by the market conditions noted above, as well as interest rates and general economic conditions. If animpairment is determined to exist, we will incur impairment losses, which will reduce our earnings.

(d) Financial Information About Geographic Areas

The amounts of net revenues and long-lived assets attributable to each of Altria Group, Inc.’s geographic segments and the amountof export sales from the United States for each of the last three fiscal years are set forth in Note 15.

Subsidiaries of ALG export tobacco and tobacco-related products, coffee products, grocery products, cheese and processed meats.In 2004, the value of all exports from the United States by these subsidiaries amounted to approximately $3 billion.

(e) Available Information

ALG is required to file annual, quarterly and special reports, proxy statements and other information with the SEC. Investors mayread and copy any document that ALG files, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at450 Fifth Street, N.W., Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxyand information statements, and other information regarding issuers that file electronically with the SEC, from which investors canelectronically access ALG’s SEC filings.

ALG makes available free of charge on or through its web site (www.altria.com), its Annual Report on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as

15


Table of Contents

amended, as soon as reasonably practicable after ALG electronically files such material with, or furnishes it to, the SEC. Investors canaccess ALG’s filings with the SEC by visiting www.altria.com/secfilings.

The information on ALG’s web site is not, and shall not be deemed to be, a part of this report or incorporated into any other filingsALG makes with the SEC.

Item 2. Properties.

Tobacco Products

PM USA owns and operates four tobacco manufacturing and processing facilities — three in the Richmond, Virginia area and onein Cabarrus County, North Carolina. Subsidiaries and affiliates of PMI own, lease or have an interest in 51 cigarette or componentmanufacturing facilities in 32 countries outside the United States, including cigarette manufacturing facilities in Bergen Op Zoom, theNetherlands; Berlin, Germany; and St. Petersburg, Russia.

Food Products

Kraft has 192 manufacturing and processing facilities, 67 of which are located in the United States. Outside the United States,Kraft has 125 manufacturing and processing facilities located in 45 countries. Kraft owns 181 and leases 11 of these facilities. Inaddition, Kraft has 356 distribution centers and depots, of which 51 are located outside the United States. Kraft owns 54 distributioncenters and depots, with the remainder being leased.

Included in the facilities above are sugar confectionery manufacturing facilities in Creston, Iowa; Chattanooga, Tennessee; Brasov,Romania; and Bridgend, United Kingdom that are part of the sale of the sugar confectionery business that is expected to be completedin the second quarter of 2005.

In January 2004, Kraft announced a multi-year restructuring program. As part of this program, Kraft anticipates the closing or saleof up to 20 plants. During 2004, Kraft announced the closing of 13 plants under the restructuring program.

General

The plants and properties owned and operated by ALG’s subsidiaries are maintained in good condition and are believed to besuitable and adequate for present needs.

Item 3. Legal Proceedings.

Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictionsagainst ALG, its subsidiaries and affiliates, including PM USA and PMI, as well as their respective indemnitees. Various types ofclaims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patentinfringement, employment matters, claims for contribution and claims of competitors and distributors.

Overview of Tobacco-Related Litigation

Types and Number of Cases

Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases allegingpersonal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury andpurporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number ofindividual plaintiffs are to be tried in a single proceeding, (iii) health care cost recovery cases brought by governmental (both domesticand foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarettesmoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class actionsuits alleging that the use of the terms “Lights” and “Ultra Lights” constitutes

16


Table of Contents

deceptive and unfair trade practices, suits by foreign governments seeking to recover damages resulting from the allegedly illegalimportation of cigarettes into various jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement foramounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part bycigarette smoking, and various antitrust suits. Damages claimed in some of the tobacco-related litigation range into the billions ofdollars. Plaintiffs’ theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases arediscussed below.

The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in someinstances, ALG or PMI, as of February 15, 2005, December 31, 2003 and December 31, 2002, and a page-reference to furtherdiscussions of each type of case.

Number of Cases Number of Cases Number of Cases Pending as of Pending as of Pending as of PageType of Case February 15, 2005 December 31, 2003 December 31, 2002 References

IndividualSmoking andHealth Cases(1) 228 423 250 22; Exhibit 99.1, page 1

Smoking andHealth ClassActions andAggregatedClaimsLitigation(2)

7

12

41

22-23; Exhibit 99.1, pages 2-3

Health Care CostRecoveryActions(3) 8 13 41 23-26; Exhibit 99.1, pages 3-5

Lights/ UltraLights ClassActions

22

21

11

26; Exhibit 99.1, pages 5-7

Tobacco PriceCases 2 28 39 26; Exhibit 99.1, page 7

CigaretteContrabandCases

2

5

5

28; Exhibit 99.1, page 8

(1) Does not include 2,662 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly causedby exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smokingand health class action, which was settled in 1997. The terms of the court-approved settlement in that case allow class membersto file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. See the discussionof these cases in “Exhibit 99.1 — Flight Attendant Litigation.”

(2) Includes as one case the aggregated claims of 983 individuals that are proposed to be tried in a single proceeding in WestVirginia.

(3) Includes a health care cost recovery case that was dismissed on February 28, 2005.

There are also a number of other tobacco-related actions pending outside the United States against PMI and its affiliates andsubsidiaries, including an estimated 112 individual smoking and health cases (Argentina (47), Australia (2), Brazil (47), Chile,Colombia, Ireland, Israel (3), Italy (4), the Philippines, Poland, Scotland, Spain (2) and Venezuela), compared with approximately 99such cases on December 31, 2003, and 86 such cases on December 31, 2002. The increase in cases at February 15, 2005, compared toprior periods is due primarily to cases filed in Brazil. In addition, in Italy, eleven cases are pending in the Italian equivalent of smallclaims court where damages are limited to €2,000 per case.

In addition, as of February 15, 2005, there was one smoking and health putative class action pending outside the United Statesagainst PMI (Brazil) compared with four such cases on December 31, 2003, and six such cases on December 31, 2002. Four healthcare cost recovery actions are pending in Israel, Canada, France and Spain against PMI or its affiliates, and two Lights/ Ultra Lightsclass actions are pending in Israel. In February 2005, a Polish social organization filed a representative action against the PMI’s Polishaffiliate and six other Polish tobacco companies; this complaint has not yet been served on PMI’s affiliate.

17


Table of Contents

Pending and Upcoming Trials

Trial is currently underway in the case brought by the United States government in which ALG and PM USA are defendants. For adiscussion of this case, see “Health Care Cost Recovery Litigation — Federal Government’s Lawsuit” below. Trials are also underwayin New York and California in two individual smoking and health cases in which PM USA is a defendant.

Certain cases against PM USA are scheduled for trial through the end of 2005, including a case in which cigarette distributorsallege that PM USA’s Wholesale Leaders program violates antitrust laws, a case brought by cigarette vending machine operatorsalleging that PM USA’s retail promotional and merchandising programs violate the Robinson-Patman Act, and Lights/Ultra Lightsaction in which PM USA and ALG are defendants. In addition, an estimated five individual smoking and health cases are scheduledfor trial through the end of 2005, including two cases scheduled for trial in April 2005 in Florida and Louisiana. In addition, trial isscheduled for April 2005 in a case brought by a flight attendant seeking compensatory damages for personal injuries allegedly causedby exposure to ETS. Cases against other tobacco companies are also scheduled for trial through the end of 2005. Trial dates aresubject to change.

Recent Trial Results

Since January 1999, verdicts have been returned in 39 smoking and health, Lights/ Ultra Lights and health care cost recovery casesin which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 24 of the 39 cases. These 24cases were tried in California (3), Florida (7), Mississippi, Missouri, New Hampshire, New Jersey, New York (3), Ohio (2),Pennsylvania, Rhode Island, Tennessee (2) and West Virginia. Plaintiffs’ appeals or post-trial motions challenging the verdicts arepending in California, Florida, Missouri, and Pennsylvania. A motion for a new trial has been granted in one of the cases in Florida. Inaddition, in December 2002, a court dismissed an individual smoking and health case in California at the end of trial.

Of the fifteen cases in which verdicts were returned in favor of plaintiffs, two have reached final resolution. A $17.8 millionverdict against defendants in a health care cost recovery case (including $6.8 million against PM USA) was reversed, and all claimswere dismissed with prejudice in February 2005 (Blue Cross/ Blue Shield). In October 2004, after exhausting all appeals, PM USApaid $3.7 million in an individual smoking and health case in Florida (Eastman).

The chart below lists the verdict and post-trial developments in the remaining 13 pending cases that have gone to trial sinceJanuary 1999 in which verdicts were returned in favor of plaintiffs.

Location of Court/Name

Date of Plaintiff Type of Case Verdict Post-Trial Developments

October 2004

Florida/ Arnitz

IndividualSmoking andHealth

$240,000 against PM USA.

In January 2005, PM USA’s post- trialmotions challenging the verdict weredenied. PM USA’s appeal is pending.

May 2004

Louisiana/ Scott

Smoking andHealth ClassAction

Approximately $590 million, againstall defendants jointly and severally, tofund a 10-year smoking cessationprogram.

In June 2004, the court enteredjudgment in the amount of the verdict of$590 million, plus prejudgment interestaccruing from the date the suitcommenced. As of February 15, 2005,the amount of prejudgment interest wasapproximately $359 million. PM USA’sshare of the verdict and prejudgmentinterest has not been allocated.Defendants, including PM USA, haveappealed. See Scott Class Action below.

18


Table of Contents



November 2003

Missouri/Thompson


$2.1 million in compensatory damagesagainst all defendants, including$837,403 against PM USA.

In March 2004, the court denieddefendants’ post-trial motionschallenging the verdict. PM USA hasappealed.

March 2003

Illinois/Price

Lights/UltraLights ClassAction

$7.1005 billion in compensatorydamages and $3 billion in punitivedamages against PM USA.

In November 2004, the Illinois SupremeCourt heard arguments on PM USA’sappeal. See the discussion of the Pricecase under the heading “Certain OtherTobacco-Related Litigation — Lights/Ultra Lights Cases.”

October 2002

California/Bullock


$850,000 in compensatory damagesand $28 billion in punitive damagesagainst PM USA.

In December 2002, the trial courtreduced the punitive damages award to$28 million; PM USA and plaintiff haveappealed.

June 2002

Florida/ French

Flight AttendantETS Litigation

$5.5 million in compensatory damagesagainst all defendants, including PMUSA.

In September 2002, the trial courtreduced the damages award to$500,000. In December 2004, theFlorida Third District Court of Appealaffirmed the judgment awardingplaintiff $500,000, and directed the trialcourt to hold defendants jointly andseverally liable. Defendants’ motion forrehearing is pending.

June 2002

Florida/ Lukacs


$37.5 million in compensatorydamages against all defendants,including PM USA.

In March 2003, the trial court reducedthe damages award to $24.86 million.PM USA’s share of the damages awardis approximately $6 million. The courthas not yet entered the judgment on thejury verdict. If a judgment is entered inthis case, PM USA intends to appeal.

March 2002

Oregon/Schwarz


$168,500 in compensatory damagesand $150 million in punitive damagesagainst PM USA.

In May 2002, the trial court reduced thepunitive damages award to$100 million; PM USA and plaintiffhave appealed.

June 2001

California/Boeken


$5.5 million in compensatory damagesand $3 billion in punitive damagesagainst PM USA.

In August 2001, the trial court reducedthe punitive damages award to$100 million. In September 2004, theCalifornia Second District Court ofAppeal reduced the punitive damagesaward to $50 million but otherwiseaffirmed the judgment entered in thecase. Plaintiff and PM USA each soughtrehearing, and in October 2004, theCourt of Appeal granted the parties’motions for rehearing, and heardarguments in February 2005.

19


Table of Contents



July 2000

Florida/ Engle

Smoking andHealthClass Action

$145 billion in punitive damagesagainst all defendants, including$74 billion against PM USA.

In May 2003, the Florida Third DistrictCourt of Appeal reversed the judgmententered by the trial court and instructedthe trial court to order thedecertification of the class. Plaintiffs’motion for reconsideration was deniedin September 2003, and plaintiffspetitioned the Florida Supreme Courtfor further review. In May 2004, theFlorida Supreme Court agreed to reviewthe case, and the Supreme Court heardoral arguments in November 2004. See“Engle Class Action” below.

March 2000

California/Whiteley


$1.72 million in compensatorydamages against PM USA and anotherdefendant, and $10 million in punitivedamages against each of PM USA andthe other defendant.

In April 2004, the California FirstDistrict Court of Appeal enteredjudgment in favor of defendants onplaintiff’s negligent design claims, andreversed and remanded for a new trialon plaintiff’s fraud-related claims.

March 1999

Oregon/Williams


$800,000 in compensatory damages,$21,500 in medical expenses and$79.5 million in punitive damagesagainst PM USA.

The trial court reduced the punitivedamages award to $32 million, and PMUSA and plaintiff appealed. In June2002, the Oregon Court of Appealsreinstated the $79.5 million punitivedamages award. Following the OregonSupreme Court’s refusal to hear PMUSA’s appeal, PM USA recorded aprovision of $32 million in marketing,administration and research costs on the2002 consolidated statement of earningsas its best estimate of the probable lossin this case and petitioned the UnitedStates Supreme Court for furtherreview. In October 2003, the UnitedStates Supreme Court set aside theOregon appellate court’s ruling, anddirected the Oregon court to reconsiderthe case in light of the 2003 State Farmdecision by the United States SupremeCourt, which limited punitive damages.In June 2004, the Oregon Court ofAppeals reinstated the punitive damagesaward. In December 2004, the OregonSupreme Court granted PM USA’spetition for review of the case.

20


Table of Contents



February 1999

California/Henley


$1.5 million in compensatory damagesand $50 million in punitive damagesagainst PM USA.

The trial court reduced the punitivedamages award to $25 million and PMUSA and plaintiff appealed. InSeptember 2003, a California Court ofAppeal, citing the State Farm decision,reduced the punitive damages award to$9 million, but otherwise affirmed thejudgment for compensatory damages,and PM USA appealed to the CaliforniaSupreme Court. In September 2004, theCalifornia Supreme Court dismissedPM USA’s appeal. In October 2004, theCalifornia Court of Appeal issued anorder allowing the execution of thejudgment. PM USA has recorded aprovision of $16 million (includinginterest) in connection with this case.On October 10, 2004, PM USA filed inthe United States Supreme Court anapplication for a stay pending the filingof, and ruling upon, PM USA’s petitionfor certiorari. On October 27, 2004, theSupreme Court granted the stay, whichwill remain in effect until the SupremeCourt either denies PM USA’s petitionfor certiorari or issues its mandate. InDecember 2004, PM USA filed itspetition for certiorari.

In addition to the cases discussed above, in October 2003, a three-judge panel of an appellate court in Brazil reversed a lowercourt’s dismissal of an individual smoking and health case and ordered PMI’s Brazilian affiliate to pay plaintiff approximately$256,000 and other unspecified damages. PMI’s Brazilian affiliate appealed. In December 2004, the three-judge panel’s decision wasvacated by an en banc panel of the appellate court, which upheld the trial court’s dismissal of the case.

With respect to certain adverse verdicts currently on appeal, excluding amounts relating to the Engle and Price cases, as ofFebruary 15, 2005, PM USA has posted various forms of security totaling approximately $360 million, the majority of which havebeen collateralized with cash deposits, to obtain stays of judgments pending appeals. The cash deposits are included in other assets onthe consolidated balance sheets.

Engle Class Action

In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessingpunitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Followingentry of judgment, PM USA posted a bond in the amount of $100 million and appealed.

In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Englejudgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. Asa result of the stipulation, PM USA placed $500 million into

21


Table of Contents

a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court willdetermine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In July 2001, PM USA also placed$1.2 billion into an interest-bearing escrow account, which will be returned to PM USA should it prevail in its appeal of the case. (The$1.2 billion escrow account is included in the December 31, 2004 and December 31, 2003 consolidated balance sheets as other assets.Interest income on the $1.2 billion escrow account is paid to PM USA quarterly and is being recorded as earned, in interest and otherdebt expense, net, in the consolidated statements of earnings.) In connection with the stipulation, PM USA recorded a $500 millionpre-tax charge in its consolidated statement of earnings for the quarter ended March 31, 2001. In May 2003, the Florida Third DistrictCourt of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class.Plaintiffs petitioned the Florida Supreme Court for further review and, in May 2004, the Florida Supreme Court agreed to review thecase. Oral arguments were heard in November 2004.

Scott Class Action

In July 2003, following the first phase of the trial in the Scott class action, in which plaintiffs sought creation of funds to pay formedical monitoring and smoking cessation programs, a Louisiana jury returned a verdict in favor of defendants, including PM USA,in connection with plaintiffs’ medical monitoring claims, but also found that plaintiffs could benefit from smoking cessationassistance. The jury also found that cigarettes as designed are not defective but that the defendants failed to disclose all they knewabout smoking and diseases and marketed their products to minors. In May 2004, in the second phase of the trial, the jury awardedplaintiffs approximately $590 million, against all defendants jointly and severally, to fund a 10-year smoking cessation program. InJune 2004, the court entered judgment, which awarded plaintiffs the approximately $590 million jury award plus prejudgment interestaccruing from the date the suit commenced. As of February 15, 2005, the amount of prejudgment interest was approximately$359 million. PM USA’s share of the jury award and pre-judgment interest has not been allocated. Defendants, including PM USA,have appealed. Pursuant to a stipulation of the parties, the trial court entered an order setting the amount of the bond at $50 million forall defendants in accordance with an article of the Louisiana Code of Civil Procedure, and a Louisiana statute (the “bond cap law”)fixing the amount of security in civil cases involving a signatory to the MSA (as defined below). Under the terms of the stipulation,plaintiffs reserve the right to contest, at a later date, the sufficiency or amount of the bond on any grounds including the applicabilityor constitutionality of the bond cap law. In September 2004, defendants collectively posted a bond in the amount of $50 million.

Smoking and Health Litigation

Overview

Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence,gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties,breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, andclaims under the federal and state anti-racketeering statutes. In certain of these cases, plaintiffs claim that cigarette smokingexacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief,including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medicalmonitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these casesinclude lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations andpreemption by the Federal Cigarette Labeling and Advertising Act.

Smoking and Health Class Actions

Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of “addicted” smokers, plaintiffs havefiled numerous putative smoking and health class action suits in various state and

22


Table of Contents

federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few casespurport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.

Class certification has been denied or reversed by courts in 56 smoking and health class actions involving PM USA in Arkansas,the District of Columbia (2), Florida (the Engle case), Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada(29), New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin. A classremains certified in the Scott class action discussed above.

Health Care Cost Recovery Litigation

Overview

In health care cost recovery litigation, domestic and foreign governmental entities and non-governmental plaintiffs seekreimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures anddamages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutorydamages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits,funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.

The claims asserted include the claim that cigarette manufacturers were “unjustly enriched” by plaintiffs’ payment of health carecosts allegedly attributable to smoking, as well as claims of indemnity, negligence, strict liability, breach of express and impliedwarranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claimsunder federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims underfederal and state anti-racketeering statutes.

Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequateremedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from,the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit, and statutes oflimitations. In addition, defendants argue that they should be entitled to “set off” any alleged damages to the extent the plaintiffbenefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that thesecases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories ofrecovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by “standing inthe shoes” of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individualhealth care recipients and should be subject to all defenses available against the injured party.

Although there have been some decisions to the contrary, most judicial decisions have dismissed all or most health care costrecovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and six state appellate courts, relying primarilyon grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. TheUnited States Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five circuit courts of appeals.

A number of foreign governmental entities have filed health care cost recovery actions in the United States. Such suits have beenbrought in the United States by 13 countries, a Canadian province, 11 Brazilian states and 11 Brazilian cities. Thirty-three of the caseshave been dismissed, and three remain pending. In addition to the cases brought in the United States, health care cost recovery actionshave also been brought in Israel, the Marshall Islands (dismissed), Canada, France and Spain, and other entities have stated that theyare considering filing such actions. In September 2003, the case pending in France was dismissed, and plaintiff has appealed. In May2004, the case in Spain was dismissed, and plaintiff has appealed.

In March 1999, in the first health care cost recovery case to go to trial, an Ohio jury returned a verdict in favor of defendants on allcounts. In June 2001, a New York jury returned a verdict awarding $6.83 million in

23


Table of Contents

compensatory damages against PM USA and a total of $11 million against four other defendants in a health care cost recovery actionbrought by a Blue Cross and Blue Shield plan, and defendants, including PM USA, appealed. In December 2004, the United StatesCourt of Appeals for the Second Circuit vacated the damages award and an accompanying award of attorneys’ fees, reversed thejudgment and remanded the case with instructions to the trial court to dismiss plaintiff’s claims. In February 2005, the trial courtdismissed all of plaintiff’s claims with prejudice. Trial in the health care cost recovery case brought by the City of St. Louis, Missouriand approximately 50 Missouri hospitals, in which PM USA and ALG are defendants, is scheduled for January 2006.

Settlements of Health Care Cost Recovery Litigation

In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the Master SettlementAgreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, AmericanSamoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certainother United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas andMinnesota (together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements require that the domestictobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by theagreement with tobacco growers discussed below), subject to adjustments for several factors, including inflation, market share andindustry volume: 2005 through 2007, $8.4 billion each year; and thereafter, $9.4 billion each year. In addition, the domestic tobaccoindustry is required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million.

The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure ofcertain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbyingactivities and other provisions.

As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concernsabout the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, in 1999, four of themajor domestic tobacco product manufacturers, including PM USA, and the grower states, established the NTGST, a trust fund toprovide aid to tobacco growers and quota-holders. The trust was to be funded by these four manufacturers over 12 years withpayments, prior to application of various adjustments, scheduled to total $5.15 billion. Remaining industry payments (2005 through2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, includinginflation, United States cigarette volume and certain contingent events, and, in general are to be allocated based on eachmanufacturer’s relative market share. Provisions of the NTGST allow for offsets to the extent that payments are made to growers aspart of a legislated end to the federal tobacco quota and price support program.

In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) was signed into law. FETRA provides for theelimination of the federal tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quotaholders. The cost of the buy-out is approximately $9.6 billion and will be paid over 10 years by manufacturers and importers of alltobacco products. The cost will be allocated based on the relative market shares of manufacturers and importers of all tobaccoproducts. PM USA expects that its quota buy-out payments will offset already scheduled payments to the NTGST. Manufacturers andimporters of tobacco products are also obligated to cover any losses (up to $500 million) that the government may incur on thedisposition of pool stock tobacco accumulated under the previous tobacco price support program. PM USA’s share of tobacco poolstock losses cannot currently be determined, as the calculation of any such losses will depend on a number of factors, including theextent to which the government can sell such pool tobacco and thereby mitigate or avoid losses. Altria Group, Inc. does not anticipatethat the quota buy-out will have a material adverse impact on its consolidated results in 2005 and beyond.

Following the enactment of FETRA, the trustee of the NTGST and the state entities conveying NTGST payments to tobaccogrowers and quota holders sued tobacco product manufacturers alleging that the offset

24


Table of Contents

provisions do not apply to payments due in 2004. In December 2004, a North Carolina court ruled that the tobacco companies,including PM USA, are entitled to receive a refund of amounts paid to the NTGST during the first three quarters of 2004 and are notrequired to make the payments that would otherwise have been due during the fourth quarter of 2004. Plaintiffs have appealed. If thetrial court’s ruling is upheld, PM USA would reverse accruals and receive reimbursements totaling $232 million.

The State Settlement Agreements have materially adversely affected the volumes of PM USA, and ALG believes that they mayalso materially adversely affect the results of operations, cash flows or financial position of PM USA and Altria Group, Inc. in futureperiods. The degree of the adverse impact will depend on, among other things, the rate of decline in United States cigarette sales in thepremium and discount segments, PM USA’s share of the domestic premium and discount cigarette segments, and the effect of anyresulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements.

In April 2004, a lawsuit was filed in state court in Los Angeles, California, on behalf of all California residents who purchasedcigarettes in California from April 2000 to the present, alleging that the MSA enabled the defendants, including PM USA and ALG, toengage in unlawful price fixing and market sharing agreements. The complaint sought damages and also sought to enjoin defendantsfrom continuing to operate under those provisions of the MSA that allegedly violate California law. In June, plaintiffs dismissed thiscase and refiled a substantially similar complaint in federal court in San Francisco, California. The new complaint is brought on behalfof the same purported class but differs in that it covers purchases from June 2000 to the present, names the Attorney General ofCalifornia as a defendant, and does not name ALG as a defendant. PM USA’s motion to dismiss the case is pending.

There is a suit pending against New York state officials, in which importers of cigarettes allege that the MSA and certain NewYork statutes enacted in connection with the MSA violate federal antitrust law. Neither ALG nor PM USA is a defendant in this case.In September 2004, the court denied plaintiffs’ motion to preliminarily enjoin the MSA and certain related New York statutes, but thecourt issued a preliminary injunction against an amendment repealing the “allocable share” provision of the New York EscrowStatute. Plaintiffs have appealed the trial court’s September 2004 order to the extent that it denied their request for a preliminaryinjunction. In addition, a similar putative class action has been brought in the Commonwealth of Kentucky challenging the repeal ofcertain implementing legislation that had been enacted in Kentucky subsequent to the MSA. Neither ALG nor PM USA is a defendantin the case in Kentucky.

Federal Government’s Lawsuit

In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia againstvarious cigarette manufacturers, including PM USA, and others, including ALG, asserting claims under three federal statutes, theMedical Care Recovery Act (“MCRA”), the Medicare Secondary Payer (“MSP”) provisions of the Social Security Act and theRacketeer Influenced and Corrupt Organizations Act (“RICO”). Trial of the case is currently underway. The lawsuit seeks to recoveran unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants’ fraudulent and tortiousconduct and paid for by the government under various federal health care programs, including Medicare, military and veterans’ healthbenefits programs, and the Federal Employees Health Benefits Program. The complaint alleges that such costs total more than$20 billion annually. It also seeks what it alleges to be equitable and declaratory relief, including disgorgement of profits which arosefrom defendants’ allegedly tortious conduct, an injunction prohibiting certain actions by the defendants, and a declaration that thedefendants are liable for the federal government’s future costs of providing health care resulting from defendants’ alleged past tortiousand wrongful conduct. In September 2000, the trial court dismissed the government’s MCRA and MSP claims, but permitteddiscovery to proceed on the government’s claims for relief under RICO. The government alleges that disgorgement by defendants ofapproximately $280 billion is an appropriate remedy. In May 2004, the trial court issued an order denying defendants’ motion forpartial summary judgment limiting the disgorgement remedy. In February 2005, a panel of the United States Court of Appeals for theDistrict of Columbia Circuit held that disgorgement is not a remedy available to the government under RICO and entered summaryjudgment in favor of defendants, with respect to the disgorgement claim. The government’s motion for rehearing is pending. In July2004, the trial court found that

25


Table of Contents

PM USA had inadequately complied with a document preservation order and ordered that persons who failed to comply with PMUSA’s document retention program will not be permitted to testify at trial and PM USA and ALG jointly pay $2,750,000 to the courtby September 1, 2004. This amount was paid to the court in September 2004. PM USA and ALG have sought rehearing of the judge’sruling.

Certain Other Tobacco-Related Litigation Lights/ Ultra Lights Cases: These class actions have been brought against PM USA and, in certain instances, ALG and PMI or itssubsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, MarlboroUltra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Plaintiffs in these class actions allege, amongother things, that the use of the terms “Lights” and/or “Ultra Lights” constitutes deceptive and unfair trade practices, and seekinjunctive and equitable relief, including restitution and, in certain cases, punitive damages. Cases are pending in Arkansas (2),Delaware, Florida, Georgia, Illinois (2), Louisiana, Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, New Jersey,New York, Ohio (2), Oregon, Tennessee, Washington, and West Virginia (2). In addition, there are two cases pending in Israel, andother entities have stated that they are considering filing such actions. To date, a trial court in Arizona has refused to certify a class,and an appellate court in Florida has overturned class certification by a trial court. Plaintiffs in the Florida case have petitioned theFlorida Supreme Court for further review, and the Supreme Court has stayed further proceedings pending its decision in the Englecase discussed above. Trial courts have certified classes against PM USA in the Price case in Illinois and in Massachusetts (Aspinall),Minnesota, Missouri and Ohio (2). PM USA has appealed or otherwise challenged these class certification orders. In August 2004,Massachusetts’ highest court affirmed the class certification order in the Aspinall case. In September 2004, an appellate court affirmedthe class certification orders in the cases in Ohio, and PM USA sought review by the Ohio Supreme Court. In February 2005, the OhioSupreme Court accepted the cases for review to determine whether a prior determination has been made by the State of Ohio that theconduct at issue is deceptive such that plaintiffs may pursue private claims. Trial of the case pending in New York is scheduled forNovember 2005. With respect to the Price case, trial commenced in January 2003, and in March 2003, the judge found in favor of the plaintiff classand awarded approximately $7.1 billion in compensatory damages and $3 billion in punitive damages against PM USA. In April 2003,the judge reduced the amount of the appeal bond that PM USA must provide and ordered PM USA to place a pre-existing 7.0%,$6 billion long-term note from ALG to PM USA in an escrow account with an Illinois financial institution. (Since this note is theresult of an intercompany financing arrangement, it does not appear on the consolidated balance sheets of Altria Group, Inc.) Thejudge’s order also requires PM USA to make cash deposits with the clerk of the Madison County Circuit Court in the followingamounts: beginning October 1, 2003, an amount equal to the interest earned by PM USA on the ALG note ($210 million every sixmonths), an additional $800 million in four equal quarterly installments between September 2003 and June 2004 and the payments ofprincipal of the note, which are due in April 2008, 2009 and 2010. Through December 31, 2004, PM USA paid $1.4 billion of the cashpayments due under the judge’s order. (Cash payments into the account are included in other assets on Altria Group, Inc.’sconsolidated balance sheets at December 31, 2004 and 2003.) If PM USA prevails on appeal, the escrowed note and all cash depositedwith the court will be returned to PM USA, with accrued interest less administrative fees payable to the court. Plaintiffs appealed thejudge’s order reducing the bond. In July 2003, the Illinois Fifth District Court of Appeals ruled that the trial court had exceeded itsauthority in reducing the bond. In September 2003, the Illinois Supreme Court upheld the reduced bond set by the trial court andannounced it would hear PM USA’s appeal on the merits without the need for intermediate appellate court review. PM USA believesthat the Price case should not have been certified as a class action and that the judgment should ultimately be set aside on any of anumber of legal and factual grounds that it is pursuing on appeal. Oral arguments on PM USA’s appeal were heard in November 2004. Tobacco Price Cases: As of February 15, 2005, two cases were pending in Kansas and New Mexico in which plaintiffs allege thatdefendants, including PM USA, conspired to fix cigarette prices in violation of antitrust laws. ALG and PMI are defendants in the casein Kansas. Plaintiffs’ motions for class certification have been granted in both cases. In February 2005, the New Mexico Court ofAppeals affirmed the class certification decision.

26


Table of Contents

Wholesale Leaders Cases: In June 2003, certain wholesale distributors of cigarettes filed suit against PM USA seeking to enjointhe PM USA “2003 Wholesale Leaders” (“WL”) program that became available to wholesalers in June 2003. The complaint allegesthat the WL program constitutes unlawful price discrimination and is an attempt to monopolize. In addition to an injunction, plaintiffsseek unspecified monetary damages, attorneys’ fees, costs and interest. The states of Tennessee and Mississippi intervened asplaintiffs in this litigation. In January 2004, Tennessee filed a motion to dismiss its complaint, and the complaint was dismissedwithout prejudice in March 2004. In August 2003, the trial court issued a preliminary injunction, subject to plaintiffs’ posting a bondin the amount of $1 million, enjoining PM USA from implementing certain discount terms with respect to the sixteen wholesaledistributor plaintiffs, and PM USA appealed. In September 2003, the United States Court of Appeals for the Sixth Circuit granted PMUSA’s motion to stay the injunction pending PM USA’s expedited appeal. Trial is currently scheduled for July 2005. In December2003, a tobacco manufacturer filed a similar lawsuit against PM USA in Michigan seeking unspecified monetary damages in which italleges that the WL program constitutes unlawful price discrimination and is an attempt to monopolize. Plaintiff voluntarily dismissedits claims alleging price discrimination, and in July 2004, the court granted defendants’ motion to dismiss the attempt-to-monopolizeclaim. Plaintiff has appealed.

Consolidated Putative Punitive Damages Cases: In September 2000, a putative class action was filed in the federal district court inthe Eastern District of New York that purported to consolidate punitive damages claims in ten tobacco-related actions then pending infederal district courts in New York and Pennsylvania. In July 2002, plaintiffs filed an amended complaint and a motion seekingcertification of a punitive damages class of persons residing in the United States who smoke or smoked defendants’ cigarettes, andwho have been diagnosed by a physician with an enumerated disease from April 1993 through the date notice of the certification ofthis class is disseminated. The following persons are excluded from the class: (1) those who have obtained judgments or settlementsagainst any defendants; (2) those against whom any defendant has obtained judgment; (3) persons who are part of the Engle class;(4) persons who should have reasonably realized that they had an enumerated disease prior to April 9, 1993; and (5) those whosediagnosis or reasonable basis for knowledge predates their use of tobacco. In September 2002, the court granted plaintiffs’ motion forclass certification. Defendants petitioned the United States Court of Appeals for the Second Circuit for review of the trial court’sruling, and the Second Circuit agreed to hear defendants’ petition. The parties are awaiting the Second Circuit’s decision. Trial of thecase has been stayed pending resolution of defendants’ petition.

Cases Under the California Business and Professions Code: In June 1997 and July 1998, two suits were filed in California statecourt alleging that domestic cigarette manufacturers, including PM USA and others, have violated California Business and ProfessionsCode Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices. Class certification was granted in bothcases as to plaintiffs’ claims that class members are entitled to reimbursement of the costs of cigarettes purchased during the classperiods and injunctive relief. In September 2002, the court granted defendants’ motion for summary judgment as to all claims in oneof the cases, and plaintiffs appealed. In October 2004, the California Fourth District Court of Appeal affirmed the trial court’s ruling,and also denied plaintiffs’ motion for rehearing. In February 2005, the California Supreme Court agreed to hear plaintiffs’ appeal. InSeptember 2004, the trial court in the other case granted defendants’ motion for summary judgment as to plaintiffs’ claims attackingdefendants’ cigarette advertising and promotion and denied defendants’ motion for summary judgment on plaintiffs’ claims based onallegedly false affirmative statements. Plaintiffs’ motion for rehearing is pending. In March 2005, the court granted defendants’motion to decertify the class based on a recent change in California law.

In May 2004, a lawsuit was filed in California state court on behalf of a purported class of all California residents who purchasedthe Merit brand of cigarettes since July 2000 to the present alleging that defendants, including PM USA and ALG, violatedCalifornia’s Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices,including false and misleading advertising. The complaint also alleges violations of California’s Consumer Legal Remedies Act.Plaintiffs seek injunctive relief, disgorgement, restitution, and attorneys’ fees. In July 2004, plaintiffs voluntarily dismissed ALG fromthe case. PM USA’s motion to dismiss the case is pending.

27


Table of Contents

Asbestos Contribution Cases: These cases, which have been brought on behalf of former asbestos manufacturers and affiliatedentities against PM USA and other cigarette manufacturers, seek, among other things, contribution or reimbursement for amountsexpended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarettesmoking. In January 2005, one case was dismissed; currently, one case remains pending.

Cigarette Contraband Cases: In May 2000 and August 2001, various departments of Colombia and the European Community andten member states filed suits in the United States against ALG and certain of its subsidiaries, including PM USA and PMI, and othercigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported intovarious jurisdictions. The claims asserted in these cases include negligence, negligent misrepresentation, fraud, unjust enrichment,violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages andunspecified injunctive relief. In February 2002, the trial court granted defendants’ motions to dismiss the actions. Plaintiffs in eachcase appealed. In January 2004, the United States Court of Appeals for the Second Circuit affirmed the dismissals of the cases. InApril 2004, plaintiffs petitioned the United States Supreme Court for further review. The European Community and the 10 memberstates moved to dismiss their petition in July 2004 following the agreement entered into among PMI, the European Commission and10 member states of the European Community. The terms of this cooperation agreement provide for broad cooperation with Europeanlaw enforcement agencies on anti-contraband and anti-counterfeit efforts and resolve all disputes between the parties on these issues.It is possible that future litigation related to cigarette contraband issues may be brought.

Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vending machine operators,allege that PM USA has violated the Robinson-Patman Act in connection with its promotional and merchandising programs availableto retail stores and not available to cigarette vending machine operators. The initial complaint was amended to bring the total numberof plaintiffs to 211 but, by stipulated orders, all claims were stayed, except those of ten plaintiffs that proceeded to pre-trial discovery.Plaintiffs request actual damages, treble damages, injunctive relief, attorneys’ fees and costs, and other unspecified relief. In June1999, the court denied plaintiffs’ motion for a preliminary injunction. Plaintiffs have withdrawn their request for class action status. InAugust 2001, the court granted PM USA’s motion for summary judgment and dismissed, with prejudice, the claims of the tenplaintiffs. In October 2001, the court certified its decision for appeal to the United States Court of Appeals for the Sixth Circuitfollowing the stipulation of all plaintiffs that the district court’s dismissal would, if affirmed, be binding on all plaintiffs. In January2004, the Sixth Circuit reversed the lower court’s grant of summary judgment with respect to plaintiffs’ claim that PM USA violatedRobinson-Patman Act provisions regarding promotional services and with respect to the discriminatory pricing claim of plaintiffs whobought cigarettes directly from PM USA. In October 2004, the United States Supreme Court denied PM USA’s petition for furtherreview. Trial is scheduled for July 2005.

Certain Other Actions

Italian Tax Matters: In recent years, approximately two hundred tax assessments alleging nonpayment of taxes in Italy wereserved upon certain affiliates of PMI. All of these assessments were resolved in 2003 and the second quarter of 2004, with theexception of certain assessments which were duplicative of other assessments. Legal proceedings continue in order to resolve theseduplicative assessments.

Italian Antitrust Case: During 2001, the competition authority in Italy initiated an investigation into the pricing activities byparticipants in that cigarette market. In March 2003, the authority issued its findings, and imposed fines totaling 50 million euro oncertain affiliates of PMI. PMI’s affiliates appealed to the administrative court, which rejected the appeal in July 2003. PMI believesthat its affiliates have numerous grounds for appeal, and in February 2004, its affiliates appealed to the supreme administrative court.However, under Italian law, if fines are not paid within certain specified time periods, interest and eventually penalties will be appliedto the fines. Accordingly, in December 2003, pending final resolution of the case, PMI’s affiliates paid 51 million euro representingthe fines and any applicable interest to the date of payment. The

28


Table of Contents

51 million euro will be returned to PMI’s affiliates if they prevail on appeal. Accordingly, the payment has been included in otherassets on Altria Group, Inc.’s consolidated balance sheets.

PMCC Federal Income Tax Matter: The IRS is examining the consolidated tax returns for Altria Group, Inc., which includePMCC for years 1996 through 1999. Recently, the IRS has challenged some, and in the future may challenge several more of PMCC’sleveraged leases based on recent Revenue Rulings and a recent IRS Notice addressing specific types of leveraged leases (lease in/leaseout transactions, qualified technological equipment transactions, and sale in/lease out transactions). PMCC believes that the positionand supporting case law described in the Revenue Rulings and the IRS Notice are incorrectly applied to PMCC’s transactions and thatits leveraged leases are factually and legally distinguishable in material respects from the IRS’s position. PMCC and its parent, ALG,intend vigorously to defend against any challenges based on that position through administrative appeals and litigation, if necessary,and ALG believes that the ultimate outcome of such challenges will not have a material adverse impact on Altria Group, Inc.’sconsolidated results of operations, cash flows or financial position.

It is not possible to predict the outcome of the litigation pending against ALG and its subsidiaries. Litigation is subject to manyuncertainties. As discussed above under “Recent Trial Results,” unfavorable verdicts awarding substantial damages against PM USAhave been returned in 15 cases since 1999. Of the fifteen cases in which verdicts were returned in favor of plaintiffs, two have reachedfinal resolution. A verdict against defendants in a health care cost recovery case has been reversed and all claims were dismissed withprejudice, and after exhausting all appeals, PM USA paid $3.7 million in an individual smoking and health case in Florida. Theremaining 13 cases are in various post-trial stages. It is possible that there could be further adverse developments in these cases andthat additional cases could be decided unfavorably. In the event of an adverse trial result in certain pending litigation, the defendantmay not be able to obtain a required bond or obtain relief from bonding requirements in order to prevent a plaintiff from seeking tocollect a judgment while an adverse verdict is being appealed. An unfavorable outcome or settlement of pending tobacco-relatedlitigation could encourage the commencement of additional litigation. There have also been a number of adverse legislative,regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespreadmedia attention. These developments may negatively affect the perception of judges and jurors with respect to the tobacco industry,possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation.

ALG and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine thatan unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as discussed elsewhere in thisItem 3. Legal Proceedings: (i) management has not concluded that it is probable that a loss has been incurred in any of the pendingtobacco-related litigation; (ii) management is unable to make a meaningful estimate of the amount or range of loss that could resultfrom an unfavorable outcome of pending tobacco-related litigation; and (iii) accordingly, management has not provided any amountsin the consolidated financial statements for unfavorable outcomes, if any.

The present legislative and litigation environment is substantially uncertain, and it is possible that the business and volume ofALG’s subsidiaries, as well as Altria Group, Inc.’s consolidated results of operations, cash flows or financial position could bematerially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or statetobacco legislation. ALG and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handlingthe respective cases, that it has a number of valid defenses to the litigation pending against it, as well as valid bases for appeal ofadverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, ALG and its subsidiaries mayenter into settlement discussions in particular cases if they believe it is in the best interests of ALG’s stockholders to do so.

Reference is made to Note 19 for a description of certain pending legal proceedings. Reference is also made to Exhibit 99.1 to thisForm 10-K for a list of pending smoking and health class actions, health care cost recovery actions, and certain other actions, and for adescription of certain developments in such proceedings; and Exhibit 99.2 for a schedule of the smoking and health class action, healthcare cost recovery action, and individual smoking and health cases, which are currently scheduled for trial through the end of 2005.Copies of

29


Table of Contents

Note 19 and Exhibits 99.1 and 99.2 are available upon written request to the Corporate Secretary, Altria Group, Inc., 120 ParkAvenue, New York, NY 10017.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

ALG’s share repurchase activity for each of the three months ended December 31, 2004, were as follows:

Total Number of Approximate Dollar Shares Purchased as Value of Shares that Total Number of Part of Publicly May Yet be

Shares Average PricePaid Announced Plans or Purchased Under the

Period Repurchased(1) per Share Programs Plans or Programs

October 1, 2004 —October 31, 2004 91,780 $ 47.55 — —

November 1, 2004 —November 30, 2004 217,033 $ 55.61 — —

December 1, 2004 —December 31, 2004 110,821 $ 59.22 — —

For the Quarter EndedDecember 31, 2004 419,634 $ 54.80

(1) The shares repurchased during the periods presented above represent shares tendered to ALG by employees who exercised stockoptions and used previously owned shares to pay all, or a portion of, the option exercise price and related taxes.

The other information called for by this Item is hereby incorporated by reference to the paragraph captioned “Quarterly FinancialData (Unaudited)” on pages 74 to 75 of the 2004 Annual Report and made a part hereof.

Item 6. Selected Financial Data.

The information called for by this Item is hereby incorporated by reference to the information with respect to 2000-2004 appearingunder the caption “Selected Financial Data” on page 39 of the 2004 Annual Report and made a part hereof.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

The information called for by this Item is hereby incorporated by reference to the paragraphs captioned “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) on pages 17 to 38 of the 2004 Annual Reportand made a part hereof.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The information called for by this Item is hereby incorporated by reference to the paragraphs in the MD&A captioned “MarketRisk” and “Value at Risk” on pages 35 to 36 of the 2004 Annual Report and made a part hereof.

30


Table of Contents

Item 8. Financial Statements and Supplementary Data.

The information called for by this Item is hereby incorporated by reference to the 2004 Annual Report as set forth under thecaption “Quarterly Financial Data (Unaudited)” on pages 74 to 75 and in the Index to Consolidated Financial Statements andSchedules (see Item 15) and made a part hereof.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Altria Group, Inc. carried out an evaluation, with the participation of Altria Group, Inc.’s management, including ALG’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of Altria Group, Inc.’s disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.Based upon that evaluation, ALG’s Chief Executive Officer and Chief Financial Officer concluded that Altria Group, Inc.’s disclosurecontrols and procedures are effective.

See Exhibit 13 for the Report of Management on Internal Control over Financial Reporting and the Report of IndependentRegistered Public Accounting Firm containing an attestation thereto.

Item 9B. Other Information.

On March 12, 2005, PT Philip Morris Indonesia (“PM Indonesia”), a subsidiary of PMI, entered into agreements to acquire 40% ofthe outstanding shares of PT HM Sampoerna Tbk (“Sampoerna”) from a number of Sampoerna’s principal shareholders.PM Indonesia also will proceed with a public tender offer for all of the remaining shares at a price per share of IDR 10,600(U.S. $1.13 per share), the price per share to be paid to the principal shareholders. Assuming all shares are acquired, the total cost ofthe transaction will be approximately $5.2 billion (based on an exchange rate of IDR 9,365 to U.S. $1.00), including Sampoerna’s netdebt of the U.S.$ equivalent of approximately $160 million. Sampoerna’s shares are listed in Indonesia on the Jakarta and Surabayaexchanges.

Sampoerna is Indonesia’s third-largest tobacco company, with estimated domestic tobacco volume of 41 billion units in 2004.Sampoerna acts as PMI’s exclusive distributor in Indonesia. Sampoerna’s kretek cigarette brands held an estimated 19.4% share of themarket in 2004. Kreteks are cigarettes made with both tobacco and cloves, and represent 92% of the total Indonesian cigarette market,which is estimated at more than 200 billion units annually.

Subject to customary regulatory approvals, PMI anticipates completing the transaction within approximately 90 days. Thepurchase price will be financed through a bank credit facility to be arranged for PMI and its subsidiaries. Following announcement ofthe transaction, Moody’s, Standard & Poor’s and Fitch Rating Services each affirmed ALG’s credit ratings and outlook.

31


Table of Contents

PART III

Item 10. Directors and Executive Officers of the Registrant.

Executive Officers as of February 28, 2005:

Name Office Age

André Calantzopoulos President and Chief Executive Officer of Philip MorrisInternational Inc. 48

Louis C. Camilleri Chairman of the Board and Chief Executive Officer 50 Nancy J. De Lisi Senior Vice President, Mergers and Acquisitions 54 Roger K. Deromedi Chief Executive Officer of Kraft Foods Inc. 51 Dinyar S. Devitre Senior Vice President and Chief Financial Officer 57 Amy J. Engel Vice President and Treasurer 48 David I. Greenberg Senior Vice President and Chief Compliance Officer 50 G. Penn Holsenbeck Vice President, Associate General Counsel and Corporate

Secretary 58

Kenneth F. Murphy Senior Vice President, Human Resources and Administration 49 Steven C. Parrish Senior Vice President, Corporate Affairs 54 Walter V. Smith Vice President, Taxes 61 Michael E. Szymanczyk Chairman and Chief Executive Officer of Philip Morris USA

Inc. 56

Joseph A. Tiesi Vice President and Controller 46 Charles R. Wall Senior Vice President and General Counsel 59

With the exception of Dinyar S. Devitre, all of the above-mentioned officers have been employed by Altria Group, Inc. in variouscapacities during the past five years. Dinyar S. Devitre was appointed Senior Vice President and Chief Financial Officer effectiveApril 25, 2002. From April 2001 to March 2002, he was a private business consultant. From January 1998 to March 2001, Mr. Devitrewas Executive Vice President at Citigroup Inc. in Europe. Prior to 1998, Mr. Devitre had been employed by ALG or its subsidiaries invarious capacities since 1970.

Codes of Conduct and Corporate Governance

ALG has adopted the Altria Code of Conduct for Compliance and Integrity, which complies with requirements set forth inItem 406 of Regulation S-K, and this Code of Conduct applies to all of its employees, including its principal executive officer,principal financial officer, principal accounting officer or controller, and persons performing similar functions. ALG has also adopteda code of business conduct and ethics that applies to the members of its Board of Directors. These documents are available free ofcharge on ALG’s web site at www.altria.com and will be provided free of charge to any stockholder requesting a copy by writing to:Corporate Secretary, Altria Group, Inc., 120 Park Avenue, New York, NY 10017.

In addition, ALG has adopted corporate governance guidelines and charters for its Audit, Compensation and Nominating andCorporate Governance Committees and the other committees of the board of directors. All of these documents are available free ofcharge on ALG’s web site at www.altria.com, are included in ALG’s definitive proxy statement, and will be provided free of charge toany stockholder requesting a copy by writing to: Corporate Secretary, Altria Group, Inc., 120 Park Avenue, New York, NY 10017.

The information on ALG’s web site is not, and shall not be deemed to be, a part of this Report or incorporated into any otherfilings made with the SEC.

32


Table of Contents

Item 11. Executive Compensation.

Except for the information relating to the executive officers set forth above in Item 10 and the information relating to equitycompensation plans set forth in Item 12, the information called for by Items 10-14 is hereby incorporated by reference to ALG’sdefinitive proxy statement for use in connection with its annual meeting of stockholders to be held on April 28, 2005, filed with theSEC on March 14, 2005, and, except as indicated therein, made a part hereof.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The number of shares to be issued upon exercise or vesting and the number of shares remaining available for future issuance underALG’s equity compensation plans at December 31, 2004, were as follows:

Number of Shares to be Issued upon Number of Shares Exercise of Outstanding Weighted Average Remaining Available for Options and Vesting of Exercise Price of Future Issuance Under

Restricted Stock OutstandingOptions Equity Compensation Plans

Equity compensation plansapproved by stockholders 77,601,050 $ 39.93 86,775,831

Item 13. Certain Relationships and Related Transactions.

See Item 11.

Item 14. Principal Accounting Fees and Services.

See Item 11.

33


Table of Contents

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Index to Consolidated Financial Statements and Schedules

Reference

Form 10-K 2004

AnnualReport Annual Report

Page Page

Data incorporated by reference to Altria Group, Inc.’s 2004 Annual Report: Consolidated Balance Sheets at December 31, 2004 and 2003 — 40-41

Consolidated Statements of Earnings for the years ended December 31,2004, 2003 and 2002 — 42

Consolidated Statements of Stockholders’ Equity for the years endedDecember 31, 2004, 2003 and 2002 — 43

Consolidated Statements of Cash Flows for the years ended December 31,2004, 2003 and 2002 — 44-45

Notes to Consolidated Financial Statements — 46-75 Report of Independent Registered Public Accounting Firm — 76 Data submitted herewith:

Report of Independent Registered Public Accounting Firm on FinancialStatement Schedule S-1 —

Financial Statement Schedule — Valuation and Qualifying Accounts S-2 —

Schedules other than those listed above have been omitted either because such schedules are not required or are not applicable.

(b) The following exhibits are filed as part of this Report:

3.1 — Articles of Amendment to the Restated Articles of Incorporation of ALG and Restated Articles ofIncorporation of ALG.(22)

3.2 — By-Laws, as amended, of ALG.(23)

4.1 — Indenture dated as of August 1, 1990, between ALG and JPMorgan Chase Bank, Trustee.(1)

4.2 — First Supplemental Indenture dated as of February 1, 1991, to Indenture dated as of August 1,

1990, between ALG and JPMorgan Chase Bank (formerly known as Chemical Bank), Trustee.(2)

4.3 — Second Supplemental Indenture dated as of January 21, 1992, to Indenture dated as of August 1,1990, between ALG and JPMorgan Chase Bank (formerly known as Chemical Bank), Trustee.(3)

4.4 — Indenture dated as of December 2, 1996, between ALG and JPMorgan Chase Bank, Trustee.(4)

4.5 — Indenture dated as of October 17, 2001, between Kraft Foods Inc. and JPMorgan Chase Bank,

Trustee.(19)

4.6

—

5-Year Revolving Credit Agreement dated as of July 24, 2001, among Altria Group, Inc., theInitial Lenders named therein, JPMorgan Chase Bank (formerly known as The Chase ManhattanBank), and Citibank, N.A. as Administrative Agents, Credit Suisse First Boston and DeutscheBank AG New York Branch and/or Cayman Islands Branch as Syndication Agents, ABN AMROBank N.V., BNP Paribas, Dresdner Bank AG, New York and Grand Cayman Branches and HSBCBank USA as Arrangers and Documentation Agents.(21)

4.7

—

The Registrant agrees to furnish copies of any instruments defining the rights of holders oflong-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percentof the total assets of the Registrant and its consolidated subsidiaries to the Commission uponrequest.

10.1 — Financial Counseling Program.(5)

10.2 — Benefit Equalization Plan, as amended.(6)

10.3 — Form of Employee Grantor Trust Enrollment Agreement.(7)


34


Table of Contents

10.4 — Automobile Policy.(5) 10.5 — Form of Employment Agreement between ALG and its executive officers.(8) 10.6 — Supplemental Management Employees’ Retirement Plan of ALG, as amended.(5) 10.7 — 1992 Incentive Compensation and Stock Option Plan.(5) 10.8 — 1992 Compensation Plan for Non-Employee Directors, as amended.(9) 10.9 — Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996.(7) 10.10 — Form of Executive Master Trust between ALG, JPMorgan Chase Bank and Handy Associates.(8) 10.11 — 1997 Performance Incentive Plan.(10) 10.12 — Long-Term Disability Benefit Equalization Plan, as amended.(5) 10.13 — Survivor Income Benefit Equalization Plan, as amended.(5) 10.14 — 2000 Performance Incentive Plan.(17) 10.15 — 2000 Stock Compensation Plan for Non-Employee Directors, as amended.(22) 10.16 — Comprehensive Settlement Agreement and Release dated October 17, 1997, related to settlement

of Mississippi health care cost recovery action.(5) 10.17 — Settlement Agreement dated August 25, 1997, related to settlement of Florida health care cost

recovery action.(11) 10.18 — Comprehensive Settlement Agreement and Release dated January 16, 1998, related to settlement

of Texas health care cost recovery action.(12) 10.19 — Settlement Agreement and Stipulation for Entry of Judgment, dated May 8, 1998, regarding the

claims of the State of Minnesota.(13) 10.20 — Settlement Agreement and Release, dated May 8, 1998, regarding the claims of Blue Cross and

Blue Shield of Minnesota.(13) 10.21 — Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order, dated July 2,

1998, regarding the settlement of the Mississippi health care cost recovery action.(14) 10.22 — Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated

July 24, 1998, regarding the settlement of the Texas health care cost recovery action.(14) 10.23 — Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated

September 11, 1998, regarding the settlement of the Florida health care cost recovery action.(15) 10.24 — Master Settlement Agreement relating to state health care cost recovery and other claims.(16) 10.25 — Stipulation and Agreed Order Regarding Stay of Execution Pending Review and Related

Matters.(18) 10.26 — Agreement among ALG, PM USA and Michael E. Szymanczyk.(20) 10.27 — Description of Agreement with Roger K. Deromedi.(24) 10.28 — Anti-Contraband and Anti-Counterfeit Agreement and General Release dated July 9, 2004 and

Appendixes.(25) 10.29 — Form of Restricted Stock Agreement.(26) 10.30 — Description of Agreement with Louis C. Camilleri.


10.31

—

Agreement for the Sale and Purchase of 1,377,525,000 shares in PT HM Sampoerna Tbk datedMarch 12, 2005, between Dubuis Holding Limited and PT Philip Morris Indonesia (PT PhilipMorris Indonesia entered into agreements with a number of other principal shareholders on termssubstantially identical in all material respects).

12 — Statements re: computation of ratios. 13

—

Pages 16 to 77 of the 2004 Annual Report, but only to the extent set forth in Items 1, 3, 5-8, and15 hereof. With the exception of the aforementioned information incorporated by reference in thisAnnual Report on Form 10-K, the 2004 Annual Report is not to be deemed “filed” as part of thisReport.

21 — Subsidiaries of ALG. 23 — Consent of independent auditors.

35


Table of Contents

24 — Powers of attorney. 31.1

—

Certifications of the Registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) ofthe Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

31.2

—

Certifications of the Registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) ofthe Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

32.1 — Certification of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 — Certification of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 — Certain Pending Litigation Matters and Recent Developments. 99.2 — Trial Schedule.

(1) Incorporated by reference to ALG’s Registration Statement on Form S-3 (No. 33-36450) dated August 22, 1990 (FileNo. 1-08940).

(2) Incorporated by reference to ALG’s Registration Statement on Form S-3 (No. 33-39059) dated February 21, 1991 (FileNo. 1-08940).

(3) Incorporated by reference to ALG’s Registration Statement on Form S-3 (No. 33-45210) dated January 22, 1992 (FileNo. 1-08940).

(4) Incorporated by reference to ALG’s Registration Statement on Form S-3/ A (No. 333-35143) dated January 29, 1998 (FileNo. 1-08940).

(5) Incorporated by reference to ALG’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940).




(9) Incorporated by reference to ALG’s Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-08940).(10) Incorporated by reference to ALG’s proxy statement dated March 10, 1997 (File No. 1-08940).

(11) Incorporated by reference to ALG’s Current Report on Form 8-K dated September 3, 1997 (File No. 1-08940).

(12) Incorporated by reference to ALG’s Current Report on Form 8-K dated January 28, 1998 (File No. 1-08940).

(13) Incorporated by reference to ALG’s Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940).

(14) Incorporated by reference to ALG’s Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No. 1-08940).

(15) Incorporated by reference to ALG’s Quarterly Report on Form 10-Q for the period ended September 30, 1998 (FileNo. 1-08940).

(16) Incorporated by reference to ALG’s Current Report on Form 8-K dated November 25, 1998, as amended by Form 8-K/ A datedDecember 24, 1998 (File No. 1-08940).

(17) Incorporated by reference to ALG’s proxy statement dated March 10, 2000 (File No. 1-08940).

(18) Incorporated by reference to ALG’s Current Report on Form 8-K dated May 8, 2001.

36


Table of Contents

(19) Incorporated by reference to Kraft Foods Inc.’s Registration Statement on Form S-3 (No. 333-67770) dated August 16, 2001.

(20) Incorporated by reference to ALG’s Quarterly Report on Form 10-Q for the period ended June 30, 2002.

(21) Incorporated by reference to ALG’s Quarterly Report on Form 10-Q for the period ended March 31, 2003.

(22) Incorporated by reference to ALG’s Annual Report on Form 10-K for the year ended December 31, 2002.

(23) Incorporated by reference to ALG’s Current Report on Form 8-K dated December 17, 2004.

(24) Incorporated by reference to ALG’s Annual Report on Form 10-K for the year ended December 31, 2003.

(25) Incorporated by reference to ALG’s Current Report on Form 8-K dated July 9, 2004 (portions of which have been omittedpursuant to a request for confidential treatment filed with the Securities and Exchange Commission).

(26) Incorporated by reference to ALG’s Current Report on Form 8-K dated January 28, 2005.

37


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto duly authorized.

ALTRIA GROUP, INC.

BY: /s/ LOUIS C. CAMILLERI

(Louis C. Camilleri Chairman of the Board and Chief Executive Officer)

Date: March 15, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the date indicated:

Signature Title Date

/s/ LOUIS C. CAMILLERI

(Louis C. Camilleri)

Director, Chairman of the Board and ChiefExecutive Officer

March 15, 2005

/s/ DINYAR S. DEVITRE

(Dinyar S. Devitre)

Senior Vice President and Chief Financial Officer

March 15, 2005

/s/ JOSEPH A. TIESI

(Joseph A. Tiesi)

Vice President and Controller

March 15, 2005

*ELIZABETH E. BAILEY, HAROLD BROWN, MATHIS CABIALLAVETTA, J. DUDLEY FISHBURN, ROBERT E. R. HUNTLEY, THOMAS W. JONES, GEORGE MUÑOZ, LUCIO A. NOTO, JOHN S. REED, CARLOS SLIM HELÚ, STEPHEN M. WOLF

Directors

*By:


(Louis C. CamilleriAttorney-in-fact)

March 15, 2005

38


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders ofALTRIA GROUP, INC.:

Our audits of the consolidated financial statements, of management’s assessment of internal control over financial reporting and ofthe effectiveness of internal control over financial reporting referred to in our report dated February 2, 2005 appearing in the 2004Annual Report to Shareholders of Altria Group, Inc. (which report, consolidated financial statements and assessment are incorporatedby reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a) of thisForm 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New YorkFebruary 2, 2005

S-1


Table of Contents

ALTRIA GROUP, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTSFor the Years Ended December 31, 2004, 2003 and 2002

(in millions)

Col. A Col. B Col. C Col. D Col. E

Additions

Balance at Chargedto Charged to Balance at

Beginning Costs and Other End ofDescription of Period Expenses Accounts Deductions Period

(a) (b) 2004: CONSUMER PRODUCTS: Allowance for discounts $ 14 $ 563 $ — $ 565 $ 12 Allowance for doubtful accounts 150 29 8 32 155 Allowance for returned goods 21 14 — 21 14

$ 185 $ 606 $ 8 $ 618 $ 181

FINANCIAL SERVICES: Allowance for losses $ 396 $ 140 $ — $ 39 $ 497

2003: CONSUMER PRODUCTS: Allowance for discounts $ 12 $ 802 $ — $ 800 $ 14 Allowance for doubtful accounts 156 17 — 23 150 Allowance for returned goods 16 176 — 171 21

$ 184 $ 995 $ — $ 994 $ 185

FINANCIAL SERVICES: Allowance for losses $ 444 $ — $ — $ 48 $ 396

2002: CONSUMER PRODUCTS: Allowance for discounts $ 13 $ 710 $ 2 $ 713 $ 12 Allowance for doubtful accounts 207 32 (51) 32 156 Allowance for returned goods 7 166 — 157 16

$ 227 $ 908 $ (49) $ 902 $ 184

FINANCIAL SERVICES: Allowance for losses $ 132 $ 324 $ — $ 12 $ 444

Notes:(a) Primarily related to divestitures, acquisitions and currency translation.(b) Represents charges for which allowances were created.

S-2


Exhibit 10.30

DESCRIPTION OF AGREEMENT WITH LOUIS C. CAMILLERI

Mr. Camilleri is entitled to receive a Supplemental Retirement Allowance in an amount determined by using the formula under theRetirement Plan for Salaried Employees and his total years of service from September 4, 1978. This benefit is payable under theSupplemental Management Employees’ Retirement Plan and is offset by any benefits payable under the Company’s other qualifiedand nonqualified U.S. Retirement Plans.


Table of Contents

Exhibit 10.31

CLIFFORDCHANCE LIMITED LIABILITY PARTNERSHIP

DUBUIS HOLDING LIMITED

AND

PT PHILIP MORRIS INDONESIA

AGREEMENT FOR THE SALE ANDPURCHASE OF 1,377,525,000 SHARES IN PT HANJAYA

MANDALA SAMPOERNA

Exhibit 10.31

CONTENTS

Clause Page 1. Sale And Purchase 2 2. Documents To Be Delivered By The Parties 2 3. Conditions To Completion 2 4. Completion 3 5. Seller Warranties 5 6. Buyer Warranties 5 7. Further Undertakings 5 8. Payment Of The Balance Of The Purchase Price 6 9. Conduct In Connection With The Tender Offer 6 10. Limitation Of Liability 6 11. Confidential Information 7 12. Announcements 8 13. Assignment 9 14. Notices 9 15. Governing Law And Dispute Resolution 10 16. General 11 17. Definitions And Interpretation 12 Schedule 1 BUYER WARRANTIES (CLAUSE 6) 18 Schedule 2 COMPLETION REQUIREMENTS (CLAUSE 4.2.2) 19


Schedule 3 SELLER WARRANTIES (CLAUSE 5) 20 Schedule 4 ACTION PENDING COMPLETION (CLAUSE 7.3) 21 Schedule 5 FORM OF COMPLETION CERTIFICATE (SCHEDULE 2, PARAGRAPH 1) 23

Agreed Form Documents

1. Commencement of negotiations announcement 2. Escrow Agreement


Table of Contents

Exhibit 10.31

THIS AGREEMENT is made on 12 March 2005

BETWEEN :

(1) DUBUIS HOLDING LIMITED, a company originally incorporated in Mauritius and now continued and incorporated in theSeychelles as a Seychelles company and having a registered office at Suites 25 and 27 Second Floor, Oliaji Trade Centre,Francis Rachel Street, P.O. Box 1312, Victoria, Mahé, Seychelles (the “Seller”); and

(2) PT PHILIP MORRIS INDONESIA, a limited liability company established under the laws of the Republic of Indonesia,

domiciled in Jakarta, having its registered office at Wisma GKBI, Suite 1801, JL. Jend. Sudirman No. 28, Jakarta 10210,Indonesia a company incorporated in Indonesia (the “Buyer”).

RECITALS

(A) The Seller is the holder of 1,377,525,000 fully-paid ordinary shares of Rupiah 100 each of the Company representing 31.43% ofthe issued share capital of the Company (the “Shares”).

(B) The Seller wishes to sell and the Buyer wishes to buy the Shares on the terms and conditions set out in this Agreement.

THE PARTIES AGREE as follows:

1. SALE AND PURCHASE

1.1 The Seller agrees to sell, and the Buyer agrees to buy, the Shares and each right attaching to the Shares at or after the date of thisAgreement, free of any Encumbrance.

1.2 The Seller waives all rights of pre-emption and other restrictions on transfer over the Shares conferred on it. The Seller shall

procure that all such rights conferred on any other person are waived no later than Completion so as to permit the sale andpurchase of the Shares.

2. DOCUMENTS TO BE DELIVERED BY THE PARTIES

2.1 On the date of this Agreement the Seller shall deliver to the Buyer an opinion from Simon Mitchell, Seychelles Attorney-at-Law(as to Seychelles law), in form and substance satisfactory to the Buyer, dated the date of this Agreement, opining that the Selleris duly authorised to execute this Agreement.

2.2 On the date of this Agreement the Buyer shall deliver to the Seller an opinion from Mochtar, Karuwin & Komar (as to

Indonesian law), in form and substance satisfactory to the Seller, dated the date of this Agreement, opinining that the Buyer isduly authorised to execute this Agreement.

3. CONDITIONS TO COMPLETION

3.1 Completion is conditional on the following conditions being satisfied or waived by the Buyer under clause 3.3:

-2-


Table of Contents

Exhibit 10.31

3.1.1 none of the Seller Warranties being untrue, inaccurate or misleading and there not having occurred any fact orcircumstance which would result or which would cause a Seller Warranty to be untrue, inaccurate or misleading whengiven in respect of the facts or circumstances as at Completion; and

3.1.2 the Seller having complied with clause 7.1.

3.2 If the Seller becomes aware of a fact or circumstance that might prevent a Condition being satisfied, it shall immediately informthe Buyer.

3.3 At any time prior to Completion the Buyer may waive a Condition on any terms it decides by notice to the Seller. 3.4 Completion is also conditional on the Buyer having deposited in immediately available funds the Initial Payment with the

Escrow Agent on the terms of the Escrow Agreement. If the Buyer becomes aware of a fact or circumstance that might preventthe condition in this clause 3.4 being satisfied, it shall immediately inform the Seller. At any time prior to Completion the Sellermay waive this condition by notice in writing to the Buyer. As soon as practicable following signature of this Agreement, theparties shall appoint the Escrow Agent and enter into the Escrow Agreement with such amendments as the parties may agree(acting reasonably).

4. COMPLETION

4.1 Completion shall take place at the offices of Mochtar, Karuwin & Komar at 9.00 a.m. on the Completion Date. 4.2 At Completion:

4.2.1 the Buyer will provide the Seller with evidence, in a form reasonably satisfactory to the Seller, that it has satisfied thecondition in clause 3.4;

4.2.2 the Seller shall do all the things required of it in schedule 2; 4.2.3 The Seller will provide the Buyer with evidence, in a form reasonably satisfactory to the Buyer, that the Seller’s

broker/custodian owns the Shares free of all liens and the Shares are available for transfer, and the Seller’s broker shallenter an instruction to transfer/sell the Shares to the Buyer on the Negotiated Market of the Jakarta Stock Exchange, andupon notification of the transfer/sale of an additional 375,675,000 shares of the Company (the “Additional Shares”), theBuyer’s broker will enter an instruction to transfer/purchase the Shares from the Seller on the Negotiated Market of theJakarta Stock Exchange, and the Seller’s broker and the Buyer’s broker shall mutually confirm that such transfers havebeen crossed in the Negotiated Market.

4.2.4 Subject to the Seller and the Buyer having complied with clause 4.2.3, and subject to the Buyer having received evidence

in a form reasonably satisfactory to the Buyer that the Shares and the Additional Shares have been crossed on theexchange through the Negotiated Market in favour of the Buyer, the Seller shall instruct its custodian to instruct theClearing Agency to execute, on the same day, the book entry settlement of the transfer of the Shares to the Buyer’s

-3-


Table of Contents

Exhibit 10.31

broker’s account, in favour of the Buyer, through a delivery free of payment method. The Buyer, on receipt of evidencethrough the C Best system that there are instructions pending to transfer the Shares and the Additional Shares to theBuyer’s account, shall instruct its custodian to issue an instruction to the Clearing Agency to execute a book entrysettlement to receive the Shares from the securities account of the Seller by way of a receive free of payment method.

4.2.5 On the earlier of (a) receipt of confirmation in the form set out in Annexure 1 to the Escrow Agreement signed by or on

behalf of the Buyer; and (b) receipt of a notice signed by or on behalf of Seller’s Custodian(s) confirming that anaggregate of 1,753,200,000 shares in the Company have been transferred from the Clearing Agency account of Seller’sCustodian(s) to the Clearing Agency account of Buyer’s Custodian and attaching a certified copy of a letter from theClearing Agency confirming that such transfer(s) has occurred, the Escrow Agent shall release and pay (and the Buyershall instruct the Escrow Agent to release and pay) the Initial Payment to the Seller in accordance with paragraph 3 of theEscrow Agreement on account of the Purchase Price. Release and payment of the Initial Payment to the Seller shall begood, valid and effectual discharge of the Buyer’s obligations under this clause 4.2.5. The balance of the Purchase Priceafter deducting the Initial Payment shall be paid by the Buyer in accordance with clause 8.

4.3 The Buyer:

4.3.1 is not obliged to complete this Agreement unless the Seller complies with its obligations under clause 4.2; and 4.3.2 is not entitled or obliged to complete this Agreement unless the Buyer simultaneously completes the acquisition of that

number of fully paid ordinary shares of Rupiah 100 each of the Company which (together with the Shares) represent notless than 40 per cent. of the issued share capital of the Company.

4.4 The Seller is not obliged to complete this Agreement unless the Buyer complies with its obligations under clause 4.2.5. 4.5 If Completion does not take place on the Completion Date because a party (the “Defaulting Party”) fails to comply with any of

its obligations under clause 4.2, then the other party (the “Second Party”) may by notice to the Defaulting Party:

4.5.1 postpone Completion to a date not more than 20 Business Days after the Completion Date. If the Second Party postponesCompletion to another date in accordance with this clause 4.5.1, then the provisions of this Agreement apply as if thatother date is the Completion Date; or

4.5.2 terminate this Agreement with immediate effect. If the Second Party terminates this Agreement under this clause 4.5.2,

then each party’s further rights and obligations under this Agreement cease immediately, but termination does not affect aparty’s accrued rights and obligations under this Agreement at the time of termination.

-4-


Table of Contents

Exhibit 10.31

5. SELLER WARRANTIES

5.1 The Seller warrants to the Buyer that each Seller Warranty is true, accurate and not misleading at the date of this Agreement. 5.2 Immediately before Completion, the Seller is deemed to warrant to the Buyer that each Seller Warranty is true, accurate and not

misleading by reference to the facts and circumstances as at Completion. 5.3 Each Seller Warranty is to be construed independently and (except where this Agreement provides otherwise) is not limited by a

provision of this Agreement or another Seller Warranty.

6. BUYER WARRANTIES 6.1 The Buyer warrants to the Seller that

each Buyer Warranty is true, accurateand not misleading at the date of thisAgreement.

6.2 Immediately before Completion, the

Buyer is deemed to warrant to the Sellerthat each Buyer Warranty is true,accurate and not misleading byreference to the facts and circumstancesas at Completion.

6.3 Each Buyer Warranty is to be construed

independently and (except where thisAgreement provides otherwise) is notlimited by a provision of thisAgreement or another Buyer Warranty.

7. FURTHER UNDERTAKINGS 7.1 The Seller shall procure that an extraordinary general meeting of the shareholders of the Company is called for the purposes only

of considering resolutions (in a form reasonably satisfactory to the Buyer) to appoint the Buyer’s nominees to the Board ofDirectors and the Board of Commissioners, such meeting to be held on the date (being not later than 60 days after Completion)which is notified to the Seller by the Buyer at least two Business Days before Completion.

7.2 The Buyer agrees that it shall procure that members of the Board of Directors and the Board of Commissioners who are replaced

by the Buyer’s nominees at the meeting called in accordance with clause 7.1 (or at any other meeting of shareholders called forthat purpose) shall be released and discharged (acquit et décharge) of all their duties and liabilities as directors or commissioners(as the case may be) of the Company as of and for the period up to and including the EGM Date.

7.3 Without the prior written consent of the Buyer (such consent not to be unreasonably withheld or delayed), the Seller agrees that

it shall not, in its capacity as a shareholder of the Company, do any of the things specified in schedule 4 at any time prior toCompletion.

7.4 The Seller shall notify the Buyer as soon as reasonably practicable if, to its knowledge, there is a Consultation Event prior to

Completion and, to the extent it is able as a shareholder of the Company, it shall (i) cooperate with any reasonable request madeby the Buyer and shall use its reasonable endeavours to procure that persons nominated by

-5-


Table of Contents

Exhibit 10.31

the Buyer are provided with reasonable access to the Board of Directors and the Board of Commissioners and that (subject totheir fiduciary duties and any obligations of confidentiality applicable to them or to the Company) the Board of Directors and theBoard of Commissioners shall consult with such persons and provide them with such information which they may reasonablyrequest in connection with the Consultation Event, its effect on the Target Group and/or the steps being taken to alleviate orremedy the Consultation Event.

7.5 Other than in accordance with its obligations under this Agreement, the Seller will not offer, sell or contract to sell, or otherwisedispose of, directly or indirectly, or announce an offer of, any Shares (or any interest therein or in respect thereof) or enter intoany transaction with the same economic effect as any of the foregoing.

8. PAYMENT OF THE BALANCE OF THE PURCHASE PRICE

The Buyer shall pay the Deferred Payment by wire transfer in immediately available funds to the Seller’s Bank Account on thedate which is 60 days after the Completion Date (provided that if this is not a Business Day, payment shall be made on the nextfollowing Business Day). Such payment of the Deferred Payment into the Seller’s Bank Account shall be good, valid andeffectual discharge of the Buyer’s obligations under this clause 8.

9. CONDUCT IN CONNECTION WITH THE TENDER OFFER

9.1 The Buyer agrees that it shall:

9.1.1 deliver a letter to the Board of Directors and the Board of Commissioners of the Company during the course of themorning (Jakarta time) on 13 March 2005 notifying them of its intentions in relation to the Company following the closingof the Tender Offer;

9.1.2 issue an announcement of the commencement of negotiations in the agreed form.

9.2 Conditional on Completion, the Buyer agrees that it shall:

9.2.1 submit a plan in relation to the Tender Offer to Bapepam within two Business Days after the Completion Date; 9.2.2 proceed with the Tender Offer in accordance with applicable Indonesian law; and 9.2.3 not increase the price per share (in Rupiah) payable under the Tender Offer above Rupiah 10,600 per Share paid to the

Seller under this Agreement.

10. LIMITATION OF LIABILITY

10.1 The Seller shall not be liable under this Agreement:

10.1.1 in respect of any claim relating to a breach of Seller Warranties set out in paragraphs 1 to 6 of schedule 3, to the extentthat the aggregate amount of the liability of the Seller would exceed an amount equal to the Purchase Price;

-6-


Table of Contents

Exhibit 10.31

10.1.2 in respect of any claim (other than a claim referred to in clause 10.1.1):

(a) unless the aggregate amount of all such other claims for which the Seller would otherwise be liable under thisAgreement exceeds US$20 million; and

(b) to the extent that the aggregate amount of the liability of the Seller for all claims made under this Agreement would

(but for this clause 10.1.2) exceed an amount equal to US$400 million.

10.2 None of the Buyer or any of its Affiliates shall be entitled to recover from the Seller under this Agreement more than once inrespect of the same loss, damage or other liability suffered or incurred.

11. CONFIDENTIAL INFORMATION

11.1 The Seller undertakes to the Buyer, for itself and, after Completion, on behalf of each member of the Target Group, that afterCompletion the Seller shall, and shall procure that its Affiliates shall:

11.1.1 not use or disclose to any person any Target Group Confidential Information or any Buyer Confidential Information it (orits Affiliates) has or acquires; and

11.1.2 make every effort to prevent the use or disclosure of any Target Group Confidential Information or any Buyer

Confidential Information it (or its Affiliates) has or acquires.

11.2 The Buyer undertakes to the Seller, for itself and on behalf of its Affiliates, the Buyer shall and shall procure that its Affiliatesshall:

11.2.1 not use or disclose to any person any Seller Confidential Information it (or its Affiliates) has or acquiries; and 11.2.2 make every effort to prevent the use or disclosure of Seller Confidential Information.

11.3 Clauses 11.1 and 11.2 do not apply to disclosure of Target Group Confidential Information or of Buyer Confidential Informationby the Seller or its Affiliates or a disclosure of Seller Confidential Information by the Buyer or its Affiliates (as the case maybe):

11.3.1 to the extent required to be disclosed by law or by a rule of any Relevant Authority, whether or not the requirement hasthe force of law, provided that (so far as is reasonably practicable) the disclosure shall only be made:

(a) in the case of a disclosure of Target Group Confidential Information prior to Completion or of Buyer ConfidentialInformation by the Seller or any of its Affiliates after promptly notifying the Buyer in advance of such requirement,consulting with the Buyer on the advisability of such disclosure and on taking steps to narrow or minimise suchdisclosure, permitting the Buyer to meet with and make representations to the

-7-


Table of Contents

Exhibit 10.31

Relevant Authority and, if disclosure is still required by the Relevant Authority, after taking into account the Buyer’sreasonable requirements as to its timing, content and manner of making or despatch; or

(b) in the case of a disclosure of Seller Confidential Information by the Buyer or any of its Affiliates, to the extentreasonably practicable after promptly notifying the Seller in advance of such requirement, consulting with the Selleron the advisability of such disclosure and on taking steps to narrow or minimise such disclosure, permitting the Sellerto meet with and make representations to the Relevant Authority and, if disclosure is still required by the RelevantAuthority, after consultation with the Seller and after taking into account the Seller’s reasonable requirements as to itstiming, content and manner of making or despatch; or

11.3.2 to a party’s directors, officers, employees, advisers, agents, Affiliates or representatives of their advisors or agents(“Representative”) for the purpose of advising such party in connection with the transactions contemplated by thisAgreement or any Dispute provided that such disclosure is essential for these purposes and is on the basis that the partymaking the disclosure shall be responsible for any breach of this clause 11 by its Representatives as if theRepresentatives were bound by this clause 11 in the same manner as the party making the disclosure.

11.4 If it is not reasonably practicable for a party (the “Disclosing Party”) to consult with the other party (the “InformationHolder”) under clause 11.3.1 prior to making a disclosure under that clause, then the Disclosing Party shall, to the extentpermitted by law or by the rules of any Relevant Authority, inform the Information Holder of the circumstances, timing, contentand manner of making or despatch of the disclosure promptly after such disclosure is made.

11.5 Subject to the provisions of this clause 11, the Seller shall provide all information available to it and in its possession concerning

the Company and the Seller which the Buyer reasonably requests for inclusion in the tender offer statement to be issued inconnection with the Tender Offer.

11.6 This clause 11 will cease to apply on the date three years following the date of this Agreement.

12. ANNOUNCEMENTS

12.1 Subject to clause 12.2, neither party may make or send, and each party shall procure that none of its Affiliates make or send, apublic announcement, communication or circular concerning the transactions referred to in this Agreement unless it first obtainsthe other party’s written consent, which may not be unreasonably withheld or delayed.

-8-


Table of Contents

Exhibit 10.31

12.2 Without limitation to the parties’ obligations under clause 11, clause 12.1 does not apply to a public announcement,communication or circular:

12.2.1 issued by or on behalf of the Buyer for the purposes of or in connection with the Tender Offer; 12.2.2 made or sent by the Buyer after Completion to a customer, client or supplier of the Target Group informing it of the

Buyer’s purchase of the Shares; or 12.2.3 required by applicable law or by the rules of any Relevant Authority, whether or not the requirement has the force of law,

provided that the public announcement, communication or circular shall (so far as is reasonably practicable) be madeafter consultation with the Buyer (in the case of an announcement made by a Seller or any of its Affiliates in reliance onthis clause 12.2.3) or the Seller (in the case of an announcement made by the Buyer or any of its Affiliates in reliance orthis clause 12.2.3) and after taking into account the reasonable requirements of the Buyer or the Seller (as the case maybe) as to its timing, content and manner of making or despatch.

13. ASSIGNMENT

The Buyer (and its successors and assigns) may, without the Seller’s consent, assign to any of its Affiliates the benefit of all orany of the Seller’s obligations under this Agreement and/or any other benefit arising under or out of this Agreement. The Sellershall not assign, transfer, declare a trust of the benefit of or in any other way alienate any of his or its rights under this Agreementwhether in whole or in part.

14. NOTICES

14.1 A notice, waiver, consent or other communication under or in connection with this Agreement shall be in writing, in the Englishlanguage and delivered personally or sent by fax to the party due to receive the notice to the address set out in clause 14.3 or toanother address, person, or fax number specified by that party by not less than 10 Business Days’ notice to the other partyreceived before the notice was despatched.

14.2 Unless there is evidence that it was received earlier, a notice is deemed given if:

14.2.1 delivered personally, when left at the address referred to in clause 14.1; 14.2.2 sent by international courier service, four Business Days after posting it; or 14.2.3 sent by fax, when confirmation of its transmission has been recorded by the sender’s fax machine provided that a copy of

any notice sent by fax shall promptly be given to the recipient party by one of the other means of service described inclause 14.1.

14.3 The address referred to in clause 14.1 is:

-9-


Table of Contents

Exhibit 10.31

The Seller Dubuis Holding Limited Suites 25 and 27

Second Floor Oliaji Trade Centre Francis Rachel Street PO Box 1312 Victoria Mahé Seychelles

Fax no.: +248 226 043

With a copy to:

Barrye L. Wall, Esq. 50 Raffles Place #30-00 Singapore Land Tower Singapore 048623

Republic of Singapore Fax: +65 6225 6009The Buyer PT Philip Morris Indonesia Wisma GKBI

Suite 1801 JL. Jend. Sudirman No. 28 Jakarta 10210 Indonesia

Attention: General Counsel

Fax no.: 6221 570 8154

With a copy to:

Justin G. Mayall Vice President and Associate General Counsel 231F, Two Pacific Place 88 Queensway Hong Kong

Fax no.: +852 2826 3809

15. GOVERNING LAW AND DISPUTE RESOLUTION

15.1 This Agreement is governed by English law.

-10-


Table of Contents

Exhibit 10.31

15.2 Any Dispute shall be referred to and exclusively, definitely and finally resolved by arbitration under the Rules. 15.3 The tribunal shall consist of one arbitrator who shall be an English lawyer of not less than 10 years standing. The seat of the

arbitration and the venue of all hearings shall be London, England, and the language of the arbitration shall be English. 15.4 Any arbitral award or other outcome determined in accordance with this clause 15 shall be final and binding on the parties and

may be enforced by any competent court or judicial authority. 15.5 The parties agree that the arbitral tribunal shall have power to award on a provisional basis any relief which it would have power

to grant in a final award. 15.6 The parties exclude any rights to refer points of law or to appeal to the courts, to the extent that they can validly waive these

rights. Notwithstanding the foregoing, the parties agree that they may apply to any competent judicial authority for interim orconservative measures. The application to a judicial authority for such measures shall not be deemed an infringement or waiverof the arbitration agreement made in this clause 15.

15.7 A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any

term of this Agreement, but this does not affect any right or remedy of a third party which exists or is available apart from thatAct.

15.8 So far as permitted by law and except in the case of fraud each party agrees and acknowledges that its only right and remedy in

relation to any warranty or undertaking made or given in connection with this Agreement shall be for breach of the terms of thisAgreement to the exclusion of all other rights and remedies (including those in tort or arising under statute).

16. GENERAL

16.1 This Agreement constitutes the entire agreement between the parties relating to the subject matter of this Agreement to theexclusion of any terms implied by law which may be excluded by contract and supersedes any previous written or oralagreement between the parties relating to its subject matter. This clause 16.1 shall not limit or restrict any liability arising as aresult of any fraud.

16.2 Each party shall pay its own costs relating to the negotiation, preparation, execution and performance by it of this Agreement

and of each document referred to in it. 16.3 A variation of this Agreement is valid only if it is in writing and signed by or on behalf of each party. 16.4 The failure to exercise or delay in exercising a right or remedy provided by this Agreement or by law does not impair or

constitute a waiver of the right or remedy or an impairment of or a waiver of other rights or remedies. No single or partialexercise of a right or remedy provided by this Agreement or by law prevents further exercise of the right or remedy or theexercise of another right or remedy.

-11-


Table of Contents

Exhibit 10.31

16.5 The rights and remedies containedin this Agreement are cumulativeand not exclusive of rights orremedies provided by law.

16.6 Except to the extent that they have

been performed and except wherethis Agreement provides otherwise,the obligations contained in thisAgreement remain in force afterCompletion.

16.7 This Agreement may be executed in

any number of counterparts, each ofwhich when executed and deliveredis an original and all of whichtogether evidence the sameagreement.

17. DEFINITIONS AND INTERPRETATION

17.1 In this Agreement:

“Affiliate” means any entity which controls, is controlled by or is under common control with a party and “control” means theability, directly or indirectly, to direct the affairs of another by means of ownership, contract or others;

“Bapepam” means the Indonesian Capital Market Supervisory Agency (Badan Pengawas Pasar Modal);

“Board of Commissioners” means the Company’s the board of commissioners from time to time;

“Board of Directors” means the Company’s board of directors from time to time;

“Business Day” means a day other than a Saturday or Sunday or public holiday in Indonesia or in the United States of America;

“Buyer Confidential Information” means:

(a) all information which is used in or otherwise relates to the business, customers or financial or other affairs of the Buyer orany of its Affiliates provided in relation to the transactions contemplated by this Agreement including:

(i) information relating to the marketing of goods or services including product information, customer names and lists andother details of customers, sales targets, sales statistics, market share statistics, prices, market research reports andsurveys, and advertising or other promotional materials;

(ii) information relating to future projects, business development or planning, legal and regulatory issues, commercialrelationships and negotiations;

(b) information relating to the Buyer or its Affiliates; and

(c) the terms and conditions of this Agreement and the negotiations and discussions between the parties concerning thetransactions contemplated by this Agreement,

but does not include information which:

-12-


Table of Contents

Exhibit 10.31

(ii) is or becomes generally available to the public other than as a result of a disclosure by the Seller (or its Affiliates) in breachof clause 11; or

(iii) becomes available to the Seller (or its Affiliates) after the EGM Date on a non-confidential basis from a source other than the

Buyer (or its Affiliates, including the Target Group), provided that such source was (to the knowledge of the Seller (or itsAffiliates)) not bound by a confidentiality, non-disclosure or similar agreement with the Buyer (or its Affiliates, includingthe Target Group) or their respective representatives or agents or otherwise prohibited from transmitting the information tothe Seller (or its Affiliates) or any of their respective representatives or agents by a contractual, legal or fiduciary obligation;

“Buyer Warranty” means a statement contained in schedule 1 and “Buyer Warranties” means all of those statements;

“Clearing Agency” means PT Kustodian Sentral Efek Indonesia;

“Company” means PT Hanjaya Mandala Sampoerna, a publicly listed company incorporated in Indonesia, whose registeredoffice is at Jalan Rungkut Industri Raya No. 18, Surabaya, East Java;

“Completion” means completion of the sale and purchase of the Shares in accordance with clause 4;

“Completion Date” means 18 March 2005 unless a party notifies the other at all before 4:00pm (Jakarta time) on 16 March 2005that it is not able to complete on that date in which case the Completion Date shall be as specified by the relevant party in itsnotice, but in any event no later than 23 March 2005;

“Conditions” means the conditions in clause 3;

“Consultation Event” means the occurrence after the date of this Agreement of a material adverse change in the business,financial position, prospects or the results of operations of the Company, PT Perusahaan Dangang dan Industri Panamas, PTSumber Alfaria Trijaya or PT Sampoerna JL Sdn. Bhd. or the occurrence after the date of this Agreement of any event orcircumstance which is reasonably likely to result in such a material adverse change excluding, in any such case:

(a) an event, circumstance or change which occurs directly as a result of any change in stock markets, interest rates, exchangerates or commodity prices which affect relevant markets generally; or

(b) any material adverse change arising out of any change or development relating to (i) Indonesian or global economic or

industry conditions; (ii) Indonesian or global financial markets or conditions; or (iii) any generally applicable change in anyapplicable law, rules of any Relevant Authority or any other governmental or regulatory authority or Indonesian GAAP orany interpretation thereof;

-13-


Table of Contents

Exhibit 10.31

“Deferred Payment” means the amount equal to 25 per cent. of the Purchase Price in United States dollars (converted at the ratefor purchasing US$ with rupiah quoted by Bloomberg as being the midway between the bid and ask on the trading day inIndonesia immediately preceding the date of this Agreement (namely 9365 rupiah per US$)) rounded down to the nearest wholedollar amount;

“Dispute” means a dispute arising from or connected with this Agreement including a dispute regarding its existence or validity;

“EGM Date” means the date when the extraordinary general meeting of shareholders of the Company called in accordance withclause 7.1 is held;

“Encumbrance” means a mortgage, charge, pledge, lien, option, restriction, right of first refusal, right of pre-emption, third-partyright or interest, other encumbrance or security interest of any kind, or another type of preferential arrangement (including a titletransfer or retention arrangement) having similar effect;

“Escrow Agent” means CSFB Singapore or, if they are unwilling or incapable of acting, such other international bank of goodstanding as the parties shall agree, acting reasonably;

“Initial Payment” means the amount equal to 75 per cent. of the Purchase Price in United States’ dollars (converted at the rate forpurchasing US$ with rupiah quoted by Bloomberg as being the midway between the bid and ask on the trading day in Indonesiaimmediately preceding the date of this agreement (namely 9365 rupiah per US$)) rounded up to the nearest whole dollar amount;

“Pledges” means any registered pledges in favour of any person;

“Purchase Price” means Rupiah 14,601,765,000,000 in aggregate, calculated as Rupiah 10,600 per Share;

“Relevant Authority” means, in relation to any party, any listing authority by which the shares in such party or any of itsAffiliates are listed, any stock exchange on which the shares in such party or any of its any Affiliates are listed or traded(including Bapepam) or a governmental or regulatory authority or other authority with relevant powers to which such party or anyof its Affiliates is subject or to which it submits;

“Rules” means the Rules of Arbitration of the International Chamber of Commerce;

“Shares” has the meaning given to it in Recital (A);

“Seller’s Bank Account” means the bank account details which are designated by the Seller in writing to the Buyer not less than2 Business Days prior to Completion or such other bank account details as may be designated from time to time by the Seller inwriting to the Buyer on not less than 2 Business Days notice;

“Seller Confidential Information” means:

(a) all information which is used in or otherwise relates to the business, customers or financial or other affairs of the Seller orany of its Affiliates (excluding, after

-14-


Table of Contents

Exhibit 10.31

Completion, the Target Group) provided in relation to the transactions contemplated by this Agreement includinginformation relating to future projects, business development or planning, legal and regulatory issues, commercialrelationships and negotiations;

(b) information relating to the Seller or its Affiliates; and (c) the terms and conditions of this Agreement and the negotiations and discussions between the parties concerning the

transactions contemplated by this Agreement,


(i) is or becomes generally available to the public other than as a result of a disclosure by the Buyer (or its Affiliates) in breachof clause 11; or

(ii) which becomes available to the Buyer (or its Affiliates) after the EGM Date on a non-confidential basis from a source other

than the Seller (or its Affiliates), provided that such source was (to the knowledge of the Buyer (or its Affiliates)) not boundby a confidentiality, non-disclosure or similar agreement with the Seller (or its Affiliates) or their respective representativesor agents or otherwise prohibited from transmitting the information to the Buyer (or its Affiliates) or any of their respectiverepresentatives or agents by a contractual, legal or fiduciary obligation;

“Seller’s Warranties” means a statement contained in schedule 3 and “Warranties” means all of those statements;

“Target Confidential Information” means:

(a) all information which is used in or otherwise relates to the business, customers or financial or other affairs of the Target orany of its Affiliates, including:

(i) information relating to the marketing of goods or services including product information, customer names and lists andother details of customers, sales targets, sales statistics, market share statistics, prices, market research reports andsurveys, and advertising or other promotional materials;

(ii) information relating to future projects, business development or planning, legal and regulatory issues, commercial

relationships and negotiations; and

(b) any information which the Target or any of its Affiliates have indicated in writing to the Seller prior to the date of thisAgreement is confidential;


(i) is or becomes generally available to the public other than as a result of a disclosure by the Seller (or its Affiliates) inbreach of clause 11; or

-15-


Table of Contents

Exhibit 10.31

(ii) becomes available to the Seller (or its Affiliates) after the EGM Date on a non-confidential basis from a source otherthan the Buyer (or its Affiliates) or the Target Group, provided that such source was (to the knowledge of the Seller (orits Affiliates)) not bound by a confidentiality, non-disclosure or similar agreement with the Buyer (or its Affiliates) orany Target Group member or their respective representatives or agents or otherwise prohibited from transmitting theinformation to the Seller (or its Affiliates) or any of their respective representatives or agents by a contractual, legal orfiduciary obligation;

“Target Group” means the Company and its subsidiaries (as defined in Section 736 of the UK Companies Act 1985 as amended)from time to time;

“Target Shares” means all of the issued ordinary shares of Rupiah 100 each in the Company from time to time;

“Tax” means any form of taxation, levy, duty, charge, contribution, withholding or impost of whatever nature (including anyrelated fine, penalty, surcharge or interest) imposed, collected or assessed by, or payable to, any government, state or municipalityor any local, state, federal or other authority, body or official anywhere in the world exercising a fiscal, revenue, customs or excisefunction;

“Tender Offer” means the mandatory tender offer proposed to be made by the Buyer in accordance with Indonesian law andregulation for the Target Shares following and as a consequence of Completion.

17.2 In this Agreement, a reference to:

17.2.1 a document in the “agreed form” is a reference to a document in a form approved and for the purposes of identificationinitialled by or on behalf of each party;

17.2.2 a “person” includes a reference to:

(a) any individual, firm, company, corporation or other body corporate, government, state or agency of a state or any jointventure, association or partnership, works council or employee representative body (whether or not having separatelegal personality); and

(b) that person’s legal personal representatives, successors and permitted assigns;

17.2.3 any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, officialor any legal concept or thing shall for any jurisdiction other than England be deemed to include what most nearlyapproximates in that jurisdiction to the English legal term and to any English statute shall be construed so as to includeequivalent or analogous laws of any other jurisdiction; and

17.2.4 times of the day are to Jakarta time.

-16-


Table of Contents

Exhibit 10.31

17.3 The headings in this Agreement do not affect its interpretation.

-17-


Table of Contents

Exhibit 10.31

SCHEDULE 1

BUYER WARRANTIES (CLAUSE 6)

1. The Buyer is a limited company incorporated under the laws of Indonesia and has been in continuous existence since itsincorporation.

2. The Buyer has the right, power and authority, and has taken all action necessary, to execute, deliver and exercise its rights, andperform its obligations, under this Agreement and each document to be executed by it under this Agreement.

3. The Buyer’s obligations under this Agreement and each document to be executed by it under this Agreement are, or when therelevant document is executed shall be, enforceable in accordance with its or their terms.

-18-


Table of Contents

Exhibit 10.31

SCHEDULE 2

COMPLETION REQUIREMENTS (CLAUSE 4.2.2)

At Completion the Seller shall deliver to the Buyer:

1. a certificate in the form set out in schedule 5 duly executed by or on behalf of the Seller and dated the Completion Date; 2. if requested by the Buyer, an irrevocable power of attorney (in a form reasonably satisfactory to the Buyer) duly executed by the

Seller in favour of the Buyer to enable the Buyer to exercise all voting and other rights attaching to the Shares and to appointproxies for this purpose;

3. as evidence of the authority of each person executing a document referred to in this schedule on behalf of the Seller:

(a) a copy of the minutes of a duly held meeting of, or written resolutions of, the directors of the Seller (or a duly constitutedcommittee thereof) authorising the execution by the Seller of the document and, where such execution is authorised by acommittee of the board of directors of the Seller, a copy of the minutes of a duly held meeting of the directors constitutingsuch committee or a relevant extract; or

(b) a copy of the power of attorney conferring the authority,

in each case certified by a director or the secretary of the Seller to be true;

4. a letter, in a form reasonably satisfactory to the Buyer, from the Seller’s broker/custodian attaching a copy of the confirmationfrom the Clearing Agency that the Pledges have been released;

5. any waiver, consent, release or other document necessary to give the Buyer or its nominee(s) full legal and beneficial ownership

of the Shares; 6. evidence, in a form satisfactory to the Buyer, that the extraordinary general meeting of the Company referred to in clause 7.1 has

been called to be held on the date notified by the Buyer to the Seller in accordance with that clause to consider the resolutionsreferred to in that clause; and

7. evidence, in a form satisfactory to the Buyer, that Puerta Sampoerna has transferred title to the following shares to the Company

(or to a Target Group member) for no consideration and without liability on the part of the transferee:

(a) 10,000 shares of Rupiah 10,000 each in PT Citra Investasi Nusantasa, comprising 2.5 per cent. of the issued share capital ofthat company;

(b) 24 shares of Rupiah 5,000,000 each in PT Wahana Sampoerna, comprising 12.5 per cent. of the issued share capital of that

company; and (c) 112 shares of Rupiah 5,000,000 each in PT Sampoerna Transport Nusantasa, comprising 11.2% of the issued share capital

of that company.

-19-


Table of Contents

Exhibit 10.31

SCHEDULE 3

SELLER WARRANTIES (CLAUSE 5)

1. Incorporation and existence

The Seller is a limited company originally incorporated in Mauritius and now continued and incorporated in the Seychelles.

2. Right, power, authority and action

The Seller has the right, power and authority, and has taken all action necessary, to execute, deliver and exercise its rights, andperform its obligations, under this Agreement and each document to be executed under it.

3. Binding agreements

The Seller’s obligations under this Agreement and each document to be executed under it are, or when the relevant document isexecuted shall be, enforceable in accordance with its or their terms.

4. The Shares

The Seller is the sole legal owner of the Shares.

5. No Encumbrance

Other than the Pledges:

(a) there is no Encumbrance, and there is no agreement, arrangement or obligation to create or give an Encumbrance, inrelation to any of the Shares; and

(b) no person has claimed to be entitled to an Encumbrance in relation to any of the Shares.

6. The Company has 4,383,000,000 shares in issue all of which:

6.1.1 have been duly authorised and issued and are fully paid; and 6.1.2 are admitted to trading on the Jakarta Stock Exchange and the Surabaya Stock Exchange and are freely tradable and not

listed on any other stock exchange.

There are no securities in issue convertible into or exchangeable for, or warrants, rights or options to purchase or require theissue of, any shares in the capital of the Company or any Target Group member.

-20-


Table of Contents

Exhibit 10.31

SCHEDULE 4

ACTION PENDING COMPLETION (CLAUSE 7.3)

The following are the things referred to in clause 7.3:

1. appoint or dismiss a director or a Commissioner; 2. adopt or change any of the accounting policies of any Target Group member other than as required by law or regulation; 3. approve or cause the negotiation or entering into of any partnership, joint venture or other profit sharing arrangements by or in

respect of any Target Group member; 4. dispose of or acquire or cause any member of the Target Group to dispose of or to acquire any business or to dispose of any

material part of its business; 5. transfer, assign, licence or dispose of any Target Group member’s rights in or to any patents, inventions, trade secrets,

know-how, copyright, trade marks, registered designs or any registrations or applications to register any such rights; 6. participate or cause any Target Group member to participate in a merger or consolidation; 7. change or cause the change of the nature or scope of the business of any member of the Target Group; 8. declare or pay or make or cause the declaration, payment or making of a dividend or distribution by the Company; 9. change or cause the change of the authorised or issued share or loan capital or grant any option over any of the Company’s share

or loan capital; 10. other than to permit foreign persons to act as directors or commissioners of the Board of Directors or Board of Commissioners in

the agreed form, alter or cause the alteration of either the Company’s memorandum or its articles of association; 11. undertake or cause any member of the Target Group to (a) undertake a transaction outside the ordinary course of business or

(b) amend any existing or enter into any new related party transaction; 12. enter into an arrangement generally with creditors or propose a resolution that any member of the Target Group be liquidated; 13. incur or cause any member of the Target Group to incur any borrowing or cause the amendment or the increase in any borrowing

of any member of the Target Group, in each case other than in the ordinary course of the relevant Target Group member’sbusiness;

14. enter into or, approve or cause the negotiation or execution or agreement of any arrangement under which any member of the

Target Group enters into any guarantee, indemnity or suretyship (whether or not legally binding) for the liabilities or solvency of

-21-


Table of Contents

Exhibit 10.31

any third party or any similar obligation other than in the ordinary course of business of the relevant Target Group member;

15. other than in the ordinary course of the Target Group’s business, make any loan or advance or provide any credit to or for anyperson;

16. make or incur or agree to make or incur capital expenditure, or acquire or dispose of any assets, in each case in excess of

US$10 million or cause any member of the Target Group to do the same; 17. other than as directed by the Buyer or in accordance with this Agreement, pass a shareholders’ resolution or cause the approval

of a shareholders’ resolution for any member of the Target Group; 18. create or agree to create or cause the creation of an Encumbrance over (a) the Shares or (b) assets having up to an aggregate

value of US$1 million held by any member of the Target Group other than an Encumbrance created by operation of law; 19. amend or discontinue or void any insurance policies of any member of the Target Group (or cause the same to occur); 20. amend or terminate a material agreement entered into by or for any member of the Target Group or any third party operator

agreement; 21. amend the terms of or terminate the employment of or engage an employee of any Target Group member earning in excess of

US$100,000 per annum or its equivalent (or cause the same to occur); 22. start or compromise any litigation or arbitration proceedings other than routine debt collection actions, or cause any member of

the Target Group to do the same; 23. acquire or dispose of or cause any Target Group member to acquire or dispose of any shares in a body corporate; 24. enter into or cause any Target Group member to enter into any agreement with a term in excess of 365 days; 25. not appoint any person as an authorised signatory of any Target Group member for any bank accounts; 26. increase or cause any Target Group member to increase the remuneration payable to any employees of a Target Group member

(other than an increase which is consistent with the ordinary practice of the Target Group as to timing and amount for the twofinancial years ending prior to Completion); or

27. acquire or dispose of or cause any Target Group member to acquire or dispose of any assets where such acquisition or disposal

(as the case may be) would render the working capital position of any Target Group member materially different from theaverage working capital position of that Target Group member for the two financial years ending prior to Completion.

-22-


Table of Contents

Exhibit 10.31

SCHEDULE 5

FORM OF COMPLETION CERTIFICATE (SCHEDULE 2, PARAGRAPH 1)

[PT Philip Morris Indonesia][Address 1][Address 1][City/Code][Country]

Attention: [Name]

Fax no.: +[number]

[Completion Date] 2005

Agreement for the sale and purchase of shares in PT Hanjaya Mandala Sampoerna Tbk — Completion Certificate

We refer to the agreement for the sale and purchase of shares in PT Hanjaya Mandala Sampoerna Tbk between Dubuis HoldingLimited and PT Philip Morris Indonesia dated 12 March 2005 (the “Agreement”).

This letter, which comprises a completion certificate from the Seller as required under paragraph 1 of schedule 2 to the Agreement,uses the same defined terms as the Agreement. A reference in this letter to a “clause” is a reference to a clause of the Agreement.

The Seller certifies that at the date of this letter:

1. none of the Warranties are untrue, inaccurate or misleading and no fact or circumstance has occurred which would result in orwhich would cause a Warranty to be untrue, inaccurate or misleading when given in respect of the facts or circumstances as atCompletion; and

2. the Seller has complied with clause 7.1.

Yours faithfully

For and on behalf of the Seller

-23-

[Signature page omitted]


Exhibit 12

ALTRIA GROUP, INC. AND SUBSIDIARIESComputation of Ratios of Earnings to Fixed Charges

(in millions of dollars)

For the Years Ended December 31, 2004 2003 2002 2001 2000 Earnings from continuing operations before income taxes,

minority interest and cumulative effect of accountingchange $ 14,004 $ 14,609 $ 17,945 $ 14,117 $ 14,008

Add (deduct):

Equity in net earnings of less than 50% owned affiliates (141) (205) (235) (228) (228)Dividends from less than 50% owned affiliates 52 45 32 29 70 Fixed charges 1,787 1,730 1,678 1,984 1,348 Interest capitalized, net of amortization 10 10 10 7

Earnings available for fixed charges $ 15,702 $ 16,189 $ 19,430 $ 15,912 $ 15,205

Fixed charges:

Interest incurred: Consumer products $ 1,427 $ 1,370 $ 1,331 $ 1,665 $ 1,087 Financial services 94 105 100 102 114

1,521 1,475 1,431 1,767 1,201 Portion of rent expense deemed to represent interest factor 266 255 247 217 147

Fixed charges $ 1,787 $ 1,730 $ 1,678 $ 1,984 $ 1,348

Ratio of earnings to fixed charges (A) 8.8 9.4 11.6 8.0 11.3

(A) Earnings from continuing operations before income taxes and minority interest for the year ended December 31, 2002, include anon-recurring pre-tax gain of $2,631 million related to the Miller Brewing Company transaction. Excluding this gain, the ratio ofearnings to fixed charges would have been 10.0 to 1.0 for the year ended December 31, 2002.


Exhibit 13

Financial Review

Financial Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations page 17

Selected Financial Data — Five-Year Review page 39

Consolidated Balance Sheets page 40

Consolidated Statements of Earnings page 42

Consolidated Statements of Stockholders’ Equity page 43

Consolidated Statements of Cash Flows page 44

Notes to Consolidated Financial Statements page 46

Report of Independent Registered Public Accounting Firm page 76

Report of Management on Internal Control Over Financial Reporting page 77 Guide to Select Disclosures

For easy reference, areas that may be of interest to investors are highlighted in the index below.

Benefit Plans Note 16 includes a discussion of pension plans page 59

Contingencies Note 19 includes a discussion of litigation page 64

Finance Assets, net Note 8 includes a discussion of leasing activities page 51

Segment Reporting Note 15 page 57

Stock Plans Note 12 includes a discussion of stock compensation page 54

16


Exhibit 13

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Description of the Company

Throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, the term “AltriaGroup, Inc.” refers to the consolidated financial position, results of operations and cash flows of the Altria family ofcompanies and the term “ALG” refers solely to the parent company. ALG’s wholly-owned subsidiaries, Philip Morris USAInc. (“PM USA”) and Philip Morris International Inc. (“PMI”), and its majority-owned (85.4%) subsidiary, Kraft Foods Inc.(“Kraft”), are engaged in the manufacture and sale of various consumer products, including cigarettes and tobaccoproducts, packaged grocery products, snacks, beverages, cheese and convenient meals. Philip Morris CapitalCorporation (“PMCC”), another wholly-owned subsidiary, maintains a portfolio of leveraged and direct finance leases.Miller Brewing Company (“Miller”), engaged in the manufacture and sale of various beer products, was ALG’swholly-owned subsidiary prior to the merger of Miller into South African Breweries plc (“SAB”) on July 9, 2002 (see Note 4to the consolidated financial statements). ALG has a 33.9% economic interest and a 24.9% voting interest in SABMillerplc (“SABMiller”). ALG’s access to the operating cash flows of its subsidiaries consists of cash received from the paymentof dividends and interest, and the repayment of amounts borrowed from ALG by its subsidiaries.

In November 2004, ALG announced that, for significant business reasons, the Board of Directors is looking at anumber of restructuring alternatives, including the possibility of separating Altria Group, Inc. into two, or potentially three,independent entities. Continuing improvements in the entire litigation environment are a prerequisite to such action by theBoard of Directors, and the timing and chronology of events are uncertain.

On November 15, 2004, Kraft announced the sale of substantially all of its sugar confectionery business forapproximately $1.5 billion. The transaction, which is subject to regulatory approval, is expected to be completed in thesecond quarter of 2005. Altria Group, Inc. has reflected the results of Kraft’s sugar confectionery business as discontinuedoperations on the consolidated statements of earnings for all years presented. The assets related to the sugarconfectionery business were reflected as assets of discontinued operations held for sale on the consolidated balancesheet at December 31, 2004. Accordingly, historical statements of earnings amounts included in Management’sDiscussion and Analysis of Financial Condition and Results of Operations have been restated to reflect the discontinuedoperation.

Executive Summary

The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows.

• Consolidated Operating Results — The changes in Altria Group, Inc.’s earnings from continuing operations anddiluted earnings per share (“EPS”) from continuing operations for the year ended December 31, 2004, from the yearended December 31, 2003, were due primarily to the following:

Earnings Diluted EPS from from Continuing Continuing (in millions, except per share data)

Operations

Operations

For the year ended December 31, 2003 $ 9,121 $ 4.48 2003 Domestic tobacco legal settlement 132 0.06 2003 Domestic tobacco headquarters relocation charges 45 0.02 2003 Gains on sales of businesses (17) (0.01)2003 Asset impairment, exit and integration costs 48 0.03

Subtotal 2003 items 208 0.10 2004 Domestic tobacco headquarters relocation charges (20) (0.01)2004 International tobacco E.C. agreement (161) (0.08)2004 Asset impairment, exit and implementation costs (446) (0.21)2004 Loss on sales of businesses (2) — 2004 Investment impairment (26) (0.01)2004 Provision for airline industry exposure (85) (0.04)2004 Reversal of taxes no longer required 419 0.20 2004 Gains from investments at SABMiller 111 0.05

Subtotal 2004 items (210) (0.10)Currency 415 0.20


Higher effective tax rate (89) (0.04)Higher shares outstanding (0.06)Operations (25) (0.01)

For the year ended December 31, 2004 $ 9,420 $ 4.57

See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated OperatingResults section of the following Discussion and Analysis. Amounts shown above that relate to Kraft are reported net of therelated minority interest impact.

• Asset Impairment, Exit and Implementation Costs — In January 2004, Kraft announced a multi-year restructuringprogram. As part of this program, Kraft anticipates the closing or sale of up to twenty plants and the elimination ofapproximately six thousand positions. From 2004 through 2006, Kraft expects to incur up to $1.2 billion in pre-tax chargesfor the program, reflecting asset disposals, severance and other implementation costs, including $641 million incurred in2004. For further details, see Note 3 to the Consolidated Financial Statements and the Food Business Environmentsection of the following Discussion and Analysis.

17


Exhibit 13

• International Tobacco E.C. Agreement — On July 9, 2004, PMI entered into an agreement with the EuropeanCommission (“E.C.”) and 10 member states of the European Union that provides for broad cooperation with European lawenforcement agencies on anti-contraband and anti-counterfeit efforts. Under the terms of the agreement, PMI will make13 payments over 12 years, including an initial payment of $250 million, which was recorded as a pre-tax charge againstits earnings in 2004. During the third quarter of 2004, PMI began accruing for payments due on the first anniversary of theagreement.

The favorable currency impact on earnings from continuing operations and diluted EPS from continuing operations isdue primarily to the weakness of the U.S. dollar versus the euro, Japanese yen and Russian ruble.

The $419 million tax item reflects the reversal of $355 million of tax accruals that are no longer required due to foreigntax events that were resolved during the first quarter of 2004 at Kraft ($35 million) and the second quarter of 2004 at PMI($320 million). The amount also reflects an $81 million favorable resolution of an outstanding tax item at Kraft, the majorityof which occurred in the third quarter of 2004, partially offset by the minority interest impact of Kraft’s items.

Higher shares outstanding during 2004 reflect exercises of employee stock options and the impact of a higher averagestock price on the number of incremental shares from the assumed conversion of outstanding employee stock options.

The decrease in results from continuing operations was due primarily to the following:

• Lower North American food income, reflecting higher commodity and benefit costs, and increased promotionalprograms, partially offset by higher volume/mix.

• Lower international food income, reflecting higher costs, including benefits, promotional programs and

commodity costs.

These decreases were partially offset by:

• Higher domestic tobacco income, reflecting savings resulting from changes to trade programs in 2004,including PM USA’s returned goods policy and lower Wholesale Leaders program discounts.

• Higher 2004 equity earnings from SABMiller. • Higher international tobacco income, reflecting higher pricing, the impact of acquisitions and higher volume.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of thefollowing Discussion and Analysis.

• 2005 Forecasted Results — In January 2005, Altria Group, Inc. announced that it expects forecasted 2005 full-yeardiluted EPS from continuing operations in a range of $4.95 to $5.05. This forecast assumes current foreign exchangerates, a base income tax rate of 34.7% and approximately $0.12 per share in charges associated with the continuing Kraftrestructuring program. However, it does not include any tax benefits that could arise from the repatriation of funds frominternational businesses under provisions of the American Jobs Creation Act, nor does it include any benefit from prioryear accrued contributions to the National Tobacco Grower Settlement Trust. In addition, this forecast does not includethe impact of any possible acquisitions or divestitures not previously announced. The factors described in the CautionaryFactors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to thisforecast.

Discussion and Analysis

Critical Accounting Policies and Estimates

Note 2 to the consolidated financial statements includes a summary of the significant accounting policies and methodsused in the preparation of Altria Group, Inc.’s consolidated financial statements. In most instances, Altria Group, Inc. mustuse an accounting policy or method because it is the only policy or method permitted under accounting principlesgenerally accepted in the United States of America (“U.S. GAAP”).

The preparation of financial statements includes the use of estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and thereported amounts of net revenues and expenses during the reporting periods. If actual amounts are ultimately differentfrom previous estimates, the revisions are included in Altria Group, Inc.’s consolidated results of operations for the periodin which the actual amounts become known. Historically, the aggregate differences, if any, between Altria Group, Inc.’sestimates and actual amounts in any year, have not had a significant impact on its consolidated financial statements.


The selection and disclosure of Altria Group, Inc.’s critical accounting policies and estimates have been discussed withAltria Group, Inc.’s Audit Committee. The following is a review of the more significant assumptions and estimates, as wellas the accounting policies and methods used in the preparation of Altria Group, Inc.’s consolidated financial statements:

• Consolidation — The consolidated financial statements include ALG, as well as its wholly-owned and majority-ownedsubsidiaries. Investments in which ALG exercises significant influence (20% — 50% ownership interest), are accountedfor under the equity method of accounting. Investments in which ALG has an ownership interest of less than 20%, or doesnot exercise significant influence, are accounted for with the cost method of accounting. All intercompany transactions andbalances have been eliminated.

• Revenue Recognition — As required by U.S. GAAP, Altria Group, Inc.’s consumer products businesses recognizerevenues, net of sales incentives and including shipping and handling charges billed to customers, upon shipment ofgoods when title and risk of loss pass to customers. ALG’s tobacco subsidiaries also include excise taxes billed tocustomers in revenues. Shipping and handling costs are classified as part of cost of sales.

• Depreciation, Amortization and Goodwill Valuation — Altria Group, Inc. depreciates property, plant and equipmentand amortizes its definite life intangible assets using straight-line methods over the estimated useful lives of the assets.

Altria Group, Inc. is required to conduct an annual review of goodwill and intangible assets for potential impairment.Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If thecarrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as thedifference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows.Impairment testing for non-amortizable intangible assets requires a comparison between fair value and carrying value ofthe intangible asset. If the carrying value exceeds fair value, the intangible

18


Exhibit 13

asset is considered impaired and is reduced to fair value. These calculations may be affected by interest rates andgeneral economic conditions. During 2004, Altria Group, Inc. completed its annual review of goodwill and intangibleassets. This review resulted in a $29 million non-cash pre-tax charge at Kraft related to intangible asset impairments for asmall confectionery business in the United States and certain brands in Mexico. A portion of this charge, $12 million, wasrecorded as asset impairment and exit costs on the consolidated statement of earnings. The remainder of the charge,$17 million, is included in discontinued operations.

• Marketing and Advertising Costs — As required by U.S. GAAP, Altria Group, Inc. records marketing costs as anexpense in the year to which such costs relate. Altria Group, Inc. does not defer amounts on its year-end consolidatedbalance sheets with respect to marketing costs. Altria Group, Inc. expenses advertising costs in the year incurred.Consumer incentive and trade promotion activities are recorded as a reduction of revenues based on amounts estimatedas being due to customers and consumers at the end of a period, based principally on historical utilization and redemptionrates. Such programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives andvolume-based incentives. For interim reporting purposes, advertising and certain consumer incentive expenses arecharged to operations as a percentage of sales, based on estimated sales and related expenses for the full year.

• Contingencies — As discussed in Note 19 to the consolidated financial statements (“Note 19”), legal proceedingscovering a wide range of matters are pending or threatened in various jurisdictions against ALG, its subsidiaries andaffiliates, including PM USA and PMI, as well as their respective indemnitees. In 1998, PM USA and certain other UnitedStates tobacco product manufacturers entered into the Master Settlement Agreement (the “MSA”) with 46 states andvarious other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims.PM USA and certain other United States tobacco product manufacturers had previously settled similar claims brought byMississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). PM USA’s portionof ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers’ domesticcigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM USArecords its portion of ongoing settlement payments as part of cost of sales as product is shipped. During the years endedDecember 31, 2004, 2003 and 2002, PM USA recorded expenses of $4.6 billion, $4.4 billion and $5.3 billion, respectively,as part of cost of sales for the payments under the State Settlement Agreements and payments for tobacco growers andquota-holders.

ALG and its subsidiaries record provisions in the consolidated financial statements for pending litigation when theydetermine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except asdiscussed in Note 19: (i) management has not concluded that it is probable that a loss has been incurred in any of thepending tobacco-related litigation; (ii) management is unable to make a meaningful estimate of the amount or range ofloss that could result from an unfavorable outcome of pending tobacco-related litigation; and (iii) accordingly,management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any.

• Employee Benefit Plans — As discussed in Note 16. Benefit Plans (“Note 16”) of the notes to the consolidatedfinancial statements, Altria Group, Inc. provides a range of benefits to its employees and retired employees, includingpensions, postretirement health care and postemployment benefits (primarily severance). Altria Group, Inc. recordsannual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarialassumptions, such as discount rates, assumed rates of return on plan assets, compensation increases, turnover rates andhealth care cost trend rates. Altria Group, Inc. reviews its actuarial assumptions on an annual basis and makesmodifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. As permittedby U.S. GAAP, the effect of the modifications is generally amortized over future periods. Altria Group, Inc. believes thatthe assumptions utilized in recording its obligations under its plans, which are presented in Note 16, are reasonable basedon advice from its actuaries.

In December 2003, the United States enacted into law the Medicare Prescription Drug, Improvement andModernization Act of 2003, establishing a prescription drug benefit known as “Medicare Part D,” and a federal subsidy tosponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to MedicarePart D.

In May 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 106-2, “Accountingand Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”(“FSP 106-2”). FSP 106-2 requires companies to account for the effect of the subsidy on benefits attributable to pastservice as an actuarial experience gain and as a reduction of the service cost component of net postretirement healthcare costs for amounts attributable to current service, if the benefit provided is at least actuarially equivalent to MedicarePart D.

Altria Group, Inc. adopted FSP 106-2 in the third quarter of 2004. The impact of adoption for 2004 was a reduction ofpre-tax net postretirement health care costs and an increase in net earnings of $28 million (including $24 million related toKraft). In addition, as of July 1, 2004, Altria Group, Inc. reduced its accumulated postretirement benefit obligation for the


subsidy related to benefits attributed to past service by $375 million and decreased its unrecognized actuarial losses bythe same amount.

At December 31, 2004, for its U.S. pension and postretirement plans, Altria Group, Inc. reduced its discount rateassumption to 5.75% and modified its health care cost trend rate assumption. At December 31, 2004, Altria Group, Inc.reduced its long-term rate of return assumption from 9.0% to 8.0% based on the investment return of its pension assets,which are primarily in U.S. equity securities. Altria Group, Inc. presently anticipates that these assumption changes,coupled with the amortization of lower returns on pension fund assets in prior years and the full effect of adoptingMedicare Part D, will result in an increase in 2005 pre-tax benefit expense of approximately $300 million. A fifty basispoint decline (increase) in Altria Group, Inc.’s discount rate would increase (decrease) Altria Group, Inc.’s pension andpostretirement expense by approximately $120 million. Similarly, a fifty basis point decrease (increase) in the expectedreturn on plan assets would increase (decrease) Altria Group, Inc.’s pension expense by approximately $52 million. SeeNote 16 for a sensitivity discussion of the assumed health care cost trend rates.

• Income Taxes — Altria Group, Inc. accounts for income taxes in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, deferred tax assets and liabilities aredetermined based on the difference between the financial statement and tax bases of assets and liabilities, using enactedtax rates in effect for the year in which the differences are expected to reverse. The provision for income taxes is basedon domestic and international statutory income tax

19


Exhibit 13

rates and tax planning opportunities available in the jurisdictions in which Altria Group, Inc. operates. Significant judgmentis required in determining income tax provisions and in evaluating tax positions. ALG and its subsidiaries establishadditional provisions for income taxes when, despite the belief that their tax positions are fully supportable, there remaincertain positions that are likely to be challenged and that may not be sustained on review by tax authorities. ALG and itssubsidiaries adjust these additional accruals in light of changing facts and circumstances. The consolidated tax provisionincludes the impact of changes to these accruals, as well as the related net interest. If ALG’s and its subsidiaries’ filingpositions are ultimately upheld under audits by respective taxing authorities, it is possible that the provision for incometaxes in future years may reflect significant favorable adjustments. The tax provision in 2004 includes the reversal of$355 million of tax accruals that are no longer required due to foreign tax events that were resolved during the first quarterof 2004 at Kraft ($35 million) and the second quarter of 2004 at PMI ($320 million). The tax provision also reflects an$81 million favorable resolution of an outstanding tax item at Kraft, the majority of which occurred in the third quarter.

On October 22, 2004, the American Jobs Creation Act (“the Jobs Act”) was signed into law. The Jobs Act provides fora deduction of 85% of certain foreign earnings that are repatriated. Altria Group, Inc. may elect to apply this provision toqualifying earnings repatriations in 2005 and is conducting analyses of its effects. The U.S. Treasury Department recentlyprovided additional clarifying language on key elements of the provision, which is under consideration as part of AltriaGroup, Inc.’s evaluation. Altria Group, Inc. expects to complete its evaluation of the effects of the repatriation provisionwithin a reasonable period of time. The amount of dividends Altria Group, Inc. can repatriate under this provision is up to$7.1 billion. Since Altria Group, Inc. has provided deferred taxes on a portion of its unrepatriated earnings, there is apotential financial statement income tax benefit upon repatriations under the Jobs Act. Assuming certain expectedtechnical amendments to the Jobs Act are enacted and the entire $7.1 billion were repatriated, the income tax benefitwould be approximately $80 million.

The Jobs Act also provides tax relief to U.S. domestic manufacturers by providing a tax deduction of up to 9% of thelesser of “qualified production activities income” or taxable income. In December 2004, the FASB issued FASB StaffPosition 109-1, “Application of FASB Statement No. 109, ‘Accounting for Income Taxes,’ to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of 2004” (“FSP 109-1”). FSP 109-1 requirescompanies to account for this deduction as a “special deduction” rather than a rate reduction, in accordance with SFASNo. 109, and therefore, Altria Group, Inc. will recognize these benefits in the year earned.

• Hedging — As discussed below in “Market Risk,” Altria Group, Inc. uses derivative financial instruments principally toreduce exposures to fluctuations in foreign exchange rates and commodity prices. Altria Group, Inc. conforms with therequirements of U.S. GAAP in order to account for a substantial portion of its derivative financial instruments as hedges.As a result, gains and losses on these derivatives are deferred in accumulated other comprehensive earnings(losses) and recognized in the consolidated statement of earnings in the periods when the related hedged transaction isalso recognized in operating results. If Altria Group, Inc. had elected not to use and comply with the hedge accountingprovisions permitted under U.S. GAAP, gains (losses) deferred as of December 31, 2004, 2003 and 2002, would havebeen recorded in net earnings.

• Impairment of Long-Lived Assets — Altria Group, Inc. reviews long-lived assets, including amortizable intangibleassets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of theassets may not be fully recoverable. Altria Group, Inc. performs undiscounted operating cash flow analyses to determine ifan impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, AltriaGroup, Inc. groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If animpairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses onassets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

• Leasing — More than 85% of PMCC’s net revenues in 2004 related to leveraged leases. Income relating to leveragedleases is recorded initially as unearned income, which is included in finance assets, net, on Altria Group, Inc.’sconsolidated balance sheets, and is subsequently recorded as net revenues over the life of the related leases at aconstant after-tax rate of return. The remainder of PMCC’s net revenues consists primarily of amounts related to directfinance leases, with income initially recorded as unearned and subsequently recognized in net revenues over the life ofthe leases at a constant pre-tax rate of return. As discussed further in Note 8. Finance Assets, net, PMCC leases anumber of aircraft which were affected by developments in the airline industry during 2004, 2003 and 2002.

PMCC’s investment in leases is included in finance assets, net, on the consolidated balance sheets as ofDecember 31, 2004 and 2003. At December 31, 2004, PMCC’s net finance receivable of $7.6 billion in leveraged leasesconsists of lease receivables ($27.0 billion) and the residual value of assets under lease ($2.1 billion), reduced bythird-party nonrecourse debt ($18.3 billion) and unearned income ($3.2 billion). The payment of the nonrecourse debt iscollateralized only by lease payments receivable and the leased property, and is nonrecourse to all other assets of PMCC.As required by U.S. GAAP, the third-party nonrecourse debt has been offset against the related rentals receivable andhas been presented on a net basis. Finance assets, net, at December 31, 2004, also includes net finance receivables fordirect finance leases of $0.7 billion and an allowance for losses ($0.5 billion).


Estimated residual values represent PMCC’s estimate at lease inception as to the fair value of assets under lease atthe end of the lease term. The estimated residual values are reviewed annually by PMCC’s management based on anumber of factors and activity in the relevant industry. If necessary, revisions to reduce the residual values are recorded.Such reviews resulted in a decrease of $25 million to PMCC’s net revenues and operating results in 2004. There were noadjustments in 2003 and 2002. To the extent that lease receivables due PMCC may be uncollectible, PMCC records anallowance for losses against its finance assets. During 2004 and 2002, PMCC increased this allowance by $140 millionand $290 million, respectively, in consideration of the continuing downturn in the airline industry. PMCC’s aggregatefinance asset balance related to aircraft was approximately $2.2 billion at December 31, 2004. It is possible that furtheradverse developments in the airline industry may require PMCC to increase its allowance for losses in future periods.

20


Exhibit 13

Consolidated Operating Results

See pages 37 — 38 for a discussion of Cautionary Factors That May Affect Future Results. (in millions)

2004

2003

2002

Net Revenues Domestic tobacco $ 17,511 $ 17,001 $ 18,877 International tobacco 39,536 33,389 28,672 North American food 22,060 20,937 20,489 International food 10,108 9,561 8,759 Beer 2,641 Financial services 395 432 495

Net revenues $ 89,610 $ 81,320 $ 79,933

(in millions)

2004

2003

2002

Operating Income Operating companies income:

Domestic tobacco $ 4,405 $ 3,889 $ 5,011 International tobacco 6,566 6,286 5,666 North American food 3,870 4,658 4,664 International food 933 1,393 1,466 Beer 276 Financial services 144 313 55

Amortization of intangibles (17) (9) (7)General corporate expenses (721) (771) (683)

Operating income $ 15,180 $ 15,759 $ 16,448

As discussed in Note 15. Segment Reporting, management reviews operating companies income, which is defined asoperating income before general corporate expenses and amortization of intangibles, to evaluate segment performanceand allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze thebusiness performance and trends of the various business segments.

The following events that occurred during 2004, 2003 and 2002 affected the comparability of statement of earningsamounts.

• Domestic Tobacco Headquarters Relocation Charges — PM USA has substantially completed the move of itscorporate headquarters from New York City to Richmond, Virginia. PM USA estimates that the total cost of the relocationwill be approximately $110 million, including compensation to those employees who did not relocate. Pre-tax charges of$31 million and $69 million were recorded in the operating companies income of the domestic tobacco segment for theyears ended December 31, 2004 and 2003, respectively. Cash payments of approximately $55 million were made during2004, while total cash payments related to the relocation were $85 million through December 31, 2004. At December 31,2004, a liability of $15 million remains on the consolidated balance sheet.

• International Tobacco E.C. Agreement — On July 9, 2004, PMI entered into an agreement with the E.C. and 10member states of the European Union that provides for broad cooperation with European law enforcement agencies onanti-contraband and anti-counterfeit efforts. The agreement resolves all disputes between the parties relating to theseissues. Under the terms of the agreement, PMI will make 13 payments over 12 years, including an initial payment of$250 million, which was recorded as a pre-tax charge against its earnings in 2004. The agreement calls for additionalpayments of approximately $150 million on the first anniversary of the agreement, approximately $100 million on thesecond anniversary and approximately $75 million each year thereafter for 10 years, each of which is to be adjustedbased on certain variables, including PMI’s market share in the European Union in the year preceding payment. Becausefuture additional payments are subject to these variables, PMI will record charges for them as an expense in cost of saleswhen product is shipped. During the third quarter of 2004, PMI began accruing for payments due on the first anniversaryof the agreement.

• Asset Impairment and Exit Costs — For the years ended December 31, 2004, 2003 and 2002, pre-tax assetimpairment and exit costs consisted of the following:


(in millions)

2004

2003

2002

Separation program Domestic tobacco $ 1 $ 13 Separation program International tobacco* 31 $ 58 Separation program North American food 135 Separation program International food 7 Separation program Beer 8 Separation program General corporate** 56 26 Restructuring program North American food 383 Restructuring program International food 200 Asset impairment International tobacco* 13 Asset impairment North American food 8 Asset impairment International food 12 6 Asset impairment Beer 15 Asset impairment General corporate** 10 41 Lease termination General corporate** 4

Asset impairment and exit costs $ 718 $ 86 $ 223

* During 2004, PMI announced that it will close its Eger, Hungary facility. In addition, during 2004, PMI closed afactory in Belgium and streamlined its Benelux operations. PMI recorded pre-tax charges of $44 million forseverance benefits and impairment charges during 2004.

** In 2004 and 2003, Altria Group, Inc. recorded pre-tax charges of $70 million and $26 million, respectively, primarily

related to the streamlining of various corporate functions in 2004 and 2003, and the write-off of an investment in ane-business consumer products purchasing exchange in 2004. In addition, during 2004, Altria Group, Inc. sold itsoffice facility in Rye Brook, New York. In connection with this sale, Altria Group, Inc. recorded a pre-tax charge in2003 of $41 million to write down the facility and the related fixed assets to fair value.

21


Exhibit 13

• Provision for Airline Industry Exposure — As discussed in Note 8. Finance Assets, net, during 2004 and 2002, inrecognition of the economic downturn in the airline industry, PMCC increased its allowance for losses by $140 million and$290 million, respectively.

• Discontinued Operations — As more fully discussed in Note 5. Divestitures, on November 15, 2004, Kraftannounced the sale of substantially all of its sugar confectionery business. Altria Group, Inc. has reflected the results ofKraft’s sugar confectionery business as discontinued operations on the consolidated statements of earnings for all yearspresented.

• Losses (Gains) on Sales of Businesses — During 2004, Kraft sold a Brazilian snack nuts business and trademarksassociated with a candy business in Norway, and recorded aggregate pre-tax losses of $3 million. During 2003, Kraft solda European rice business and a branded fresh cheese business in Italy and recorded aggregate pre-tax gains of$31 million. During 2002, Kraft sold a Latin American yeast and industrial bakery ingredients business resulting in apre-tax gain of $69 million, and Kraft sold several small businesses, resulting in pre-tax gains of $11 million.

• Integration Costs and a Loss on Sale of a Food Factory — Altria Group, Inc.’s consolidated statements ofearnings include the following integration costs incurred by Kraft as it integrated the operations of Nabisco Holdings Corp.(“Nabisco”), and a loss on sale of a food factory. During 2003, Kraft reversed $13 million related to integration chargesrecorded in 2002 and 2001.

(in millions) For the Years Ended December 31,

2003

2002

Closing a facility and other consolidation

programs North American food $ (13) $ 98 Consolidation of production lines and

distribution networks in Latin America International food 17 Loss on sale of a food factory North American food (4)

Total $ (13) $ 111

• Domestic Tobacco Legal Settlement — During 2003, PM USA and certain other defendants reached an agreementwith a class of U.S. tobacco growers and quota-holders to resolve a lawsuit related to tobacco leaf purchases. During2003, PM USA recorded pre-tax charges of $202 million for its obligations under the agreement. The pre-tax charges areincluded in the operating companies income of the domestic tobacco segment.

• Miller Transaction — As more fully discussed in Note 4. Miller Brewing Company Transaction, on July 9, 2002,Miller was merged into SAB to form SABMiller. The transaction resulted in a pre-tax gain of $2.6 billion, or $1.7 billionafter-tax.

2004 compared with 2003

The following discussion compares consolidated operating results for the year ended December 31, 2004, with the yearended December 31, 2003.

Net revenues, which include excise taxes billed to customers, increased $8.3 billion (10.2%). Excluding excise taxes,net revenues increased $3.8 billion (6.3%), due primarily to increases from the tobacco and North American foodbusinesses and favorable currency.

Operating income decreased $579 million (3.7%), due primarily to asset impairment and exit costs, primarily related tothe Kraft restructuring program, the 2004 pre-tax charges for the international tobacco E.C. agreement and the provisionfor airline industry exposure, and lower operating results from the food businesses. These decreases were partially offsetby the favorable impact of currency, 2003 pre-tax charges for the domestic tobacco legal settlement and higher operatingresults from the tobacco businesses.

Currency movements increased net revenues by $3.3 billion ($1.9 billion, after excluding the impact of currencymovements on excise taxes) and operating income by $638 million. Increases in net revenues and operating income weredue primarily to the weakness versus prior year of the U.S. dollar, primarily against the euro, Japanese yen and Russianruble.


Altria Group, Inc.’s effective tax rate decreased by 2.5 percentage points to 32.4%. This decrease was due primarily tothe reversal of $355 million of tax accruals that are no longer required due to foreign tax events that were resolved duringthe year and the $81 million favorable resolution of an outstanding tax item at Kraft.

Minority interest in earnings from continuing operations, and equity earnings, net, was $44 million of expense for 2004,compared with $391 million of expense for 2003. The change from 2003 was due to lower 2004 net earnings at Kraft andhigher equity earnings from SABMiller, which included $111 million of gains from the sales of investments.

Earnings from continuing operations of $9.4 billion increased $299 million (3.3%), due primarily to the favorable impactof currency, a lower effective tax rate, 2003 pre-tax charges for the domestic tobacco legal settlement, higher equityearnings from SABMiller and higher operating income from the tobacco businesses, partially offset by the 2004 pre-taxcharges for asset impairment and exit costs, primarily related to the Kraft restructuring program, the international tobaccoE.C. agreement and a provision for airline industry exposure, and lower operating income from the food businesses.Diluted and basic EPS from continuing operations of $4.57 and $4.60, respectively, increased by 2.0% and 2.2%,respectively.

(Loss) earnings from discontinued operations, net of income taxes and minority interest, was a loss of $4 million for2004 compared to earnings of $83 million for 2003, due primarily to a pre-tax non-cash asset impairment charge of$107 million in 2004.

Net earnings of $9.4 billion increased $212 million (2.3%). Diluted and basic EPS from net earnings of $4.56 and$4.60, respectively, increased by 0.9% and 1.3%, respectively.

22


Exhibit 13


The following discussion compares consolidated operating results for the year ended December 31, 2003, with the yearended December 31, 2002.

Net revenues, which include excise taxes billed to customers, increased $1.4 billion (1.7%). Excluding excise taxes,net revenues decreased $1.5 billion (2.5%) due primarily to the impact of the Miller transaction and a decrease in netrevenues from the domestic tobacco business, partially offset by favorable currency and higher net revenues from thefood and international tobacco businesses.

Operating income decreased $689 million (4.2%), due primarily to lower operating results from the domestic tobaccoand food businesses, the impact of the Miller transaction, and the 2003 pre-tax charges for the domestic tobacco legalsettlement and headquarters relocation, partially offset by higher operating results from the international tobaccobusiness, the favorable impact of currency, a 2002 provision for airline industry exposure and the impact of the 2002pre-tax charges for asset impairment and exit costs, and integration costs.

Currency movements increased net revenues by $3.4 billion ($1.8 billion, after excluding the impact of currencymovements on excise taxes) and operating income by $562 million. Increases in net revenues and operating income weredue primarily to the weakness of the U.S. dollar against the euro and other currencies, partially offset by the impact ofcertain Latin American currencies.

Altria Group, Inc.’s effective tax rate decreased by 0.6 percentage points to 34.9%, due primarily to favorable state taxrulings, as well as the mix of foreign versus domestic pre-tax earnings.

Earnings from continuing operations of $9.1 billion decreased $1.9 billion (17.2%), due primarily to the $1.7 billionafter-tax gain from the Miller transaction in 2002 and lower operating income in 2003. Diluted and basic EPS fromcontinuing operations of $4.48 and $4.50, respectively, decreased by 13.5% and 13.8%, respectively, as the adverseimpact of lower operating income and the impact of the gain from the Miller transaction in 2002 were partially offset by thefavorable impact of share repurchases and a lower effective tax rate.

Net earnings of $9.2 billion decreased $1.9 billion (17.1%). Diluted and basic EPS from net earnings of $4.52 and$4.54, respectively, decreased by 13.2% and 13.7%, respectively.

Operating Results by Business Segment

Tobacco


Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Smoking

The tobacco industry, both in the United States and abroad, faces a number of challenges that may continue to adverselyaffect the business, volume, results of operations, cash flows and financial position of PM USA, PMI and ALG. Thesechallenges, which are discussed below and in the Cautionary Factors That May Affect Future Results, include:

• the civil lawsuit, in which trial is currently underway, filed by the United States federal government seekingapproximately $280 billion from various cigarette manufacturers and others, including PM USA and ALG,discussed in Note 19. Contingencies (“Note 19”);

• a compensatory and punitive damages judgment totaling approximately $10.1 billion against PM USA in the

Price Lights/Ultra Lights class action, and punitive damages verdicts against PM USA in other smoking andhealth cases discussed in Note 19;

• a $74 billion punitive damages judgment against PM USA in the Engle smoking and health class action, which

has been overturned by a Florida district court of appeal and is currently on appeal to the Florida SupremeCourt;

• pending and threatened litigation and bonding requirements as discussed in Note 19; • competitive disadvantages related to price increases in the United States attributable to the settlement of

certain tobacco litigation; • actual and proposed excise tax increases worldwide as well as changes in tax structure in foreign markets;


• the sale of counterfeit cigarettes by third parties; • the sale of cigarettes by third parties over the Internet and by other means designed to avoid the collection of

applicable taxes; • price gaps and changes in price gaps between premium and lowest price brands; • diversion into one market of products intended for sale in another; • the outcome of proceedings and investigations involving contraband shipments of cigarettes; • governmental investigations; • actual and proposed requirements regarding the use and disclosure of cigarette ingredients and other

proprietary information; • actual and proposed restrictions on imports in certain jurisdictions outside the United States; • actual and proposed restrictions affecting tobacco manufacturing, marketing, advertising and sales; • governmental and private bans and restrictions on smoking; • the diminishing prevalence of smoking and increased efforts by tobacco control advocates to further restrict

smoking; • governmental regulations setting ignition propensity standards for cigarettes; and • other actual and proposed tobacco legislation both inside and outside the United States.

In the ordinary course of business, PM USA and PMI are subject to many influences that can impact the timing ofsales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customerincentive programs and customer inventory programs, as well as the timing of pricing actions and tax-driven priceincreases.

• Excise Taxes: Cigarettes are subject to substantial excise taxes in the United States and to substantial taxationabroad. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to beproposed or enacted within the United States, the European Union

23


Exhibit 13

(the “EU”) and in other foreign jurisdictions. In addition, in certain jurisdictions, PMI’s products are subject to discriminatorytax structures and inconsistent rulings and interpretations on complex methodologies to determine excise and other taxburdens.

These tax increases are expected to continue to have an adverse impact on sales of cigarettes by PM USA and PMI,due to lower consumption levels and to a shift in consumer purchases from the premium to the non-premium or discountsegments or to other low-priced tobacco products or to counterfeit and contraband products.

• Tar and Nicotine Test Methods and Brand Descriptors: A number of governments and public health organizationsthroughout the world have determined that the existing standardized machine-based methods for measuring tar andnicotine yields do not provide useful information about tar and nicotine deliveries and that such results are misleading tosmokers. For example, in the 2001 publication of Monograph 13, the U.S. National Cancer Institute (“NCI”) concluded thatmeasurements based on the Federal Trade Commission (“FTC”) standardized method “do not offer smokers meaningfulinformation on the amount of tar and nicotine they will receive from a cigarette” or “on the relative amounts of tar andnicotine exposure likely to be received from smoking different brands of cigarettes.” Thereafter, the FTC issued a pressrelease indicating that it would be working with the NCI to determine what changes should be made to its testing methodto “correct the limitations” identified in Monograph 13. In 2002, PM USA petitioned the FTC to promulgate new rulesgoverning the use of existing standardized machine-based methodologies for measuring tar and nicotine yields anddescriptors. That petition remains pending. In addition, the World Health Organization (“WHO”) has concluded that thesestandardized measurements are “seriously flawed” and that measurements based upon the current standardizedmethodology “are misleading and should not be displayed.”

In light of these conclusions, governments and public health organizations have increasingly challenged the use ofdescriptors — such as “light,” “mild,” and “low tar” — that are based on measurements produced by the standardized testmethodologies. For example, the European Commission has concluded that descriptors based on standardized tar andnicotine yield measurements “may mislead the consumer” and has prohibited the use of descriptors. Public healthorganizations have also urged that descriptors be banned. For example, the Scientific Advisory Committee of the WHOconcluded that descriptors such as “light, ultra-light, mild and low tar” are “misleading terms” and should be banned. In2003, the WHO proposed the Framework Convention on Tobacco Control (“FCTC”), a treaty that requires signatorynations to adopt and implement measures to ensure that descriptive terms do not create “the false impression that aparticular tobacco product is less harmful than other tobacco products.” Such terms “may include ‘low tar,’ ‘light,’‘ultra-light,’ or ‘mild.’ ” For a discussion of the FCTC, see below under the heading “The World Health Organization’sFramework Convention for Tobacco Control.” In addition, public health organizations in Canada and the United Stateshave advocated “a complete prohibition of the use of deceptive descriptors such as ‘light’ and ‘mild.’ ”

See Note 19, which describes pending litigation concerning the use of brand descriptors.

• Food and Drug Administration (“FDA”) Regulations: ALG and PM USA endorsed federal legislation introduced inMay 2004 in the Senate and the House of Representatives, known as the Family Smoking Prevention and TobaccoControl Act, which would have granted the FDA the authority to regulate the design, manufacture and marketing ofcigarettes and disclosures of related information. The legislation also would have granted the FDA the authority to combatcounterfeit and contraband tobacco products and would have imposed fees to pay for the cost of regulation and othermatters. Congress adjourned in October 2004 without adopting this legislation. Whether Congress will grant the FDAauthority over tobacco products in the future cannot be predicted.

• Tobacco Quota Buy-Out: In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) wassigned into law. FETRA provides for the elimination of the federal tobacco quota and price support program through anindustry-funded buy-out of tobacco growers and quota holders. The cost of the proposed buy-out is approximately$9.6 billion and will be paid over 10 years by manufacturers and importers of all tobacco products. The cost will beallocated based on the relative market shares of manufacturers and importers of all tobacco products. PM USA expectsthat its quota buy-out payments will offset already scheduled payments to the National Tobacco Grower Settlement Trust(the “NTGST”), a trust fund established in 1999 by four of the major domestic tobacco product manufacturers to provideaid to tobacco growers and quota-holders. Manufacturers and importers of tobacco products are also obligated to coverany losses (up to $500 million) that the government may incur on the disposition of pool stock tobacco accumulated underthe previous tobacco price support program. PM USA’s share of tobacco pool stock losses cannot currently bedetermined, as the calculation of any such losses will depend on a number of factors, including the extent to which thegovernment can sell such pool tobacco and thereby mitigate or avoid losses. For a discussion of the NTGST, see Note19. Altria Group, Inc. does not anticipate that the quota buy-out will have a material adverse impact on its consolidatedresults in 2005 and beyond.

Following the enactment of FETRA, the trustees of the NTGST and the state entities conveying NTGST payments totobacco growers and quota holders, alleging that the offset provisions do not apply to payments due in 2004, suedtobacco product manufacturers. In December 2004, a North Carolina court ruled that the tobacco manufacturers, including


PM USA, are entitled to receive a refund of amounts paid to the NTGST during the first three quarters of 2004 and are notrequired to make the payments that would otherwise have been due during the fourth quarter of 2004. Plaintiffs haveappealed. If the trial court’s ruling is upheld, PM USA would reverse accruals and receive reimbursements totaling$232 million.

• Ingredient Disclosure Laws: Jurisdictions inside and outside the United States have enacted or proposedlegislation or regulations that would require cigarette manufacturers to disclose the ingredients used in the manufacture ofcigarettes and, in certain cases, to provide toxicological information. In some jurisdictions, governments have prohibitedthe use of certain ingredients, and proposals have been discussed to further prohibit the use of ingredients. Under an EUtobacco product directive, tobacco companies are now required to disclose ingredients and toxicological information toeach Member State. In implementing the EU tobacco product directive, the Netherlands has issued a decree that wouldrequire tobacco companies to disclose the ingredients used in each brand of cigarettes, including quantities used. PMIand others have challenged this decree in the Dutch District Court of The Hague on the grounds of a lack of appropriateprotection of proprietary information.

• Health Effects of Smoking and Exposure to Environmental Tobacco Smoke (“ETS”): Reports with respect tothe health risks of cigarette smoking have been publicized for many years, and the sale, promotion, and use of cigarettescontinue to be subject to increasing governmental regulation.

24


Exhibit 13

It is the policy of PM USA and PMI to support a single, consistent public health message on the health effects ofcigarette smoking in the development of diseases in smokers, and on smoking and addiction, and on exposure to ETS. Itis also their policy to defer to the judgment of public health authorities as to the content of warnings in advertisements andon product packaging regarding the health effects of smoking, addiction and exposure to ETS.

PM USA and PMI each have established Web sites that include, among other things, the views of public healthauthorities on smoking, disease causation in smokers, addiction and ETS. These sites reflect PM USA’s and PMI’sagreement with the medical and scientific consensus that cigarette smoking is addictive, and causes lung cancer, heartdisease, emphysema and other serious diseases in smokers. The Web sites advise smokers, and those consideringsmoking, to rely on the messages of public health authorities in making all smoking-related decisions. The Web siteaddresses are www.philipmorrisusa.com and www.philipmorrisinternational.com. The information on PMI’s and PM USA’sWeb sites is not, and shall not be deemed to be, a part of this document or incorporated into any filings ALG makes withthe Securities and Exchange Commission.

• The WHO’s Framework Convention for Tobacco Control: In May 2003, the Framework Convention for TobaccoControl was adopted by the World Health Assembly and it was signed by 167 countries and the EU. More than 50countries have now ratified the treaty, and it entered into force on February 27, 2005. The treaty recommends (and incertain instances, requires) signatory nations to enact legislation that would, among other things, establish specific actionsto prevent youth smoking; restrict and gradually eliminate tobacco product advertising and promotion; inform the publicabout the health consequences of smoking and the benefits of quitting; regulate the ingredients of tobacco products;impose new package warning requirements that may include the use of pictures or graphic images; adopt measures thatwould eliminate cigarette smuggling and counterfeit cigarettes; restrict smoking in public places; increase cigarette taxes;adopt and implement measures that ensure that descriptive terms do not create the false impression that one brand ofcigarettes is safer than another; phase out duty-free tobacco sales; and encourage litigation against tobacco productmanufacturers.

Each country that ratifies the treaty must implement legislation reflecting the treaty’s provisions and principles. Whilenot agreeing with all of the provisions of the treaty, PM USA and PMI have expressed hope that the treaty will lead to theimplementation of meaningful, effective regulation of tobacco products around the world.

• Cigarette Ignition Propensity Requirements: Effective June 28, 2004, all cigarettes sold or offered for sale in NewYork (except for certain cigarettes that already were in the stream of commerce on that date) are required to meetfire-safety standards established in regulations issued by the New York State Office of Fire Prevention and Control.Similar regulation or legislation is being considered in other states, at the federal level, and in jurisdictions outside theUnited States. Similar legislation has been passed in Canada.

• Other Legislation and Legislative Initiatives: Legislative and regulatory initiatives affecting the tobacco industryhave been adopted or are being considered in a number of countries and jurisdictions. In 2001, the EU adopted adirective on tobacco product regulation requiring EU Member States to implement regulations that reduce maximumpermitted levels of tar, nicotine and carbon monoxide yields; require manufacturers to disclose ingredients andtoxicological data; require cigarette packs to carry health warnings covering no less than 30% of the front panel and noless than 40% of the back panel; gives Member States the option of introducing graphic warnings as of 2005; require tar,nicotine and carbon monoxide data to cover at least 10% of the side panel; and prohibit the use of texts, names,trademarks and figurative or other signs suggesting that a particular tobacco product is less harmful than others.

All 25 EU Member States have implemented these regulations. The European Commission has issued guidelines foroptional graphic warnings on cigarette packaging that Member States may apply as of 2005. Graphic warningrequirements have also been proposed or adopted in a number of other jurisdictions. In 2003, the EU adopted a newdirective prohibiting radio, press and Internet tobacco marketing and advertising. EU Member States must implement thisdirective by July 31, 2005. Tobacco control legislation addressing the manufacture, marketing and sale of tobaccoproducts has been proposed or adopted in numerous other jurisdictions.

In the United States in recent years, various members of federal and state governments have introduced legislationthat would: subject cigarettes to various regulations; establish educational campaigns relating to tobacco consumption ortobacco control programs, or provide additional funding for governmental tobacco control activities; further restrict theadvertising of cigarettes; require additional warnings, including graphic warnings, on packages and in advertising;eliminate or reduce the tax deductibility of tobacco advertising; provide that the Federal Cigarette Labeling and AdvertisingAct and the Smoking Education Act not be used as a defense against liability under state statutory or common law; andallow state and local governments to restrict the sale and distribution of cigarettes.

It is not possible to predict what, if any, additional governmental legislation or regulations will be adopted relating tothe manufacturing, advertising, sale or use of cigarettes, or the tobacco industry generally. If, however, any of theproposals were to be implemented, the business, volume, results of operations, cash flows and financial position of PM


USA, PMI and their parent, ALG, could be materially adversely affected.

• Governmental Investigations: From time to time, ALG and its subsidiaries are subject to governmentalinvestigations on a range of matters, including those discussed below.

•Australia:

In 2001, authorities in Australia initiated an investigation into the use of descriptors, in order todetermine whether their use is false and misleading. The investigation is directed at one of PMI’sAustralian affiliates and other cigarette manufacturers.

• Canada: ALG believes that Canadian authorities are contemplating a legal proceeding based on an

investigation of ALG entities relating to allegations of contraband shipments of cigarettes into Canadain the early to mid-1990s.

• Greece: In 2003, the competition authorities in Greece initiated an investigation into recent cigarette price

increases in that market. PMI’s Greek affiliates have responded to the authorities’ request forinformation.

• Italy: Pursuant to two separate requests from a consumer advocacy group, the Italian competition

authorities held that the use of the “lights” descriptors such as Marlboro Lights, Merit Ultra Lights, andDiana Leggere brands were misleading advertising, but took no action because an EU directiveprohibited the use of the descriptors as of October 2003. PMI has appealed the decisions to theadministrative court.

25


Exhibit 13

ALG and its subsidiaries cannot predict the outcome of these investigations or whether additional investigations maybe commenced.

• Cooperation Agreement between PMI and the European Commission: In July 2004, PMI entered into anagreement with the European Commission (acting on behalf of the European community) and 10 member states of theEU that provides for broad cooperation with European law enforcement agencies on anti-contraband and anti-counterfeitefforts. The agreement resolves all disputes between the European Community and the 10 member states that signed theagreement, on the one hand, and PMI and certain affiliates, on the other hand, relating to these issues. Under the termsof the agreement, PMI will make 13 payments over 12 years. In the second quarter of 2004, PMI recorded a pre-taxcharge of $250 million for the initial payment. The agreement calls for payments of approximately $150 million on the firstanniversary of the agreement, approximately $100 million on the second anniversary, and approximately $75 million eachyear thereafter for 10 years, each of which is to be adjusted based on certain variables, including PMI’s market share inthe EU in the year preceding payment. PMI will record these payments as an expense in cost of sales when product isshipped. See the section below entitled “Aggregate Contractual Obligations” for a table showing the estimated paymentsto be made during the next five years.

• State Settlement Agreements: As discussed in Note 19, during 1997 and 1998, PM USA and other major domestictobacco product manufacturers entered into agreements with states and various United States jurisdictions settlingasserted and unasserted health care cost recovery and other claims. These settlements require PM USA to makesubstantial annual payments. See the section below entitled “Aggregate Contractual Obligations” for a table showing theestimated payments to be made during the next five years. The settlements also place numerous restrictions on PMUSA’s business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes. Amongthese are prohibitions of outdoor and transit brand advertising; payments for product placement; and free sampling.Restrictions are also placed on the use of brand name sponsorships and brand name non-tobacco products. The StateSettlement Agreements also place prohibitions on targeting youth and the use of cartoon characters. In addition, the StateSettlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes;impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit theindustry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certaintobacco-related organizations and place restrictions on the establishment of any replacement organizations.

Operating Results

Net Revenues

Operating Companies Income

(in millions)

2004

2003

2002

2004

2003

2002

Domestic tobacco $ 17,511 $ 17,001 $ 18,877 $ 4,405 $ 3,889 $ 5,011 International tobacco 39,536 33,389 28,672 6,566 6,286 5,666

Total tobacco $ 57,047 $ 50,390 $ 47,549 $ 10,971 $ 10,175 $ 10,677


The following discussion compares tobacco operating results for 2004 with 2003.

• Domestic tobacco: PM USA’s net revenues, which include excise taxes billed to customers, increased $510 million(3.0%). Excluding excise taxes, net revenues increased $514 million (3.9%), due primarily to savings resulting fromchanges to the 2004 trade programs, including PM USA’s returned goods policy and lower Wholesale Leaders programdiscounts.

Operating companies income increased $516 million (13.3%), due primarily to savings resulting from changes to tradeprograms in 2004, including PM USA’s returned goods policy and lower Wholesale Leaders program discounts, net ofincreased costs including the State Settlement Agreements (aggregating $197 million), the 2003 pre-tax charges for thedomestic tobacco legal settlement ($202 million), lower marketing, administration and research costs ($67 million), lowerpre-tax charges for the domestic tobacco headquarters relocation ($38 million) and lower asset impairment and exit costs($12 million).

Marketing, administration and research costs include PM USA’s cost of administering and litigating product liabilityclaims. Litigation defense costs are influenced by a number of factors, as more fully discussed in Note 19. Principalamong these factors are the number and types of cases filed, the number of cases tried annually, the results of trials andappeals, the development of the law controlling relevant legal issues, and litigation strategy and tactics. For the years


ended December 31, 2004, 2003 and 2002, product liability defense costs were $268 million, $307 million and$358 million, respectively. The factors that have influenced past product liability defense costs are expected to continue toinfluence future costs. While PM USA does not expect that product liability defense costs will increase significantly in thefuture, it is possible that adverse developments among the factors discussed above could have a material adverse effecton PM USA’s operating companies income.

PM USA’s shipment volume was 187.1 billion units, a decrease of 0.1%. In the premium segment, PM USA’sshipment volume increased 0.1%, as gains in Marlboro were essentially offset by declines in other premium brands.Marlboro shipment volume increased 2.5 billion units (1.7%) to 150.4 billion units with gains across the brand portfolio andthe introduction of Marlboro Menthol 72 mm. In the discount segment, PM USA’s shipment volume decreased 1.9%, whileBasic shipment volume was down 0.7% to 15.6 billion units.

The following table summarizes PM USA’s retail share performance, based on data from the IRI/Capstone Total RetailPanel, which was developed to measure market share in retail stores selling cigarettes, but was not designed to captureInternet or direct mail sales:

For the Years Ended December 31,

2004

2003

Marlboro 39.5% 38.0%Parliament 1.7 1.7 Virginia Slims 2.4 2.4 Basic 4.2 4.2

Focus on Four Brands 47.8 46.3 Other PM USA 2.0 2.4

Total PM USA 49.8% 48.7%

26


Exhibit 13

PM USA reduced its wholesaler promotional allowance for its Focus on Four brands by $1.00 per carton, from $6.50to $5.50, effective December 12, 2004. In addition, effective January 16, 2005, the price of PM USA’s other brands wasincreased by $5.00 per thousand cigarettes or $1.00 per carton.

PM USA cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes ofthe premium and discount segments or in PM USA’s shipments or retail market share; however, it believes that PM USA’sresults may be materially adversely affected by price increases related to increased excise taxes and tobacco litigationsettlements, as well as by the other items discussed under the caption Tobacco—Business Environment.

• International tobacco: International tobacco net revenues, which include excise taxes billed to customers, increased$6.1 billion (18.4%). Excluding excise taxes, net revenues increased $1.6 billion (10.2%), due primarily to favorablecurrency ($1.0 billion), price increases ($538 million) and the impact of acquisitions ($285 million), partially offset by lowervolume/mix ($300 million), reflecting lower volume in France, Germany and Italy.

Operating companies income increased $280 million (4.5%), due primarily to favorable currency ($540 million), priceincreases ($538 million) and the impact of acquisitions ($71 million), partially offset by higher marketing, administrationand research costs ($373 million), the 2004 pre-tax charges for the international tobacco E.C. agreement ($250 million),unfavorable volume/mix ($201 million), reflecting lower volume in the higher margin markets of France, Germany andItaly, and asset impairment and exit costs for the closures of facilities in Hungary and Belgium, as well as the streamliningof PMI’s Benelux operations ($44 million).

PMI’s volume of 761.4 billion units increased 25.6 billion units (3.5%), due primarily to incremental volume fromacquisitions made during 2003. Excluding acquisition volume, shipments increased 9.1 billion units (1.2%). In WesternEurope, volume declined 8.7%, due primarily to decreases in France, Germany and Italy. Shipment volume decreased19.5% in France, due to tax-driven price increases since January 1, 2003, that continued to drive an overall marketdecline. PMI’s market share in France increased 0.7 share points to 39.9%. In Italy, volume decreased 6.4% and marketshare fell 2.6 share points to 51.5%, as PMI’s brands were adversely impacted by low-price competitive brands and alower total market. Italy passed a minimum reference price law and implementation regulations are expected in the firstquarter of 2005. In Germany, volume declined, reflecting a lower total cigarette market due mainly to tax-driven priceincreases and the resultant consumer shifts to low-price tobacco products, particularly tobacco portions which benefit fromlower excise taxes than cigarettes. PMI entered the tobacco portions market during the second quarter of 2004 with theMarlboro and Next brands and is further expanding its capacity to manufacture these products in 2005. In Central andEastern Europe, Middle East and Africa, volume increased due to gains in Kazakhstan, Poland, Romania, Russia, SaudiArabia, Turkey and Ukraine, and acquisitions in Greece and Serbia, partially offset by declines in Lithuania and Hungary.In worldwide duty-free, volume increased, reflecting the global recovery in travel and a favorable comparison to the prioryear, which was depressed by the effects of SARS and the Iraq war. In Asia, volume grew, due primarily to increases inKorea, Malaysia, Thailand and the Philippines. In Japan, PMI’s volume was up slightly, while the total market was downdue to the adverse impact of the July 2003 tax-driven retail price increase and a lower incidence of smoking. In LatinAmerica, volume decreased, driven mainly by declines in Argentina, partially offset by an increase in Mexico.

PMI achieved market share gains in a number of important markets, including Austria, Belgium, Egypt, France,Greece, Japan, Mexico, the Netherlands, Poland, Russia, Saudi Arabia, Spain, Turkey and Ukraine.

Volume for Marlboro declined 1.3%, as lower volume in Western Europe, mainly France and Germany, was partiallyoffset by gains in Central Europe, Eastern Europe and Asia, including Japan. Marlboro market share increased in manyimportant markets, including Argentina, Belgium, Japan, Mexico, Poland, Portugal, Russia, Spain, Turkey, Ukraine andthe United Kingdom.

During 2004, PMI purchased a tobacco business in Finland for a cost of approximately $42 million. Also, during 2004,PMI reached an agreement to acquire Coltabaco, the largest tobacco company in Colombia, with a 48% market share.PMI expects to close the transaction in the beginning of 2005, for approximately $310 million. During 2003, PMIpurchased approximately 74.2% of a tobacco business in Serbia for a cost of approximately $486 million, and in 2004,PMI increased its ownership interest to 85.2%. During 2003, PMI also purchased 99% of a tobacco business in Greece forapproximately $387 million and increased its ownership interest in its affiliate in Ecuador from less than 50% toapproximately 98% for a cost of $70 million. In addition, during the third quarter of 2003, PMI announced that its licenseagreement with Japan Tobacco Inc. for the manufacture and sale of Marlboro cigarettes in Japan will not be renewedwhen the current term of the agreement expires in April 2005. PMI will undertake the manufacture of Marlboro and hasexpanded its distribution and sales force in Japan. As a result, PMI anticipates a smooth transition and higher operatingcompanies income from Japan in 2005.


The following discussion compares tobacco operating results for 2003 with 2002.


• Domestic tobacco: PM USA’s net revenues, which include excise taxes billed to customers, decreased $1.9 billion(9.9%). Excluding excise taxes, net revenues decreased $1.8 billion (11.9%), due primarily to price promotions to narrowprice gaps ($1.5 billion) and lower volume ($335 million).

Operating companies income decreased $1.1 billion (22.4%), due primarily to price promotions to narrow price gaps,net of lower costs under the State Settlement Agreements (aggregating $620 million), lower volume ($186 million), highermarketing, administration and research costs, and the 2003 pre-tax charges for a legal settlement ($202 million) andheadquarters relocation ($69 million).

PM USA’s shipment volume was 187.2 billion units, a decrease of 2.3%. In the premium segment, PM USA’sshipment volume decreased 1.1%, while Marlboro shipment volume decreased 636 million units (0.4%) to 147.9 billionunits. In the discount segment, PM USA’s shipment volume decreased 12.9%, while Basic shipment volume was down11.6% to 15.8 billion units. While PM USA’s shipment volume comparisons to 2002 were affected by factors such as aweak economic environment and sharp increases in state excise taxes, PM USA’s sequential retail share improved.

27


Exhibit 13

Effective with the first quarter of 2003, PM USA began reporting retail share results based on a retail tracking service,with data beginning in the fourth quarter of 2002. This service, IRI/Capstone Total Retail Panel, was developed tomeasure market share in retail stores selling cigarettes, but was not designed to capture Internet or direct mail sales. Thefollowing table summarizes sequential retail share performance for PM USA’s key brands from the fourth quarter of 2002through the fourth quarter of 2003, and the full year 2003, based on data from the IRI/Capstone Total Retail Panel:

For the Three Months Ended For the Year Ended

December

31, March 31, June 30, September 30, December 31, December 31,

2002

2003

2003

2003

2003

2003

Marlboro 37.4% 37.5% 37.8% 38.1% 38.5% 38.0%Parliament 1.3 1.5 1.7 1.8 1.7 1.7 Virginia Slims 2.5 2.5 2.4 2.4 2.4 2.4 Basic 4.3 4.3 4.2 4.2 4.2 4.2

Focus on Four Brands 45.5 45.8 46.1 46.5 46.8 46.3 Other PM USA 2.6 2.5 2.4 2.3 2.3 2.4

Total PM USA 48.1% 48.3% 48.5% 48.8% 49.1% 48.7%

• International tobacco: International tobacco net revenues, which include excise taxes billed to customers, increased$4.7 billion (16.5%). Excluding excise taxes, net revenues increased $1.3 billion (8.7%), due primarily to favorablecurrency ($1.1 billion), price increases ($212 million), the impact of acquisitions in Serbia and Greece, and higher volume.

Operating companies income increased $620 million (10.9%), due primarily to favorable currency ($469 million), priceincreases ($212 million) and the pre-tax charges for asset impairment and exit costs in 2002 ($58 million), partially offsetby higher marketing, administration and research costs, and unfavorable volume/mix, reflecting lower volume in the highermargin markets of France, Germany and Italy.

PMI’s volume of 735.8 billion units increased 12.7 billion units (1.8%). In Western Europe, volume declined, dueprimarily to decreases in France, Germany and Italy, partially offset by increases in Spain and Austria. Shipment volumedecreased in France, although market share was higher, reflecting contraction of the entire market following tax-drivenprice increases in January 2002, January 2003 and October 2003. In Germany, volume declined, reflecting a lower totalmarket and consumer down-trading to low-priced tobacco portions following tax-driven price increases. In Italy, volumedecreased 14.3% and market share fell 7.1 share points to 54.1%, as PMI’s brands remain under pressure fromlow-priced competitive brands. In Central and Eastern Europe, Middle East and Africa, volume increased, due to gains inRussia, Ukraine, Romania and Turkey, and acquisitions in Greece and Serbia, partially offset by declines in Hungary andPoland, due to intense price competition, and declines in Lithuania and the Slovak Republic, due to lower markets as aresult of tax-driven price increases. In Asia, volume declined slightly as decreases in the Philippines and Indonesia werepartially offset by increases in Japan, Korea, Taiwan and Thailand. In Latin America, volume increased, driven by gains inArgentina and Mexico.

PMI achieved market share gains in a number of important markets, including Argentina, Austria, France, Germany,Greece, Japan, Poland, Russia, Singapore, the Slovak Republic, Spain, Turkey, Ukraine and the United Kingdom.

Volume for Marlboro declined 1.9%, due primarily to tax-driven price increases in France and Germany, intense pricecompetition in Italy, consumer down-trading in Turkey and difficult economic conditions and price competition in Egypt andIndonesia, partially offset by higher volume in Argentina, Austria, Brazil, the Czech Republic, Japan, Romania, Russia,Serbia, the Slovak Republic, Spain and Ukraine.

Food


Kraft manufactures and markets packaged food products, consisting principally of beverages, cheese, snacks, convenientmeals and various packaged grocery products. Kraft manages and reports operating results through two units, Kraft NorthAmerica Commercial (“KNAC”) and Kraft International Commercial (“KIC”). KNAC represents the North American foodsegment and KIC represents the international food segment. Beginning in 2004, results for the Mexico and Puerto Ricobusinesses, which were previously included in the North American food segment, are included in the international food


segment and historical amounts have been restated.

In the ordinary course of business, Kraft is subject to many influences that can impact the timing of sales tocustomers, including the timing of holidays and other annual or special events, seasonality of certain products, significantweather conditions, timing of Kraft and customer incentive programs, customer inventory programs, Kraft’s initiatives toimprove supply chain efficiency, including efforts to align product shipments more closely with consumption by shiftingsome of its customer marketing programs to a consumption based approach, financial situations of customers andgeneral economic conditions.

KNAC and KIC are subject to a number of challenges that may adversely affect their businesses. These challenges,which are discussed below and in the Cautionary Factors That May Affect Future Results section include:

• fluctuations in commodity prices; • movements of foreign currencies; • competitive challenges in various products and markets, including price gaps with competitor products and the

increasing price-consciousness of consumers; • a rising cost environment; • a trend toward increasing consolidation in the retail trade and consequent pricing pressure and inventory

reductions; • a growing presence of hard discount retailers, primarily in Europe, with an emphasis on private label products;

28


Exhibit 13

• changing consumer preferences, including diet trends; • competitors with different profit objectives and less susceptibility to currency exchange rates; and • consumer concerns and/or regulations regarding food safety, quality and health, including genetically modified

organisms, trans-fatty acids and obesity. Increased government regulation of the food industry could result inincreased costs to Kraft.

Fluctuations in commodity costs can cause retail price volatility and intense price competition, and can influenceconsumer and trade buying patterns. During 2004, Kraft’s commodity costs on average were significantly higher thanthose incurred in 2003 (most notably dairy, coffee, meat, nuts, energy and packaging) and have adversely affectedearnings. Dairy costs rose to historical highs during the first half of 2004, but moderated during the second half of 2004.For 2004, Kraft had a negative pre-tax earnings impact from all commodities of approximately $930 million as comparedwith 2003.

To build its business while confronting these challenges, Kraft operates with seven business strategies: 1) buildsuperior consumer brand value; 2) build shopper demand through superior customer collaboration; 3) transform theportfolio; 4) expand global scale; 5) drive out costs and assets; 6) strengthen employee and organizational excellence;and 7) act responsibly.

In January 2004, Kraft announced a multi-year restructuring program with the objectives of leveraging Kraft’s globalscale, realigning and lowering its cost structure, and optimizing capacity utilization. As part of this program (which isdiscussed further in Note 3. Asset Impairment and Exit Costs), Kraft anticipates the closing or sale of up to twenty plantsand the elimination of approximately six thousand positions. From 2004 through 2006, Kraft expects to incur up to$1.2 billion in pre-tax charges for the program, reflecting asset disposals, severance and other implementation costs,including $641 million incurred in 2004. Approximately one-half of the pre-tax charges are expected to require cashpayments.

In addition, Kraft expects to incur approximately $140 million in capital expenditures from 2004 through 2006 toimplement the restructuring program, including $46 million spent in 2004. Cost savings as a result of the restructuringprogram were approximately $127 million in 2004, are expected to increase by an incremental amount between$120 million and $140 million in 2005, and are anticipated to reach annualized cost savings of approximately $400 millionby 2006, all of which are expected to be used in support of brand-building initiatives.

One element of the growth strategy of Kraft is to strengthen its brand portfolio through active programs of selectiveacquisitions and divestitures. Kraft is constantly investigating potential acquisition candidates and from time to time sellsbusinesses that are outside its core categories or that do not meet its growth or profitability targets. The impact of anyfuture acquisition or divestiture could have a material impact on Altria Group, Inc.’s consolidated financial position, resultsof operations or cash flows.

During 2004, Kraft acquired a U.S.-based beverage business for a total cost of $137 million. During 2003, Kraftacquired trademarks associated with a small U.S.-based natural foods business and also acquired a biscuits business inEgypt. The total cost of these and other smaller businesses purchased by Kraft during 2003 was $98 million. During 2002,Kraft acquired a snacks business in Turkey and a biscuits business in Australia. The total cost of these and smallerbusinesses purchased by Kraft during 2002 was $122 million.

On November 15, 2004, Kraft announced the sale of substantially all of its sugar confectionery business forapproximately $1.5 billion. The proposed sale includes the Life Savers, Creme Savers, Altoids, Trolli and Sugus brands.The transaction, which is subject to regulatory approval, is expected to be completed in the second quarter of 2005. AltriaGroup, Inc. has reflected the results of Kraft’s sugar confectionery business as discontinued operations on theconsolidated statements of earnings for all years presented. The assets related to the sugar confectionery business werereflected as assets of discontinued operations held for sale on the consolidated balance sheet at December 31, 2004. Inaddition, Kraft anticipates additional tax expense of $270 million will be recorded as a loss on sale of discontinuedoperations in 2005. In accordance with the provisions of SFAS No. 109, the tax expense will be recorded when thetransaction is consummated.

During 2004, Kraft sold a Brazilian snack nuts business and trademarks associated with a candy business in Norway.The aggregate proceeds received from the sales of these businesses were $18 million, on which pre-tax losses of$3 million were recorded. In December 2004, Kraft announced the sale of its U.K. desserts business for approximately$135 million, which is expected to result in a gain. The transaction, which is subject to required approvals, is expected toclose in the first quarter of 2005, following completion of necessary employee consultation requirements. In addition, inDecember 2004, Kraft announced the sale of its yogurt business for approximately $59 million, which is expected to resultin an after-tax loss of approximately $12 million. The transaction, which is also subject to regulatory approval, is expected


to be completed in the first quarter of 2005.

During 2003, Kraft sold a European rice business and a branded fresh cheese business in Italy. The aggregateproceeds received from the sales of businesses in 2003 were $96 million, on which pre-tax gains of $31 million wererecorded.

During 2002, Kraft sold several small North American food businesses, most of which had been previously classifiedas businesses held for sale arising from the acquisition of Nabisco. In addition, Kraft sold a Latin American yeast andindustrial bakery ingredients business for approximately $110 million and recorded a pre-tax gain of $69 million. Theaggregate proceeds received from the sales of these businesses during 2002 were $219 million, on which pre-tax gains of$80 million were recorded.

The operating results of businesses acquired and sold, excluding Kraft’s sugar confectionery business, were notmaterial to Altria Group, Inc.’s consolidated financial position, results of operations or cash flows in any of the yearspresented.

Operating Results

Net Revenues


(in millions)

2004

2003

2002

2004

2003

2002

North American food $ 22,060 $ 20,937 $ 20,489 $ 3,870 $ 4,658 $ 4,664 International food 10,108 9,561 8,759 933 1,393 1,466

Total food $ 32,168 $ 30,498 $ 29,248 $ 4,803 $ 6,051 $ 6,130

29


Exhibit 13


The following discussion compares food operating results for 2004 with 2003.

• North American food: Net revenues increased $1.1 billion (5.4%), due primarily to higher volume/mix ($537 million),higher net pricing ($312 million, reflecting commodity-driven price increases, partially offset by increased promotionalspending), favorable currency ($164 million) and the impact of acquisitions ($117 million).

Operating companies income decreased $788 million (16.9%), due primarily to the 2004 pre-tax charges for assetimpairment and exit costs ($391 million), cost increases, net of higher pricing ($356 million, including higher commoditycosts and increased promotional spending), higher marketing, administration and research costs ($214 million, includinghigher benefit costs), and the 2004 implementation costs associated with the Kraft restructuring program ($40 million),partially offset by higher volume/mix ($197 million) and favorable currency ($29 million).

Volume increased 4.3%, of which 2.6% was due to acquisitions. In U.S. Beverages, volume increased, drivenprimarily by an acquisition in beverages, growth in coffee and new product introductions. Volume gains were achieved inU.S. Cheese, Canada & North America Foodservice, due primarily to promotional reinvestment spending in cheese andhigher volume in Foodservice, due to the impact of an acquisition and higher shipments to national accounts. In U.S.Convenient Meals, volume increased, due primarily to higher cold cuts shipments and new product introductions in pizza,partially offset by lower shipments of meals. In U.S. Grocery, volume increased, due primarily to growth in enhancers,partially offset by declines in desserts. In U.S. Snacks & Cereals, volume increased, due primarily to higher snack nutsand biscuits shipments, partially offset by lower cereals volumes.

• International food: Net revenues increased $547 million (5.7%), due primarily to favorable currency ($674 million),favorable volume/mix ($23 million) and the impact of acquisitions ($23 million), partially offset by the impact of divestitures($126 million) and increased promotional spending, net of higher pricing ($47 million).

Operating companies income decreased $460 million (33.0%), due primarily to the pre-tax charges for assetimpairment and exit costs ($206 million), cost increases and increased promotional spending, net of higher pricing($113 million), higher marketing, administration and research costs ($92 million, including higher benefit costs andinfrastructure investment in developing markets), an investment impairment charge relating to a joint venture in Turkey($47 million), the 2004 loss and 2003 gain on sales of businesses (aggregating $34 million) and the impact of divestitures,partially offset by favorable currency ($69 million).

Volume decreased 1.1%, due primarily to the impact of the divestitures of a rice business and a branded fresh cheesebusiness in Europe in 2003, as well as price competition and trade inventory reductions in several markets, partially offsetby the impact of acquisitions.

In Europe, Middle East and Africa, volume decreased, impacted by divestitures, price competition in France and tradeinventory reductions in Russia, partially offset by growth in Germany, Austria, Italy and Romania, and the impact ofacquisitions. Beverages volume declined, impacted by price competition in coffee in France and lower shipments ofrefreshment beverages in the Middle East. In cheese, volume decreased, due primarily to the divestiture of a brandedfresh cheese business in Italy, partially offset by higher shipments of cream cheese in Germany, Italy and the UnitedKingdom, and higher process cheese shipments in the United Kingdom. In convenient meals, volume declined, dueprimarily to the divestiture of a European rice business. In grocery, volume declined across several markets, includingGermany and Italy, partially offset by an acquisition in Egypt. Snacks volume increased, benefiting from acquisitions andnew product introductions across the region, partially offset by trade inventory reductions in Russia.

Volume decreased in Latin America & Asia Pacific, due primarily to declines in Mexico, Peru, and Venezuela, partiallyoffset by gains in Brazil and China. Snacks volume decreased, impacted by price competition and trade inventoryreductions in Peru and Venezuela. In grocery, volume decreased across several markets, including Peru, Australia andthe Philippines. In beverages, volume increased, impacted by gains in Brazil and China, partially offset by pricecompetition in Mexico. Cheese volume increased, with gains across several markets, including Japan, Australia and thePhilippines.


The following discussion compares food operating results for 2003 with 2002.

• North American food: Net revenues increased $448 million (2.2%), due primarily to favorable currency($162 million), higher pricing, net of increased promotional spending ($157 million) and higher volume/mix ($148 million),partially offset by the divestiture of a small confectionery business in the fourth quarter of 2002.


Operating companies income decreased $6 million (0.1%), due primarily to cost increases, net of higher pricing($132 million, including higher commodity costs and increased promotional spending), higher fixed manufacturing costs($82 million, including higher benefit costs) and unfavorable volume/mix ($35 million), partially offset by the 2002 pre-taxcharges for asset impairment and exit costs, and integration charges (aggregating $242 million).

Volume increased 1.5%. Volume gains were achieved in U.S. Beverages, driven primarily by new product momentumin ready-to-drink beverages, partially offset by lower shipments of coffee. In U.S. Cheese, Canada & North AmericaFoodservice, volume increased, due primarily to improved consumption and share trends in cheese from increasedmarketing spending, and higher shipments in Canada. Volume for the Foodservice business in the United Statesincreased, due to higher shipments to national accounts. In U.S. Convenient Meals, volume increased, due primarily tohigher shipments of cold cuts, hot dogs, bacon, soy-based meat alternatives and frozen pizza. In U.S. Grocery, volumedecreased, due primarily to divestitures and lower shipments of enhancers, partially offset by higher desserts volume.Volume decreased in U.S. Snacks & Cereal, due primarily to weakness in cookies resulting from the impact of consumers’health and wellness focus, lower contributions from new products and higher pricing, partially offset by gains in snacknuts.

• International food: Net revenues increased $802 million (9.2%), due primarily to favorable currency ($564 million),higher pricing ($320 million, reflecting higher commodity and currency devaluation-driven cost increases in Latin America)and the impact of acquisitions ($57 million), partially offset by lower volume/mix ($73 million) and the impact of divestitures($66 million).

30


Exhibit 13

Operating companies income decreased $73 million (5.0%), due primarily to higher marketing, administration andresearch costs ($90 million, including higher benefit costs and infrastructure investment in developing markets), the netimpact of lower gains on sales of businesses ($41 million), lower volume/mix ($39 million) and the impact of divestitures,partially offset by favorable currency ($61 million), higher pricing, net of cost increases ($24 million, including fixedmanufacturing costs), the 2002 pre-tax charges for integration costs ($17 million) and the impact of acquisitions($7 million).

Volume decreased 1.1%, due primarily to the impact of divestitures, the adverse impact of the summer heat waveacross Europe on the coffee and confectionery businesses, and price competition, partially offset by growth in developingmarkets and the impact of acquisitions.

In Europe, Middle East and Africa, volume increased, driven by growth in the Central and Eastern Europe, MiddleEast and Africa region, benefiting from the impact of acquisitions and new product introductions, partially offset by theadverse impact of the summer heat wave across Europe, price competition and the impact of divestitures. Snacks volumeincreased, benefiting from acquisitions, partially offset by the adverse impact of the summer heat wave on confectioneryshipments and price competition. Beverages volume declined, due primarily to the summer heat wave across Europe(which had an adverse impact on coffee shipments) and price competition. These declines were partially offset byincreased coffee shipments in Russia, benefiting from expanded distribution, and Poland, aided by new productintroductions. In convenient meals, volume declined, due primarily to the divestiture of a European rice business, partiallyoffset by higher shipments of canned meats in Italy. In cheese, volume decreased, due primarily to the impact of pricecompetition in Germany and Spain, partially offset by higher shipments of cream cheese in Italy.

Volume decreased in the Latin America and Asia Pacific region, due primarily to the divestiture of a Latin Americanbakery ingredients business in 2002, partially offset by growth in Argentina, Brazil, Mexico, China and Australia. Ingrocery, volume declined in Latin America, due primarily to the divestiture of a bakery ingredients business in the fourthquarter of 2002. Snacks volume increased, due primarily to new product introductions in Brazil, Argentina, China andAustralia, partially offset by lower confectionery volume due to trade inventory reductions, price competition and economicweakness in Brazil. In beverages, volume increased, driven by growth in Brazil, Venezuela, Mexico and China, aided bynew product introductions. In cheese, volume increased, due primarily to higher shipments to the Philippines andAustralia, partially offset by declines in the Latin American region. Convenient meals volume also grew, benefiting fromgains in Argentina.

Beer

On July 9, 2002, Miller merged into SAB to form SABMiller. The transaction, which is discussed more fully in Note 4 to theconsolidated financial statements, resulted in a pre-tax gain of $2.6 billion, or $1.7 billion after-tax. Beginning with the thirdquarter of 2002, ALG ceased consolidating the operating results and balance sheet of Miller and began to account for itsownership interest in SABMiller under the equity method.

Financial Services


During 2003, PMCC shifted its strategic focus from an emphasis on the growth of its portfolio of finance leases throughnew investments to one of maximizing investment gains and generating cash flows from its existing portfolio of financeassets. Accordingly, PMCC’s operating companies income will decrease over time, although there may be fluctuationsfrom year to year, as lease investments mature or are sold. During 2004 and 2003, PMCC received proceeds from assetsales and maturities of $644 million and $507 million, respectively, and recorded gains of $112 million and $45 million,respectively, in operating companies income.

Among its leasing activities, PMCC leases a number of aircraft, predominantly to major U.S. carriers. At December 31,2004, approximately 27%, or $2.2 billion of PMCC’s aggregate finance asset balance related to aircraft. Two of PMCC’slessees, United Air Lines, Inc. (“UAL”) and US Airways Group, Inc. (“US Airways”) are currently under bankruptcyprotection and therefore PMCC has ceased recording income on these leases.

PMCC leases 24 Boeing 757 aircraft to UAL with an aggregate finance asset balance of $569 million at December 31,2004. PMCC has entered into an agreement with UAL to amend 18 direct finance leases subject to UAL’s successfulemergence from bankruptcy and assumption of the leases. UAL remains current on lease payments due to PMCC onthese 18 amended leases. PMCC continues to monitor the situation at UAL with respect to the six remaining aircraftfinanced under leveraged leases, in which PMCC has an aggregate finance asset balance of $92 million. PMCC has noamended agreement relative to these leases since its interests are subordinate to those of public debt holders associatedwith the leveraged leases. Accordingly, since UAL has declared bankruptcy, PMCC has received no lease paymentsrelative to these six aircraft and remains at risk of foreclosure on these aircraft by the senior lenders under the leveraged


leases.

In addition, PMCC leases 16 Airbus A-319 aircraft to US Airways financed under leveraged leases with an aggregatefinance asset balance of $150 million at December 31, 2004. US Airways filed for bankruptcy protection inSeptember 2004. Previously, US Airways emerged from Chapter 11 bankruptcy protection in March 2003, at which timePMCC’s leveraged leases were assumed pursuant to an agreement with US Airways. Since entering bankruptcy again inSeptember 2004, US Airways has entered into agreements with respect to all 16 PMCC aircraft which require US Airwaysto honor its lease obligations on a going forward basis until it either assumes or rejects the leases. If US Airways rejectsthe leases on these aircraft, PMCC is at risk of having its interest in these aircraft foreclosed upon by the senior lendersunder the leveraged leases.

PMCC has an aggregate finance asset balance of $258 million at December 31, 2004, relating to six Boeing 757, nineBoeing 767 and four McDonnell Douglas (MD-88) aircraft leased to Delta Air Lines, Inc. (“Delta”) under long-termleveraged leases. PMCC and many other aircraft financiers entered into restructuring agreements with Delta inNovember 2004. As a result of its agreement, PMCC recorded a charge to the allowance for losses of $40 million. Deltaremains current under its lease obligations to PMCC.

In recognition of ongoing concerns within its airline portfolio, PMCC recorded a provision for losses of $140 million inthe fourth quarter of 2004. Previously, PMCC had recorded a provision for losses of $290 million in the fourth quarter of2002 for its airline industry exposure. At December 31, 2004, PMCC’s allowance for losses, which includes the provisionsrecorded by PMCC for its airline industry exposure, was $497 million. It is possible that further adverse developments inthe airline industry may require PMCC to increase its allowance for losses.

31


Exhibit 13

Operating Results

Net Revenues


(in millions)

2004

2003

2002

2004

2003

2002

Financial Services $ 395 $ 432 $ 495 $ 144 $ 313 $ 55

PMCC’s net revenues for 2004 decreased $37 million (8.6%) from 2003, due primarily to the previously discussedchange in strategy which resulted in lower lease portfolio revenues, partially offset by an increase of $66 million fromgains on asset sales. PMCC’s operating companies income for 2004 decreased $169 million (54.0%) from 2003, dueprimarily to the 2004 provision for airline industry exposure discussed above, and the decrease in net revenues.

PMCC’s net revenues for 2003 decreased $63 million (12.7%) from 2002, due primarily to the previously discussedchange in strategy which resulted in lower lease portfolio revenues. PMCC’s operating companies income for 2003increased $258 million over 2002, due primarily to the previously discussed 2002 provision for airline industry exposure,partially offset by the impact of lower investment balances as a result of PMCC’s change in strategic direction.

Financial Review

• Net Cash Provided by Operating Activities: During 2004, net cash provided by operating activities was$10.9 billion, compared with $10.8 billion during 2003. The increase of $74 million was due primarily to higher netearnings in 2004, partially offset by higher escrow deposits for the Price domestic tobacco case and lower cash from thefinancial services business.

During 2003, net cash provided by operating activities of $10.8 billion was $204 million higher than 2002, due primarilyto a lower use of cash to fund working capital, partially offset by a use of cash to fund the Price escrow.

• Net Cash Used in Investing Activities: One element of the growth strategy of ALG’s subsidiaries is to strengthentheir brand portfolios through active programs of selective acquisitions and divestitures. These subsidiaries are constantlyinvestigating potential acquisition candidates and from time to time Kraft sells businesses that are outside its corecategories or that do not meet its growth or profitability targets. The impact of any future acquisition or divestiture couldhave a material impact on Altria Group, Inc.’s consolidated cash flows.

During 2004, 2003 and 2002, net cash used in investing activities was $1.4 billion, $2.4 billion and $2.5 billion,respectively. The decrease in 2004 primarily reflects lower amounts used for the purchase of businesses in 2004. Thediscontinuation of finance asset investments, as well as the increased proceeds from finance asset sales also contributedto a lower level of cash used in investing activities.

Capital expenditures for 2004 decreased 3.1% to $1.9 billion. Approximately 45% related to tobacco operations andapproximately 55% related to food operations; the expenditures were primarily for modernization and consolidation ofmanufacturing facilities, and expansion of certain production capacity. In 2005, capital expenditures are expected to beapproximately 10% to 15% above 2004 expenditures and are expected to be funded by operating cash flows.

• Net Cash Used in Financing Activities: During 2004, net cash used in financing activities was $8.0 billion,compared with $5.5 billion in 2003 and $8.2 billion in 2002. The increase of $2.5 billion over 2003 was due primarily to therepayment of debt in 2004, as compared with 2003 when ALG and Kraft borrowed against their revolving credit facilities,while their access to commercial paper markets was temporarily eliminated following a $10.1 billion judgment against PMUSA. The decrease in net cash used in financing activities in 2003 from 2002 was due primarily to a lower level($5.4 billion) of ALG payments for common stock repurchases in 2003, partially offset by a lower net issuance ofconsumer products debt in 2003.

• Debt and Liquidity:

Credit Ratings: Following a $10.1 billion judgment on March 21, 2003, against PM USA in the Price litigation, which isdiscussed in Note 19, the three major credit rating agencies took a series of ratings actions resulting in the lowering ofALG’s short-term and long-term debt ratings. During 2003, Moody’s lowered ALG’s short-term debt rating from “P-1” to“P-3” and its long-term debt rating from “A2” to “Baa2.” Standard & Poor’s lowered ALG’s short-term debt rating from “A-1”to “A-2” and its long-term debt rating from “A–” to “BBB.” Fitch Rating Services lowered ALG’s short-term debt rating from“F-1” to “F-2” and its long-term debt rating from “A” to “BBB.”


While Kraft is not a party to, and has no exposure to, this litigation, its credit ratings were also lowered, but to a lesserdegree. As a result of the rating agencies’ actions, borrowing costs for ALG and Kraft have increased. None of ALG’s orKraft’s debt agreements require accelerated repayment as a result of a decrease in credit ratings. The credit ratingdowngrades by Moody’s, Standard & Poor’s, and Fitch Rating Services had no impact on any of ALG’s or Kraft’s otherexisting third-party contracts.

Credit Lines: ALG and Kraft each maintain separate revolving credit facilities that they have historically used to supportthe issuance of commercial paper. However, as a result of the rating agencies’ actions discussed above, ALG’s andKraft’s access to the commercial paper market was eliminated in 2003. Subsequently, in April 2003, ALG and Kraft beganto borrow against existing credit facilities to repay maturing commercial paper and to fund normal working capital needs.By the end of May 2003, Kraft regained its access to the commercial paper market, and in November 2003, ALG regainedlimited access to the commercial paper market.

At December 31, 2004, credit lines for ALG and Kraft, and the related activity were as follows (in billions of dollars):

ALG

Commercial Credit Amount Paper Lines Type

Lines

Drawn

Outstanding

Available

Multi-year $ 5.0 $ — $ — $ 5.0

Kraft

Commercial Credit Amount Paper Lines Type

Lines

Drawn

Outstanding

Available

364-day $ 2.5 $ — $ — $ 2.5 Multi-year 2.0 1.7 0.3

$ 4.5 $ — $ 1.7 $ 2.8

32


Exhibit 13

The ALG multi-year revolving credit facility requires the maintenance of an earnings to fixed charges ratio, as definedby the agreement, of 2.5 to 1.0. At December 31, 2004, the ratio calculated in accordance with the agreement was 9.7 to1.0. The Kraft multi-year revolving credit facility, which is for the sole use of Kraft, requires the maintenance of a minimumnet worth of $18.2 billion. At December 31, 2004, Kraft’s net worth was $29.9 billion. ALG and Kraft expect to continue tomeet their respective covenants. The multi-year facilities, which expire in July 2006, enable the respective companies toreclassify short-term debt on a long-term basis.

After a review of projected borrowing requirements, ALG’s management determined that its revolving credit facilitiesprovided liquidity in excess of its needs. As a result, ALG’s 364-day revolving credit facility was not renewed when itexpired in July 2004. In July 2004, Kraft replaced its 364-day facility, which was expiring. The new Kraft 364-day revolvingcredit facility, in the amount of $2.5 billion, expires in July 2005, although it contains a provision allowing Kraft to extendthe maturity of outstanding borrowings for up to one additional year. It also requires the maintenance of a minimum networth of $18.2 billion. These facilities do not include any additional financial tests, any credit rating triggers or anyprovisions that could require the posting of collateral.

In addition to the above, certain international subsidiaries of ALG and Kraft maintain uncommitted credit lines to meettheir respective working capital needs. These credit lines, which amounted to approximately $2.0 billion for ALGsubsidiaries (other than Kraft) and approximately $0.6 billion for Kraft subsidiaries, are for the sole use of theseinternational businesses. Borrowings on these lines amounted to approximately $0.9 billion at December 31, 2004.

Debt: Altria Group, Inc.’s total debt (consumer products and financial services) was $23.0 billion and $24.5 billion atDecember 31, 2004 and 2003, respectively. Total consumer products debt was $20.8 billion and $22.3 billion atDecember 31, 2004 and 2003, respectively. At December 31, 2004 and 2003, Altria Group, Inc.’s ratio of consumerproducts debt to total equity was 0.68 and 0.89, respectively. The ratio of total debt to total equity was 0.75 and 0.98 atDecember 31, 2004 and 2003, respectively. Fixed-rate debt constituted approximately 90% and 80% of total consumerproducts debt at December 31, 2004 and 2003, respectively. The weighted average interest rate on total consumerproducts debt, including the impact of swap agreements, was approximately 5.4% and 5.2% at December 31, 2004 and2003, respectively.

In November 2004, Kraft issued $750 million of 5-year notes bearing interest at 4.125%. The net proceeds of theoffering were used by Kraft to refinance maturing debt. Kraft has a Form S-3 shelf registration statement on file with theSEC, under which Kraft may sell debt securities and/or warrants to purchase debt securities in one or more offerings. AtDecember 31, 2004, Kraft had $3.5 billion of capacity remaining under its shelf registration.

In November 2003, ALG completed the issuance of $1.5 billion in long-term notes under an existing shelf registrationstatement. The borrowings included $500 million of 5-year notes bearing interest at a rate of 5.625% and $1.0 billion of10-year notes bearing interest at a rate of 7.0%. The net proceeds from this transaction were used to retire borrowingsagainst the ALG revolving credit facilities. At December 31, 2004, ALG had approximately $2.8 billion of capacityremaining under its shelf registration.

ALG does not guarantee the debt of Kraft.

• Off-Balance Sheet Arrangements and Aggregate Contractual Obligations: Altria Group, Inc. has no off-balancesheet arrangements, including special purpose entities, other than guarantees and contractual obligations that arediscussed below.

Guarantees: As discussed in Note 19, at December 31, 2004, Altria Group, Inc.’s third-party guarantees, which areprimarily related to excise taxes, and acquisition and divestiture activities, approximated $468 million, of which$305 million have no specified expiration dates. The remainder expire through 2023, with $134 million expiring during2005. Altria Group, Inc. is required to perform under these guarantees in the event that a third party fails to makecontractual payments or achieve performance measures. Altria Group, Inc. has a liability of $44 million on its consolidatedbalance sheet at December 31, 2004, relating to these guarantees. In the ordinary course of business, certainsubsidiaries of ALG have agreed to indemnify a limited number of third parties in the event of future litigation. AtDecember 31, 2004, subsidiaries of ALG were also contingently liable for $1.8 billion of guarantees related to their ownperformance, consisting of the following:

• $1.6 billion of guarantees of excise tax and import duties related primarily to international shipments of tobaccoproducts. In these agreements, a financial institution provides a guarantee of tax payments to the respectivegovernments. PMI then issues a guarantee to the respective financial institution for the payment of the taxes.These are revolving facilities that are integral to the shipment of tobacco products in international markets, andthe underlying taxes payable are recorded on Altria Group, Inc.’s consolidated balance sheet.

• $0.2 billion of other guarantees related to the tobacco and food businesses.


Although Altria Group, Inc.’s guarantees of its own performance are frequently short-term in nature, the short-termguarantees are expected to be replaced, upon expiration, with similar guarantees of similar amounts. These items havenot had, and are not expected to have, a significant impact on Altria Group, Inc.’s liquidity.

33


Exhibit 13

Aggregate Contractual Obligations: The following table summarizes Altria Group, Inc.’s contractual obligations atDecember 31, 2004:

Payments Due

2006- 2008- 2010 and (in millions)

Total

2005

2007

2009

Thereafter

Long-term debt(1):

Consumer products $ 18,252 $ 1,751 $ 5,317 $ 3,791 $ 7,393 Financial services 2,221 1,722 499

20,473 1,751 7,039 4,290 7,393 Operating leases(2) 1,997 544 711 355 387 Purchase obligations(3):

Inventory and production costs 9,060 4,847 2,643 692 878 Other 3,772 2,325 1,246 183 18

12,832 7,172 3,889 875 896 Other long-term liabilities(4) 108 11 75 18 4

$ 35,410 $ 9,478 $ 11,714 $ 5,538 $ 8,680

(1) Amounts represent the expected cash payments of Altria Group, Inc.’s long-term debt and do not include bondpremiums or discounts, or nonrecourse debt issued by PMCC.

(2) Amounts represent the minimum rental commitments under non-cancelable operating leases. Altria Group, Inc. hasno significant capital lease obligations.

(3) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies,packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to beutilized in the normal course of business. Other purchase obligations include commitments for marketing,advertising, capital expenditures, information technology and professional services. Arrangements are consideredpurchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to bepurchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelablewithout a significant penalty, and with short notice (usually 30 days). Any amounts reflected on the consolidatedbalance sheet as accounts payable and accrued liabilities are excluded from the table above.

(4) Other long-term liabilities primarily consist of specific severance and incentive compensation arrangements. Thefollowing long-term liabilities included on the consolidated balance sheet are excluded from the table above:accrued pension, postretirement health care and postemployment costs, income taxes, minority interest, insuranceaccruals and other accruals. Altria Group, Inc. is unable to estimate the timing of payments for these items.Currently, Altria Group, Inc. anticipates making U.S. pension contributions of approximately $780 million in 2005and non-U.S. pension contributions of approximately $210 million in 2005, based on current tax law (as discussedin Note 16).

The State Settlement Agreements and related legal fee payments, and payments for tobacco-growers, as discussedbelow and in Note 19, are excluded from the table above, as the payments are subject to adjustment for several factors,including inflation, market share and industry volume. In addition, the international tobacco E.C. agreement paymentsdiscussed below are excluded from the table above, as the payments are subject to adjustment based on certainvariables including PMI’s market share in the European Union. Litigation escrow deposits, as discussed below and in Note19, are also excluded from the table above since these deposits will be returned to PM USA should it prevail on appeal.

International Tobacco E.C. Agreement: On July 9, 2004, PMI entered into an agreement with the E.C. and 10 memberstates of the European Union that provides for broad cooperation with European law enforcement agencies onanti-contraband and anti-counterfeit efforts. This agreement resolves all disputes between the parties relating to theseissues. Under the terms of the agreement, PMI will make 13 payments over 12 years, including an initial payment of$250 million, which was recorded as a pre-tax charge against its earnings in 2004. The agreement calls for additionalpayments of approximately $150 million on the first anniversary of the agreement, approximately $100 million on thesecond anniversary and approximately $75 million each year thereafter for 10 years, each of which is to be adjustedbased on certain variables, including PMI’s market share in the European Union in the year preceding payment. Becausefuture additional payments are subject to these variables, PMI will record charges for them as an expense in cost of sales


when product is shipped. During the third quarter of 2004, PMI began accruing for payments due on the first anniversaryof the agreement.

Payments Under State Settlement and Other Tobacco Agreements: As discussed previously and in Note 19, PM USAhas entered into State Settlement Agreements with the states and territories of the United States and has also enteredinto agreements for the benefit of United States tobacco growers. During 2004, PMI entered into a cooperation agreementwith the European Community. Each of these agreements calls for payments that are based on variable factors, such ascigarette volume, market shares and inflation. PM USA and PMI account for the cost of these agreements as acomponent of cost of sales as product is shipped.

As a result of these agreements, PM USA and PMI recorded the following amounts in cost of sales for the yearsended December 31, 2004, 2003 and 2002:

(in billions)

PM USA

PMI

Total

2004 $ 4.6 $ 0.1 $ 4.7 2003 4.4 4.4 2002 5.3 5.3

In addition, during 2004, PMI recorded a pre-tax charge of $250 million at the signing of the cooperation agreementwith the European Community, and PM USA recorded a one-time pre-tax charge of $202 million in 2003 related to thesettlement of litigation with tobacco growers.

Based on current agreements and current estimates of volume, market share and inflation trends, the estimatedamounts that PM USA and PMI may charge to cost of sales under these agreements will be approximately as follows:

(in billions)

PM USA

PMI

Total

2005 $ 4.9 $ 0.1 $ 5.0 2006 5.0 0.1 5.1 2007 5.6 0.1 5.7 2008 5.7 0.1 5.8 2009 5.7 0.1 5.8 2010 to 2015 5.9 annually 0.1 annually 6.0 annuallyThereafter 6.0 annually 6.0 annually

The estimated amounts charged to cost of sales in each of the years above would generally be paid in the followingyear. As previously stated, the payments due under the terms of these agreements are subject to adjustment for severalfactors, including cigarette volume, inflation and certain contingent events and, in general, are allocated based on eachmanufacturer’s market share. The amounts shown in the table above are estimates, and actual amounts will differ asunderlying assumptions differ from actual future results.

34


Exhibit 13

Litigation Escrow Deposits: As discussed in Note 19, in connection with obtaining a stay of execution in May 2001 inthe Engle class action, PM USA placed $1.2 billion into an interest-bearing escrow account. The $1.2 billion escrowaccount and a deposit of $100 million related to the bonding requirement are included in the December 31, 2004 and2003 consolidated balance sheets as other assets. These amounts will be returned to PM USA should it prevail in itsappeal of the case. Interest income on the $1.2 billion escrow account is paid to PM USA quarterly and is being recordedas earned in interest and other debt expense, net, in the consolidated statements of earnings.

In addition, in connection with obtaining a stay of execution in the Price case, PM USA placed a pre-existing 7.0%,$6 billion long-term note from ALG to PM USA into an escrow account with an Illinois financial institution. Since this noteis the result of an intercompany financing arrangement, it does not appear on the consolidated balance sheet of AltriaGroup, Inc. In addition, PM USA agreed to make cash deposits with the clerk of the Madison County Circuit Court in thefollowing amounts: beginning October 1, 2003, an amount equal to the interest earned by PM USA on the ALG note($210 million every six months), an additional $800 million in four equal quarterly installments between September 2003and June 2004 and the payments of the principal of the note which are due in equal installments in April 2008, 2009 and2010. Through December 31, 2004, PM USA made $1.4 billion of the cash deposits due under the judge’s order. Cashdeposits into the account are included in other assets on the consolidated balance sheet. If PM USA prevails on appeal,the escrowed note and all cash deposited with the court will be returned to PM USA, with accrued interest lessadministrative fees payable to the court.

With respect to certain adverse verdicts and judicial decisions currently on appeal, other than the Engle and the Pricecases discussed above, as of December 31, 2004, PM USA has posted various forms of security totaling $360 million, themajority of which have been collateralized with cash deposits, to obtain stays of judgments pending appeals. In addition,as discussed in Note 19, PMI placed 51 million euro in an escrow account pending appeal of an adverse administrativecourt decision in Italy. These cash deposits are included in other assets on the consolidated balance sheets.

As discussed above under Tobacco—Business Environment, the present legislative and litigation environment issubstantially uncertain and could result in material adverse consequences for the business, financial condition, cash flowsor results of operations of ALG, PM USA and PMI. Assuming there are no material adverse developments in thelegislative and litigation environment, Altria Group, Inc. expects its cash flow from operations to provide sufficient liquidityto meet the ongoing needs of the business.

• Equity and Dividends: During 2003, ALG completed its three-year, $10 billion share repurchase program and begana one-year, $3 billion share repurchase program that expired in March 2004. Following the rating agencies’ actions in thefirst quarter of 2003, discussed above in “Credit Ratings,” ALG suspended its share repurchase program. During 2003,ALG repurchased 18.7 million shares of its common stock at a cost of $0.7 billion. Cumulative repurchases under the$3 billion authority totaled approximately 7.0 million shares at an aggregate cost of $241 million.

During 2003, Kraft completed its $500 million share repurchase program and began a $700 million share repurchaseprogram. During December 2004, Kraft completed its $700 million share repurchase program and began a $1.5 billiontwo-year share repurchase program. During 2004 and 2003, Kraft repurchased 21.5 million and 12.5 million shares,respectively, of its Class A common stock at a cost of $700 million and $380 million, respectively. As of December 31,2004, Kraft had repurchased 1.4 million shares of its Class A common stock, under its $1.5 billion authority, at anaggregate cost of $50 million.

Altria Group, Inc. purchased 1.6 million shares of Kraft’s Class A common stock in open market transactions during2002 in order to completely satisfy a one-time grant of Kraft options to employees of Altria Group, Inc. at the time of theKraft IPO.

As discussed in Note 12 to the consolidated financial statements, in January 2004 and January 2003, Altria Group,Inc. granted approximately 1.4 million and 2.3 million shares of restricted stock, respectively, to eligible U.S.-basedemployees and Directors of Altria Group, Inc. and also issued to eligible non-U.S. employees and Directors rights toreceive approximately 1.0 million and 1.5 million equivalent shares, respectively. Restrictions on most of the stock andrights granted in 2004 and 2003 lapse in the first quarter of 2007 and the first quarter of 2006, respectively.

Dividends paid in 2004 and 2003 were $5.7 billion and $5.3 billion, respectively, an increase of 7.3%, primarilyreflecting a higher dividend rate in 2004. During the third quarter of 2004, Altria Group, Inc.’s Board of Directors approveda 7.4% increase in the quarterly dividend rate to $0.73 per share. As a result, the annualized dividend rate increased to$2.92 from $2.72.

Market Risk

ALG’s subsidiaries operate globally, with manufacturing and sales facilities in various locations around the world. ALG andits subsidiaries utilize certain financial instruments to manage foreign currency and commodity exposures. Derivative


financial instruments are used by ALG and its subsidiaries, principally to reduce exposure to market risks resulting fromfluctuations in foreign exchange rates and commodity prices, by creating offsetting exposures. Altria Group, Inc. is not aparty to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes.

A substantial portion of Altria Group, Inc.’s derivative financial instruments is effective as hedges. Hedging activityaffected accumulated other comprehensive earnings (losses), net of income taxes, during the years ended December 31,2004, 2003 and 2002, as follows:

(in millions)

2004

2003

2002

(Loss) gain as of January 1 $ (83) $ (77) $ 33

Derivative losses (gains) transferred to earnings 86 (42) 1 Change in fair value (17) 36 (111)

Loss as of December 31 $ (14) $ (83) $ (77)

The fair value of all derivative financial instruments has been calculated based on market quotes.

• Foreign exchange rates: Altria Group, Inc. uses forward foreign exchange contracts and foreign currency options tomitigate its exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions.The primary currencies to which Altria Group, Inc. is exposed include the Japanese yen, Swiss franc and the euro. AtDecember 31, 2004 and 2003, Altria Group, Inc. had foreign exchange option and forward contracts with aggregatenotional amounts of $9.7 billion and $13.6 billion, respectively. The $3.9 billion decrease from December 31, 2003,reflects $3.0 billion due to the maturity of a substantial portion of equal and offsetting foreign currency transactionsdiscussed below, as well as the maturity of contracts that were outstanding at December 31, 2003, partially offset by newagreements in 2004. Included in the foreign currency aggregate notional

35


Exhibit 13

amounts at December 31, 2004 and 2003, were $0.4 billion and $3.4 billion, respectively, of equal and offsetting foreigncurrency positions, which do not qualify as hedges and that will not result in any significant gain or loss. In addition, AltriaGroup, Inc. uses foreign currency swaps to mitigate its exposure to changes in exchange rates related to foreign currencydenominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debtdenominated in the functional currency of the borrowing entity. A substantial portion of the foreign currency swapagreements is accounted for as cash flow hedges. The unrealized gain (loss) relating to foreign currency swapagreements that do not qualify for hedge accounting treatment under U.S. GAAP was insignificant as of December 31,2004 and 2003. At December 31, 2004 and 2003, the notional amounts of foreign currency swap agreements aggregated$2.7 billion and $2.5 billion, respectively.

Altria Group, Inc. also designates certain foreign currency denominated debt as net investment hedges of foreignoperations. During the years ended December 31, 2004, 2003 and 2002, losses, net of income taxes, of $344 million,$286 million and $366 million, respectively, which represented effective hedges of net investments, were reported as acomponent of accumulated other comprehensive earnings (losses) within currency translation adjustments.

• Commodities: Kraft is exposed to price risk related to forecasted purchases of certain commodities used as rawmaterials. Accordingly, Kraft uses commodity forward contracts as cash flow hedges, primarily for coffee, cocoa, milk andcheese. Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee,cocoa, wheat, corn, sugar and soybean oil. At December 31, 2004 and 2003, Kraft had net long commodity positions of$443 million and $255 million, respectively. In general, commodity forward contracts qualify for the normal purchaseexception under U.S. GAAP. The effective portion of unrealized gains and losses on commodity futures and optioncontracts is deferred as a component of accumulated other comprehensive earnings (losses) and is recognized as acomponent of cost of sales when the related inventory is sold. Unrealized gains or losses on net commodity positionswere immaterial at December 31, 2004 and 2003.

• Value at Risk: Altria Group, Inc. uses a value at risk (“VAR”) computation to estimate the potential one-day loss inthe fair value of its interest rate-sensitive financial instruments and to estimate the potential one-day loss in pre-taxearnings of its foreign currency and commodity price-sensitive derivative financial instruments. The VAR computationincludes Altria Group, Inc.’s debt; short-term investments; foreign currency forwards, swaps and options; and commodityfutures, forwards and options. Anticipated transactions, foreign currency trade payables and receivables, and netinvestments in foreign subsidiaries, which the foregoing instruments are intended to hedge, were excluded from thecomputation.

The VAR estimates were made assuming normal market conditions, using a 95% confidence interval. Altria Group,Inc. used a “variance/co-variance” model to determine the observed interrelationships between movements in interestrates and various currencies. These interrelationships were determined by observing interest rate and forward currencyrate movements over the preceding quarter for the calculation of VAR amounts at December 31, 2004 and 2003, and overeach of the four preceding quarters for the calculation of average VAR amounts during each year. The values of foreigncurrency and commodity options do not change on a one-to-one basis with the underlying currency or commodity, andwere valued accordingly in the VAR computation.

The estimated potential one-day loss in fair value of Altria Group, Inc.’s interest rate-sensitive instruments, primarilydebt, under normal market conditions and the estimated potential one-day loss in pre-tax earnings from foreign currencyand commodity instruments under normal market conditions, as calculated in the VAR model, were as follows:

Pre-Tax Earnings Impact

At (in millions)

12/31/04

Average

High

Low

Instruments sensitive to:

Foreign currency rates $ 16 $ 21 $ 35 $ 16 Commodity prices 4 6 8 4

Fair Value Impact

At (in millions)

12/31/04

Average

High

Low


Interest rates $ 72 $ 96 $ 113 $ 72


Pre-Tax Earnings Impact

At (in millions)

12/31/03

Average

High

Low


Foreign currency rates $ 20 $ 35 $ 74 $ 20 Commodity prices 5 5 7 3

Fair Value Impact

(in millions)

At12/31/03

Average

High

Low

Instruments sensitive to: Interest rates $ 119 $ 139 $ 171 $ 113

The VAR computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss fromadverse movements in interest rates, foreign currency rates and commodity prices under normal market conditions. Thecomputation does not purport to represent actual losses in fair value or earnings to be incurred by Altria Group, Inc., nordoes it consider the effect of favorable changes in market rates. Altria Group, Inc. cannot predict actual future movementsin such market rates and does not present these VAR results to be indicative of future movements in such market rates orto be representative of any actual impact that future changes in market rates may have on its future results of operationsor financial position.

36


Exhibit 13

New Accounting Standards

See Note 2 to the consolidated financial statements for a discussion of new accounting standards.

Contingencies

See Note 19 to the consolidated financial statements for a discussion of contingencies.

Cautionary Factors That May Affect Future Results

Forward-Looking and Cautionary Statements

We* may from time to time make written or oral forward-looking statements, including statements contained in filings withthe SEC, in reports to stockholders and in press releases and investor Webcasts. You can identify these forward-lookingstatements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,”“intends,” “projects,” “goals,” “targets” and other words of similar meaning. You can also identify them by the fact that theydo not relate strictly to historical or current facts.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudentin our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions.Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actualresults could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as theyconsider forward-looking statements and whether to invest in or remain invested in Altria Group, Inc.’s securities. Inconnection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifyingimportant factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially fromthose contained in any forward-looking statements made by us; any such statement is qualified by reference to thefollowing cautionary statements. We elaborate on these and other risks we face throughout this document, particularly inthe “Business Environment” sections preceding our discussion of operating results of our subsidiaries’ businesses. Youshould understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider thefollowing to be a complete discussion of all potential risks or uncertainties. We do not undertake to update anyforward-looking statement that we may make from time to time.

• Tobacco-Related Litigation: There is substantial litigation related to tobacco products in the United States andcertain foreign jurisdictions. We anticipate that new cases will continue to be filed. Damages claimed in some of thetobacco-related litigation range into the billions of dollars. There are presently 13 cases on appeal in which verdicts werereturned against PM USA, including a compensatory and punitive damages verdict totaling approximately $10.1 billion inthe Price case in Illinois. Generally, in order to prevent a plaintiff from seeking to collect a judgment while the verdict isbeing appealed, the defendant must post an appeal bond, frequently in the amount of the judgment or more, or negotiatean alternative arrangement with plaintiffs. In the event of future losses at trial, we may not always be able to obtain therequired bond or to negotiate an acceptable alternative arrangement.

The present litigation environment is substantially uncertain, and it is possible that our business, volume, results ofoperations, cash flows or financial position could be materially affected by an unfavorable outcome of pending litigation,including certain of the verdicts against us that are on appeal. We intend to continue vigorously defending alltobacco-related litigation, although we may enter into settlement discussions in particular cases if we believe it is in thebest interest of our stockholders to do so. The entire litigation environment may not improve sufficiently to enable theBoard of Directors to implement any contemplated restructuring alternatives. Please see Note 19 for a discussion ofpending tobacco-related litigation.

• Anti-Tobacco Action in the Public and Private Sectors: Our tobacco subsidiaries face significant governmentalaction aimed at reducing the incidence of smoking and seeking to hold us responsible for the adverse health effectsassociated with both smoking and exposure to environmental tobacco smoke. Governmental actions, combined with thediminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industryvolume, and we expect this decline to continue.

• Excise Taxes: Cigarettes are subject to substantial excise taxes in the United States and to substantial taxationabroad. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to beproposed or enacted within the United States, the EU and in other foreign jurisdictions. These tax increases are expectedto continue to have an adverse impact on sales of cigarettes by our tobacco subsidiaries, due to lower consumption levelsand to a shift in sales from the premium to the non-premium or discount segments or to other low-priced tobacco productsor to sales outside of legitimate channels.


• Increased Competition in the Domestic Tobacco Market: Settlements of certain tobacco litigation in the UnitedStates have resulted in substantial cigarette price increases. PM USA faces increased competition from lowest pricedbrands sold by certain domestic and foreign manufacturers that have cost advantages because they are not parties tothese settlements. These manufacturers may fail to comply with related state escrow legislation or may take advantage ofcertain provisions in the legislation that permit the non-settling manufacturers to concentrate their sales in a limitednumber of states and thereby avoid escrow deposit obligations on the majority of their sales. Additional competition hasresulted from diversion into the United States market of cigarettes intended for sale outside the United States, the sale ofcounterfeit cigarettes by third parties, the sale of cigarettes by third parties over the Internet and by other means designedto avoid collection of applicable taxes and increased imports of foreign lowest priced brands.

• Governmental Investigations: From time to time, ALG and its tobacco subsidiaries are subject to governmentalinvestigations on a range of matters. Ongoing investigations include allegations of contraband shipments of cigarettes,allegations of unlawful pricing activities within certain international markets and allegations of false and misleading usageof descriptors, such as “Lights” and “Ultra Lights.” We cannot predict the outcome of those investigations or whetheradditional investigations may be commenced, and it is possible that our business could be materially affected by anunfavorable outcome of pending or future investigations.

* This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among ALG and its variousoperating subsidiaries or when any distinction is clear from the context.

37


Exhibit 13

• New Tobacco Product Technologies: Our tobacco subsidiaries continue to seek ways to develop and tocommercialize new product technologies that have the objective of reducing the risk of smoking. Their goal is to reduceconstituents in tobacco smoke identified by public health authorities as harmful while continuing to offer adult smokersproducts that meet their taste expectations. We cannot guarantee that our tobacco subsidiaries will succeed in theseefforts. If they do not succeed, but one or more of their competitors do, our tobacco subsidiaries may be at a competitivedisadvantage.

• Foreign Currency: Our international food and tobacco subsidiaries conduct their businesses in local currency and,for purposes of financial reporting, their results are translated into U.S. dollars based on average exchange ratesprevailing during a reporting period. During times of a strengthening U.S. dollar, our reported net revenues and operatingincome will be reduced because the local currency will translate into fewer U.S. dollars.

• Competition and Economic Downturns: Each of our consumer products subsidiaries is subject to intensecompetition, changes in consumer preferences and local economic conditions. To be successful, they must continue to:

• promote brand equity successfully; • anticipate and respond to new consumer trends; • develop new products and markets and to broaden brand portfolios in order to compete effectively with lower

priced products; • improve productivity; and • respond effectively to changing prices for their raw materials.

The willingness of consumers to purchase premium cigarette brands and premium food and beverage brandsdepends in part on local economic conditions. In periods of economic uncertainty, consumers tend to purchase moreprivate label and other economy brands and the volume of our consumer products subsidiaries could suffer accordingly.

Our finance subsidiary, PMCC, holds investments in finance leases, principally in transportation (including aircraft),power generation and manufacturing equipment and facilities. Its lessees are also subject to intense competition andeconomic conditions. If counterparties to PMCC’s leases fail to manage through difficult economic and competitiveconditions, PMCC may have to increase its allowance for losses, which would adversely affect our profitability.

• Grocery Trade Consolidation: As the retail grocery trade continues to consolidate and retailers grow larger andbecome more sophisticated, they demand lower pricing and increased promotional programs. Further, these customersare reducing their inventories and increasing their emphasis on private label products. If Kraft fails to use its scale,marketing expertise, branded products and category leadership positions to respond to these trends, its volume growthcould slow or it may need to lower prices or increase promotional support of its products, any of which would adverselyaffect our profitability.

• Continued Need to Add Food and Beverage Products in Faster Growing and More Profitable Categories: Thefood and beverage industry’s growth potential is constrained by population growth. Kraft’s success depends in part on itsability to grow its business faster than populations are growing in the markets that it serves. One way to achieve thatgrowth is to enhance its portfolio by adding products that are in faster growing and more profitable categories. If Kraftdoes not succeed in making these enhancements, its volume growth may slow, which would adversely affect ourprofitability.

• Strengthening Brand Portfolios Through Acquisitions and Divestitures: One element of the growth strategy ofour consumer products subsidiaries is to strengthen their brand portfolios through active programs of selectiveacquisitions and divestitures. These subsidiaries are constantly investigating potential acquisition candidates and fromtime to time Kraft sells businesses that are outside its core categories or that do not meet its growth or profitability targets.Acquisition opportunities are limited and acquisitions present risks of failing to achieve efficient and effective integration,strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will beable to continue to acquire attractive businesses on favorable terms or that all future acquisitions will be quickly accretiveto earnings.

• Food Raw Material Prices: The raw materials used by our food businesses are largely commodities that experienceprice volatility caused by external conditions, commodity market fluctuations, currency fluctuations and changes ingovernmental agricultural programs. Commodity price changes may result in unexpected increases in raw material andpackaging costs, and our operating subsidiaries may be unable to increase their prices to offset these increased costswithout suffering reduced volume, net revenue and operating companies income. We do not fully hedge against changes


in commodity prices and our hedging strategies may not work as planned.

• Food Safety, Quality and Health Concerns: We could be adversely affected if consumers in Kraft’s principalmarkets lose confidence in the safety and quality of certain food products. Adverse publicity about these types ofconcerns, whether or not valid, may discourage consumers from buying Kraft’s products or cause production and deliverydisruptions. Recent publicity concerning the health implications of obesity and trans-fatty acids could also reduceconsumption of certain of Kraft’s products. In addition, Kraft may need to recall some of its products if they becomeadulterated or misbranded. Kraft may also be liable if the consumption of any of its products causes injury. A widespreadproduct recall or a significant product liability judgment could cause products to be unavailable for a period of time and aloss of consumer confidence in Kraft’s food products and could have a material adverse effect on Kraft’s business andresults.

• Limited Access to Commercial Paper Market: As a result of actions by credit rating agencies during 2003, ALGcurrently has limited access to the commercial paper market, and may have to rely on its revolving credit facility.

• Asset Impairment: We periodically calculate the fair value of our goodwill and intangible assets to test forimpairment. This calculation may be affected by the market conditions noted above, as well as interest rates and generaleconomic conditions. If an impairment is determined to exist, we will incur impairment losses, which will reduce ourearnings.

38


Exhibit 13

Selected Financial Data–Five-Year Review(in millions of dollars, except per share data)

2004

2003

2002

2001

2000

Summary of Operations: Net revenues $ 89,610 $ 81,320 $ 79,933 $ 80,376 $ 73,301 United States export sales 3,493 3,528 3,654 3,866 4,347 Cost of sales 33,959 31,573 32,491 33,644 29,600 Federal excise taxes on

products 3,694 3,698 4,229 4,418 4,537 Foreign excise taxes on

products 21,953 17,430 13,997 12,791 12,733

Operating income 15,180 15,759 16,448 15,535 14,727 Interest and other debt expense,

net 1,176 1,150 1,134 1,418 719 Earnings from continuing

operations before incometaxes, minority interest andcumulative effect of accountingchange 14,004 14,609 17,945 14,117 14,008

Pre-tax profit margin fromcontinuing operations 15.6% 18.0% 22.5% 17.6% 19.1%

Provision for income taxes 4,540 5,097 6,368 5,326 5,416

Earnings from continuingoperations before minorityinterest and cumulative effectof accounting change 9,464 9,512 11,577 8,791 8,592

Minority interest in earnings fromcontinuing operations, andequity earnings, net 44 391 556 302 127

Earnings from continuingoperations before cumulativeeffect of accounting change 9,420 9,121 11,021 8,489 8,465

(Loss) earnings fromdiscontinued operations, net ofincome taxes and minorityinterest (4) 83 81 77 45

Cumulative effect of accountingchange (6)

Net earnings 9,416 9,204 11,102 8,560 8,510

Basic EPS — continuingoperations 4.60 4.50 5.22 3.89 3.75

— discontinuedoperations 0.04 0.04 0.04 0.02

— cumulative effectof accounting change (0.01)

— net earnings 4.60 4.54 5.26 3.92 3.77 Diluted EPS — continuing

operations 4.57 4.48 5.18 3.84 3.73 — discontinued

operations (0.01) 0.04 0.03 0.04 0.02 — cumulative effect

of accounting change (0.01)

— net earnings 4.56 4.52 5.21 3.87 3.75 Dividends declared per share 2.82 2.64 2.44 2.22 2.02

2,047 2,028 2,111 2,181 2,260


Weighted average shares(millions) — Basic

Weighted average shares(millions) — Diluted 2,063 2,038 2,129 2,210 2,272

Capital expenditures 1,913 1,974 2,009 1,922 1,682 Depreciation 1,590 1,431 1,324 1,323 1,126 Property, plant and equipment,

net (consumer products) 16,305 16,067 14,846 15,137 15,303 Inventories (consumer products) 10,041 9,540 9,127 8,923 8,765 Total assets 101,648 96,175 87,540 84,968 79,067 Total long-term debt 18,683 21,163 21,355 18,651 19,154 Total debt — consumer products 20,759 22,329 21,154 20,098 27,196

— financial services 2,221 2,210 2,166 2,004 1,926

Total deferred income taxes 11,305 10,943 9,739 8,622 4,750 Stockholders’ equity 30,714 25,077 19,478 19,620 15,005 Common dividends declared as

a % of Basic EPS 61.3% 58.1% 46.4% 56.6% 53.6%Common dividends declared as

a % of Diluted EPS 61.8% 58.4% 46.8% 57.4% 53.9%Book value per common share

outstanding 14.91 12.31 9.55 9.11 6.79 Market price per common share

— high/low 61.88-44.50 55.03-27.70 57.79-35.40 53.88-38.75 45.94-18.69

Closing price of common shareat year end 61.10 54.42 40.53 45.85 44.00

Price/earnings ratio at year end— Basic 13 12 8 12 12

Price/earnings ratio at year end— Diluted 13 12 8 12 12

Number of common sharesoutstanding at year end(millions) 2,060 2,037 2,039 2,153 2,209

Number of employees 156,000 165,000 166,000 175,000 178,000

39


Exhibit 13

Consolidated Balance Sheets(in millions of dollars, except share and per share data)

at December 31,

2004

2003

Assets Consumer products

Cash and cash equivalents $ 5,744 $ 3,777 Receivables (less allowances of $139 in 2004 and $135 in 2003) 5,754 5,256 Inventories:

Leaf tobacco 3,643 3,591 Other raw materials 2,170 2,009 Finished product 4,228 3,940

10,041 9,540

Assets of discontinued operations held for sale 1,458 Other current assets 2,904 2,809

Total current assets 25,901 21,382

Property, plant and equipment, at cost: Land and land improvements 889 840 Buildings and building equipment 7,366 6,917 Machinery and equipment 19,566 18,230 Construction in progress 1,266 1,246

29,087 27,233 Less accumulated depreciation 12,782 11,166

16,305 16,067

Goodwill 28,056 27,742 Other intangible assets, net 11,056 11,803 Other assets 12,485 10,641

Total consumer products assets 93,803 87,635 Financial services

Finance assets, net 7,827 8,393 Other assets 18 147

Total financial services assets 7,845 8,540

Total Assets $ 101,648 $ 96,175

See notes to consolidated financial statements.

40


Exhibit 13

at December 31,

2004

2003

Liabilities Consumer products

Short-term borrowings $ 2,546 $ 1,715 Current portion of long-term debt 1,751 1,661 Accounts payable 3,466 3,198 Accrued liabilities:

Marketing 2,516 2,443 Taxes, except income taxes 2,909 2,325 Employment costs 1,325 1,363 Settlement charges 3,501 3,530 Other 3,072 2,455

Income taxes 983 1,316 Dividends payable 1,505 1,387

Total current liabilities 23,574 21,393

Long-term debt 16,462 18,953 Deferred income taxes 7,677 7,295 Accrued postretirement health care costs 3,285 3,216 Minority interest 4,764 4,760 Other liabilities 6,856 7,161

Total consumer products liabilities 62,618 62,778 Financial services

Long-term debt 2,221 2,210 Deferred income taxes 5,876 5,815 Other liabilities 219 295

Total financial services liabilities 8,316 8,320

Total liabilities 70,934 71,098 Contingencies (Note 19) Stockholders’ Equity

Common stock, par value $0.331/3 per share (2,805,961,317 shares issued) 935 935 Additional paid-in capital 5,176 4,813 Earnings reinvested in the business 50,595 47,008 Accumulated other comprehensive losses (including currency translation of $610 in 2004

and $1,578 in 2003) (1,141) (2,125)Cost of repurchased stock (746,433,841 shares in 2004 and 768,697,895 shares in 2003) (24,851) (25,554)

Total stockholders’ equity 30,714 25,077

Total Liabilities and Stockholders’ Equity $ 101,648 $ 96,175

41


Exhibit 13

Consolidated Statements of Earnings(in millions of dollars, except per share data)

for the years ended December 31,

2004

2003

2002

Net revenues $ 89,610 $ 81,320 $ 79,933 Cost of sales 33,959 31,573 32,491 Excise taxes on products 25,647 21,128 18,226

Gross profit 30,004 28,619 29,216 Marketing, administration and research costs 13,665 12,538 12,217 Domestic tobacco headquarters relocation charges 31 69 Domestic tobacco legal settlement 202 International tobacco E.C. agreement 250 Asset impairment and exit costs 718 86 223 Losses (gains) on sales of businesses 3 (31) (80)Integration costs and a loss on sale of a food factory (13) 111 Provision for airline industry exposure 140 290 Amortization of intangibles 17 9 7

Operating income 15,180 15,759 16,448 Gain on Miller Brewing Company transaction (2,631)Interest and other debt expense, net 1,176 1,150 1,134

Earnings from continuing operations before income taxes and minority interest 14,004 14,609 17,945 Provision for income taxes 4,540 5,097 6,368

Earnings from continuing operations before minority interest 9,464 9,512 11,577 Minority interest in earnings from continuing operations, and equity earnings, net 44 391 556

Earnings from continuing operations 9,420 9,121 11,021 (Loss) earnings from discontinued operations, net of income taxes and minority

interest (4) 83 81

Net earnings $ 9,416 $ 9,204 $ 11,102

Per share data: Basic earnings per share:

Continuing operations $ 4.60 $ 4.50 $ 5.22 Discontinued operations 0.04 0.04

Net earnings $ 4.60 $ 4.54 $ 5.26

Diluted earnings per share: Continuing operations $ 4.57 $ 4.48 $ 5.18 Discontinued operations (0.01) 0.04 0.03

Net earnings $ 4.56 $ 4.52 $ 5.21


42


Exhibit 13

Consolidated Statements of Stockholders’ Equity(in millions of dollars, except per share data)

Accumulated Other

Comprehensive Earnings (Losses)

Additional Earnings Currency Cost of Total Common Paid-in Reinvested in Translation Repurchased Stockholders’

Stock

Capital

the Business

Adjustments

Other

Total

Stock

Equity

Balances, January 1, 2002 $ 935 $ 4,503 $ 37,269 $ (3,238) $ (135) $ (3,373) $ (19,714) $ 19,620 Comprehensive earnings:

Net earnings 11,102 11,102 Other comprehensive

earnings (losses), netof income taxes:

Currency translationadjustments 287 287 287

Additional minimumpension liability (760) (760) (760)

Change in fair valueof derivativesaccounted for ashedges (110) (110) (110)

Total othercomprehensive losses (583)

Total comprehensiveearnings 10,519

Exercise of stock optionsand issuance of otherstock awards 139 15 563 717

Cash dividends declared($2.44 per share) (5,127) (5,127)

Stock repurchased (6,251) (6,251)

Balances, December 31,2002 935 4,642 43,259 (2,951) (1,005) (3,956) (25,402) 19,478

Comprehensive earnings: Net earnings 9,204 9,204 Other comprehensive


Currency translationadjustments 1,373 1,373 1,373

Additional minimumpension liability 464 464 464

Change in fair valueof derivativesaccounted for ashedges (6) (6) (6)

Total othercomprehensiveearnings 1,831


171 (93) 537 615


Exercise of stock optionsand issuance of otherstock awards


Stock repurchased (689) (689)

Balances, December 31,2003 935 4,813 47,008 (1,578) (547) (2,125) (25,554) 25,077

Comprehensive earnings: Net earnings 9,416 9,416 Other comprehensive


Currency translationadjustments 968 968 968

Additional minimumpension liability (53) (53) (53)

Change in fair valueof derivativesaccounted for ashedges 69 69 69

Total othercomprehensiveearnings 984


Exercise of stock optionsand issuance of otherstock awards 363 (39) 703 1,027


Balances, December 31,2004 $ 935 $ 5,176 $ 50,595 $ (610) $ (531) $ (1,141) $ (24,851) $ 30,714


43


Exhibit 13

Consolidated Statements of Cash Flows(in millions of dollars)


2004

2003

2002

Cash Provided by (Used in) Operating Activities Net earnings — Consumer products $ 9,330 $ 8,934 $ 11,072

— Financial services 86 270 30

Net earnings 9,416 9,204 11,102 Adjustments to reconcile net earnings to operating cash flows: Consumer products

Depreciation and amortization 1,607 1,440 1,331 Deferred income tax provision 381 717 1,310 Minority interest in earnings from continuing operations, and equity earnings,

net 44 405 572 Domestic tobacco legal settlement, net of cash paid (57) 57 Domestic tobacco headquarters relocation charges, net of cash paid (22) 35 Escrow bond for Price domestic tobacco case (820) (610) Integration costs and a loss on sale of a food factory, net of cash paid (1) (26) 91 Asset impairment and exit costs, net of cash paid 510 62 195 Impairment loss on discontinued operations 107 Gain on Miller Brewing Company transaction (2,631)Losses (gains) on sales of businesses 3 (31) (80)Cash effects of changes, net of the effects from acquired and divested

companies: Receivables, net (193) 295 (161)Inventories (140) 251 38 Accounts payable 49 (220) (640)Income taxes (502) (119) (151)Accrued liabilities and other current assets 785 (588) 489 Domestic tobacco accrued settlement charges (31) 497 (189)

Pension plan contributions (1,078) (1,183) (1,104)Pension provisions and postretirement, net 425 278 250 Other 314 33 (348)

Financial services

Deferred income tax provision 7 267 275 Provision for airline industry exposure 140 290 Other (54) 52 (27)

Net cash provided by operating activities 10,890 10,816 10,612

Cash Provided by (Used in) Investing Activities Consumer products

Capital expenditures (1,913) (1,974) (2,009)Purchase of businesses, net of acquired cash (179) (1,041) (147)Proceeds from sales of businesses 18 96 221 Other 24 125 54

Financial services

Investments in finance assets (10) (140) (950)Proceeds from finance assets 644 507 360

Net cash used in investing activities (1,416) (2,427) (2,471)


44


Exhibit 13


2004

2003

2002

Cash Provided by (Used in) Financing Activities Consumer products

Net repayment of short-term borrowings $ (1,090) $ (419) $ (473)Long-term debt proceeds 833 3,077 5,325 Long-term debt repaid (1,594) (1,871) (2,024)

Financial services

Net repayment of short-term borrowings (512)Long-term debt proceeds 440 Long-term debt repaid (189) (147)

Repurchase of Altria Group, Inc. common stock (777) (6,220)Repurchase of Kraft Foods Inc. common stock (688) (372) (170)Dividends paid on Altria Group, Inc. common stock (5,672) (5,285) (5,068)Issuance of Altria Group, Inc. common stock 827 443 724 Other (409) (108) (187)

Net cash used in financing activities (7,982) (5,459) (8,165)

Effect of exchange rate changes on cash and cash equivalents 475 282 136

Cash and cash equivalents: Increase 1,967 3,212 112 Balance at beginning of year 3,777 565 453

Balance at end of year $ 5,744 $ 3,777 $ 565

Cash paid: Interest — Consumer products $ 1,397 $ 1,336 $ 1,355

— Financial services $ 97 $ 120 $ 88

Income taxes $ 4,448 $ 4,158 $ 4,818

45


Exhibit 13

Notes to Consolidated Financial Statements

Note 1.

Background and Basis of Presentation:

• Background: Throughout these financial statements, the term “Altria Group, Inc.” refers to the consolidated financialposition, results of operations and cash flows of the Altria family of companies and the term “ALG” refers solely to theparent company. ALG, through its wholly-owned subsidiaries, Philip Morris USA Inc. (“PM USA”), Philip MorrisInternational Inc. (“PMI”) and its majority-owned (85.4%) subsidiary, Kraft Foods Inc. (“Kraft”), is engaged in themanufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages,cheese and convenient meals. Philip Morris Capital Corporation (“PMCC”), another wholly-owned subsidiary, maintains aportfolio of leveraged and direct finance leases. During 2003, PMCC shifted its strategic focus from an emphasis on thegrowth of its portfolio of finance leases through new investments to one of maximizing investment gains and generatingcash flows from its existing portfolio of finance assets. Miller Brewing Company (“Miller”), engaged in the manufacture andsale of various beer products, was ALG’s wholly-owned subsidiary prior to the merger of Miller into South AfricanBreweries plc (“SAB”) on July 9, 2002 (see Note 4. Miller Brewing Company Transaction). ALG’s access to the operatingcash flows of its subsidiaries consists of cash received from the payment of dividends and interest, and the repayment ofamounts borrowed from ALG by its subsidiaries.

On November 15, 2004, Kraft announced the sale of substantially all of its sugar confectionery business forapproximately $1.5 billion. The transaction, which is subject to regulatory approval, is expected to be completed in thesecond quarter of 2005. Altria Group, Inc. has reflected the results of Kraft’s sugar confectionery business as discontinuedoperations on the consolidated statements of earnings for all years presented. The assets related to the sugarconfectionery business were reflected as assets of discontinued operations held for sale on the consolidated balancesheet at December 31, 2004. Accordingly, historical statements of earnings amounts included in the notes to theconsolidated financial statements have been restated to reflect the discontinued operation.

• Basis of presentation: The consolidated financial statements include ALG, as well as its wholly-owned andmajority-owned subsidiaries. Investments in which ALG exercises significant influence (20%-50% ownership interest), areaccounted for under the equity method of accounting. Investments in which ALG has an ownership interest of less than20%, or does not exercise significant influence, are accounted for with the cost method of accounting. All intercompanytransactions and balances have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United Statesof America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reportedamounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include,among other things, pension and benefit plan assumptions, lives and valuation assumptions of goodwill and otherintangible assets, income taxes, and the allowance for loan losses and estimated residual values of finance leases. Actualresults could differ from those estimates.

Balance sheet accounts are segregated by two broad types of business. Consumer products assets and liabilities areclassified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordancewith respective industry practices.

Certain prior years’ amounts have been reclassified to conform with the current year’s presentation, due primarily tothe new global organization structure at Kraft and the classification of the sugar confectionery business as discontinuedoperations.

Note 2.

Summary of Significant Accounting Policies:

• Cash and cash equivalents: Cash equivalents include demand deposits with banks and all highly liquid investmentswith original maturities of three months or less.

• Depreciation, amortization and goodwill valuation: Property, plant and equipment are stated at historical cost anddepreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment aredepreciated over periods ranging from 3 to 20 years, and buildings and building improvements over periods up to50 years.


Definite life intangible assets are amortized over their estimated useful lives. Altria Group, Inc. is required to conductan annual review of goodwill and intangible assets for potential impairment. Goodwill impairment testing requires acomparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value,goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying valueand implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing fornon-amortizable intangible assets requires a comparison between fair value and carrying value of the intangible asset. Ifthe carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. During2004, Altria Group, Inc. completed its annual review of goodwill and intangible assets. This review resulted in a $29 millionnon-cash pre-tax charge at Kraft related to an intangible asset impairment for a small confectionery business in the UnitedStates and certain brands in Mexico. A portion of this charge, $12 million, was recorded as asset impairment and exitcosts on the consolidated statement of earnings. The remainder of the charge, $17 million, is included in discontinuedoperations.

Goodwill by segment was as follows:

December 31, December 31, (in millions)

2004

2003

International tobacco $ 2,222 $ 2,016 North American food 20,511 20,877 International food 5,323 4,849

Total goodwill $ 28,056 $ 27,742

46


Exhibit 13

Intangible assets were as follows:

December 31, 2004

December 31, 2003

Gross Gross Carrying Accumulated Carrying Accumulated (in millions)

Amount

Amortization

Amount

Amortization

Non-amortizable intangible assets $ 10,901 $ 11,758 Amortizable intangible assets 212 $ 57 84 $ 39

Total intangible assets $ 11,113 $ 57 $ 11,842 $ 39

Non-amortizable intangible assets substantially consist of brand names from the acquisition of Nabisco Holdings Corp.(“Nabisco”). Amortizable intangible assets consist primarily of certain trademark licenses and non-compete agreements.Pre-tax amortization expense for intangible assets during the years ended December 31, 2004, 2003 and 2002, was$17 million, $9 million and $7 million, respectively. Amortization expense for each of the next five years is estimated to be$20 million or less, assuming no additional transactions occur that require the amortization of intangible assets.

The movement in goodwill and intangible assets is as follows:

2004

2003

Intangible Intangible (in millions)

Goodwill

Assets

Goodwill

Assets

Balance at January 1 $ 27,742 $ 11,842 $ 26,037 $ 11,864 Changes due to:

Acquisitions 90 74 996 30 Reclassification to assets held for sale (814) (485) Currency 640 3 602 (38)Intangible asset impairment (29) Other 398 (292) 107 (14)

Balance at December 31 $ 28,056 $ 11,113 $ 27,742 $ 11,842

As a result of Kraft’s common stock repurchases, ALG’s ownership percentage of Kraft has increased, therebyresulting in an increase in goodwill. Other, above, includes this additional goodwill, as well as the reclassification togoodwill of certain amounts previously classified as indefinite life intangible assets, and tax adjustments related to theNabisco acquisition.

• Environmental costs: Altria Group, Inc. is subject to laws and regulations relating to the protection of the environment.Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basiswhen such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new informationdevelops or circumstances change.

While it is not possible to quantify with certainty the potential impact of actions regarding environmental remediationand compliance efforts that Altria Group, Inc. may undertake in the future, in the opinion of management, environmentalremediation and compliance costs, before taking into account any recoveries from third parties, will not have a materialadverse effect on Altria Group, Inc.’s consolidated financial position, results of operations or cash flows.

• Finance leases: Income attributable to leveraged leases is initially recorded as unearned income and subsequentlyrecognized as revenue over the terms of the respective leases at constant after-tax rates of return on the positive netinvestment balances.

Income attributable to direct finance leases is initially recorded as unearned income and subsequently recognized asrevenue over the terms of the respective leases at constant pre-tax rates of return on the net investment balances.

Finance leases include unguaranteed residual values that represent PMCC’s estimates at lease inception as to the fairvalues of assets under lease at the end of the non-cancelable lease terms. The estimated residual values are reviewed


annually by PMCC’s management based on a number of factors and activity in the relevant industry. If necessary,revisions are recorded to reduce the residual values. Such reviews resulted in a decrease of $25 million to PMCC’s netrevenues and results of operations in 2004. There were no adjustments in 2003 and 2002.

Investments in leveraged leases are stated net of related nonrecourse debt obligations, except for a debt obligation asa result of the securitization of rents on a leveraged lease which is reflected as other liabilities on the consolidated balancesheets.

• Foreign currency translation: Altria Group, Inc. translates the results of operations of its foreign subsidiaries usingaverage exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at theend of each period. Currency translation adjustments are recorded as a component of stockholders’ equity. Transactiongains and losses are recorded in the consolidated statements of earnings and were not significant for any of the periodspresented.

• Guarantees: Effective January 1, 2003, Altria Group, Inc. adopted Financial Accounting Standards Board (“FASB”)Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” Interpretation No. 45 required the disclosure of certain guarantees existing atDecember 31, 2002. In addition, Interpretation No. 45 requires the recognition of a liability for the fair value of theobligation of qualifying guarantee activities initiated or modified after December 31, 2002. Altria Group, Inc. has appliedthe recognition provisions of Interpretation No. 45 to guarantee activities initiated after December 31, 2002. Adoption ofInterpretation No. 45 as of January 1, 2003, did not have a material impact on Altria Group, Inc.’s consolidated financialstatements. See Note 19. Contingencies for a further discussion of guarantees.

• Hedging instruments: Derivative financial instruments are recorded at fair value on the consolidated balance sheetsas either assets or liabilities. Changes in the fair value of derivatives are recorded each period either in accumulated othercomprehensive earnings (losses) or in earnings, depending on whether a derivative is designated and effective as part ofa hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported inaccumulated other comprehensive earnings (losses) are reclassified to the consolidated statements of earnings in theperiods in which operating results are affected by the hedged item. Cash flows from hedging instruments are classified inthe same manner as the affected hedged item in the consolidated statements of cash flows.

• Impairment of long-lived assets: Altria Group, Inc. reviews long-lived assets, including amortizable intangible assets,for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assetsmay not be fully recoverable. Altria Group, Inc. performs

47


Exhibit 13

undiscounted operating cash flow analyses to determine if an impairment exists. For purposes of recognition andmeasurement of an impairment for assets held for use, Altria Group, Inc. groups assets and liabilities at the lowest levelfor which cash flows are separately identifiable. If an impairment is determined to exist, any related impairment loss iscalculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimatedproceeds to be received, less costs of disposal.

• Income taxes: Altria Group, Inc. accounts for income taxes in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, deferred tax assets and liabilities aredetermined based on the difference between the financial statement and tax bases of assets and liabilities, using enactedtax rates in effect for the year in which the differences are expected to reverse. Significant judgment is required indetermining income tax provisions and in evaluating tax positions. ALG and its subsidiaries establish additional provisionsfor income taxes when, despite the belief that their tax positions are fully supportable, there remain certain positions thatare likely to be challenged and that may not be sustained on review by tax authorities. ALG and its subsidiaries adjustthese additional accruals in light of changing facts and circumstances. The consolidated tax provision includes the impactof changes to accruals that are considered appropriate, as well as the related net interest.

• Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out (“LIFO”) method is used to costsubstantially all domestic inventories. The cost of other inventories is principally determined by the average cost method.It is a generally recognized industry practice to classify leaf tobacco inventory as a current asset although part of suchinventory, because of the duration of the aging process, ordinarily would not be utilized within one year.

In 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 requires that abnormal idle facilityexpense, spoilage, freight and handling costs be recognized as current-period charges. In addition, SFAS No. 151requires that allocation of fixed production overhead costs to inventories be based on the normal capacity of theproduction facility. Altria Group, Inc. is required to adopt the provisions of SFAS No. 151 prospectively after January 1,2006, but the effect of adoption is not expected to have a material impact on its consolidated results of operations,financial position or cash flows.

• Marketing costs: ALG’s subsidiaries promote their products with advertising, consumer incentives and tradepromotions. Such programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives andvolume-based incentives. Advertising costs are expensed as incurred. Consumer incentive and trade promotion activitiesare recorded as a reduction of revenues based on amounts estimated as being due to customers and consumers at theend of a period, based principally on historical utilization and redemption rates. For interim reporting purposes, advertisingand certain consumer incentive expenses are charged to operations as a percentage of sales, based on estimated salesand related expenses for the full year.

• Revenue recognition: The consumer products businesses recognize revenues, net of sales incentives and includingshipping and handling charges billed to customers, upon shipment of goods when title and risk of loss pass to customers.ALG’s tobacco subsidiaries also include excise taxes billed to customers in revenues. Shipping and handling costs areclassified as part of cost of sales.

• Software costs: Altria Group, Inc. capitalizes certain computer software and software development costs incurred inconnection with developing or obtaining computer software for internal use. Capitalized software costs are included inproperty, plant and equipment on the consolidated balance sheets and are amortized on a straight-line basis over theestimated useful lives of the software, which do not exceed five years.

• Stock-based compensation: Altria Group, Inc. accounts for employee stock compensation plans in accordance withthe intrinsic value-based method permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” which has notresulted in compensation cost for stock options. The market value at date of grant of restricted stock and rights to receiveshares of stock is recorded as compensation expense over the period of restriction.

At December 31, 2004, Altria Group, Inc. had stock-based employee compensation plans, which are described morefully in Note 12. Stock Plans. Altria Group, Inc. applies the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accountingfor stock options within those plans. No compensation expense for employee stock options is reflected in net earnings, asall stock options granted under those plans had an exercise price not less than the market value of the common stock onthe date of the grant. Net earnings, as reported, includes pre-tax compensation expense related to restricted stock andrights to receive shares of stock of $185 million, $99 million and $13 million for the years ended December 31, 2004, 2003and 2002, respectively. The following table illustrates the effect on net earnings and earnings per share (“EPS”) if AltriaGroup, Inc. had applied the fair value recognition provisions of SFAS No. 123 to measure stock-based compensationexpense for outstanding stock option awards for the years ended December 31, 2004, 2003 and 2002:


(in millions, except per share data)

2004

2003

2002

Net earnings, as reported $ 9,416 $ 9,204 $ 11,102 Deduct: Total stock-based employee compensation expense determined under fair value

method for all stock option awards, net of related tax effects 12 19 137

Pro forma net earnings $ 9,404 $ 9,185 $ 10,965

Earnings per share: Basic — as reported $ 4.60 $ 4.54 $ 5.26

Basic — pro forma $ 4.59 $ 4.53 $ 5.19

Diluted — as reported $ 4.56 $ 4.52 $ 5.21

Diluted — pro forma $ 4.56 $ 4.51 $ 5.15

Altria Group, Inc. has not granted stock options to employees since 2002. The amount shown above as stock-basedcompensation expense in 2004 relates primarily to Executive Ownership Stock Options (“EOSOs”). Under certaincircumstances, senior executives who exercise outstanding stock options, using shares to pay the option exercise priceand taxes, receive EOSOs equal to the number of shares tendered. During the years ended December 31, 2004, 2003and 2002, Altria Group, Inc. granted 1.7 million, 1.3 million and 2.6 million EOSOs, respectively.

In 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123Rrequires companies to measure compensation cost for share-based payments at fair value. Altria Group, Inc. will adoptthis new standard prospectively, on July 1, 2005, and does not expect the adoption of SFAS No. 123R to have a materialimpact on Altria Group, Inc.’s 2005 consolidated financial position, results of operations or cash flows.

48


Exhibit 13

Note 3.

Asset Impairment and Exit Costs:

For the years ended December 31, 2004, 2003 and 2002, pre-tax asset impairment and exit costs consisted of thefollowing:

(in millions)

2004

2003

2002

Separation program Domestic tobacco $ 1 $ 13 Separation program International tobacco* 31 $ 58 Separation program North American food 135 Separation program International food 7 Separation program Beer 8 Separation program General corporate** 56 26 Restructuring program North American food 383 Restructuring program International food 200 Asset impairment International tobacco* 13 Asset impairment North American food 8 Asset impairment International food 12 6 Asset impairment Beer 15 Asset impairment General corporate** 10 41 Lease termination General corporate** 4

Asset impairment and exit costs $ 718 $ 86 $ 223

* During 2004, PMI announced that it will close its Eger, Hungary facility. In addition, during 2004, PMI closed afactory in Belgium and streamlined its Benelux operations. PMI recorded pre-tax charges of $44 million forseverance benefits and impairment charges during 2004.

** In 2004 and 2003, Altria Group, Inc. recorded pre-tax charges of $70 million and $26 million, respectively, primarily

related to the streamlining of various corporate functions in 2004 and 2003, and the write-off of an investment in ane-business consumer products purchasing exchange in 2004. In addition, during 2004, Altria Group, Inc. sold itsoffice facility in Rye Brook, New York. In connection with this sale, Altria Group, Inc. recorded a pre-tax charge in2003 of $41 million to write down the facility and the related fixed assets to fair value.

Kraft Restructuring Program

In January 2004, Kraft announced a multi-year restructuring program with the objectives of leveraging Kraft’s global scale,realigning and lowering its cost structure, and optimizing capacity utilization. As part of this program, Kraft anticipates theclosing or sale of up to twenty plants and the elimination of approximately six thousand positions. From 2004 through2006, Kraft expects to incur up to $1.2 billion in pre-tax charges for the program, reflecting asset disposals, severance andother implementation costs, including $641 million incurred in 2004. Approximately one-half of the pre-tax charges areexpected to require cash payments.

During 2004, Kraft recorded $603 million of asset impairment and exit costs on the consolidated statement of earnings.These pre-tax charges were composed of $583 million of costs under the restructuring program, $12 million of impairmentcharges relating to intangible assets and $8 million of impairment charges related to the sale of Kraft’s yogurt business.The restructuring charges resulted from the 2004 announcement of the closing of thirteen plants, the termination ofco-manufacturing agreements and the commencement of a number of workforce reduction programs. Approximately$216 million of the pre-tax charges incurred in 2004 will require cash payments.

Pre-tax restructuring liability activity for 2004 was as follows:

Asset (in millions)

Severance

Write-downs

Other

Total

Liability balance,

January 1, 2004 $ — $ — $ — $ — Charges 176 363 44 583 Cash spent (84) (26) (110)


Charges against assets (5) (363) (368)Currency 4 1 5

Liability balance, December 31, 2004 $ 91 $ — $ 19 $ 110

Severance costs in the above schedule, which relate to the workforce reduction programs, include the cost of relatedbenefits. Specific programs announced during 2004, as part of the overall restructuring program, will result in theelimination of approximately 3,500 positions. Asset write-downs relate to the impairment of assets caused by the plantclosings. Other costs incurred relate primarily to contract termination costs associated with the plant closings and thetermination of co-manufacturing agreements.

During 2004, Kraft recorded $58 million of pre-tax implementation costs associated with the restructuring program, ofwhich $7 million was recorded as a reduction of net revenues, $30 million was recorded in cost of sales, $13 million wasrecorded in marketing, administration and research costs, and $8 million related to the sugar confectionery business wasrecorded in loss from discontinued operations, on the consolidated statement of earnings. These costs include thediscontinuance of certain product lines and incremental costs related to the integration of functions and closure offacilities. Approximately $36 million of these costs will require cash payments.

49


Exhibit 13

Kraft Asset Impairment Charges

During 2004, Altria Group, Inc. also completed its annual review of goodwill and intangible assets. This review resulted ina $29 million non-cash pre-tax charge at Kraft related to an intangible asset impairment for a small confectionery businessin the United States and certain brands in Mexico. A portion of this charge, $17 million, relates to the sugar confectionerybusiness and has been recorded in loss from discontinued operations on the consolidated statement of earnings.

In November 2004, Kraft completed a valuation of its equity investment in a joint venture in Turkey following thedetermination that a non-temporary decline in value had occurred. This valuation resulted in a $47 million non-cashpre-tax charge. This charge was recorded as marketing, administration and research costs on the consolidated statementof earnings.

On November 15, 2004, Kraft announced the sale of substantially all of its sugar confectionery business forapproximately $1.5 billion. As a result of the anticipated transaction, which is expected to close in the second quarter of2005, Kraft recorded non-cash asset impairments totaling $107 million. This charge was included in loss fromdiscontinued operations on the consolidated statement of earnings.

In December 2004, Kraft announced the sale of its yogurt business for approximately $59 million. As a result of theanticipated transaction, expected to close in the first quarter of 2005, Kraft recorded asset impairments totaling $8 million.This charge was recorded as asset impairment and exit costs on the consolidated statement of earnings.

Note 4.

Miller Brewing Company Transaction:

On July 9, 2002, Miller merged into SAB and SAB changed its name to SABMiller plc (“SABMiller”). At closing, ALGreceived 430 million shares of SABMiller valued at approximately $3.4 billion, based upon a share price of 5.12 Britishpounds per share, in exchange for Miller, which had $2.0 billion of existing debt. ALG’s ownership of SABMiller stockresulted in a 36% economic interest and a 24.9% voting interest in SABMiller. ALG has the contractual right to convertnon-voting shares to voting shares in order to maintain its 24.9% voting interest in SABMiller. The transaction resulted in apre-tax gain of $2.6 billion or $1.7 billion after-tax, which was recorded in the third quarter of 2002. Beginning with the thirdquarter of 2002, ALG’s ownership interest in SABMiller is being accounted for under the equity method. Accordingly,ALG’s investment in SABMiller of approximately $2.5 billion and $2.1 billion is included in other assets on the consolidatedbalance sheets at December 31, 2004 and 2003, respectively. During December 2004, ALG’s economic interest inSABMiller declined to 33.9%, as a result of the conversion of SABMiller convertible bonds into equity. ALG records itsshare of SABMiller’s net earnings, based on its economic ownership percentage, in minority interest in earnings fromcontinuing operations, and equity earnings, net, on the consolidated statements of earnings.

Note 5.

Divestitures:

Discontinued Operations

On November 15, 2004, Kraft announced the sale of substantially all of its sugar confectionery business for approximately$1.5 billion. The proposed sale includes the Life Savers, Creme Savers, Altoids, Trolli and Sugus brands. The transaction,which is subject to regulatory approval, is expected to be completed in the second quarter of 2005. Altria Group, Inc. hasreflected the results of Kraft’s sugar confectionery business as discontinued operations on the consolidated statements ofearnings for all years presented. Pursuant to the sugar confectionery sale agreement, Kraft has agreed to provide certaintransition and supply services to the buyer. These service arrangements are primarily for terms of one year or less, withthe exception of one supply arrangement with a term of not more than three years. The expected cash flow from thissupply arrangement is not significant.

Summary results of operations for the sugar confectionery business for the years ended December 31, 2004, 2003 and2002, were as follows:

(in millions)

2004

2003

2002

Net revenues $ 477 $ 512 $ 475

Earnings before income taxes and minority interest $ 103 $ 151 $ 153 Impairment loss on assets of discontinued operations held for sale (107)


Provision for income taxes 54 56 Minority interest in earnings from discontinued operations, net 14 16

(Loss) earnings from discontinued operations, net of income taxes and minorityinterest $ (4) $ 83 $ 81

In addition, Kraft anticipates additional tax expense of $270 million to be recorded as a loss on sale of discontinuedoperations in 2005. In accordance with the provisions of SFAS No. 109, the tax expense will be recorded when thetransaction is consummated.

The assets of the sugar confectionery business, which were reflected as assets of discontinued operations held forsale on the consolidated balance sheet at December 31, 2004, were as follows:

(in millions)

Inventories $ 65 Property, plant and equipment, net 201 Goodwill 814 Other intangible assets, net 485 Impairment loss on assets of discontinued operations held for sale (107)

Assets of discontinued operations held for sale $ 1,458

50


Exhibit 13

Other

During 2004, Kraft sold a Brazilian snack nuts business and trademarks associated with a candy business in Norway. Theaggregate proceeds received from the sale of these businesses were $18 million, on which pre-tax losses of $3 millionwere recorded. In December 2004, Kraft announced the sale of its U.K. desserts business for approximately $135 million,which is expected to result in a gain. The transaction, which is subject to required approvals, is expected to close in thefirst quarter of 2005, following completion of necessary employee consultation requirements. In addition, inDecember 2004, Kraft announced the sale of its yogurt business for approximately $59 million, which is expected to resultin an after-tax loss of approximately $12 million. The transaction, which is also subject to regulatory approval, is expectedto be completed in the first quarter of 2005.

During 2003, Kraft sold a European rice business and a branded fresh cheese business in Italy. The aggregateproceeds received from the sales of businesses in 2003 were $96 million, on which pre-tax gains of $31 million wererecorded.

During 2002, Kraft sold several small North American food businesses, most of which had been previously classifiedas businesses held for sale arising from the acquisition of Nabisco. The net revenues and operating results of thebusinesses held for sale, which were not significant, were excluded from Altria Group, Inc.’s consolidated statements ofearnings and no gain or loss was recognized on these sales. In addition, Kraft sold a Latin American yeast and industrialbakery ingredients business for approximately $110 million and recorded a pre-tax gain of $69 million. The aggregateproceeds received from the sales of these businesses, as well as a small beer operation, were $221 million, resulting inpre-tax gains of $80 million.

The operating results of the other businesses sold, discussed above, were not material to Altria Group, Inc.’sconsolidated financial position, operating results or cash flows in any of the periods presented.

Note 6.

Acquisitions:

During 2004, Kraft purchased a U.S.-based beverage business and PMI purchased a tobacco business in Finland. Thetotal cost of acquisitions during 2004 was $179 million. In September 2004, PMI announced its intention to acquireColtabaco, the largest tobacco company in Colombia, with a 48% market share, and expects to close the transaction inthe beginning of 2005, for approximately $310 million.

During 2003, PMI purchased approximately 74.2% of a tobacco business in Serbia for a cost of $486 million andpurchased 99% of a tobacco business in Greece for approximately $387 million. PMI also increased its ownership interestin its affiliate in Ecuador from less than 50% to approximately 98% for a cost of $70 million. In addition, Kraft acquired abiscuits business in Egypt and acquired trademarks associated with a small U.S.-based natural foods business. The totalcost of acquisitions during 2003 was $1,041 million.

During 2002, Kraft acquired a snacks business in Turkey and a biscuits business in Australia. The total cost of theseand other smaller acquisitions, including a PMI acquisition, was $147 million.

The effects of these acquisitions were not material to Altria Group, Inc.’s consolidated financial position, results ofoperations or cash flows in any of the periods presented.

Note 7.

Inventories:

The cost of approximately 35% and 38% of inventories in 2004 and 2003, respectively, was determined using the LIFOmethod. The stated LIFO amounts of inventories were approximately $0.8 billion and $0.7 billion lower than the currentcost of inventories at December 31, 2004 and 2003, respectively.

Note 8.

Finance Assets, net:

During 2003, PMCC shifted its strategic focus from an emphasis on the growth of its portfolio of finance leases throughnew investments to one of maximizing investment gains and generating cash flows from its existing portfolio of financeassets. Accordingly, PMCC’s operating companies income will decrease over time, although there may be fluctuationsyear to year, as lease investments mature or are sold. During 2004 and 2003, PMCC received proceeds from asset sales


and maturities of $644 million and $507 million, respectively, and recorded gains of $112 million and $45 million,respectively, in operating companies income.

At December 31, 2004, finance assets, net, of $7,827 million were comprised of investment in finance leases of$8,266 million and other receivables of $58 million, reduced by allowance for losses of $497 million. At December 31,2003, finance assets, net, of $8,393 million were comprised of investment in finance leases of $8,720 million and otherreceivables of $69 million, reduced by allowance for losses of $396 million.

A summary of the net investment in finance leases at December 31, before allowance for losses, was as follows:

Leveraged Leases

Direct Finance Leases

Total

(in millions)

2004

2003

2004

2003

2004

2003

Rentals receivable, net $ 8,726 $ 9,225 $ 747 $ 1,081 $ 9,473 $ 10,306 Unguaranteed residual values 2,139 2,235 110 120 2,249 2,355 Unearned income (3,237) (3,646) (177) (249) (3,414) (3,895)Deferred investment tax credits (42) (46) (42) (46)

Investment in finance leases 7,586 7,768 680 952 8,266 8,720 Deferred income taxes (5,739) (5,502) (351) (381) (6,090) (5,883)

Net investment in finance leases $ 1,847 $ 2,266 $ 329 $ 571 $ 2,176 $ 2,837

51


Exhibit 13

For leveraged leases, rentals receivable, net, represent unpaid rentals, net of principal and interest payments onthird-party nonrecourse debt. PMCC’s rights to rentals receivable are subordinate to the third-party nonrecoursedebt-holders, and the leased equipment is pledged as collateral to the debt-holders. The payment of the nonrecourse debtis collateralized only by lease payments receivable and the leased property, and is nonrecourse to all other assets ofPMCC. As required by U.S. GAAP, the third-party nonrecourse debt of $18.3 billion and $19.4 billion at December 31,2004 and 2003, respectively, has been offset against the related rentals receivable. There were no leases with contingentrentals in 2004 and 2003.

At December 31, 2004, PMCC’s investment in finance leases was principally comprised of the following investmentcategories: aircraft (27%), electric power (24%), surface transport (21%), real estate (13%), manufacturing (13%) andenergy (2%). Investments located outside the United States, which are primarily dollar-denominated, represent 19% and21% of PMCC’s investment in finance leases in 2004 and 2003, respectively.

Among its leasing activities, PMCC leases a number of aircraft, predominantly to major U.S. carriers. PMCC’saggregate finance asset balance related to aircraft was $2.2 billion at December 31, 2004. Two of PMCC’s lessees,United Air Lines, Inc. (“UAL”) and US Airways Group, Inc. (“US Airways”) are currently under bankruptcy protection andtherefore on non-accrual status.

PMCC leases 24 Boeing 757 aircraft to UAL with an aggregate finance asset balance of $569 million at December 31,2004. PMCC has entered into an agreement with UAL to amend 18 direct finance leases subject to UAL’s successfulemergence from bankruptcy and assumption of the leases. UAL remains current on lease payments due to PMCC onthese 18 amended leases. PMCC continues to monitor the situation at UAL with respect to the six remaining aircraftfinanced under leveraged leases, in which PMCC has an aggregate finance asset balance of $92 million. PMCC has noamended agreement relative to these leases since its interests are subordinate to those of public debt holders associatedwith the leveraged leases. Accordingly, since UAL has declared bankruptcy, PMCC has received no lease paymentsrelative to these six aircraft and remains at risk of foreclosure on these aircraft by the senior lenders under the leveragedleases.

In addition, PMCC leases 16 Airbus A-319 aircraft to US Airways financed under leveraged leases with an aggregatefinance asset balance of $150 million at December 31, 2004. US Airways filed for bankruptcy protection in September2004. Previously, US Airways emerged from Chapter 11 bankruptcy protection in March 2003, at which time PMCC’sleveraged leases were assumed pursuant to an agreement with US Airways. Since entering bankruptcy again inSeptember 2004, US Airways has not announced its plans with respect to PMCC’s aircraft. If US Airways rejects theleases on these aircraft, PMCC is at risk of having its interest in these aircraft foreclosed upon by the senior lenders underthe leveraged leases.

PMCC has an aggregate finance asset balance of $258 million at December 31, 2004, relating to six Boeing 757, nineBoeing 767 and four McDonnell Douglas (MD-88) aircraft leased to Delta Air Lines, Inc. (“Delta”) under long-termleveraged leases. PMCC and many other aircraft financiers entered into restructuring agreements with Delta inNovember 2004. As a result of its agreement, PMCC recorded a charge to the allowance for losses of $40 million. Deltaremains current under its lease obligations to PMCC.

In recognition of ongoing concerns within its airline portfolio, PMCC recorded a provision for losses of $140 million inthe fourth quarter of 2004. Previously, PMCC had recorded a provision for losses of $290 million in the fourth quarter of2002 for its airline exposures. It is possible that further adverse developments in the airline industry may require PMCC toincrease its allowance for losses, which was $497 million at December 31, 2004.

Rentals receivable in excess of debt service requirements on third-party nonrecourse debt related to leveraged leasesand rentals receivable from direct finance leases at December 31, 2004, were as follows:

Leveraged Direct (in millions)

Leases

Finance Leases

Total

2005 $ 210 $ 78 $ 288 2006 276 56 332 2007 246 40 286 2008 358 27 385 2009 309 28 337 2010 and thereafter 7,327 518 7,845

Total $ 8,726 $ 747 $ 9,473


Included in net revenues for the years ended December 31, 2004, 2003 and 2002, were leveraged lease revenues of$351 million, $333 million and $363 million, respectively, and direct finance lease revenues of $38 million, $90 million and$99 million, respectively. Income tax expense on leveraged lease revenues for the years ended December 31, 2004, 2003and 2002, was $136 million, $120 million and $142 million, respectively.

Income from investment tax credits on leveraged leases and initial direct costs and executory costs on direct financeleases were not significant during the years ended December 31, 2004, 2003 and 2002.

Note 9.

Short-Term Borrowings and Borrowing Arrangements:

At December 31, 2004 and 2003, Altria Group, Inc.’s short-term borrowings and related average interest rates consistedof the following:

2004

2003

Average Average Amount Year-End Amount Year-End (in millions)

Outstanding

Rate

Outstanding

Rate

Consumer products:

Bank loans $ 878 4.9% $ 915 4.6%Commercial paper 1,668 2.4 2,700 1.5 Amount reclassified as long-term debt (1,900)

$ 2,546 $ 1,715

The fair values of Altria Group, Inc.’s short-term borrowings at December 31, 2004 and 2003, based upon currentmarket interest rates, approximate the amounts disclosed above.

Following a $10.1 billion judgment on March 21, 2003, against PM USA in the Price litigation, which is discussed inNote 19. Contingencies, the three major credit rating agencies took a series of ratings actions resulting in the lowering ofALG’s short-term and long-term debt ratings. During 2003, Moody’s lowered ALG’s short-term debt rating from “P-1” to“P-3” and its long-term debt rating from “A2” to “Baa2.” Standard & Poor’s lowered ALG’s short-term debt rating from “A-1”to “A-2” and its long-term debt rating from “A-” to “BBB.” Fitch Rating Services lowered ALG’s short-term debt rating from“F-1” to “F-2” and its long-term debt rating from “A” to “BBB.”

52


Exhibit 13

While Kraft is not a party to, and has no exposure to, this litigation, its credit ratings were also lowered, but to a lesserdegree. As a result of the rating agencies’ actions, borrowing costs for ALG and Kraft have increased. None of ALG’s orKraft’s debt agreements require accelerated repayment as a result of a decrease in credit ratings.

ALG and Kraft each maintain separate revolving credit facilities that they have historically used to support the issuanceof commercial paper. However, as a result of the rating agencies’ actions discussed above, ALG’s and Kraft’s access tothe commercial paper market was eliminated in 2003. Subsequently, in April 2003, ALG and Kraft began to borrowagainst existing credit facilities to repay maturing commercial paper and to fund normal working capital needs. By the endof May 2003, Kraft regained its access to the commercial paper market, and in November 2003, ALG regained limitedaccess to the commercial paper market.

At December 31, 2004, credit lines for ALG and Kraft, and the related activity, were as follows:

ALG

Commercial Type Amount Paper Lines (in billions of dollars)

Credit Lines

Drawn

Outstanding

Available

Multi-year $ 5.0 $ — $ — $ 5.0

Kraft

Commercial Type Amount Paper Lines (in billions of dollars)

Credit Lines

Drawn

Outstanding

Available

364-day $ 2.5 $ — $ — $ 2.5 Multi-year 2.0 1.7 0.3

$ 4.5 $ — $ 1.7 $ 2.8

The ALG multi-year revolving credit facility requires the maintenance of an earnings to fixed charges ratio, as definedby the agreement, of 2.5 to 1.0. At December 31, 2004, the ratio was 9.7 to 1.0. The Kraft multi-year revolving creditfacility, which is for the sole use of Kraft, requires the maintenance of a minimum net worth of $18.2 billion. AtDecember 31, 2004, Kraft’s net worth was $29.9 billion. ALG and Kraft expect to continue to meet their respectivecovenants. The multi-year facilities, which both expire in July 2006, enable the respective companies to reclassifyshort-term debt on a long-term basis.

After a review of projected borrowing requirements, ALG’s management determined that its revolving credit facilitiesprovided liquidity in excess of its needs. As a result, ALG’s 364-day revolving credit facility was not renewed when itexpired in July 2004. In July 2004, Kraft replaced its 364-day facility, which was expiring. The new Kraft 364-day revolvingcredit facility, in the amount of $2.5 billion, expires in July 2005, although it contains a provision allowing Kraft to extendthe maturity of outstanding borrowings for up to one additional year. It also requires the maintenance of a minimum networth of $18.2 billion. These facilities do not include any additional financial tests, any credit rating triggers or anyprovisions that could require the posting of collateral.

In addition to the above, certain international subsidiaries of ALG and Kraft maintain uncommitted credit lines to meettheir respective working capital needs. These credit lines, which amounted to approximately $2.0 billion for ALGsubsidiaries (other than Kraft) and approximately $0.6 billion for Kraft subsidiaries, are for the sole use of theseinternational businesses. Borrowings on these lines amounted to approximately $0.9 billion and $0.4 billion atDecember 31, 2004 and 2003, respectively.

Note 10.

Long-Term Debt:

At December 31, 2004 and 2003, Altria Group, Inc.’s long-term debt consisted of the following:


(in millions)

2004

2003

Consumer products:

Short-term borrowings, reclassified as long-term debt $ — $ 1,900 Notes, 4.00% to 7.65% (average effective rate 5.94%), due through 2031 14,443 15,190 Debentures, 7.00% to 7.75% (average effective rate 8.38%), $950 million face

amount, due through 2027 911 907 Foreign currency obligations:

Euro, 4.50% to 5.63% (average effective rate 5.07%), due through 2008 2,670 2,427 Other foreign 15 17

Other 174 173

18,213 20,614 Less current portion of long-term debt (1,751) (1,661)

$ 16,462 $ 18,953

Financial services: Eurodollar bonds, 7.50%, due 2009 $ 499 $ 499 Swiss franc, 4.00%, due 2006 and 2007 1,521 1,345 Euro, 6.88%, due 2006 201 366

$ 2,221 $ 2,210

Aggregate maturities of long-term debt are as follows:

Consumer Financial (in millions)

Products

Services

2005 $ 1,751 2006 3,414 $ 1,070 2007 1,903 652 2008 2,904 2009 887 499 2010-2014 5,502 2015-2019 391 Thereafter 1,500

Based on market quotes, where available, or interest rates currently available to Altria Group, Inc. for issuance of debtwith similar terms and remaining maturities, the aggregate fair value of consumer products and financial serviceslong-term debt, including the current portion of long-term debt, at December 31, 2004 and 2003, was $21.7 billion and$24.1 billion, respectively.

53


Exhibit 13

Note 11.

Capital Stock:

Shares of authorized common stock are 12 billion; issued, repurchased and outstanding shares were as follows:

Shares Shares Shares

Issued

Repurchased

Outstanding

Balances, January 1, 2002 2,805,961,317 (653,458,100) 2,152,503,217

Exercise of stock options and issuance of other stockawards 21,155,477 21,155,477

Repurchased (134,399,142) (134,399,142)

Balances, December 31, 2002 2,805,961,317 (766,701,765) 2,039,259,552 Exercise of stock options and issuance of other stock

awards 16,675,270 16,675,270 Repurchased (18,671,400) (18,671,400)

Balances, December 31, 2003 2,805,961,317 (768,697,895) 2,037,263,422 Exercise of stock options and issuance of other stock

awards 22,264,054 22,264,054

Balances, December 31, 2004 2,805,961,317 (746,433,841) 2,059,527,476

At December 31, 2004, 164,376,881 shares of common stock were reserved for stock options and other stock awardsunder Altria Group, Inc.’s stock plans, and 10 million shares of Serial Preferred Stock, $1.00 par value, were authorized,none of which have been issued.

Prior to the rating agencies’ actions in the first quarter of 2003, discussed in Note 9. Short-Term Borrowings andBorrowing Arrangements, ALG repurchased its stock in open market transactions. On March 7, 2003, ALG completed a$10 billion repurchase program, which resulted in the purchase of 215,721,057 shares at an average price of $46.36 pershare, and commenced repurchasing shares under a one-year $3 billion repurchase program. Cumulative repurchasesunder the $3 billion program were 6,953,135 shares at a cost of $241 million, or $34.59 per share. ALG’s one-year$3 billion repurchase program expired in March 2004. During 2003 and 2002, ALG repurchased $0.7 billion and$6.3 billion, respectively, of its common stock. Following the rating agencies’ actions, ALG suspended its sharerepurchase program. Kraft began to repurchase its Class A common stock in 2002 to satisfy the requirements of itsstock-based compensation programs. During 2004, 2003 and 2002, Kraft repurchased 21.5 million, 12.5 million and4.4 million of its Class A common stock at a cost of $700 million, $380 million and $170 million, respectively.

Note 12.

Stock Plans:

Under the Altria Group, Inc. 2000 Performance Incentive Plan (the “2000 Plan”), Altria Group, Inc. may grant to eligibleemployees stock options, stock appreciation rights, restricted stock, reload options and other stock-based awards, as wellas cash-based annual and long-term incentive awards. Up to 110 million shares of common stock may be issued underthe 2000 Plan, of which no more than 27.5 million shares may be awarded as restricted stock. In addition, Altria Group,Inc. may grant up to one million shares of common stock to members of the Board of Directors who are not employees ofAltria Group, Inc. under the 2000 Stock Compensation Plan for Non-Employee Directors (the “2000 Directors Plan”).Shares available to be granted under the 2000 Plan and the 2000 Directors Plan at December 31, 2004, were 85,966,916and 808,915, respectively.

Stock options are granted at an exercise price of not less than fair value on the date of the grant. Stock options grantedunder the 2000 Plan or the 2000 Directors Plan (collectively, “the Plans”) generally become exercisable on the firstanniversary of the grant date and have a maximum term of ten years.

In addition, Kraft may grant stock options, stock appreciation rights, restricted stock, reload options and other awardsof its Class A common stock to its employees under the terms of the Kraft Performance Incentive Plan. Up to 75 millionshares of Kraft’s Class A common stock may be issued under the Kraft plan. At December 31, 2004, Kraft’s employeesheld options to purchase 16,188,864 shares of Kraft’s Class A common stock.


Concurrent with Kraft’s Initial Public Offering (“IPO”) in June 2001, certain Altria Group, Inc. employees received aone-time grant of options to purchase shares of Kraft’s Class A common stock held by Altria Group, Inc. at the IPO priceof $31.00 per share. At December 31, 2004, employees held options to purchase approximately 1.5 million shares ofKraft’s Class A common stock from Altria Group, Inc. In order to completely satisfy the obligation, Altria Group, Inc.purchased 1.6 million shares of Kraft’s Class A common stock in open market transactions during 2002.

Altria Group, Inc. and Kraft apply the intrinsic value-based methodology in accounting for the various stock plans.Accordingly, no compensation expense has been recognized other than for restricted stock awards. In December 2004,the FASB issued SFAS No. 123R, which requires companies to measure compensation cost for share-based payments atfair value. Altria Group, Inc. will adopt this new standard prospectively, on July 1, 2005.

Had compensation cost for stock option awards been determined by using the fair value at the grant date, Altria Group,Inc.’s net earnings and basic and diluted EPS would have been $9,404 million, $4.59 and $4.56, respectively, for the yearended December 31, 2004; $9,185 million, $4.53 and $4.51, respectively, for the year ended December 31, 2003; and$10,965 million,

54


Exhibit 13

$5.19 and $5.15, respectively, for the year ended December 31, 2002. The foregoing impact of compensation cost wasdetermined using a modified Black-Scholes methodology and the following assumptions for Altria Group, Inc. and KraftClass A common stock:

Weighted Risk-Free Average Expected Fair Value Interest Expected Expected Dividend at Grant

Rate

Life

Volatility

Yield

Date

2004 Altria Group, Inc. 2.96% 4 years 37.01% 5.22% $ 11.09 2003 Altria Group, Inc. 2.72 4 37.33 6.26 8.20 2002 Altria Group, Inc. 3.89 5 31.73 4.54 10.17 2002 Kraft 4.27 5 28.72 1.41 10.65

Altria Group, Inc. has not granted stock options to employees since 2002. The amount included above as stock-basedcompensation expense in 2004 relates primarily to EOSOs. Under certain circumstances, senior executives who exerciseoutstanding stock options using shares to pay the option exercise price and taxes, receive EOSOs equal to the number ofshares tendered. During the years ended December 31, 2004, 2003 and 2002, Altria Group, Inc. granted 1.7 million,1.3 million and 2.6 million EOSOs, respectively.

Altria Group, Inc. stock option activity was as follows for the years ended December 31, 2002, 2003 and 2004:

Weighted Shares Average Subject Exercise Options

to Option

Price

Exercisable

Balance at January 1, 2002 137,134,837 $ 35.98 103,155,954

Options granted 3,245,480 53.08 Options exercised (24,115,829) 30.33 Options canceled (1,941,148) 38.22

Balance at December 31, 2002 114,323,340 37.62 105,145,417 Options granted 1,317,224 42.72 Options exercised (15,869,797) 28.57 Options canceled (3,072,139) 47.91

Balance at December 31, 2003 96,698,628 38.85 95,229,316 Options granted 1,678,420 53.32 Options exercised (22,810,009) 36.26 Options canceled (275,956) 43.75

Balance at December 31, 2004 75,291,083 39.93 74,548,371

The weighted average exercise prices of Altria Group, Inc. stock options exercisable at December 31, 2004, 2003 and2002, were $39.82, $38.78 and $36.57, respectively.

The following table summarizes the status of Altria Group, Inc. stock options outstanding and exercisable as ofDecember 31, 2004, by range of exercise price:

Options Outstanding

Options Exercisable

Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices

Outstanding

Life

Price

Exercisable

Price

$21.34 - $31.90 11,619,986 4 years $ 21.89 11,619,986 $ 21.89 33.58 - 50.35 60,546,946 4 42.62 60,115,583 42.58 50.43 - 65.00 3,124,151 5 54.95 2,812,802 54.74


75,291,083 74,548,371

Altria Group, Inc. and Kraft may grant shares of restricted stock and rights to receive shares of stock to eligibleemployees, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge orotherwise encumber such shares and rights. Such shares and rights are subject to forfeiture if certain employmentconditions are not met. During 2004, 2003 and 2002, Altria Group, Inc. granted 1,392,380; 2,327,320; and 6,000 shares,respectively, of restricted stock to eligible U.S.-based employees and Directors, and during 2004 and 2003, also issued toeligible non-U.S. employees and Directors rights to receive 1,011,467 and 1,499,920 equivalent shares, respectively. Themarket value per restricted share or right was $55.42 and $36.61 on the respective dates of the 2004 and 2003 grants. AtDecember 31, 2004, restrictions on such stock and rights, net of forfeitures, lapse as follows: 2005 — 39,000 shares;2006 — 3,153,130 shares; 2007 — 2,370,040 shares; 2008 — 262,600 shares; and 2009 and thereafter — 189,007shares. During 2004 and 2003, Kraft granted 4,129,902 and 3,659,751 restricted Class A shares to eligible U.S.-basedemployees and issued rights to receive 1,939,450 and 1,651,717 restricted Class A equivalent shares to eligible non-U.S.employees, respectively. Restrictions on the Kraft Class A shares lapse as follows: 2005 — 13,719 shares; 2006 —4,520,120 shares; 2007 — 5,532,500 shares; 2009 — 150,000 shares; and 2012 — 100,000 shares.

The fair value of the restricted shares and rights at the date of grant is amortized to expense ratably over the restrictionperiod. Altria Group, Inc. recorded compensation expense related to restricted stock and other stock awards of$185 million (including $106 million related to Kraft awards), $99 million (including $57 million related to Kraft awards) and$13 million for the years ended December 31, 2004, 2003 and 2002, respectively. The unamortized portion related toAltria Group, Inc. restricted stock, which is reported as a reduction of earnings reinvested in the business, was$140 million and $101 million at December 31, 2004 and 2003, respectively.

55


Exhibit 13

Note 13.

Earnings per Share:

Basic and diluted EPS from continuing and discontinued operations were calculated using the following:


2004

2003

2002

Earnings from continuing operations $ 9,420 $ 9,121 $ 11,021 (Loss) earnings from discontinued operations (4) 83 81

Net earnings $ 9,416 $ 9,204 $ 11,102

Weighted average shares for basic EPS 2,047 2,028 2,111 Plus incremental shares from assumed conversions:

Restricted stock and stock rights 3 2 1 Stock options 13 8 17

Weighted average shares for diluted EPS 2,063 2,038 2,129

Incremental shares from assumed conversions are calculated as the number of shares that would be issued, net of thenumber of shares that could be purchased in the marketplace with the cash received upon stock option exercise or, in thecase of restricted stock and rights, the number of shares corresponding to the unamortized compensation expense. Forthe 2004, 2003 and 2002 computations, 2 million, 43 million and 11 million stock options, respectively, were excludedfrom the calculation of weighted average shares for diluted EPS because their effects were antidilutive (i.e., the cash thatwould be received upon exercise is greater than the average market price of the stock during the year).

Note 14.

Income Taxes:

Earnings from continuing operations before income taxes and minority interest, and provision for income taxes consistedof the following for the years ended December 31, 2004, 2003 and 2002:

(in millions)

2004

2003

2002

Earnings from continuing operations before

income taxes and minority interest: United States $ 7,414 $ 8,062 $ 12,037 Outside United States 6,590 6,547 5,908

Total $ 14,004 $ 14,609 $ 17,945

Provision for income taxes: United States federal:

Current $ 2,106 $ 1,926 $ 2,585 Deferred 450 742 1,493

2,556 2,668 4,078 State and local 398 377 454

Total United States 2,954 3,045 4,532

Outside United States: Current 1,605 1,810 1,744 Deferred (19) 242 92

Total outside United States 1,586 2,052 1,836


Total provision for income taxes $ 4,540 $ 5,097 $ 6,368

The (loss) earnings from discontinued operations for the year ended December 31, 2004, included a deferred incometax benefit of $43 million. Kraft also anticipates additional tax expense of approximately $270 million in 2005, once thesale of its sugar confectionery business has been consummated.

At December 31, 2004, applicable United States federal income taxes and foreign withholding taxes have not beenprovided on approximately $11.8 billion of accumulated earnings of foreign subsidiaries that are expected to bepermanently reinvested.

On October 22, 2004, the American Jobs Creation Act (“the Jobs Act”) was signed into law. The Jobs Act includes adeduction for 85% of certain foreign earnings that are repatriated. Altria Group, Inc. may elect to apply this provision toqualifying earnings repatriations in 2005 and is conducting analyses of its effects. The U.S. Treasury Department recentlyprovided additional clarifying language on key elements of the provision which is under consideration as part of AltriaGroup, Inc.’s evaluation. Altria Group, Inc. expects to complete its evaluation of the effects of the repatriation provisionwithin a reasonable period of time. The amount of dividends Altria Group, Inc. can repatriate under this provision is up to$7.1 billion. Since Altria Group, Inc. has provided deferred taxes on a portion of its unrepatriated earnings, there is apotential financial statement income tax benefit upon repatriations under the Jobs Act. Assuming certain expectedtechnical amendments to the Jobs Act are enacted and if the entire $7.1 billion were repatriated, the income tax benefitwould be approximately $80 million.

The Jobs Act also provides tax relief to U.S. domestic manufacturers by providing a tax deduction of up to 9% of thelesser of “qualified production activities income” or taxable income. In December 2004, the FASB issued FASB StaffPosition 109-1, “Application of FASB Statement No. 109, ‘Accounting for Income Taxes,’ to the Tax Deduction onQualified Production Activities Provided

56


Exhibit 13

by the American Jobs Creation Act of 2004” (“FSP 109-1”). FSP 109-1 requires companies to account for this deductionas a “special deduction” rather than a rate reduction, in accordance with SFAS No. 109, and therefore, Altria Group, Inc.will recognize these benefits, which are not expected to be significant, in the year earned.

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasonsfor the years ended December 31, 2004, 2003 and 2002:

2004

2003

2002

U.S. federal statutory rate 35.0% 35.0% 35.0%Increase (decrease) resulting from:

State and local income taxes, net of federal tax benefit 1.8 1.8 1.7 Reversal of taxes no longer required (3.1) (0.5) Other (1.3) (1.4) (1.2)

Effective tax rate 32.4% 34.9% 35.5%

The tax provision in 2004 includes the reversal of $355 million of tax accruals that are no longer required due to foreigntax events that were resolved during the first quarter of 2004 ($35 million) and the second quarter of 2004 ($320 million),and an $81 million favorable resolution of an outstanding tax item at Kraft, the majority of which occurred in the thirdquarter. The tax provision in 2003 reflects reversals of $74 million of state tax liabilities, net of federal tax benefit, that areno longer needed due to published rulings during 2003.

The tax effects of temporary differences that gave rise to consumer products deferred income tax assets and liabilitiesconsisted of the following at December 31, 2004 and 2003:

(in millions)

2004

2003

Deferred income tax assets:

Accrued postretirement and postemployment benefits $ 1,427 $ 1,392 Settlement charges 1,229 1,240 Other 224 415

Total deferred income tax assets 2,880 3,047

Deferred income tax liabilities: Trade names (3,545) (3,839)Unremitted earnings (971) (862)Property, plant and equipment (2,415) (2,275)Prepaid pension costs (1,378) (1,199)

Total deferred income tax liabilities (8,309) (8,175)

Net deferred income tax liabilities $ (5,429) $ (5,128)

Financial services deferred income tax liabilities are primarily attributable to temporary differences relating to netinvestments in finance leases.

Note 15.

Segment Reporting:

The products of ALG’s subsidiaries include cigarettes, food (consisting principally of a wide variety of snacks, beverages,cheese, grocery products and convenient meals) and beer, prior to the merger of Miller into SAB on July 9, 2002. Anothersubsidiary of ALG, PMCC, maintains a portfolio of leveraged and direct finance leases. The products and services ofthese subsidiaries constitute Altria Group, Inc.’s reportable segments of domestic tobacco, international tobacco, NorthAmerican food, international food, beer (prior to July 9, 2002) and financial services. During January 2004, Kraftannounced a new global organization structure. Beginning in 2004, results for Kraft’s Mexico and Puerto Rico businesses,


which were previously included in the North American food segment, are included in the international food segment, andhistorical amounts have been restated.

Altria Group, Inc.’s management reviews operating companies income to evaluate segment performance and allocateresources. Operating companies income for the segments excludes general corporate expenses and amortization ofintangibles. Interest and other debt expense, net (consumer products), and provision for income taxes are centrallymanaged at the ALG level and, accordingly, such items are not presented by segment since they are excluded from themeasure of segment profitability reviewed by Altria Group, Inc.’s management. Altria Group, Inc.’s assets are managed ona worldwide basis by major products and, accordingly, asset information is reported for the tobacco, food and financialservices segments. Intangible assets and related amortization are principally attributable to the food businesses. Otherassets consist primarily of cash and cash equivalents and the investment in SABMiller. The accounting policies of thesegments are the same as those described in Note 2. Summary of Significant Accounting Policies.

Segment data were as follows:


2004

2003

2002

Net revenues:

Domestic tobacco $ 17,511 $ 17,001 $ 18,877 International tobacco 39,536 33,389 28,672 North American food 22,060 20,937 20,489 International food 10,108 9,561 8,759 Beer 2,641 Financial services 395 432 495

Net revenues $ 89,610 $ 81,320 $ 79,933

Earnings from continuing operations before income taxes and minority interest: Operating companies income:

Domestic tobacco $ 4,405 $ 3,889 $ 5,011 International tobacco 6,566 6,286 5,666 North American food 3,870 4,658 4,664 International food 933 1,393 1,466 Beer 276 Financial services 144 313 55

Amortization of intangibles (17) (9) (7)General corporate expenses (721) (771) (683)

Operating income 15,180 15,759 16,448 Gain on Miller transaction 2,631 Interest and other debt expense, net (1,176) (1,150) (1,134)

Earnings from continuing operations before income taxes and minorityinterest $ 14,004 $ 14,609 $ 17,945

57


Exhibit 13

Items affecting the comparability of results from continuing operations were as follows:

• Domestic Tobacco Headquarters Relocation Charges — PM USA has substantially completed the move of itscorporate headquarters from New York City to Richmond, Virginia. PM USA estimates that the total cost of the relocationwill be approximately $110 million, including compensation to those employees who did not relocate. Pre-tax charges of$31 million and $69 million were recorded in the operating companies income of the domestic tobacco segment for theyears ended December 31, 2004 and 2003, respectively. Cash payments of approximately $55 million were made during2004, while total cash payments related to the relocation were $85 million through December 31, 2004. At December 31,2004, a liability of $15 million remains on the consolidated balance sheet.

• International Tobacco E.C. Agreement — On July 9, 2004, PMI entered into an agreement with the EuropeanCommission (“E.C.”) and 10 member states of the European Union that provides for broad cooperation with European lawenforcement agencies on anti-contraband and anti-counterfeit efforts. The agreement resolves all disputes between theparties relating to these issues. Under the terms of the agreement, PMI will make 13 payments over 12 years, includingan initial payment of $250 million, which was recorded as a pre-tax charge against its earnings in 2004. The agreementcalls for additional payments of approximately $150 million on the first anniversary of the agreement, approximately$100 million on the second anniversary and approximately $75 million each year thereafter for 10 years, each of which isto be adjusted based on certain variables, including PMI’s market share in the European Union in the year precedingpayment. Because future additional payments are subject to these variables, PMI will record charges for them as anexpense in cost of sales when product is shipped. During the third quarter of 2004, PMI began accruing for payments dueon the first anniversary of the agreement.

• Asset Impairment and Exit Costs — See Note 3. Asset Impairment and Exit Costs for a breakdown of assetimpairment and exit costs by segment.

• Domestic Tobacco Legal Settlement — During 2003, PM USA and certain other defendants reached an agreementwith a class of U.S. tobacco growers and quota-holders to resolve a lawsuit related to tobacco leaf purchases. During2003, PM USA recorded pre-tax charges of $202 million for its obligations under the agreement. The pre-tax charges areincluded in the operating companies income of the domestic tobacco segment.

• Losses (Gains) on Sales of Businesses — During 2004, Kraft sold a Brazilian snack nuts business and trademarksassociated with a candy business in Norway, and recorded aggregate pre-tax losses of $3 million. During 2003, Kraft solda European rice business and a branded fresh cheese business in Italy and recorded aggregate pre-tax gains of$31 million. During 2002, Kraft sold a Latin American yeast and industrial bakery ingredients business, resulting in apre-tax gain of $69 million, and Kraft sold several small businesses, resulting in pre-tax gains of $11 million.

• Integration Costs and a Loss on Sale of a Food Factory — Altria Group, Inc.’s consolidated statements ofearnings disclose the following items as integration costs, which are costs incurred by Kraft as it integrated the operationsof Nabisco, and a loss on sale of a food factory. During 2003, Kraft reversed $13 million related to the previously recordedintegration charges.


2003

2002

Closing a facility and other consolidation

programs North American food $ (13) $ 98 Consolidation of production lines and

distribution networks in Latin America International food 17 Loss on sale of a food factory North American food (4)

Total $ (13) $ 111

• Provision for Airline Industry Exposure — As discussed in Note 8. Finance Assets, net, during 2004 and 2002, inrecognition of the economic downturn in the airline industry, PMCC increased its allowance for losses by $140 million and$290 million, respectively.

• Miller Transaction — As more fully discussed in Note 4. Miller Brewing Company Transaction, on July 9, 2002, Millerwas merged into SAB to form SABMiller. The transaction resulted in a pre-tax gain of $2.6 billion or $1.7 billion after-tax.

58


Exhibit 13

See Notes 4, 5 and 6, respectively, regarding the Miller Brewing Company transaction, divestitures and acquisitions.


2004

2003

2002

Depreciation expense from continuing operations:

Domestic tobacco $ 203 $ 194 $ 194 International tobacco 453 370 307 North American food 555 533 497 International food 309 266 207 Beer 61

1,520 1,363 1,266 Other 66 63 53

Total depreciation expense from continuing operations 1,586 1,426 1,319 Depreciation expense from discontinued operations 4 5 5

Total depreciation expense $ 1,590 $ 1,431 $ 1,324

Assets: Tobacco $ 27,472 $ 23,298 $ 18,329 Food 60,760 59,735 57,245 Financial services 7,845 8,540 9,231

96,077 91,573 84,805 Other 5,571 4,602 2,735

Total assets $ 101,648 $ 96,175 $ 87,540

Capital expenditures from continuing operations: Domestic tobacco $ 185 $ 154 $ 140 International tobacco 711 586 497 North American food 613 667 719 International food 389 402 410 Beer 84

1,898 1,809 1,850 Other 11 149 104

Total capital expenditures from continuing operations 1,909 1,958 1,954 Capital expenditures from discontinued operations 4 16 55

Total capital expenditures $ 1,913 $ 1,974 $ 2,009

Altria Group, Inc.’s operations outside the United States, which are principally in the tobacco and food businesses, areorganized into geographic regions within each segment, with Europe being the most significant. Total tobacco and foodsegment net revenues attributable to customers located in Germany, Altria Group, Inc.’s largest European market, were$9.0 billion, $8.5 billion and $7.4 billion for the years ended December 31, 2004, 2003 and 2002, respectively.

Geographic data for net revenues and long-lived assets (which consist of all financial services assets and non-currentconsumer products assets, other than goodwill and other intangible assets, net) were as follows:


2004

2003

2002

Net revenues:

United States — domestic $ 37,729 $ 36,312 $ 40,637 — export 3,493 3,528 3,654


Europe 36,163 30,813 26,090 Other 12,225 10,667 9,552

Total net revenues $ 89,610 $ 81,320 $ 79,933

Long-lived assets: United States $ 26,347 $ 25,825 $ 24,308 Europe 6,829 6,048 4,939 Other 3,459 3,375 2,981

Total long-lived assets $ 36,635 $ 35,248 $ 32,228

Note 16.

Benefit Plans:

In December 2003, the FASB issued a revised SFAS No. 132, “Employers’ Disclosures about Pensions and OtherPostretirement Benefits.” In accordance with the pronouncement, Altria Group, Inc. adopted the revised disclosurerequirements of this pronouncement for its U.S. plans in 2003 and for its non-U.S. plans in 2004.

Altria Group, Inc. sponsors noncontributory defined benefit pension plans covering substantially all U.S. employees.Pension coverage for employees of ALG’s non-U.S. subsidiaries is provided, to the extent deemed appropriate, throughseparate plans, many of which are governed by local statutory requirements. In addition, ALG and its U.S. and Canadiansubsidiaries provide health care and other benefits to substantially all retired employees. Health care benefits for retireesoutside the United States and Canada are generally covered through local government plans.

The plan assets and benefit obligations of Altria Group, Inc.’s U.S. and Canadian pension plans are measured atDecember 31 of each year and all other non-U.S. pension plans are measured at September 30 of each year. The benefitobligations of Altria Group, Inc.’s postretirement plans are measured at December 31 of each year.

59


Exhibit 13

Pension Plans

Obligations and Funded Status

The benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension plans at December 31, 2004 and2003, were as follows:

U.S. Plans

Non-U.S. Plans

(in millions)

2004

2003

2004

2003

Benefit obligation at January 1 $ 9,683 $ 9,002 $ 5,156 $ 4,074

Service cost 247 234 180 140 Interest cost 613 579 254 217 Benefits paid (677) (618) (315) (209)Termination, settlement and curtailment 36 46 Actuarial losses 988 428 175 236 Currency 546 626 Other 6 12 205 72

Benefit obligation at December 31 10,896 9,683 6,201 5,156

Fair value of plan assets at January 1 9,555 7,535 3,433 2,548 Actual return on plan assets 1,044 1,821 346 351 Contributions 659 867 419 316 Benefits paid (686) (662) (139) (164)Currency 392 382 Actuarial (losses) gains (3) (6) 25

Fair value of plan assets at December 31 10,569 9,555 4,476 3,433

Funded status (plan assets less than benefit obligations) atDecember 31 (327) (128) (1,725) (1,723)Unrecognized actuarial losses 4,350 3,615 1,727 1,482 Unrecognized prior service cost 120 130 108 105 Additional minimum liability (206) (196) (663) (618)Unrecognized net transition obligation 9 7

Net prepaid pension asset (liability) recognized $ 3,937 $ 3,421 $ (544) $ (747)

The combined U.S. and non-U.S. pension plans resulted in a net prepaid pension asset of $3.4 billion and $2.7 billionat December 31, 2004 and 2003, respectively. These amounts were recognized in Altria Group, Inc.’s consolidatedbalance sheets at December 31, 2004 and 2003, as other assets of $5.2 billion and $4.5 billion, respectively, for thoseplans in which plan assets exceeded their accumulated benefit obligations, and as other liabilities of $1.8 billion in eachyear, for those plans in which the accumulated benefit obligations exceeded their plan assets.

For U.S. and non-U.S. pension plans, the change in the additional minimum liability in 2004 and 2003 was as follows:

U.S. Plans

Non-U.S. Plans

(in millions)

2004

2003

2004

2003

(Increase) decrease in minimum liability included in other

comprehensive earnings (losses), net of tax $ (5) $ 508 $ (48) $ (44)

The accumulated benefit obligation for the U.S. pension plans was $9.5 billion and $8.5 billion at December 31, 2004and 2003, respectively. The accumulated benefit obligation for non-U.S. pension plans was $5.5 billion and $4.6 billion atDecember 31, 2004 and 2003, respectively.


For U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation,accumulated benefit obligation and fair value of plan assets were $584 million, $415 million and $15 million, respectively,as of December 31, 2004, and $557 million, $396 million and $17 million, respectively, as of December 31, 2003. AtDecember 31, 2004, the majority of these relate to plans for salaried employees that cannot be funded under I.R.S.regulations. For non-U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefitobligation, accumulated benefit obligation and fair value of plan assets were $3,689 million, $3,247 million and$2,013 million, respectively, as of December 31, 2004, and $3,780 million, $3,307 million and $2,048 million, respectively,as of December 31, 2003.

The following weighted-average assumptions were used to determine Altria Group, Inc.’s benefit obligations under theplans at December 31:

U.S. Plans

Non-U.S. Plans

2004

2003

2004

2003

Discount rate 5.75% 6.25% 4.75% 4.87%Rate of compensation increase 4.20 4.20 3.28 3.40

60


Exhibit 13

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following for the years ended December 31, 2004, 2003 and 2002:

U.S. Plans

Non-U.S. Plans

(in millions)

2004

2003

2002

2004

2003

2002

Service cost $ 247 $ 234 $ 215 $ 180 $ 140 $ 105 Interest cost 613 579 590 254 217 183 Expected return on plan assets (932) (936) (943) (318) (257) (209)Amortization:

Net gain on adoption of SFAS No. 87 (1) Unrecognized net loss from experience

differences 157 46 23 50 29 7 Prior service cost 16 16 14 14 11 9

Termination, settlement and curtailment 48 68 133 3 28

Net periodic pension cost $ 149 $ 7 $ 31 $ 183 $ 140 $ 123

During 2004, 2003 and 2002, employees left Altria Group, Inc. under voluntary early retirement and workforcereduction programs, and through the Miller transaction. These events resulted in settlement losses, curtailment losses andtermination benefits of $7 million, $17 million and $112 million for the U.S. plans in 2004, 2003 and 2002, respectively. Inaddition, retiring employees of Kraft North American Commercial (“KNAC”) elected lump-sum payments, resulting insettlement losses of $41 million, $51 million and $21 million in 2004, 2003 and 2002, respectively. During 2004 and 2002,early retirement programs in the international tobacco business resulted in additional termination benefits of $3 million and$28 million, respectively, for the non-U.S. plans.

The following weighted-average assumptions were used to determine Altria Group, Inc.’s net pension cost for theyears ended December 31:

U.S. Plans

Non-U.S. Plans

2004

2003

2002

2004

2003

2002

Discount rate 6.25% 6.50% 7.00% 4.87% 4.99% 5.38%Expected rate of return on plan assets 9.00 9.00 9.00 7.82 7.81 7.94 Rate of compensation increase 4.20 4.20 4.50 3.40 3.30 3.68

Altria Group, Inc.’s expected rate of return on plan assets is determined by the plan assets’ historical long-terminvestment performance, current asset allocation and estimates of future long-term returns by asset class. Altria Group,Inc. has reduced this assumption to 8% in determining its U.S. plans pension expense for 2005.

ALG and certain of its subsidiaries sponsor deferred profit-sharing plans covering certain salaried, non-union and unionemployees. Contributions and costs are determined generally as a percentage of pre-tax earnings, as defined by theplans. Certain other subsidiaries of ALG also maintain defined contribution plans. Amounts charged to expense fordefined contribution plans totaled $244 million, $235 million and $222 million in 2004, 2003 and 2002, respectively.

Plan Assets

The percentage of fair value of pension plan assets at December 31, 2004 and 2003, was as follows:

U.S. Plans

Non-U.S. Plans

Asset Category

2004

2003

2004

2003

Equity securities 72% 71% 59% 56%Debt securities 27 26 35 37


Real estate 1 4 4 Other 1 2 2 3

Total 100% 100% 100% 100%

Altria Group, Inc.’s investment strategy is based on an expectation that equity securities will outperform debt securitiesover the long term. Accordingly, the composition of Altria Group, Inc.’s U.S. plan assets is broadly characterized as a70%/30% allocation between equity and debt securities. The strategy utilizes indexed U.S. equity securities and activelymanaged investment grade debt securities (which constitute 80% or more of debt securities) with lesser allocations tohigh-yield and international debt securities.

For the plans outside the U.S., the investment strategy is subject to local regulations and the asset/liability profiles ofthe plans in each individual country. These specific circumstances result in a level of equity exposure that is typically lessthan the U.S. plans. In aggregate, the actual asset allocations of the non-U.S. plans are virtually identical to theirrespective asset policy targets.

Altria Group, Inc. attempts to mitigate investment risk by rebalancing between equity and debt asset classes as AltriaGroup, Inc.’s contributions and monthly benefit payments are made.

Altria Group, Inc. presently plans to make contributions, to the extent that they are tax deductible, in order to maintainplan assets in excess of the accumulated benefit obligation of its funded U.S. and non-U.S. plans. Currently, Altria Group,Inc. anticipates making contributions of approximately $780 million in 2005 to its U.S. plans and approximately$210 million in 2005 to its non-U.S. plans, based on current tax law. However, these estimates are subject to change as aresult of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumedlong-term rate of return on pension assets, or significant changes in interest rates.

The estimated future benefit payments from the Altria Group, Inc. pension plans at December 31, 2004, were asfollows:

(in millions)

U.S. Plans

Non-U.S. Plans

2005 $ 600 $ 267 2006 600 250 2007 602 264 2008 606 277 2009 626 293 2010 – 2014 3,801 1,579

61


Exhibit 13

Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the years ended December 31, 2004, 2003 and 2002:

(in millions)

2004

2003

2002

Service cost $ 85 $ 80 $ 68 Interest cost 280 270 272 Amortization:

Unrecognized net loss from experience differences 57 47 24 Unrecognized prior service cost (25) (27) (24)

Other expense 1 7 16

Net postretirement health care costs $ 398 $ 377 $ 356

During 2004, 2003 and 2002, Altria Group, Inc. instituted early retirement programs. These actions resulted in specialtermination benefits and curtailment losses of $1 million, $7 million and $16 million in 2004, 2003 and 2002, respectively,which are included in other expense, above.

In December 2003, the United States enacted into law the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the “Act”). The Act establishes a prescription drug benefit under Medicare, known as“Medicare Part D,” and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is atleast actuarially equivalent to Medicare Part D.

In May 2004, the FASB issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related tothe Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP 106-2 requirescompanies to account for the effect of the subsidy on benefits attributable to past service as an actuarial experience gainand as a reduction of the service cost component of net postretirement health care costs for amounts attributable tocurrent service, if the benefit provided is at least actuarially equivalent to Medicare Part D.

Altria Group, Inc. adopted FSP 106-2 in the third quarter of 2004. The impact of adoption for 2004 was a reduction ofpre-tax net postretirement health care costs and an increase in net earnings of $28 million (including $24 million related toKraft), which is included above as a reduction of $4 million in service cost, $11 million in interest cost and $13 million inamortization of unrecognized net loss from experience differences. In addition, as of July 1, 2004, Altria Group, Inc.reduced its accumulated postretirement benefit obligation for the subsidy related to benefits attributed to past service by$375 million and decreased its unrecognized actuarial losses by the same amount.

The following weighted-average assumptions were used to determine Altria Group, Inc.’s net postretirement cost forthe years ended December 31:

U.S. Plans

Canadian Plans

2004

2003

2002

2004

2003

2002

Discount rate 6.25% 6.50% 7.00% 6.50% 6.75% 6.75%Health care cost trend rate 8.90 8.00 5.90 8.00 7.00 8.00

Altria Group, Inc.’s postretirement health care plans are not funded. The changes in the accumulated benefit obligationand net amount accrued at December 31, 2004 and 2003, were as follows:

(in millions)

2004

2003

Accumulated postretirement benefit obligation at January 1 $ 4,599 $ 4,249

Service cost 85 80 Interest cost 280 270 Benefits paid (305) (246)Curtailments 1 7 Plan amendments (43) (28)


Medicare Prescription Drug, Improvement and Modernization Act of 2003 (375) Currency 10 18 Assumption changes 474 253 Actuarial losses (gains) 93 (4)

Accumulated postretirement benefit obligation at December 31 4,819 4,599

Unrecognized actuarial losses (1,466) (1,326)Unrecognized prior service cost 221 202

Accrued postretirement health care costs $ 3,574 $ 3,475

The current portion of Altria Group, Inc.’s accrued postretirement health care costs of $289 million and $259 million atDecember 31, 2004 and 2003, respectively, are included in other accrued liabilities on the consolidated balance sheets.

The following weighted-average assumptions were used to determine Altria Group, Inc.’s postretirement benefitobligations at December 31:

U.S. Plans

Canadian Plans

2004

2003

2004

2003

Discount rate 5.75% 6.25% 5.75% 6.50%Health care cost trend rate assumed for next year 8.00 8.90 9.50 8.00

Ultimate trend rate 5.00 5.00 6.00 5.00 Year that the rate reaches the ultimate trend rate 2008 2006 2012 2010

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. Aone-percentage-point change in assumed health care cost trend rates would have the following effects as ofDecember 31, 2004:

One-Percentage- One-Percentage-

Point Increase

Point Decrease

Effect on total of service and interest cost 12.3% (10.1)%Effect on postretirement benefit obligation 9.3 (7.7)

Altria Group, Inc.’s estimated future benefit payments for its postretirement health care plans at December 31, 2004,were as follows:

(in millions)

U.S. Plans

Canadian Plans

2005 $ 282 $ 7 2006 263 7 2007 266 7 2008 267 8 2009 269 8 2010 – 2014 1,429 46

62


Exhibit 13

Postemployment Benefit Plans

ALG and certain of its subsidiaries sponsor postemployment benefit plans covering substantially all salaried and certainhourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Netpostemployment costs consisted of the following for the years ended December 31, 2004, 2003 and 2002:

(in millions)

2004

2003

2002

Service cost $ 18 $ 24 $ 48 Amortization of unrecognized net loss 10 11 3 Other expense 226 69 40

Net postemployment costs $ 254 $ 104 $ 91

As discussed in Note 3. Asset Impairment and Exit Costs, certain employees left Kraft under the restructuring programand certain salaried employees left Altria Group, Inc. under separation programs. During 2002, certain salaried employeesleft Altria Group, Inc. under separation and voluntary early retirement programs. These programs resulted in incrementalpostemployment costs, which are included in other expense, above.

Altria Group, Inc.’s postemployment plans are not funded. The changes in the benefit obligations of the plans atDecember 31, 2004 and 2003, were as follows:

(in millions)

2004

2003

Accumulated benefit obligation at January 1 $ 480 $ 473

Service cost 18 24 Kraft restructuring program 167 Benefits paid (280) (196)Actuarial losses 72 179

Accumulated benefit obligation at December 31 457 480 Unrecognized experience gain (loss) 30 (14)

Accrued postemployment costs $ 487 $ 466

The accumulated benefit obligation was determined using an assumed ultimate annual turnover rate of 0.4% and 0.5%in 2004 and 2003, respectively, assumed compensation cost increases of 4.2% in 2004 and 2003, and assumed benefitsas defined in the respective plans. Postemployment costs arising from actions that offer employees benefits in excess ofthose specified in the respective plans are charged to expense when incurred.

Note 17.

Additional Information:

The amounts shown below are for continuing operations.


2004

2003

2002

Research and development expense $ 809 $ 756 $ 680

Advertising expense $ 1,763 $ 1,623 $ 1,835

Interest and other debt expense, net: Interest expense $ 1,417 $ 1,367 $ 1,327 Interest income (241) (217) (193)


$ 1,176 $ 1,150 $ 1,134

Interest expense of financial services operations included in cost of sales $ 106 $ 108 $ 97

Rent expense $ 798 $ 765 $ 740

Minimum rental commitments under non-cancelable operating leases in effect at December 31, 2004, were as follows:

(in millions)

2005 $ 544 2006 405 2007 306 2008 208 2009 147 Thereafter 387

$ 1,997

Note 18.

Financial Instruments:

• Derivative financial instruments: Altria Group, Inc. operates globally, with manufacturing and sales facilities invarious locations around the world, and utilizes certain financial instruments to manage its foreign currency andcommodity exposures. Derivative financial instruments are used by Altria Group, Inc., principally to reduce exposures tomarket risks resulting from fluctuations in foreign exchange rates and commodity prices, by creating offsetting exposures.Altria Group, Inc. is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments forspeculative purposes. Financial instruments qualifying for hedge accounting must maintain a specified level ofeffectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedgedperiod. Altria Group, Inc. formally documents the nature and relationships between the hedging instruments and hedgeditems, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method ofassessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics andexpected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecastedtransaction will occur. If it were deemed probable that the forecasted transaction will not occur, the gain or loss would berecognized in earnings currently.

63


Exhibit 13

Altria Group, Inc. uses forward foreign exchange contracts and foreign currency options to mitigate its exposure tochanges in exchange rates from third-party and intercompany actual and forecasted transactions. The primary currenciesto which Altria Group, Inc. is exposed include the Japanese yen, Swiss franc and the euro. At December 31, 2004 and2003, Altria Group, Inc. had foreign exchange option and forward contracts with aggregate notional amounts of $9.7 billionand $13.6 billion, respectively. The $3.9 billion decrease from December 31, 2003, reflects $3.0 billion due to the maturityof a substantial portion of equal and offsetting foreign currency transactions discussed below, as well as the maturity ofcontracts that were outstanding at December 31, 2003, partially offset by new agreements in 2004. Included in the foreigncurrency aggregate notional amounts at December 31, 2004 and 2003, were $0.4 billion and $3.4 billion, respectively, ofequal and offsetting foreign currency positions, which do not qualify as hedges and that will not result in any significantgain or loss. The effective portion of unrealized gains and losses associated with forward contracts and option contracts isdeferred as a component of accumulated other comprehensive earnings (losses) until the underlying hedged transactionsare reported on Altria Group, Inc.’s consolidated statement of earnings.

In addition, Altria Group, Inc. uses foreign currency swaps to mitigate its exposure to changes in exchange ratesrelated to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debtto fixed-rate debt denominated in the functional currency of the borrowing entity. A substantial portion of the foreigncurrency swap agreements is accounted for as cash flow hedges. The unrealized gain (loss) relating to foreign currencyswap agreements that do not qualify for hedge accounting treatment under U.S. GAAP was insignificant as ofDecember 31, 2004 and 2003. At December 31, 2004 and 2003, the notional amounts of foreign currency swapagreements aggregated $2.7 billion and $2.5 billion, respectively. Aggregate maturities of foreign currency swapagreements at December 31, 2004, were as follows:

(in millions)

2006 $ 1,203 2008 1,449

$ 2,652

Altria Group, Inc. also designates certain foreign currency denominated debt as net investment hedges of foreignoperations. During the years ended December 31, 2004, 2003 and 2002, losses, net of income taxes, of $344 million,$286 million and $366 million, respectively, which represented effective hedges of net investments, were reported as acomponent of accumulated other comprehensive earnings (losses) within currency translation adjustments.

Kraft is exposed to price risk related to forecasted purchases of certain commodities used as raw materials.Accordingly, Kraft uses commodity forward contracts as cash flow hedges, primarily for coffee, cocoa, milk and cheese.Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee, cocoa,wheat, corn, sugar and soybean oil. At December 31, 2004 and 2003, Kraft had net long commodity positions of$443 million and $255 million, respectively. In general, commodity forward contracts qualify for the normal purchaseexception under U.S. GAAP. The effective portion of unrealized gains and losses on commodity futures and optioncontracts is deferred as a component of accumulated other comprehensive earnings (losses) and is recognized as acomponent of cost of sales when the related inventory is sold. Unrealized gains or losses on net commodity positionswere immaterial at December 31, 2004 and 2003.

During the years ended December 31, 2004, 2003 and 2002, ineffectiveness related to fair value hedges and cash flowhedges was not material. Altria Group, Inc. is hedging forecasted transactions for periods not exceeding the next fifteenmonths. At December 31, 2004, Altria Group, Inc. estimates that derivative losses of $36 million, net of income taxes,reported in accumulated other comprehensive earnings (losses) will be reclassified to the consolidated statement ofearnings within the next twelve months.

Derivative gains or losses reported in accumulated other comprehensive earnings (losses) are a result of qualifyinghedging activity. Transfers of gains or losses from accumulated other comprehensive earnings (losses) to earnings areoffset by the corresponding gains or losses on the underlying hedged item. Hedging activity affected accumulated othercomprehensive earnings (losses), net of income taxes, during the years ended December 31, 2004, 2003 and 2002, asfollows:

(in millions)

2004

2003

2002

(Loss) gain as of January 1 $ (83) $ (77) $ 33

Derivative losses (gains) transferred to earnings 86 (42) 1


Change in fair value (17) 36 (111)

Loss as of December 31 $ (14) $ (83) $ (77)

• Credit exposure and credit risk: Altria Group, Inc. is exposed to credit loss in the event of nonperformance bycounterparties. Altria Group, Inc. does not anticipate nonperformance within its consumer products businesses. However,see Note 8. Finance Assets, net regarding certain aircraft leases.

• Fair value: The aggregate fair value, based on market quotes, of Altria Group, Inc.’s total debt at December 31, 2004,was $24.2 billion, as compared with its carrying value of $23.0 billion. The aggregate fair value of Altria Group, Inc.’s totaldebt at December 31, 2003, was $25.8 billion, as compared with its carrying value of $24.5 billion.

The fair value, based on market quotes, of Altria Group, Inc.’s equity investment in SABMiller at December 31, 2004,was $7.1 billion, as compared with its carrying value of $2.5 billion. The fair value of Altria Group, Inc.’s equity investmentin SABMiller at December 31, 2003, was $4.4 billion, as compared with its carrying value of $2.1 billion.

See Notes 9 and 10 for additional disclosures of fair value for short-term borrowings and long-term debt.

Note 19.

Contingencies:

Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreignjurisdictions against ALG, its subsidiaries and affiliates, including PM USA and PMI, as well as their respectiveindemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection,antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims ofcompetitors and distributors.

64


Exhibit 13

Overview of Tobacco-Related Litigation

• Types and Number of Cases: Pending claims related to tobacco products generally fall within the followingcategories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking andhealth cases primarily alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs,including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding,(iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffsseeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement ofprofits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that theuse of the terms “Lights” and “Ultra Lights” constitutes deceptive and unfair trade practices, suits by foreign governmentsseeking to recover damages resulting from the allegedly illegal importation of cigarettes into various jurisdictions, suits byformer asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with thedefense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and variousantitrust suits. Damages claimed in some of the tobacco-related litigation range into the billions of dollars. Plaintiffs’theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases arediscussed below.

The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, insome instances, ALG or PMI, as of December 31, 2004, December 31, 2003 and December 31, 2002, and apage-reference to further discussions of each type of case.

Number of Cases Number of Cases Number of Cases Pending as of Pending as of Pending as of Type of Case

December 31, 2004

December 31, 2003

December 31, 2002

Page References

Individual Smoking and Health Cases(1) 222 423 250 68 Smoking and Health Class Actions and

Aggregated Claims Litigation(2) 7 12 41 68-69 Health Care Cost Recovery Actions 10 13 41 69-70 Lights/Ultra Lights Class Actions 21 21 11 71 Tobacco Price Cases 2 28 39 71 Cigarette Contraband Cases 2 5 5 72 Asbestos Contribution Cases 1 7 8 72

(1) Does not include 2,663 cases brought by flight attendants seeking compensatory damages for personal injuriesallegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they aremembers of an ETS smoking and health class action, which was settled in 1997. The terms of the court-approvedsettlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibitthem from seeking punitive damages.

(2) Includes as one case the aggregated claims of 982 individuals that are proposed to be tried in a single proceeding

in West Virginia.

There are also a number of other tobacco-related actions pending outside the United States against PMI and itsaffiliates and subsidiaries, including an estimated 121 smoking and health cases brought on behalf of individuals(Argentina (47), Australia, Brazil (47), Chile, Colombia, Israel (3), Italy (15), the Philippines, Poland, Scotland, Spain(2) and Venezuela), compared with approximately 99 such cases on December 31, 2003, and 86 such cases onDecember 31, 2002. The increase in cases at December 31, 2004 compared to prior periods is due primarily to casesfiled in Brazil and Italy. As of December 31, 2004, 12 of the cases in Italy are pending in the Italian equivalent of smallclaims court.

In addition, as of December 31, 2004, there were three smoking and health putative class actions pending outside theUnited States (Brazil and Canada (2)) compared with six such cases on December 31, 2003, and eight such cases onDecember 31, 2002. Four health care cost recovery actions are pending in Israel, Canada, France and Spain against PMIor its affiliates, and two Lights/Ultra Lights class actions are pending in Israel.

• Pending and Upcoming Trials: Trial is currently underway in the case brought by the United States government inwhich ALG and PM USA are defendants. For a discussion of this case, see “Health Care Cost Recovery Litigation —Federal Government’s Lawsuit” below. Trial is also currently underway in an individual smoking and health case inCalifornia (Reller v. Philip Morris Incorporated).


Certain cases against PM USA are scheduled for trial through the end of 2005, including a health care cost recoverycase brought by the City of St Louis, Missouri and approximately 50 Missouri hospitals, in which ALG is also a defendant,a case in which cigarette distributors allege that PM USA’s Wholesale Leaders program violates antitrust laws, and a casebrought by cigarette vending machine operators alleging that PM USA’s retail promotional and merchandising programsviolate the Robinson-Patman Act. In addition, an estimated nine individual smoking and health cases are scheduled fortrial through the end of 2005, including two cases scheduled for trial in February 2005 in California and New York. Casesagainst other tobacco companies are also scheduled for trial through the end of 2005. Trial dates are subject to change.

• Recent Trial Results: Since January 1999, verdicts have been returned in 38 smoking and health, Lights/Ultra Lightsand health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and otherdefendants were returned in 23 of the 38 cases. These 23 cases were tried in California (2), Florida (7), Mississippi,Missouri, New Hampshire, New Jersey, New York (3), Ohio (2), Pennsylvania, Rhode Island, Tennessee (2) and WestVirginia. Plaintiffs’ appeals or post-trial motions challenging the verdicts are pending in California, Florida, Missouri, andPennsylvania. A motion for a new trial has been granted in one of the cases in Florida. In addition, in December 2002, acourt dismissed an individual smoking and health case in California at the end of trial.

65


Exhibit 13

After exhausting all appeals, PM USA has paid $3.7 million (the amount of the judgment plus attorneys’ fees andinterest) in an individual smoking and health case in Florida (Eastman) in which the jury found in favor of plaintiffs.

The chart below lists the verdicts and post-trial developments in the remaining 14 pending cases that have gone to trialsince January 1999 in which verdicts were returned in favor of plaintiffs.

Location of Court/Name Date of Plaintiff Type of Case Verdict Post-Trial Developments

October 2004

Florida/Arnitz


$240,000 against PM USA

In January 2005, PM USA’spost-trial motions challenging theverdict were denied. PM USAintends to appeal.

May 2004

Louisiana/Scott

Smoking andHealth ClassAction

Approximately $590 million,against all defendants jointly andseverally, to fund a 10-yearsmoking cessation program.

In June 2004, the court enteredjudgment in the amount of theverdict of $590 million, plusprejudgment interest accruing fromthe date the suit commenced. As ofDecember 31, 2004, the amount ofprejudgment interest wasapproximately $355 million. PMUSA’s share of the verdict andprejudgment interest has not beenallocated. Defendants, includingPM USA, have appealed. See thediscussion of the Scott case underthe heading “Smoking and HealthLitigation — Smoking and HealthClass Actions.”

November 2003

Missouri/Thompson


$2.1 million in compensatorydamages against all defendants,including $837,403 against PMUSA.

In March 2004, the court denieddefendants’ post-trial motionschallenging the verdict. PM USAhas appealed.

March 2003

Illinois/Price

Lights/UltraLightsClass Action

$7.1005 billion in compensatorydamages and $3 billion in punitivedamages against PM USA.

In November 2004, the IllinoisSupreme Court heard argumentson PM USA’s appeal. See thediscussion of the Price case underthe heading “Certain OtherTobacco-Related Litigation —Lights/Ultra Lights Cases.”

October 2002

California/Bullock


$850,000 in compensatorydamages and $28 billion in punitivedamages against PM USA.

In December 2002, the trial courtreduced the punitive damagesaward to $28 million; PM USA andplaintiff have appealed.

June 2002

Florida/French

FlightAttendantETSLitigation


In September 2002, the trial courtreduced the damages award to$500,000. In December 2004, theFlorida Third District Court ofAppeal affirmed the judgmentawarding plaintiff $500,000, anddirected the trial court to holddefendants jointly and severallyliable. Defendants’ motion forrehearing is pending.

June 2002 Florida/Lukacs




In March 2003, the trial courtreduced the damages award to$24.86 million. PM USA’s share ofthe damages award isapproximately $6 million. The courthas not yet entered the judgmenton the jury verdict. If a judgment isentered in this case, PM USAintends to appeal.

March 2002

Oregon/Schwarz


$168,500 in compensatorydamages and $150 million inpunitive damages against PMUSA.

In May 2002, the trial court reducedthe punitive damages award to$100 million; PM USA and plaintiffhave appealed.

June 2001

California/Boeken


$5.5 million in compensatorydamages and $3 billion in punitivedamages against PM USA.

In August 2001, the trial courtreduced the punitive damagesaward to $100 million. InSeptember 2004, the CaliforniaSecond District Court of Appealreduced the punitive damagesaward to $50 million but otherwiseaffirmed the judgment entered inthe case. Plaintiff and PM USAeach sought rehearing, and inOctober 2004, the Court of Appealgranted the parties’ motions forrehearing.

66


Exhibit 13


June 2001

NewYork/EmpireBlue Crossand BlueShield

Health CareCostRecovery

$17.8 million in compensatorydamages against all defendants,including $6.8 million against PMUSA.

In February 2002, the trial courtawarded plaintiffs $38 million inattorneys’ fees. In September 2003,the United States Court of Appealsfor the Second Circuit reversed theportion of the judgment relating tosubrogation, certified questionsrelating to plaintiff’s direct claims ofdeceptive business practices to theNew York Court of Appeals anddeferred its ruling on the appeal ofthe attorneys’ fees award pendingthe ruling on the certified questions.In October 2004, the New YorkCourt of Appeals ruled indefendants’ favor on the certifiedquestions and found that plaintiff’sdirect claims are barred on groundsof remoteness. In December 2004,the Second Circuit issued a reviseddecision, vacating the award ofcompensatory damages andattorneys’ fees, reversing thejudgment and remanding the casewith instructions to the trial court todismiss all of plaintiff’s claims withprejudice.

July 2000

Florida/Engle

Smoking andHealthClass Action

$145 billion in punitive damagesagainst all defendants, including$74 billion against PM USA.

In May 2003, the Florida ThirdDistrict Court of Appeal reversed thejudgment entered by the trial courtand instructed the trial court to orderthe decertification of the class.Plaintiffs’ motion for reconsiderationwas denied in September 2003, andplaintiffs petitioned the FloridaSupreme Court for further review. InMay 2004, the Florida SupremeCourt agreed to review the case,and the Supreme Court heard oralarguments in November 2004. See“Engle Class Action” below.

March 2000

California/Whiteley


$1.72 million in compensatorydamages against PM USA andanother defendant, and $10 millionin punitive damages against each ofPM USA and the other defendant.

In April 2004, the California FirstDistrict Court of Appeal enteredjudgment in favor of defendants onplaintiffs negligent design claims,and reversed and remanded for anew trial on plaintiff’s fraud-relatedclaims.

March 1999 Oregon/Williams IndividualSmoking andHealth

$800,000 in compensatorydamages, $21,500 in medicalexpenses and $79.5 million inpunitive damages against PM USA.

The trial court reduced the punitivedamages award to $32 million, andPM USA and plaintiff appealed. InJune 2002, the Oregon Court ofAppeals reinstated the $79.5 millionpunitive damages award. Followingthe Oregon Supreme Court’s refusal


to hear PM USA’s appeal, PM USArecorded a provision of $32 millionin marketing, administration andresearch costs on the 2002consolidated statement of earningsas its best estimate of the probableloss in this case and petitioned theUnited States Supreme Court forfurther review. In October 2003, theUnited States Supreme Court setaside the Oregon appellate court’sruling, and directed the Oregoncourt to reconsider the case in lightof the 2003 State Farm decision bythe United States Supreme Court,which limited punitive damages. InJune 2004, the Oregon Court ofAppeals reinstated the punitivedamages award. In December 2004,the Oregon Supreme Court grantedPM USA’s petition for review of thecase.

67


Exhibit 13


February 1999

California/Henley

IndividualSmokingand Health

$1.5 million in compensatorydamages and $50 million in punitivedamages against PM USA.

The trial court reduced the punitivedamages award to $25 million andPM USA and plaintiff appealed. InSeptember 2003, a California Courtof Appeal, citing the State Farmdecision, reduced the punitivedamages award to $9 million, butotherwise affirmed the judgment forcompensatory damages, and PMUSA appealed to the CaliforniaSupreme Court. In September 2004,the California Supreme Courtdismissed PM USA’s appeal. InOctober 2004, the California Courtof Appeal issued an order allowingthe execution of the judgment. PMUSA has recorded a provision of$16 million (including interest) inconnection with this case. OnOctober 10, 2004, PM USA filed inthe United States Supreme Court anapplication for a stay pending thefiling of, and ruling upon, PM USA’spetition for certiorari. OnOctober 27, 2004, the SupremeCourt granted the stay, which willremain in effect until the SupremeCourt either denies PM USA’spetition for certiorari or issues itsmandate. In December 2004, PMUSA filed its petition for certiorari.

In addition to the cases discussed above, in October 2003, a three-judge panel of an appellate court in Brazil reverseda lower court’s dismissal of an individual smoking and health case and ordered PMI’s Brazilian affiliate to pay plaintiffapproximately $256,000 and other unspecified damages. PMI’s Brazilian affiliate appealed. In December 2004, thethree-judge panel’s decision was vacated by an en banc panel of the appellate court, which upheld the trial court’sdismissal of the case.

With respect to certain adverse verdicts currently on appeal, excluding amounts relating to the Engle and Price cases,as of December 31, 2004, PM USA has posted various forms of security totaling approximately $360 million, the majorityof which have been collateralized with cash deposits, to obtain stays of judgments pending appeals. The cash depositsare included in other assets on the consolidated balance sheets.

• Engle Class Action: In July 2000, in the second phase of the Engle smoking and health class action in Florida, a juryreturned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including$74 billion against PM USA. Following entry of judgment, PM USA posted a bond in the amount of $100 million andappealed.

In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of theEngle judgment will remain stayed against PM USA and the other participating defendants through the completion of alljudicial review. As a result of the stipulation, PM USA placed $500 million into a separate interest-bearing escrow accountthat, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate ordistribute it consistent with Florida Rules of Civil Procedure. In July 2001, PM USA also placed $1.2 billion into aninterest-bearing escrow account, which will be returned to PM USA should it prevail in its appeal of the case. (The$1.2 billion escrow account is included in the December 31, 2004 and December 31, 2003 consolidated balance sheetsas other assets. Interest income on the $1.2 billion escrow account is paid to PM USA quarterly and is being recorded asearned, in interest and other debt expense, net, in the consolidated statements of earnings.) In connection with thestipulation, PM USA recorded a $500 million pre-tax charge in its consolidated statement of earnings for the quarter


ended March 31, 2001. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trialcourt and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Courtfor further review and, in May 2004, the Florida Supreme Court agreed to review the case. Oral arguments were heard inNovember 2004.

Smoking and Health Litigation

• Overview: Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery,including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach ofexpress and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive tradepractice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Incertain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure toasbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitivedamages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring andsmoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these casesinclude lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes oflimitations and preemption by the Federal Cigarette Labeling and Advertising Act.

• Smoking and Health Class Actions: Since the dismissal in May 1996 of a purported nationwide class action broughton behalf of “addicted” smokers, plaintiffs have filed numerous putative smoking and health class action suits in variousstate and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states(although a few

68


Exhibit 13

cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.

Class certification has been denied or reversed by courts in 56 smoking and health class actions involving PM USA inArkansas, the District of Columbia (2), Florida (the Engle case), Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan,Minnesota, Nevada (29), New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina,Texas and Wisconsin. A class remains certified in the Scott class action discussed below.

In July 2003, following the first phase of the trial in the Scott class action, in which plaintiffs sought creation of funds topay for medical monitoring and smoking cessation programs, a Louisiana jury returned a verdict in favor of defendants,including PM USA, in connection with plaintiffs’ medical monitoring claims, but also found that plaintiffs could benefit fromsmoking cessation assistance. The jury also found that cigarettes as designed are not defective but that the defendantsfailed to disclose all they knew about smoking and diseases and marketed their products to minors. In May 2004, in thesecond phase of the trial, the jury awarded plaintiffs approximately $590 million, against all defendants jointly andseverally, to fund a 10-year smoking cessation program. In June 2004, the court entered judgment, which awardedplaintiffs the approximately $590 million jury award plus prejudgment interest, accruing from the date the suit commenced.As of December 31, 2004, the amount of prejudgment interest was approximately $355 million. PM USA’s share of thejury award and prejudgment interest has not been allocated. Defendants, including PM USA, have appealed. Pursuant toa stipulation of the parties, the trial court entered an order setting the amount of the bond at $50 million for all defendantsin accordance with an article of the Louisiana Code of Civil Procedure, and a Louisiana statute (the “bond cap law”) fixingthe amount of security in civil cases involving a signatory to the MSA (as defined below). Under the terms of thestipulation, plaintiffs reserve the right to contest, at a later date, the sufficiency or amount of the bond on any groundsincluding the applicability or constitutionality of the bond cap law. In September 2004, defendants collectively posted abond in the amount of $50 million.

Health Care Cost Recovery Litigation

• Overview: In health care cost recovery litigation, domestic and foreign governmental entities and non-governmentalplaintiffs seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases,of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages,multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales tominors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotineyields, and payment of attorney and expert witness fees.

The claims asserted include the claim that cigarette manufacturers were “unjustly enriched” by plaintiffs’ payment ofhealth care costs allegedly attributable to smoking, as well as claims of indemnity, negligence, strict liability, breach ofexpress and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation,conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive tradepractices and false advertising, and claims under federal and state anti-racketeering statutes.

Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit,adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participatedin, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutoryauthority to bring suit, and statutes of limitations. In addition, defendants argue that they should be entitled to “set off” anyalleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excisetaxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principlesof subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) canseek recovery of health care costs from a third party solely by “standing in the shoes” of the injured party. Defendantsargue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and shouldbe subject to all defenses available against the injured party.

Although there have been some decisions to the contrary, most judicial decisions have dismissed all or most healthcare cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and six state appellatecourts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of healthcare cost recovery actions. The United States Supreme Court has refused to consider plaintiffs’ appeals from the casesdecided by five circuit courts of appeals.

A number of foreign governmental entities have filed health care cost recovery actions in the United States. Such suitshave been brought in the United States by 13 countries, a Canadian province, 11 Brazilian states and 11 Brazilian cities.Thirty-three of the cases have been dismissed, and three remain pending. In addition to the cases brought in the UnitedStates, health care cost recovery actions have also been brought in Israel, the Marshall Islands (dismissed), Canada,France and Spain, and other entities have stated that they are considering filing such actions. In September 2003, thecase pending in France was dismissed, and plaintiff has appealed. In May 2004, the case in Spain was dismissed, andplaintiff has appealed.


In March 1999, in the first health care cost recovery case to go to trial, an Ohio jury returned a verdict in favor ofdefendants on all counts. In June 2001, a New York jury returned a verdict awarding $6.83 million in compensatorydamages against PM USA and a total of $11 million against four other defendants in a health care cost recovery actionbrought by a Blue Cross and Blue Shield plan, and defendants, including PM USA, appealed. In December 2004, theUnited States Court of Appeals for the Second Circuit reversed the judgment and remanded the case with instructions tothe trial court to dismiss plaintiff’s claims. See the above discussion of the Empire Blue Cross and Blue Shield case underthe heading “Recent Trial Results.” Trial in the health care cost recovery case brought by the City of St. Louis, Missouriand approximately 50 Missouri hospitals, in which PM USA and ALG are defendants, is scheduled for June 2005.

• Settlements of Health Care Cost Recovery Litigation: In November 1998, PM USA and certain other United Statestobacco product manufacturers entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District ofColumbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settleasserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobaccoproduct manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota(together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements require that the domestictobacco industry make substantial annual payments in the following amounts (excluding future annual paymentscontemplated by the agreement with tobacco growers discussed below), subject to adjustments for several factors,including inflation, market share and industry volume: 2005 through 2007, $8.4 billion each year; and thereafter,$9.4 billion each year. In

69


Exhibit 13

addition, the domestic tobacco industry is required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of$500 million.

The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, publicdisclosure of certain industry documents, limitations on challenges to certain tobacco control and under-age use laws,restrictions on lobbying activities and other provisions.

As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states toaddress concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. Tothat end, in 1999, four of the major domestic tobacco product manufacturers, including PM USA, and the grower states,established the National Tobacco Growers Settlement Trust (the “NTGST”), a trust fund to provide aid to tobacco growersand quota-holders. The trust was to be funded by these four manufacturers over 12 years with payments, prior toapplication of various adjustments, scheduled to total $5.15 billion. Remaining industry payments (2005 through 2008,$500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, includinginflation, United States cigarette volume and certain contingent events, and, in general are to be allocated based on eachmanufacturer’s relative market share. Provisions of the NTGST allow for offsets to the extent that payments are made togrowers as part of a legislated end to the federal tobacco quota and price support program.

In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) was signed into law. FETRA providesfor the elimination of the federal tobacco quota and price support program through an industry-funded buy-out of tobaccogrowers and quota holders. The cost of the proposed buy-out is approximately $10 billion and will be paid over 10 yearsby manufacturers and importers of all tobacco products. The cost will be allocated based on the relative market shares ofmanufacturers and importers of all tobacco products. PM USA expects that its quota buy-out payments will offset alreadyscheduled payments to the NTGST. Altria Group, Inc. does not anticipate that the quota buy-out will have a materialadverse impact on its consolidated results in 2005 and beyond.

Following the enactment of FETRA, the NTGST and tobacco growers, alleging that the offset provisions do not applyto payments due in 2004, sued tobacco product manufacturers. In December 2004, a North Carolina court ruled that thetobacco companies, including PM USA, are entitled to receive a refund of amounts paid to the NTGST during the firstthree quarters of 2004 and are not required to make the payments that would otherwise have been due during the fourthquarter of 2004. Plaintiffs have appealed. If the trial court’s ruling is upheld, PM USA would reverse accruals and receivereimbursements totaling $232 million.

The State Settlement Agreements have materially adversely affected the volumes of PM USA, and ALG believes thatthey may also materially adversely affect the results of operations, cash flows or financial position of PM USA and AltriaGroup, Inc. in future periods. The degree of the adverse impact will depend on, among other things, the rate of decline inUnited States cigarette sales in the premium and discount segments, PM USA’s share of the domestic premium anddiscount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA andthe other State Settlement Agreements.

In April 2004, a lawsuit was filed in state court in Los Angeles, California, on behalf of all California residents whopurchased cigarettes in California from April 2000 to the present, alleging that the MSA enabled the defendants, includingPM USA and ALG, to engage in unlawful price fixing and market sharing agreements. The complaint sought damages andalso sought to enjoin defendants from continuing to operate under those provisions of the MSA that allegedly violateCalifornia law. In June, plaintiffs dismissed this case and refiled a substantially similar complaint in federal court in SanFrancisco, California. The new complaint is brought on behalf of the same purported class but differs in that it coverspurchases from June 2000 to the present, names the Attorney General of California as a defendant, and does not nameALG as a defendant. PM USA’s motion to dismiss the case is pending.

There is a suit pending against New York state officials, in which importers of cigarettes allege that the MSA andcertain New York statutes enacted in connection with the MSA violate federal antitrust law. Neither ALG nor PM USA is adefendant in this case. In September 2004, the court denied plaintiffs’ motion to preliminarily enjoin the MSA and certainrelated New York statutes, but the court issued a preliminary injunction against an amendment repealing the “allocableshare” provision of the New York Escrow Statute. Plaintiffs have appealed the trial court’s September 2004 order to theextent that it denied their request for a preliminary injunction. In addition, a similar putative class action has been broughtin the Commonwealth of Kentucky challenging the repeal of certain implementing legislation that had been enacted inKentucky subsequent to the MSA. Neither ALG nor PM USA is a defendant in the case in Kentucky.

• Federal Government’s Lawsuit: In 1999, the United States government filed a lawsuit in the United States DistrictCourt for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including ALG,asserting claims under three federal statutes, the Medical Care Recovery Act (“MCRA”), the Medicare Secondary Payer(“MSP”) provisions of the Social Security Act and the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Thelawsuit seeks to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by


defendants’ fraudulent and tortious conduct and paid for by the government under various federal health care programs,including Medicare, military and veterans’ health benefits programs, and the Federal Employees Health Benefits Program.The complaint alleges that such costs total more than $20 billion annually. It also seeks what it alleges to be equitable anddeclaratory relief, including disgorgement of profits which arose from defendants’ allegedly tortious conduct, an injunctionprohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government’sfuture costs of providing health care resulting from defendants’ alleged past tortious and wrongful conduct. InSeptember 2000, the trial court dismissed the government’s MCRA and MSP claims, but permitted discovery to proceedon the government’s claims for relief under RICO. The government alleges that disgorgement by defendants ofapproximately $280 billion is an appropriate remedy. In May 2004, the court issued an order denying defendants’ motionfor partial summary judgment limiting the disgorgement remedy. In June 2004, the trial court certified that order forimmediate appeal, and in July 2004, the United States Court of Appeals for the District of Columbia agreed to hear theappeal on an expedited basis. Oral arguments were heard in November 2004. In July 2004, the trial court found that PMUSA had inadequately complied with a document preservation order and ordered that persons who failed to comply withPM USA’s document retention program will not be permitted to testify at trial and PM USA and ALG jointly pay $2,750,000to the court by September 1, 2004. This amount was paid to the court in September 2004. PM USA and ALG have soughtrehearing of the judge’s ruling. Trial of the case is currently underway.

70


Exhibit 13

Certain Other Tobacco-Related Litigation

• Lights/Ultra Lights Cases: These class actions have been brought against PM USA and, in certain instances, ALGand PMI or its subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes, includingMarlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Plaintiffsin these class actions allege, among other things, that the use of the terms “Lights” and/or “Ultra Lights” constitutesdeceptive and unfair trade practices, and seek injunctive and equitable relief, including restitution and, in certain cases,punitive damages. Cases are pending in Arkansas (2), Delaware, Florida, Georgia, Illinois (2), Louisiana, Massachusetts,Minnesota, Missouri, New Hampshire, New Jersey, New York, Ohio (2), Oregon, Tennessee, Washington, and WestVirginia (2). In addition, there are two cases pending in Israel, and other entities have stated that they are consideringfiling such actions. To date, a trial court in Arizona has refused to certify a class, and an appellate court in Florida hasoverturned class certification by a trial court. Plaintiffs in the Florida case have petitioned the Florida Supreme Court forfurther review, and the Supreme Court has stayed further proceedings pending its decision in the Engle case discussedabove. Trial courts have certified classes against PM USA in the Price case in Illinois and in Massachusetts (Aspinall),Minnesota, Missouri and Ohio (2). PM USA has appealed or otherwise challenged these class certification orders. InAugust 2004, Massachusetts’ highest court affirmed the class certification order in the Aspinall case. In September 2004,an appellate court affirmed the class certification orders in the cases in Ohio, and PM USA is seeking review by the OhioSupreme Court. In September 2004, plaintiff in a case in Wisconsin voluntarily dismissed his case without prejudice. Trialof the case pending in New York is scheduled for November 2005.

With respect to the Price case, trial commenced in January 2003, and in March 2003, the judge found in favor of theplaintiff class and awarded approximately $7.1 billion in compensatory damages and $3 billion in punitive damagesagainst PM USA. In April 2003, the judge reduced the amount of the appeal bond that PM USA must provide and orderedPM USA to place a pre-existing 7.0%, $6 billion long-term note from ALG to PM USA in an escrow account with an Illinoisfinancial institution. (Since this note is the result of an intercompany financing arrangement, it does not appear on theconsolidated balance sheets of Altria Group, Inc.) The judge’s order also requires PM USA to make cash deposits with theclerk of the Madison County Circuit Court in the following amounts: beginning October 1, 2003, an amount equal to theinterest earned by PM USA on the ALG note ($210 million every six months), an additional $800 million in four equalquarterly installments between September 2003 and June 2004 and the payments of principal of the note, which are duein April 2008, 2009 and 2010. Through December 31, 2004, PM USA paid $1.4 billion of the cash payments due under thejudge’s order. (Cash payments into the account are included in other assets on Altria Group, Inc.’s consolidated balancesheets at December 31, 2004 and 2003.) If PM USA prevails on appeal, the escrowed note and all cash deposited withthe court will be returned to PM USA, with accrued interest less administrative fees payable to the court. Plaintiffsappealed the judge’s order reducing the bond. In July 2003, the Illinois Fifth District Court of Appeals ruled that the trialcourt had exceeded its authority in reducing the bond. In September 2003, the Illinois Supreme Court upheld the reducedbond set by the trial court and announced it would hear PM USA’s appeal on the merits without the need for intermediateappellate court review. PM USA believes that the Price case should not have been certified as a class action and that thejudgment should ultimately be set aside on any of a number of legal and factual grounds that it is pursuing on appeal. Oralarguments on PM USA’s appeal were heard in November 2004.

• Tobacco Price Cases: As of December 31, 2004, two cases were pending in Kansas and New Mexico in whichplaintiffs allege that defendants, including PM USA, conspired to fix cigarette prices in violation of antitrust laws. ALG andPMI are defendants in the case in Kansas. Plaintiffs’ motions for class certification have been granted in both cases;however, the New Mexico Court of Appeals has agreed to hear defendants’ appeal of the class certification decision.

• Wholesale Leaders Cases: In June 2003, certain wholesale distributors of cigarettes filed suit against PM USAseeking to enjoin the PM USA “2003 Wholesale Leaders” (“WL”) program that became available to wholesalers inJune 2003. The complaint alleges that the WL program constitutes unlawful price discrimination and is an attempt tomonopolize. In addition to an injunction, plaintiffs seek unspecified monetary damages, attorneys’ fees, costs and interest.The states of Tennessee and Mississippi intervened as plaintiffs in this litigation. In January 2004, Tennessee filed amotion to dismiss its complaint, and the complaint was dismissed without prejudice in March 2004. In August 2003, thetrial court issued a preliminary injunction, subject to plaintiffs’ posting a bond in the amount of $1 million, enjoining PMUSA from implementing certain discount terms with respect to the sixteen wholesale distributor plaintiffs, and PM USAappealed. In September 2003, the United States Court of Appeals for the Sixth Circuit granted PM USA’s motion to staythe injunction pending PM USA’s expedited appeal. Trial is currently scheduled for July 2005. In December 2003, atobacco manufacturer filed a similar lawsuit against PM USA in Michigan seeking unspecified monetary damages in whichit alleges that the WL program constitutes unlawful price discrimination and is an attempt to monopolize. Plaintiffvoluntarily dismissed its claims alleging price discrimination, and in July 2004, the court granted defendants’ motion todismiss the attempt-to-monopolize claim. Plaintiff has appealed.

• Consolidated Putative Punitive Damages Cases: In September 2000, a putative class action was filed in the federaldistrict court in the Eastern District of New York that purported to consolidate punitive damages claims in tentobacco-related actions then pending in federal district courts in New York and Pennsylvania. In July 2002, plaintiffs filed


an amended complaint and a motion seeking certification of a punitive damages class of persons residing in the UnitedStates who smoke or smoked defendants’ cigarettes, and who have been diagnosed by a physician with an enumerateddisease from April 1993 through the date notice of the certification of this class is disseminated. The following persons areexcluded from the class: (1) those who have obtained judgments or settlements against any defendants; (2) those againstwhom any defendant has obtained judgment; (3) persons who are part of the Engle class; (4) persons who should havereasonably realized that they had an enumerated disease prior to April 9, 1993; and (5) those whose diagnosis orreasonable basis for knowledge predates their use of tobacco. In September 2002, the court granted plaintiffs’ motion forclass certification. Defendants petitioned the United States Court of Appeals for the Second Circuit for review of the trialcourt’s ruling, and the Second Circuit agreed to hear defendants’ petition. The parties are awaiting the Second Circuit’sdecision. Trial of the case has been stayed pending resolution of defendants’ petition.

• Cases Under the California Business and Professions Code: In June 1997 and July 1998, two suits were filed inCalifornia state court alleging that domestic cigarette manufacturers, including PM USA and others, have violatedCalifornia Business and Professions Code Sections 17200 and 17500

71


Exhibit 13

regarding unfair, unlawful and fraudulent business practices. Class certification was granted as to plaintiffs’ claims thatclass members are entitled to reimbursement of the costs of cigarettes purchased during the class periods and injunctiverelief. In September 2002, the court granted defendants’ motion for summary judgment as to all claims in one of thecases, and plaintiffs appealed. In October 2004, the California Fourth District Court of Appeal affirmed the trial court’sruling, and also denied plaintiffs’ motion for rehearing. Plaintiffs’ petition to the California Supreme Court for further reviewis pending. In September 2004, the trial court in the other case granted defendants’ motion for summary judgment as toplaintiffs’ claims attacking defendants’ cigarette advertising and promotion and denied defendants’ motion for summaryjudgment on plaintiffs’ claims based on allegedly false affirmative statements. Plaintiffs’ motion for rehearing is pending. InNovember 2004, defendants filed a motion to decertify the class based on a recent change in California law.

In May 2004, a lawsuit was filed in California state court on behalf of a purported class of all California residents whopurchased the Merit brand of cigarettes since July 2000 to the present alleging that defendants, including PM USA andALG, violated California’s Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful andfraudulent business practices, including false and misleading advertising. The complaint also alleges violations ofCalifornia’s Consumer Legal Remedies Act. Plaintiffs seek injunctive relief, disgorgement, restitution, and attorneys’ fees.In July 2004, plaintiffs voluntarily dismissed ALG from the case. PM USA’s motion to dismiss the case is pending.

• Asbestos Contribution Cases: These cases, which have been brought on behalf of former asbestos manufacturersand affiliated entities against PM USA and other cigarette manufacturers, seek, among other things, contribution orreimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedlycaused in whole or in part by cigarette smoking. Currently, one case remains pending.

• Cigarette Contraband Cases: In May 2000 and August 2001, various departments of Colombia and the EuropeanCommunity and ten member states filed suits in the United States against ALG and certain of its subsidiaries, includingPM USA and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributorscigarettes that would be illegally imported into various jurisdictions. The claims asserted in these cases includenegligence, negligent misrepresentation, fraud, unjust enrichment, violations of RICO and its state-law equivalents andconspiracy. Plaintiffs in these cases seek actual damages, treble damages and unspecified injunctive relief. InFebruary 2002, the trial court granted defendants’ motions to dismiss the actions. Plaintiffs in each case appealed. InJanuary 2004, the United States Court of Appeals for the Second Circuit affirmed the dismissals of the cases. InApril 2004, plaintiffs petitioned the United States Supreme Court for further review. The European Community and the 10member states moved to dismiss their petition in July 2004 following the agreement entered into among PMI, theEuropean Commission and 10 member states of the EU. The terms of this cooperation agreement provide for broadcooperation with European law enforcement agencies on anti-contraband and anti-counterfeit efforts and resolve alldisputes between the parties on these issues. It is possible that future litigation related to cigarette contraband issues maybe brought.

• Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vendingmachine operators, allege that PM USA has violated the Robinson-Patman Act in connection with its promotional andmerchandising programs available to retail stores and not available to cigarette vending machine operators. The initialcomplaint was amended to bring the total number of plaintiffs to 211 but, by stipulated orders, all claims were stayed,except those of ten plaintiffs that proceeded to pre-trial discovery. Plaintiffs request actual damages, treble damages,injunctive relief, attorneys’ fees and costs, and other unspecified relief. In June 1999, the court denied plaintiffs’ motion fora preliminary injunction. Plaintiffs have withdrawn their request for class action status. In August 2001, the court grantedPM USA’s motion for summary judgment and dismissed, with prejudice, the claims of the ten plaintiffs. In October 2001,the court certified its decision for appeal to the United States Court of Appeals for the Sixth Circuit following the stipulationof all plaintiffs that the district court’s dismissal would, if affirmed, be binding on all plaintiffs. In January 2004, the SixthCircuit reversed the lower court’s grant of summary judgment with respect to plaintiffs’ claim that PM USA violatedRobinson-Patman Act provisions regarding promotional services and with respect to the discriminatory pricing claim ofplaintiffs who bought cigarettes directly from PM USA. In October 2004, the United States Supreme Court denied PMUSA’s petition for further review. Trial is scheduled for July 2005.

Certain Other Actions

• Italian Tax Matters: In recent years, approximately two hundred tax assessments alleging nonpayment of taxes inItaly were served upon certain affiliates of PMI. All of these assessments were resolved in 2003 and the second quarter of2004, with the exception of certain assessments which were duplicative of other assessments. Legal proceedingscontinue in order to resolve these duplicative assessments.

• Italian Antitrust Case: During 2001, the competition authority in Italy initiated an investigation into the pricing activitiesby participants in that cigarette market. In March 2003, the authority issued its findings, and imposed fines totaling50 million euro on certain affiliates of PMI. PMI’s affiliates appealed to the administrative court, which rejected the appealin July 2003. PMI believes that its affiliates have numerous grounds for appeal, and in February 2004, its affiliates


appealed to the supreme administrative court. However, under Italian law, if fines are not paid within certain specified timeperiods, interest and eventually penalties will be applied to the fines. Accordingly, in December 2003, pending finalresolution of the case, PMI’s affiliates paid 51 million euro representing the fines and any applicable interest to the date ofpayment. The 51 million euro will be returned to PMI’s affiliates if they prevail on appeal. Accordingly, the payment hasbeen included in other assets on Altria Group, Inc.’s consolidated balance sheets.

It is not possible to predict the outcome of the litigation pending against ALG and its subsidiaries. Litigation is subject tomany uncertainties. As discussed above under “Recent Trial Results,” unfavorable verdicts awarding substantial damagesagainst PM USA have been returned in 15 cases since 1999. The amount of the judgment has been paid in one of thesecases and the remaining 14 cases are in various post-trial stages. It is possible that there could be further adversedevelopments in these cases and that additional cases could be decided unfavorably. In the event of an adverse trialresult in certain pending litigation, the defendant may not be able to obtain a required bond or obtain relief from bondingrequirements in order to prevent a plaintiff from seeking to collect a judgment while an adverse verdict is being appealed.An unfavorable outcome or settlement of pending tobacco-related litigation

72


Exhibit 13

could encourage the commencement of additional litigation. There have also been a number of adverse legislative,regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have receivedwidespread media attention. These developments may negatively affect the perception of judges and jurors with respectto the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement ofadditional similar litigation.

ALG and its subsidiaries record provisions in the consolidated financial statements for pending litigation when theydetermine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except asdiscussed elsewhere in this Note 19. Contingencies: (i) management has not concluded that it is probable that a loss hasbeen incurred in any of the pending tobacco-related litigation; (ii) management is unable to make a meaningful estimate ofthe amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation; and(iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorableoutcomes, if any.

The present legislative and litigation environment is substantially uncertain, and it is possible that the business andvolume of ALG’s subsidiaries, as well as Altria Group, Inc.’s consolidated results of operations, cash flows or financialposition could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by theenactment of federal or state tobacco legislation. ALG and each of its subsidiaries named as a defendant believe, andeach has been so advised by counsel handling the respective cases, that it has a number of valid defenses to thelitigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and willcontinue to be, vigorously defended. However, ALG and its subsidiaries may enter into settlement discussions inparticular cases if they believe it is in the best interests of ALG’s stockholders to do so.

Third-Party Guarantees

At December 31, 2004, Altria Group, Inc.’s third-party guarantees, which are primarily related to excise taxes, andacquisition and divestiture activities, approximated $468 million, of which $305 million have no specified expiration dates.The remainder expire through 2023, with $134 million expiring during 2005. Altria Group, Inc. is required to perform underthese guarantees in the event that a third party fails to make contractual payments or achieve performance measures.Altria Group, Inc. has a liability of $44 million on its consolidated balance sheet at December 31, 2004, relating to theseguarantees. In the ordinary course of business, certain subsidiaries of ALG have agreed to indemnify a limited number ofthird parties in the event of future litigation.

73


Exhibit 13

Note 20.

Quarterly Financial Data (Unaudited):

2004 Quarters


1st

2nd

3rd

4th

Net revenues $ 21,721 $ 22,894 $ 22,615 $ 22,380

Gross profit $ 7,392 $ 7,761 $ 7,517 $ 7,334

Earnings from continuing operations $ 2,185 $ 2,608 $ 2,637 $ 1,990 Earnings (loss) from discontinued operations 9 19 11 (43)

Net earnings $ 2,194 $ 2,627 $ 2,648 $ 1,947

Per share data: Basic EPS:

Continuing operations $ 1.07 $ 1.27 $ 1.29 $ 0.97 Discontinued operations 0.01 (0.02)

Net earnings $ 1.07 $ 1.28 $ 1.29 $ 0.95

Diluted EPS: Continuing operations $ 1.06 $ 1.26 $ 1.28 $ 0.96 Discontinued operations 0.01 0.01 0.01 (0.02)

Net earnings $ 1.07 $ 1.27 $ 1.29 $ 0.94

Dividends declared $ 0.68 $ 0.68 $ 0.73 $ 0.73

Market price — high $ 58.96 $ 57.20 $ 50.30 $ 61.88 — low $ 52.49 $ 44.75 $ 44.50 $ 45.88

2003 Quarters


1st

2nd

3rd

4th

Net revenues $ 19,247 $ 20,696 $ 20,809 $ 20,568

Gross profit $ 6,867 $ 7,433 $ 7,349 $ 6,970

Earnings from continuing operations $ 2,166 $ 2,410 $ 2,468 $ 2,077 Earnings from discontinued operations 20 27 22 14

Net earnings $ 2,186 $ 2,437 $ 2,490 $ 2,091

Per share data: Basic EPS:

Continuing operations $ 1.07 $ 1.19 $ 1.22 $ 1.02 Discontinued operations 0.01 0.01 0.01 0.01

Net earnings $ 1.08 $ 1.20 $ 1.23 $ 1.03

Diluted EPS: Continuing operations $ 1.06 $ 1.19 $ 1.21 $ 1.02 Discontinued operations 0.01 0.01 0.01


Net earnings $ 1.07 $ 1.20 $ 1.22 $ 1.02

Dividends declared $ 0.64 $ 0.64 $ 0.68 $ 0.68

Market price — high $ 42.09 $ 46.20 $ 47.07 $ 55.03 — low $ 27.70 $ 27.75 $ 38.72 $ 43.85

Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of thequarterly EPS amounts may not agree to the total for the year.

74


Exhibit 13

During 2004 and 2003, Altria Group, Inc. recorded the following pre-tax charges or (gains) in earnings from continuingoperations:

2004 Quarters

(in millions)

1st

2nd

3rd

4th

Domestic tobacco headquarters relocation charges $ 10 $ 10 $ 5 $ 6 International tobacco E.C. agreement 250 Provision for airline industry exposure 140 Losses (gains) on sales of businesses 8 (5)Asset impairment and exit costs 308 160 62 188

$ 318 $ 420 $ 75 $ 329

2003 Quarters

(in millions)

1st

2nd

3rd

4th

Domestic tobacco legal settlement $ 182 $ 20 Domestic tobacco headquarters relocation charges 9 $ 27 33 Gains on sales of businesses (23) (8)Integration costs (13)Asset impairment and exit costs 6 80

$ — $ 191 $ 10 $ 112

The principal stock exchange, on which Altria Group, Inc.’s common stock (par value $0.33 1/3 per share) is listed, isthe New York Stock Exchange. At January 31, 2005, there were approximately 109,400 holders of record of Altria Group,Inc.’s common stock.

75


Exhibit 13

Report of Independent Registered Public Accounting Firm

To the Board of Directors andStockholders of Altria Group, Inc.:

We have completed an integrated audit of Altria Group, Inc.’s 2004 consolidated financial statements and of its internalcontrol over financial reporting as of December 31, 2004, and audits of its 2003 and 2002 consolidated financialstatements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Ouropinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings,stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Altria Group, Inc. and itssubsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements are the responsibility of Altria Group, Inc.’s management. Our responsibilityis to express an opinion on these financial statements based on our audits. We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the Report of Management on Internal Control Over FinancialReporting dated February 2, 2005, that Altria Group, Inc. maintained effective internal control over financial reporting as ofDecember 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (“COSO”), is fairly stated, in all material respects, based on thosecriteria. Furthermore, in our opinion, Altria Group, Inc. maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Frameworkissued by the COSO. Altria Group, Inc.’s management is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibilityis to express opinions on management’s assessment and on the effectiveness of Altria Group, Inc.’s internal control overfinancial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordancewith the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reportingwas maintained in all material respects. An audit of internal control over financial reporting includes obtaining anunderstanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluatingthe design and operating effectiveness of internal control, and performing such other procedures as we considernecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and (iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate.

PricewaterhouseCoopers LLP


New York, New YorkFebruary 2, 2005

76


Exhibit 13

Report of Management on Internal Control Over Financial Reporting

Management of Altria Group, Inc. is responsible for establishing and maintaining adequate internal control over financialreporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Altria Group, Inc.’sinternal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America. Internal control over financial reporting includes thosewritten policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of Altria Group, Inc.;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial

statements in accordance with accounting principles generally accepted in the United States of America; • provide reasonable assurance that receipts and expenditures of Altria Group, Inc. are being made only in accordance

with authorization of management and directors of Altria Group, Inc.; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition

of assets that could have a material effect on the consolidated financial statements.

Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices andactions taken to correct deficiencies as identified.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate.

Management assessed the effectiveness of Altria Group, Inc.’s internal control over financial reporting as ofDecember 31, 2004. Management based this assessment on criteria for effective internal control over financial reportingdescribed in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of theTreadway Commission. Management’s assessment included an evaluation of the design of Altria Group, Inc.’s internalcontrol over financial reporting and testing of the operational effectiveness of its internal control over financial reporting.Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on this assessment, management determined that, as of December 31, 2004, Altria Group, Inc. maintainedeffective internal control over financial reporting.

PricewaterhouseCoopers LLP, independent registered public accounting firm, who audited and reported on theconsolidated financial statements of Altria Group, Inc. included in this report, has issued an attestation report onmanagement’s assessment of internal control over financial reporting.

February 2, 2005

77


Exhibit 21

ALTRIA GROUP, INC. SUBSIDIARIES

Certain active subsidiaries of the Company and their subsidiaries as of December 31, 2004, are listed below. The names of certainsubsidiaries, which considered in the aggregate would not constitute a significant subsidiary, have been omitted.

State or Country of

Name Organization152999 Canada Inc. Canada3072440 Nova Scotia Company CanadaAB Kraft Foods Lietuva LithuaniaAbal Hermanos S.A. UruguayAberdare Developments Ltd. British Virgin IslandsAberdare Two Developments Ltd. British Virgin IslandsAGF Pack, Inc. JapanAGF SP, Inc. JapanAgrotab Empreendimentos Agro-Industriais, S.A. PortugalAirco IHC, Inc. DelawareAjinomoto General Foods, Inc. JapanAlimentos Especiales, Sociedad Anonima GuatemalaAltria Corporate Services International, Inc. DelawareAltria Corporate Services, Inc. New YorkAltria Finance (Cayman Islands) Ltd. Cayman IslandsAltria Finance (Europe) AG SwitzerlandAltria Finance Europe B.V. NetherlandsAltria Insurance (Ireland) Limited IrelandAltria ITSC Europe, sarl SwitzerlandAltria Reinsurance (Ireland) Limited IrelandBalance Bar Company DelawareBeijing Nabisco Food Company Ltd. ChinaBoca Foods Company DelawareC.A. Tabacalera Nacional VenezuelaCafe Grand ‘Mere S.A.S. FranceCallard & Bowser-Suchard, Inc. DelawareCapri Sun, Inc. DelawareCarlton Lebensmittelvertriebs GmbH GermanyCarnes y Conservas Espanolas, S.A. SpainCharles Stewart & Company (Kirkcaldy) Limited United KingdomChrysalis Technologies Incorporated VirginiaChurny Company, Inc. DelawareClosed Joint Stock Company Kraft Foods Rus RussiaClosed Joint Stock Company Kraft Foods Ukraine UkraineCompania Venezolana de Conservas C.A. VenezuelaConsiber, S.A. SpainCorporativo Kraft, S. de R.L. de C.V. MexicoCote d’Or Italia S.r.l. ItalyDart Resorts Inc. DelawareDuvanska Industrija Nis (DIN) SerbiaEl Gallito Industrial, S.A. Costa RicaEstrella A/S DenmarkFabrica de Cigarrillos El Progreso S.A. Ecuador


Exhibit 21

State or Country of

Name OrganizationFamily Nutrition Company S.S.A. EgyptFattorie Osella S.p.A. ItalyFleischmann Nabisco Uruguay S.A. UruguayFranklin Baker Company of the Philippines PhilippinesFreezer Queen Foods (Canada) Limited CanadaFTR Holding S.A. SwitzerlandGellatas United Biscuits, S.A. SpainGeneral Foods Credit Corporation DelawareGeneral Foods Credit Investors No. 1 Corporation DelawareGeneral Foods Credit Investors No. 2 Corporation DelawareGeneral Foods Foreign Sales Corporation U.S. Virgin IslandsGodfrey Phillips (Malaysia) Sdn. Bhd. MalaysiaGrant Holdings, Inc. PennsylvaniaGrant Transit Co. DelawareHAG-Coffex SNC FranceHervin Holdings, Inc. DelawareHNB Investment Corp. DelawareIKM S. de R.L. de C.V. MexicoIndustrias Del Tabaco, Alimentos Y Bebidas S.A. (Itabsa) EcuadorInternational Tobacco Marketing Ltda ChileInternational Trademarks Incorporated DelawareIntertaba S.p.A. ItalyIoniki Trading S.A. GreeceITSC Asia Pacific Pty Ltd. AustraliaJSC Philip Morris Ukraine UkraineKFI-USLLC I DelawareKFI-USLLC IX DelawareKFI-USLLC V DelawareKFI-USLLC VII DelawareKFI-USLLC XI DelawareKJS India Private Limited IndiaKraft Beverage (Tianjin) Co. Ltd. ChinaKraft Canada Inc. CanadaKraft Food Ingredients Corp. DelawareKraft Foods (Australia) Limited AustraliaKraft Foods (China) Company Limited ChinaKraft Foods (New Zealand) Limited New ZealandKraft Foods (Philippines), Inc. PhilippinesKraft Foods (Puerto Rico), Inc. Puerto RicoKraft Foods (Singapore) Pte Ltd. SingaporeKraft Foods (Thailand) Limited ThailandKraft Foods (Trinidad) Limited TrinidadKraft Foods Argentina S.A. ArgentinaKraft Foods AS NorwayKraft Foods Asia Pacific Holding LLC DelawareKraft Foods Aviation, LLC WisconsinKraft Foods Belgium S.A. BelgiumKraft Foods Brasil S.A. BrazilKraft Foods Bulgaria AD BulgariaKraft Foods Caribbean Sales Corp. DelawareKraft Foods Central & Eastern Europe Service BV NetherlandsKraft Foods Chile S.A. ChileKraft Foods Colombia Ltda Colombia

2


Exhibit 21

State or Country of

Name OrganizationKraft Foods Colombia S.A. ColombiaKraft Foods Costa Rica, S.A. Costa RicaKraft Foods CR s.r.o. Czech RepublicKraft Foods Danmark ApS DenmarkKraft Foods Danmark Holding A/S DenmarkKraft Foods de Mexico, S. de R.L. de C.V. MexicoKraft Foods Deutschland GmbH GermanyKraft Foods Deutschland Holding GmbH GermanyKraft Foods Dominicana, S.A. Dominican RepublicKraft Foods Ecuador S.A. EcuadorKraft Foods Egypt LLC EgyptKraft Foods El Salvador S.A. de C.V. El SalvadorKraft Foods Espana, S.A. SpainKraft Foods European Services Center s.r.o. SlovakiaKraft Foods France FranceKraft Foods Global, Inc. DelawareKraft Foods Hellas S.A. GreeceKraft Foods Holding (Europa) GmbH SwitzerlandKraft Foods Holdings, Inc. DelawareKraft Foods Holland Holding B.V. NetherlandsKraft Foods Honduras, S.A. HondurasKraft Foods Hors Domicile FranceKraft Foods Hungaria Kft. HungaryKraft Foods Inc. VirginiaKraft Foods International (EU) Ltd. United KingdomKraft Foods International CEEMA AustriaKraft Foods International, Inc. DelawareKraft Foods Ireland Limited IrelandKraft Foods Italia S.p.A. ItalyKraft Foods Jamaica Limited JamaicaKraft Foods Jaya (Malaysia) Sdn Bhd MalaysiaKraft Foods Latin America Holding LLC DelawareKraft Foods Laverune SNC FranceKraft Foods Limited AustraliaKraft Foods Limited (Asia) Hong KongKraft Foods Manufacturing Corporation DelawareKraft Foods Manufacturing Midwest, Inc. DelawareKraft Foods Manufacturing West, Inc. DelawareKraft Foods Maroc SA MoroccoKraft Foods Mexico Holding I B.V. NetherlandsKraft Foods Mexico Holding II B.V. NetherlandsKraft Foods Middle East & Africa Ltd. United KingdomKraft Foods Namur S.A. BelgiumKraft Foods Nederland B.V. NetherlandsKraft Foods Nicaragua S.A. NicaraguaKraft Foods Norge AS NorwayKraft Foods Oesterreich GmbH AustriaKraft Foods Panama, S.A. PanamaKraft Foods Peru S.A. PeruKraft Foods Polska Sp.z o.o. PolandKraft Foods Portugal Produtos Alimentares Lda. Portugal

3


Exhibit 21

State or Country of

Name OrganizationKraft Foods Puerto Rico Holding LLC DelawareKraft Foods Romania SA RomaniaKraft Foods Schweiz AG SwitzerlandKraft Foods Schweiz Holding AG SwitzerlandKraft Foods Slovakia, a.s. Slovak RepublicKraft Foods South Africa Pty Ltd. South AfricaKraft Foods Strasbourg SNC FranceKraft Foods Sverige AB SwedenKraft Foods Sverige Holding AB SwedenKraft Foods Taiwan Holdings LLC DelawareKraft Foods Taiwan Limited TaiwanKraft Foods UK Ltd. United KingdomKraft Foods Venezuela, C.A. VenezuelaKraft Foods Zagreb d.o.o. CroatiaKraft Gida Sanayi Ve Ticaret Anonim Sirketi TurkeyKraft Guangtong Food Company, Limited ChinaKraft Jacobs Suchard (Australia) Pty Ltd. AustraliaKraft Japan, K.K. JapanKraft Pizza Company DelawareKraft Reinsurance (Ireland) Limited IrelandKraft Tianmei Food (Tianjin) Co., Ltd. ChinaKrema Limited IrelandKTL S. de R.L. de C.V. MexicoLanders y Cia. S.A. ColombiaLanes Biscuits Pty Ltd AustraliaLanes Food (Australia) Pty Ltd AustraliaLe Rhône Investment Corp. DelawareLimited Liability Company Kraft Foods RussiaLLC (000) Kraft Foods Sales and Marketing RussiaLowney Inc. CanadaManagement Subsidiary Holdings Inc. VirginiaMassalin Particulares S.A. ArgentinaMendiola y Compania, S.A. Costa RicaMichigan Investment Corp. DelawareMirabell Salzburger Confiserie-Und Bisquit GmbH AustriaNabisco Arabia Co. Ltd. Saudi ArabiaNabisco de Nicaragua, S.A. NicaraguaNabisco Euro Holdings Ltd. Cayman IslandsNabisco Food (Suzhou) Co. Ltd. ChinaNabisco Group Ltd. DelawareNabisco Inversiones S.R.L. ArgentinaNabisco Investments, Inc. DelawareNabisco Royal de Honduras, S.A. HondurasNabisco Taiwan Corporation TaiwanNabisco, Inc. Foreign Sales Corporation U.S. Virgin IslandsNISA Holdings LLC DelawareOAO Philip Morris Kuban RussiaOMFC Service Company DelawareOne Channel Corp. DelawareOrecla Realty, Inc. PhilippinesOy Kraft Foods Finland Ab FinlandP.T. Kraft Ultrajaya Indonesia IndonesiaPapastratos Cigarette Manufacturing Company S.A. Greece

4


Exhibit 21

State or Country of

Name OrganizationPapastratos International BV NetherlandsPark (U.K.) Limited United KingdomPark 1989 B.V. NetherlandsPark International S.A. SwitzerlandPhenix Leasing Corporation DelawarePhenix Management Corporation DelawarePhilip Morris (Australia) Limited AustraliaPhilip Morris (China) Investments Co., Ltd. ChinaPhilip Morris (China) Management Co. Ltd. ChinaPhilip Morris (Malaysia) Sdn. Bhd. MalaysiaPhilip Morris (Portugal) Empresa Comercial de Tabacos, Limitada PortugalPhilip Morris (Thailand) Ltd DelawarePhilip Morris AB SwedenPhilip Morris ApS DenmarkPhilip Morris Asia Limited Hong KongPhilip Morris Belgium S.A. BelgiumPhilip Morris Belgrade D.o.o. SerbiaPhilip Morris Brasil Industria e Comercio Ltda. BrazilPhilip Morris Brasil S.A. DelawarePhilip Morris Capital Corporation DelawarePhilip Morris China Holdings Sarl SwitzerlandPhilip Morris Colombia S.A. ColombiaPhilip Morris Cote d’Ivoire S.A.R.L. Ivory CoastPhilip Morris CR a.s. Czech RepublicPhilip Morris Duty Free Inc. DelawarePhilip Morris Eesti Osauhing EstoniaPhilip Morris Exports Sarl SwitzerlandPhilip Morris Finland OY FinlandPhilip Morris France S.A.S. FrancePhilip Morris GmbH GermanyPhilip Morris Holland B.V. NetherlandsPhilip Morris Hungary Cigarette Trading Ltd. HungaryPhilip Morris India Private Ltd. IndiaPhilip Morris Information Services Limited AustraliaPhilip Morris International Finance Corporation DelawarePhilip Morris International Inc. DelawarePhilip Morris International Management SA SwitzerlandPhilip Morris International Services Sarl SwitzerlandPhilip Morris Investments Sarl SwitzerlandPhilip Morris Italia S.p.A. ItalyPhilip Morris Japan Kabushiki Kaisha JapanPhilip Morris Kazakhstan LLP KazakhstanPhilip Morris Korea Inc. KoreaPhilip Morris Kuwait Company W.L.L. KuwaitPhilip Morris LA Holding Inc. DelawarePhilip Morris Latin America & Canada Inc. DelawarePhilip Morris Latin America Sales Corp. DelawarePhilip Morris Limited United KingdomPhilip Morris Ljubljana d.o.o. SloveniaPhilip Morris Management Services B.V. NetherlandsPhilip Morris Management Services SA SwitzerlandPhilip Morris Mexico, S.A. de C.V. MexicoPhilip Morris Nicaragua S.A. NicaraguaPhilip Morris Overseas Investment Corp. DelawarePhilip Morris Paraguay S.A. ParaguayPhilip Morris Peru S.A. PeruPhilip Morris Philippines Manufacturing Inc. Philippines

5


Exhibit 21

State or Country of

Name OrganizationPhilip Morris Polska S.A. PolandPhilip Morris Products Inc. VirginiaPhilip Morris Products S.A. SwitzerlandPhilip Morris Research Laboratories BVBA BelgiumPhilip Morris Research Laboratories GmbH GermanyPhilip Morris Reunion s.a.r.l. FrancePhilip Morris Romania S.R.L. RomaniaPhilip Morris SA, Philip Morris Sabanci Pazarlama ve Satis A.S. TurkeyPhilip Morris Sales & Marketing Ltd. RussiaPhilip Morris Sdn Bhd BruneiPhilip Morris Services S.A. SwitzerlandPhilip Morris Singapore Pte. Ltd. SingaporePhilip Morris Skopje d.o.o.e.l. MacedoniaPhilip Morris Slovakia s.r.o. Slovak RepublicPhilip Morris South Africa (Pty) Ltd. South AfricaPhilip Morris Spain, S.A., Sociedad Unipersonal SpainPhilip Morris Taiwan S.A. SwitzerlandPhilip Morris USA Inc. VirginiaPhilip Morris Vietnam S.A. SwitzerlandPhilip Morris West Africa SARL SenegalPhilip Morris World Trade S.à.r.l. SwitzerlandPHILSA Philip Morris Sabanci Sigara ve Tütüncülük Sanayi ve Ticaret A.S. TurkeyPMCC Europe GmbH GermanyPMCC Investors No. 1 Corporation DelawarePMCC Investors No. 2 Corporation DelawarePMCC Investors No. 3 Corporation DelawarePMCC Investors No. 4 Corporation DelawarePMCC Leasing Corporation DelawarePMI Aviation Services SA SwitzerlandPMI Engineering S.A. SwitzerlandPMI Global Services Inc. DelawarePMM-S.G.P.S., S.A. PortugalProductos Kraft, S. de R.L.de C.V. MexicoProdutos Alimenticios Pilar Ltda. BrazilProveedora Ecuatoriana S.A. (Proesa) EcuadorPT Kraft Foods Indonesia Limited IndonesiaPT Nabisco Foods IndonesiaPT Philip Morris Indonesia IndonesiaSB Leasing Inc. DelawareServicios Corporativos Philip Morris, S. de R. L. de C. V. MexicoSeven Seas Foods, Inc. DelawareSIA Philip Morris Latvia LatviaStella D’oro Biscuit Co., Inc. New YorkTabacalera Andina SA (Tanasa) EcuadorTabacalera Centroamericana, S.A. GuatemalaTabacalera Costarricense S.A. Costa RicaTabacalera de El Salvador S.A. de C.V. El SalvadorTabamark S.A. UruguayTabaqueira, S.A. PortugalTaloca AG SwitzerlandTaloca Cafe Ltda BrazilTaloca y Cia Ltda. ColombiaTanasec Panama Sociedad en Comandita por Acciones PanamaTechnology Enterprise Computing Works, LLC VirginiaThe Hervin Company OregonThe United Kingdom Tobacco Company Limited United Kingdom

6


Exhibit 21

State or Country of

Name OrganizationTrademarks LLC DelawareTrimaran Leasing Investors, L.L.C.-II DelawareUAB Philip Morris Lietuva LithuaniaUnited Biscuits (East China) Limited ChinaUnited Biscuits Asia Pacific Hong KongVeryfine Products, Inc. MassachusettsVict. Th. Engwall & Co., Inc. DelawareVotesor BV NetherlandsWolverine Investment Corp. DelawareYili-Nabisco Biscuit & Food Company Limited ChinaZAO Philip Morris Izhora Russia

7


Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in Post-Effective Amendment No. 13 to the Registration Statement of AltriaGroup, Inc. on Form S-14 (File No. 2-96149) and in Altria Group, Inc.’s Registration Statements on Form S-3 (File No. 333-35143)and Form S-8 (File Nos. 333-28631, 333-20747, 333-16127, 33-1479, 33-10218, 33-13210, 33-14561, 33-1480, 33-17870, 33-38781,33-39162, 33-37115, 33-40110, 33-48781, 33-59109, 333-43478, 333-43484 and 333-71268), of our report dated February 2, 2005relating to the consolidated financial statements, management’s assessment of the effectiveness of internal control over financialreporting and the effectiveness of internal control over financial reporting of Altria Group, Inc., which appears in the Annual Report toShareholders, which is incorporated in the Altria Group, Inc. Annual Report on Form 10-K. We also consent to the incorporation byreference of our report dated February 2, 2005 relating to the financial statement schedule, which appears in this Form 10-K.

/S/ PRICEWATERHOUSECOOPERS LLP

New York, New YorkMarch 15, 2005


Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the“Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more ofthem, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronictransmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2004 and anyamendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission,together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting tosaid attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done inand about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying andconfirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 25th day of February, 2005.

/s/ ELIZABETH E. BAILEY Elizabeth E. Bailey


Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the“Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more ofthem, his true and lawful attorney, for his and in his name, place and stead, to execute, by manual or facsimile signature, electronictransmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2004 and anyamendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission,together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting tosaid attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done inand about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying andconfirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of February, 2005.

/s/ MATHIS CABIALLAVETTA Mathis Cabiallavetta


Exhibit 24

POWER OF ATTORNEY



/s/ HAROLD BROWN Harold Brown


Exhibit 24

POWER OF ATTORNEY



/s/ J. DUDLEY FISHBURN J. Dudley Fishburn


Exhibit 24

POWER OF ATTORNEY



/s/ ROBERT E. R. HUNTLEY Robert E. R. Huntley


Exhibit 24

POWER OF ATTORNEY



/s/ THOMAS W. JONES Thomas W. Jones


Exhibit 24

POWER OF ATTORNEY



/s/ GEORGE MUÑOZ George Muñoz


Exhibit 24

POWER OF ATTORNEY



/s/ LUCIO A. NOTO Lucio A. Noto


Exhibit 24

POWER OF ATTORNEY



/s/ JOHN S. REED John S. Reed


Exhibit 24

POWER OF ATTORNEY



/s/ CARLOS SLIM HELÚ Carlos Slim Helú


Exhibit 24

POWER OF ATTORNEY



/s/ STEPHEN M. WOLF Stephen M. Wolf


Exhibit 31.1

Certifications

I, Louis C. Camilleri certify that:

1. I have reviewed this annual report on Form 10-K of Altria Group, 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 misleadingwith 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 periodspresented in this report;

4. The registrant’s other certifying officer(s) 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 definedin 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 underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, ismade 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 thepreparation 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 thisreport 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 hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; 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.



Louis C. CamilleriChairman and Chief Executive Officer


Exhibit 31.2

Certifications

I, Dinyar S. Devitre certify that:

1. I have reviewed this annual report on Form 10-K of Altria Group, 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 misleadingwith 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 periodspresented in this report;

4. The registrant’s other certifying officer(s) 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 definedin 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 underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, ismade 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 thepreparation 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 thisreport 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 hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; 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.


/s/ DINYAR S. DEVITRE

Dinyar S. DevitreSenior Vice President andChief Financial Officer


Exhibit 32.1

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Altria Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2004as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Louis C. Camilleri, Chairman and ChiefExecutive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of2002, that:

(1) the Report 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 the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company.

/s/ LOUIS C. CAMILLERILouis C. CamilleriChairman and ChiefExecutive OfficerMarch 15, 2005

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwiseadopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, hasbeen provided to Altria Group, Inc. and will be retained by Altria Group, Inc. and furnished to the Securities and ExchangeCommission or its staff upon request.


Exhibit 32.2

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Altria Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2004as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dinyar S. Devitre, Senior Vice Presidentand Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of theSarbanes-Oxley Act of 2002, that:

(1) the Report 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 the Report fairly presents, in all material respects, the financial condition and results of

operations ofthe Company.

/s/ DINYAR S. DEVITREDinyar S. DevitreSenior Vice President andChief Financial OfficerMarch 15, 2005

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwiseadopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, hasbeen provided to Altria Group, Inc. and will be retained by Altria Group, Inc. and furnished to the Securities and ExchangeCommission or its staff upon request.


Exhibit 99.1

CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS

As described in Item 3. Legal Proceedings of this Annual Report on Form 10-K and Note 19. Contingencies to Altria Group, Inc.’sConsolidated Financial Statements included as Exhibit 13 hereto, there are legal proceedings covering a wide range of matters pendingin various U.S. and foreign jurisdictions against ALG, its subsidiaries and affiliates, including PM USA and PMI, and their respectiveindemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax,contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors.Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases allegingpersonal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to bebrought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffsare to be tried in a single proceeding, (iii) health care cost recovery cases brought by governmental (both domestic and foreign) andnon-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/ordisgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits allegingthat the use of the terms “Lights” and “Ultra Lights” constitutes deceptive and unfair trade practices, suits by foreign governmentsseeking to recover damages resulting from the allegedly illegal importation of cigarettes into various jurisdictions, suits by formerasbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment ofasbestos claims that were allegedly caused in whole or in part by cigarette smoking, and various antitrust suits.

The following lists certain of the pending claims included in these categories and certain other pending claims. Certain developmentsin these cases since November 5, 2004 are also described.

SMOKING AND HEALTH LITIGATION

The following lists the consolidated individual smoking and health cases as well as smoking and health class actions pending againstPM USA and, in some cases, ALG and/or its other subsidiaries and affiliates, including PMI, as of February 15, 2005, and describescertain developments in these cases since November 5, 2004.

Consolidated Individual Smoking and Health Cases

In re: Tobacco Litigation (Individual Personal Injury cases), Circuit Court, Ohio County, West Virginia, consolidated January 11,2000. In West Virginia, all smoking and health cases in state court alleging personal injury have been transferred to the State’s MassLitigation Panel. The transferred cases include individual cases and putative class actions. All individual cases filed in or transferred tothe court by September 13, 2000 were consolidated for pretrial proceedings and trial. Nine hundred and eighty-three (983) individualcases are pending. The trial court’s prior Case Management Order/Trial Plan that had consolidated the individual cases for trial wasvacated in June 2004. The trial court has not adopted an alternative plan for trying the individual cases. The court has certified aquestion of law relating to the trial plan to the West Virginia Supreme Court.

Flight Attendant Litigation

The settlement agreement entered into in 1997 in the case of Broin, et al. v. Philip Morris Companies Inc., et al., which was broughtby flight attendants seeking damages for personal injuries allegedly caused by environmental tobacco smoke, allows members of theBroin class to file individual lawsuits seeking compensatory damages, but prohibits them from seeking punitive damages. InOctober 2000, the trial court ruled that the flight attendants will not be required to prove the substantive liability elements of theirclaims for negligence, strict liability and breach of implied warranty in order to recover damages, if any, other than establishing thatthe plaintiffs’ alleged injuries were caused by their exposure to environmental tobacco smoke and, if so, the amount of compensatorydamages to be awarded. Defendants’ initial appeal of this ruling was dismissed as premature. Defendants are

1


Exhibit 99.1

appealing the October 2000 rulings in connection with their appeal of the adverse jury verdict in the French case. In December 2004,the Florida Third District Court of Appeal affirmed the judgment awarding plaintiff in the French case $500,000, and directed the trialcourt to hold defendants jointly and severally liable. Defendants’ motion for rehearing is pending. As of February 15, 2005, 2,662cases were pending in the Circuit Court of Dade County, Florida against PM USA and three other cigarette manufacturers, and to date,one such case is scheduled for trial through the end of 2005.

Domestic Class Actions

Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 5, 1994.See Item 3. Legal Proceedings, for a discussion of this case.

Scott, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed May 24, 1996. SeeItem 3. Legal Proceedings, for a discussion of this case.

Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed November 12, 1997.

Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West Virginia, filed February 27, 1998.

Cleary, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed June 3, 1998.

Cypret (formerly, Jones), et al. v. The American Tobacco Company, et al., Circuit Court, Jackson County, Missouri, filedDecember 22, 1998.

Simms, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed May 23, 2001. InMay 2004, plaintiffs filed a motion for reconsideration of the court’s 2003 ruling that denied their motion for class certification. InSeptember 2004, plaintiffs renewed their motion for reconsideration.

Lowe, et al. v. Philip Morris Incorporated, et al., Circuit Court, Multomah, Oregon, filed November 19, 2001. In September 2003, thecourt granted defendants’ motion to dismiss the complaint, and plaintiffs have appealed.

International Class Actions

The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower CivilCourt of the Central Courts of the Judiciary District of Sao Paulo, Brazil, filed July 25, 1995. In February 2004, the trial court issuedan order finding that the action was valid under the Brazilian Consumer Defense Code. The order contemplates a second stage of thecase in which individuals are to file their claims, and defendants have filed a motion seeking clarification of the order. In April 2004,the trial court denied defendants’ motions for clarification and granted plaintiff’s motion for clarification, setting the amount for moraldamages awarded in any second phase of the case at the equivalent of approximately $350 per smoker per year of smoking.Defendants have appealed. The trial court has granted defendants’ motion to stay its decision while the appeal is pending.

2


Exhibit 99.1

Polish Association for the Promotion of Health and Health Education in the Work Environment v. Philip Morris Polska S.A., DistrictCourt, Warsaw, Poland, filed February 4, 2005 (not yet served).

HEALTH CARE COST RECOVERY LITIGATION

The following lists the health care cost recovery actions pending against PM USA and, in some cases, ALG and/or its othersubsidiaries and affiliates as of February 15, 2005 and describes certain developments in these cases since November 5, 2004. Asdiscussed in Item 3. Legal Proceedings, in 1998 PM USA and certain other United States tobacco product manufacturers entered intoa Master Settlement Agreement (the “MSA”) settling the health care cost recovery claims of 46 states, the District of Columbia, theCommonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas. Settlementagreements settling similar claims had previously been entered into with the states of Mississippi, Florida, Texas and Minnesota. PMUSA believes that the claims in the city/county, taxpayer and certain of the other health care cost recovery actions listed below arereleased in whole or in part by the MSA or that recovery in any such actions should be subject to the offset provisions of the MSA.

City/County Cases

County of Cook v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed April 18, 1997. Defendants’ motionfor judgment on the pleadings was granted by the trial court, and plaintiff appealed. In September 2004, the Appellate Court of Illinoisaffirmed the trial court’s ruling. In January 2005, the Illinois Supreme Court denied plaintiff’s petition for leave to appeal.

City of St. Louis, et al. v. American Tobacco, et al., Circuit Court, City of St. Louis, Missouri, filed November 23, 1998. InNovember 2001, the court granted in part and denied in part defendants’ motion to dismiss and dismissed three of plaintiffs’ 11claims. Trial is scheduled for January 2006.

County of McHenry, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed July 13, 2000. The case hasbeen stayed pending the outcome of the appeal in County of Cook v. Philip Morris Incorporated, et al., discussed above. InFebruary 2005, the parties filed a stipulation of dismissal with prejudice.

Department of Justice Case

The United States of America v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filedSeptember 22, 1999. See Item 3. Legal Proceedings, for a discussion of this case.

International Cases

The Republic of Panama v. The American Tobacco Company, Inc., District Court, Orleans Parish, Louisiana, filed September 11,1998.

3


Exhibit 99.1

Kupat Holim Clalit v. Philip Morris USA, et al., Jerusalem District Court, Israel, filed September 28, 1998. Defendants’ motion todismiss the case has been denied by the district court. In June 2004, defendants filed a motion with the Israel Supreme Court for leaveto appeal the district court’s decision.

The Republic of Bolivia v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 20,1999. In February 1999, this case was removed to federal court by defendants and subsequently transferred on the court’s own motionto the federal district court for the District of Columbia in March 1999. In December 2004, the parties filed a stipulation of dismissalwithout prejudice.

The Caisse Primaire d’Assurance Maladie of Saint-Nazaire v. SEITA, et al., Civil Court of Saint-Nazaire, France, filed June 1999. InSeptember 2003, the court dismissed the case, and plaintiff has appealed.

In re: Tobacco/Governmental Health Care Costs Litigation (MDL No. 1279), United States District Court, District of Columbia,consolidated June 1999. In June 1999, the United States Judicial Panel on Multidistrict Litigation transferred foreign governmenthealth care cost recovery actions brought by Nicaragua, Venezuela, and Thailand to the District of Columbia for coordinated pretrialproceedings with two such actions brought by Bolivia and Guatemala already pending in that court. Subsequently, the resultingproceeding has also included filed cases brought by the following foreign governments: Ukraine; the Brazilian States of EspiritoSanto, Goias, Mato Grosso do Sul, Para, Parana, Pernambuco, Piaui, Rondonia, Sao Paulo and Tocantins; Panama; the Province ofOntario, Canada; Ecuador; the Russian Federation; Honduras; Tajikistan; Belize; the Kyrgyz Republic and 11 Brazilian cities. Thecases brought by Thailand and the Kyrgyz Republic were voluntarily dismissed. The complaints filed by Guatemala, Nicaragua,Ukraine and the Province of Ontario have been dismissed, and the dismissals are now final. The district court remanded the casesbrought by Belize, Ecuador, Honduras, the Russian Federation, Tajikistan, Venezuela, nine Brazilian states listed and the 11 Braziliancities to Florida state courts and remanded the cases brought by one Brazilian state and Panama to Louisiana state court. Subsequent toremand, the Ecuador case was voluntarily dismissed. In November 2001, the Venezuela and Espirito Santo actions were dismissed,and Venezuela appealed. In September 2002, a Florida intermediate appellate court affirmed the ruling dismissing the case brought byVenezuela. In June 2003, the Florida Supreme Court denied Venezuela’s petition for further review. In August 2003, the trial courtgranted defendants’ motions to dismiss the cases brought by Tajikistan and one Brazilian state, and plaintiffs in the other 21 cases thenpending in Florida voluntarily dismissed their claims without prejudice. In December 2004, the parties in the case brought by Boliviafiled a stipulation of dismissal without prejudice.

The State of Rio de Janeiro of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., District Court, Angelina County,Texas, filed July 12, 1999. In December 2002, the court granted defendants’ motion to dismiss the case, and plaintiff appealed. InAugust 2004, the appellate court affirmed the trial court’s order dismissing the case. Plaintiff has petitioned the Texas Supreme Courtfor further review.

The State of Sao Paulo of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Civil District Court, Orleans Parish,Louisiana, filed February 9, 2000.

Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, VancouverRegistry, Canada, filed January 24, 2001. In June 2003, the court granted defendants’ motion to dismiss the case, and plaintiffappealed. In May 2004, the appellate court reversed the trial court’s decision. In December 2004, the Supreme Court of Canadagranted defendants’ motion for leave to appeal from the appellate court decision.

Junta de Andalucia, et al. v. Philip Morris Spain, et al., Court of First Instance, Madrid, Spain, filed February 21, 2002. In May 2004,the court dismissed the case, and plaintiffs have appealed.

4


Exhibit 99.1

Insurer and Self – Insurer Cases

Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, EasternDistrict, New York, filed April 29, 1998. In September 2000, the court severed the claims of one plaintiff, Empire Blue Cross and BlueShield (“Empire”), from those of the other plaintiffs. Trial of Empire’s claims commenced March 2001, and in June 2001, the juryreturned a verdict in favor of Empire on two of its claims and awarded Empire up to approximately $17.8 million in compensatorydamages, including $6.8 million against PM USA, and no punitive damages. In July 2001, the court stayed the remaining Blue Crossplans’ cases pending the outcome of Empire’s appeal, and denied plaintiff’s motion to treble the damage award. In October 2001, thecourt denied defendants’ post-trial motions challenging the verdict and, in November 2001, entered judgment. Defendants, includingPM USA, appealed. In February 2002, the court awarded plaintiff approximately $38 million for attorneys’ fees. In September 2003,the United States Court of Appeals for the Second Circuit reversed the portion of the judgment relating to subrogation, certifiedquestions relating to plaintiff’s direct claims of deceptive business practices to the New York Court of Appeals and deferred its rulingon the appeal of the attorneys’ fees award pending the ruling on the certified questions. In October 2004, the New York Court ofAppeals ruled in defendants’ favor and found that plaintiff’s direct claims are barred on grounds of remoteness. In December 2004, theSecond Circuit issued an opinion, vacating the damages award and an accompanying award of attorneys’ fees, reversing the judgmentand remanding the case with instructions to the trial court to dismiss all of plaintiff’s claims with prejudice, and in February 2005, thetrial court dismissed all of plaintiff’s claims with prejudice.

Taxpayer Cases

Glover, et al. v. Philip Morris Incorporated, et al., United States District Court, Middle District, Florida, filed May 26, 2004.

CERTAIN OTHER TOBACCO-RELATED ACTIONS

The following lists certain other tobacco-related litigation pending against ALG and/or its various subsidiaries and others as ofFebruary 15, 2005, and describes certain developments since November 5, 2004.

Lights/Ultra Lights Cases

Aspinall, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Suffolk County, Massachusetts, filedNovember 24, 1998. In October 2001, the court granted plaintiffs’ motion for class certification, and defendants appealed. InMay 2003, the Single Justice sitting on behalf of the Massachusetts Court of Appeals decertified the class. In August 2004,Massachusetts’ highest court affirmed the trial court’s ruling and reinstated the class certification order.

McClure, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Circuit Court, Davidson County, Tennessee, filedJanuary 19, 1999.

Marrone, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Court of Common Pleas, Medina County, Ohio, filedNovember 8, 1999. In September 2003, plaintiffs’ motion for class certification was granted as to plaintiffs’ claims that defendantsviolated Ohio’s Consumer Sales Practices Act pursuant to which plaintiffs allege that class members are entitled to reimbursement ofthe costs of cigarettes purchased during the class periods. Class membership is limited to the residents of six Ohio counties.Defendants have appealed the class certification order. In September 2004, the Ninth District Court of Appeals affirmed the trialcourt’s class certification order. PM USA sought appeal of the order. In February 2005, the Ohio Supreme Court accepted the case forreview to determine whether a prior determination has been made by the State of Ohio that the conduct at issue is deceptive such thatplaintiffs may pursue private claims.

Price, et al. v. Philip Morris Incorporated, Circuit Court, Madison County, Illinois, filed February 10, 2000. See Item 3. LegalProceedings, for a discussion of this case.

5


Exhibit 99.1

Craft (formerly, Ratliff), et al. v. Philip Morris Companies Inc., et al., Circuit Court, City of St. Louis, Missouri, filed February 15,2000. In December 2003, the court granted plaintiffs’ motion for class certification. In September 2004, the court granted in part anddenied in part PM USA’s motion for reconsideration. In October 2004, the Missouri Court of Appeals agreed to review the classcertification decision.

Hines, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida, filedFebruary 23, 2001. In February 2002, the court granted plaintiffs’ motion for class certification, and defendants appealed. InDecember 2003, a Florida District Court of Appeal decertified the class. In March 2004, plaintiffs filed a motion for rehearing, enbanc review or certification to the Florida Supreme Court. In December 2004, the Florida Supreme Court stayed further proceedingspending its decision in the Engle case discussed above.

Philipps, et al. v. Philip Morris Incorporated, et al., Court of the Common Pleas, Medina County, Ohio, filed April 30, 2001. InSeptember 2003, plaintiffs’ motion for class certification was granted as to plaintiffs’ claims that defendants violated Ohio’sConsumer Sales Practices Act pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs ofcigarettes purchased during the class periods. Class membership is limited to the residents of six Ohio counties. Defendants haveappealed the class certification order. In September 2004, the Ninth District Court of Appeals affirmed the trial court’s classcertification order. PM USA sought appeal of the order. In February 2005, the Ohio Supreme Court accepted the case for review todetermine whether a prior determination has been made by the State of Ohio that the conduct at issue is deceptive such that plaintiffsmay pursue private claims.

Moore, et al. v. Philip Morris Incorporated, et al., Circuit Court, Marshall County, West Virginia, filed September 17, 2001.

Curtis, et al. v. Philip Morris Companies Inc., et al., Fourth Judicial District Court, Hennepin County, Minnesota, filed November 28,2001. In January 2004, the court denied plaintiffs’ motion for class certification and defendants’ motions for summary judgment. InNovember 2004, the trial court granted plaintiffs’ motion for reconsideration and ordered the certification of a class. In January 2005,defendants’ petition for leave to appeal was denied by the intermediate appellate court and defendants’ petition for further review ispending in the Minnesota Supreme Court.

Tremblay, et al. v. Philip Morris Incorporated, Superior Court, Rockingham County, New Hampshire, filed March 29, 2002. The casehas been consolidated with Peters v. Philip Morris Incorporated.

Peters v. Philip Morris Incorporated, Superior Court, Rockingham County, New Hampshire, filed April 22, 2002. This case has beenconsolidated with Tremblay, et al. v. Philip Morris Incorporated.

Pearson v. Philip Morris Incorporated, et al., Circuit Court, Multnomah County, Oregon, filed November 20, 2002.

Sullivan v. Philip Morris USA, Inc., et al., Circuit Court, Western District, Louisiana, filed March 28, 2003.

Virden v. Altria Group, Inc., et al., Circuit Court, Hancock County, West Virginia, filed March 28, 2003.

Stern, et al. v. Philip Morris USA, Inc. et al., Superior Court, Middlesex County, New Jersey, filed April 4, 2003.

Piscetta, et al. v. Philip Morris Incorporated, State Court, Fulton County, Georgia, filed April 10, 2003.

Arnold, et al. v. Philip Morris USA Inc., Circuit Court, Madison County, Illinois, filed May 5, 2003.

6


Exhibit 99.1

Watson, et al. v. Altria Group, Inc., et al., United States District Court, Eastern District, Arkansas, filed May 29, 2003.

Holmes, et al. v. Philip Morris USA Inc., et al., Superior Court, New Castle, Delaware, filed August 18, 2003.

El Roy v. Philip Morris Incorporated, et al., District Court of Tel-Aviv/Jaffa, Israel, filed January 18, 2004.

Davies v. Philip Morris USA Inc., et al., Superior Court, King County, Washington, filed April 8, 2004.

Schwab (formerly, McLaughlin), et al. v. Philip Morris USA Inc., et al., United States District Court, Eastern District, New York, filedMay 11, 2004. Trial in the case is scheduled for November 2005.

Naron, et al. v. Philip Morris Products USA, et al., District Court of Tel-Aviv/Jaffa, Israel, filed December 5, 2004.

Miner, et al. v. Altria Group, Inc., et al. Circuit Court, Franklin County, Arkansas, filed December 29, 2004.

Reed, et al. v. Altria Group Inc., et al., Circuit Court, Wayne County, Michigan, filed February 9, 2005 (not yet served).

Tobacco Price Cases

Smith, et al. v. Philip Morris Companies Inc., et al., District Court, Seward County, Kansas, filed February 9, 2000. InNovember 2001, the court granted plaintiffs’ motion for class certification.

Romero, et al. v. Philip Morris Companies Inc., et al., First Judicial District Court, Rio Arriba County, New Mexico, filed April 10,2000. Plaintiffs’ motion for class certification was granted in April 2003. In February 2005, the New Mexico Court of Appealsaffirmed the class certification decision.

Wholesale Leaders Cases

Smith Wholesale Company, Inc., et al., v. Philip Morris USA Inc., United States District Court, Eastern District, Tennessee, filedJuly 10, 2003. See Item 3. Legal Proceedings, for a discussion of this case.

Victory Brand, L.L.C., Michigan v. Philip Morris USA Inc., et al., United States District Court, Eastern District, Michigan, filedDecember 10, 2003. See Item 3. Legal Proceedings, for a discussion of this case.

Consolidated Putative Punitive Damages Cases

Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), United States District Court, Eastern District, New York, filedSeptember 6, 2000. See Item 3. Legal Proceedings, for a discussion of this case.

Cases Under the California Business and Professions Code

Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. InApril 2001, the court granted in part plaintiffs’ motion for class certification and certified a class comprised of residents of Californiawho smoked at least one of defendants’ cigarettes between June 1993 and April 2001 and who were exposed to defendants’ marketingand advertising activities in California. Certification was granted as to plaintiffs’ claims that defendants violated California Businessand Professions Code Sections 17200 and 17500 pursuant to which plaintiffs allege that class members are entitled to reimbursementof the costs of cigarettes

7


Exhibit 99.1

purchased during the class period and injunctive relief barring activities allegedly in violation of the Business and Professions Code.In September 2004, the trial court granted defendants’ motion for summary judgment as to plaintiffs’ claims attacking defendants’cigarette advertising and promotion and denied defendants’ motion for summary judgment on plaintiffs’ claims based on allegedlyfalse affirmative statements. Plaintiffs’ motion for rehearing is pending. In November 2004, defendants filed a motion to decertify theclass based on a recent change in California law. In March 2005, the court granted defendants' motion.

Daniels, et al. v. Philip Morris Companies Inc., et al., Superior Court, San Diego County, California, filed April 2, 1998. InNovember 2000, the court granted the plaintiffs’ motion for class certification on behalf of minor California residents who smoked atleast one cigarette between April 1994 and December 1999. Certification was granted as to plaintiffs’ claims that defendants violatedCalifornia Business and Professions Code Section 17200 pursuant to which plaintiffs allege that class members are entitled toreimbursements of the costs of cigarettes purchased during the class period and injunctive relief barring activities allegedly inviolation of the Business and Professions Code. In September 2002, the court granted defendants’ motions for summary judgment asto all claims in the case, and plaintiffs appealed. In October 2004, the California Fourth District Court of Appeal affirmed the trialcourt’s ruling. In February 2005, the California Supreme Court agreed to hear plaintiffs’ appeal.

Gurevitch, et al. v. Philip Morris USA Inc., et al., Superior Court, Los Angeles County, California, filed May 20, 2004. See Item 3.Legal Proceedings, for a discussion of this case.

Asbestos Contribution Cases

Fibreboard Corporation, et al. v. The American Tobacco Company, Inc., et al., Superior Court, Alameda County, California, filedDecember 11, 1997.

W.R. Grace & Co. Conn., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed April 24, 2001. InJanuary 2005, the case was dismissed with prejudice.

Cigarette Contraband Cases

Department of Amazonas, et al. v. Philip Morris Companies Inc., et al., United States District Court, Eastern District, New York, filedMay 19, 2000. Defendants’ motion to dismiss the complaint for failure to state a claim was granted by the trial court and plaintiffsappealed. In January 2004, the United States Court of Appeals for the Second Circuit affirmed the trial court’s ruling. In April 2004,plaintiffs petitioned the United States Supreme Court for further review.

The European Community, et al. v. RJR Nabisco, Inc., et al., United States District Court, Eastern District, New York, filed August 6,2001. Defendants’ motion to dismiss the complaint for failure to state a claim was granted by the trial court, and plaintiffs appealed. InJanuary 2004, the United States Court of Appeals for the Second Circuit affirmed the trial court’s ruling. In April 2004, plaintiffspetitioned the United States Supreme Court for further review. In July 2004, plaintiffs moved to withdraw their petition following theagreement entered into among PMI, the European Commission and 10 member states.

Vending Machine Case

Lewis d/b/a B&H Vendors v. Philip Morris Incorporated, United States District Court, Middle District, Tennessee, filed February 3,1999. See Item 3. Legal Proceedings, for a discussion of this case.

8


Exhibit 99.1

MSA-Related Cases

In the following cases, plaintiffs have challenged the validity of the MSA described in Item 3. Legal Proceedings or legislationimplementing the MSA.

Freedom Holdings, Inc., et al. v. Spitzer, et al., United States District Court, Southern District, New York, filed April 16, 2002.

Sanders, et al. v. Philip Morris USA, Inc., et al., United States District Court, Northern District, California, filed June 9, 2004. PMUSA’s motion to dismiss the case is pending.

Tritent International Corp. v. Commonwealth of Kentucky, United States District Court, Eastern District, Kentucky, filedSeptember 23, 2004.

National Tobacco Growers Settlement Trust Litigation

State v. Philip Morris, et al., Superior Court, Wade County, North Carolina, filed December 10, 2004. See Item 3. Legal Proceedings,for a discussion of this case.

CERTAIN OTHER ACTIONS

The following lists certain other actions pending against subsidiaries of ALG and others as of February 15, 2005.

In May 2001, the Attorney General for the State of Ohio notified Kraft Foods Global, Inc. that it may be subject to an enforcementaction for alleged past violations of Kraft Foods Global, Inc.’s wastewater discharge permit at its production facility in Farmdale,Ohio. In December 2004, Kraft Foods Global, Inc. finalized a monetary settlement with the State, which was approved by The Courtof Common Pleas for Trumball County in January 2005. The settlement amount is not material to Altria Group, Inc.

In October 2002, Mr. Mustapha Gaouar and five family members (collectively, the “Gaouars”) filed suit in the Commercial Court ofCasablanca against Kraft Foods Maroc (“KFM”), a subsidiary of Kraft, and Mr. Omar Berrada claiming damages of approximately$31 million arising from a non-compete undertaking signed by Mr. Gaouar allegedly under duress. The non-compete clause wascontained in an agreement concluded in 1986 between Mr. Gaouar and Mr. Berrada acting for himself and for his group of companies,including Les Cafes Ennasr (renamed Kraft Foods Maroc), which was acquired by Kraft Foods International, Inc. from Mr. Berrada in2001. In June 2003, the court issued a preliminary judgment against KFM and Mr. Berrada holding that the Gaouars are entitled todamages for being deprived of the possibility of engaging in coffee roasting from 1986 due to such non-compete undertaking. At thattime, the court appointed two experts to assess the amount of damages to be awarded. In December 2003, these experts delivered areport concluding that they could see no evidence of loss suffered by the Gaouars. The Gaouars asked the court that this report be setaside and new court experts be appointed. On April 15, 2004, the court delivered a judgment upholding the defenses of KFM andrejecting the claims of the Gaouars. The Gaouars appealed this judgment. KFM believes that in the event that it is ultimately foundliable for damages to plaintiffs in this case, it may have claims against Mr. Berrada for recovery of all or a portion of the amount ofany damages awarded to plaintiffs.

9


Exhibit 99.2

TRIAL SCHEDULE FOR CERTAIN CASES

Set forth below are the two antitrust cases, and the Lights/Ultra Lights class action currently scheduled for trial in 2005 against PMUSA, and with respect to the Lights/Ultra Lights class action, ALG.

Case (Jurisdiction) Type of Action Trial Date Lewis d/b/a B&H Vendors v. Antitrust July 5, 2005Philip Morris Incorporated (Tennessee) Smith Wholesale Company, Inc., Antitrust July 12, 2005et al., v. Philip Morris USA Inc., et al. (Tennessee) Schwab (formerly, McLaughlin), Lights/Ultra Lights et al. v. Philip Morris USA Inc., Class Action November 2005et al. (New York)

Below is a schedule setting forth by month the number of individual smoking and health cases, including cases brought by current andformer flight attendants claiming personal injuries allegedly related to ETS, against PM USA that are currently scheduled for trialthrough the end of 2005.

2005April (2)June (1)August (1)September (1)December (1)

1

_______________________________________________Created by 10KWizard www.10KWizard.com


http://www.10kwizard.com

FORM 10-K - Zonebourse.com III of this Form 10-K or any amendment to this Form 10-K. Indicate by...

Documents

Transcript of FORM 10-K - Zonebourse.com III of this Form 10-K or any amendment to this Form 10-K. Indicate by...