The accompanying notes are an integral part of the unaudited financial statements.
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Background
Mills Music Trust (the
Trust
) was created by a Declaration of Trust, dated December 3, 1964 (the
Declaration of Trust
), for the purpose of acquiring from Mills Music, Inc. (
Old Mills
), the right to receive
payment of a deferred contingent purchase price obligation (the
Contingent Portion
) payable to Old Mills. The obligation to pay the Contingent Portion arose as the result of the sale by Old Mills of its music and lyric copyright
catalogue (the
Catalogue
) to a newly formed company pursuant to an asset purchase agreement dated December 5, 1964 (the
Asset Purchase Agreement
). Pursuant to the Asset Purchase Agreement, payment of the
Contingent Portion to the Trust continues until the end of the year in which the last copyright in the Catalogue expires and cannot be renewed.
The
Contingent Portion amounts are currently payable by EMI Mills Music Inc. (
EMI
), the owner of the copyrighted materials contained in the Catalogue. The Trust has been advised that Sony/ATV Music Publishing LLC
(
Sony/ATV
) is the administrator and manager of EMI and the Catalogue.
HSBC Bank, USA, N.A. is the Corporate Trustee of the Trust (the
Corporate Trustee
), and Lee Eastman and Michael E. Reiss are the Individual Trustees of the Trust (the
Individual Trustees
and together with the Corporate Trustee, the
Trustees
).
Proceeds from Contingent Portion Payments
The Trust
receives quarterly payments of the Contingent Portion from EMI and distributes the amounts it receives to the registered owners of Trust Certificates (the
Unit Holders
) representing interests in the Trust (the
Trust
Units
), after payment of, or withholdings in connection with, expenses and liabilities of the Trust. The Declaration of Trust provides that these are the Trusts sole responsibilities and that the Trust is prohibited from engaging in
any business activities.
Payments of the Contingent Portion to the Trust are based on royalty income which the Catalogue generates. The Trust does not
own the Catalogue or any copyrights or other intellectual property rights and is not responsible for collecting royalties in connection with the Catalogue. As the current owner and administrator of the Catalogue, EMI is obligated under the Asset
Purchase Agreement to use its best efforts to collect all royalties, domestic and foreign, in connection with the Catalogue and to remit a portion of its royalty income to the Trust as its Contingent Portion payment obligation, in accordance with
the terms of the Asset Purchase Agreement.
Calculation of the Contingent Portion
The amount of each payment of the Contingent Portion is based on a formula set forth in the Asset Purchase Agreement. For information regarding the calculation
of the Contingent Portion and a related dispute between EMI and the Trust see Contingent Portion Payments under Part I Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Cash Distributions to Unit Holders
The Declaration of Trust provides for the distribution to the Unit Holders of all funds the Trust receives after payment of, or withholdings in connection
with, expenses and liabilities of the Trust. See the table headed Statement of Cash Receipts and Disbursements for information regarding cash disbursements made to Unit Holders during the three months ended March 31, 2019 and
March 31, 2018.
4
The Copyright Catalogue
The Catalogue is estimated to be composed of over 25,000 music titles (the
Copyrighted Songs
), of which approximately 1,600 produced royalty
income in recent years. EMI has provided the Trust with a listing of the top 50 earning songs in the Catalogue during the 2018 calendar year (the
Top 50 Songs
), together with certain copyright information with respect to each of
the Top 50 Songs (the
2018 Listing
). A copy of the 2018 Listing, as provided by EMI, is included in the Trusts annual report
on Form 10-K for the
fiscal year ended
December 31, 2018. The 2018 Listing does not include any information regarding Copyrighted Songs for the 2019 calendar year.
Accounting Policies
EMI typically makes payments to the Trust of the Contingent Portion in March, June, September and December for the prior calendar quarter. The
payments received are accounted for on a cash basis, as are expenses of the Trust. The Declaration of Trust provides for the distribution of the amounts it receives in Contingent Portion payments to the Unit Holders after payment of, or withholdings
in connection with, expenses and liabilities of the Trust.
The Trusts financial statements reflect only cash transactions and do not include
transactions that would be recorded in financial statements presented on the accrual basis of accounting, as contemplated by generally accepted accounting principles in the United States. The Trust does not prepare a balance sheet or a statement of
cash flows.
NOTE 2. INCOME TAXES
No provision for income
taxes has been made since the liability therefore is that of the Unit Holders and not the Trust.
NOTE 3. GOVERNANCE OF THE TRUST
The Trust does not have, nor does the Declaration of Trust provide for, officers, a board of directors or any employees. HSBC Bank, USA, N.A. is the Corporate
Trustee of the Trust, and Lee Eastman and Michael E. Reiss are the Individual Trustees of the Trust. Pursuant to the Declaration of Trust, Trustees of the Trust serve until their removal, resignation, incapacity, or in the case of Individual
Trustees, their death.
On December 23, 2014, the Trust adopted a code of ethics (as defined in Item 406
of Regulation S-K under the
Securities Exchange Act of 1933) applicable to the Individual Trustees and the trust officers of the Corporate Trustee. A copy of the Code of Ethics will be
provided to any person without charge upon written request to the Trust at its administrative office, c/o HSBC BANK USA, N.A., Corporate Trust, Issuer Services, 452 Fifth Avenue, New York, NY. In addition, the Trust relies on the Corporate Trustee
to abide by HSBC Bank, USA, N.A.s Statement of Business Principles and Code of Ethics, which is available on the Corporate Trustees website at http://www.us.hsbc.com.
The Trust is not a corporate entity and thus does not have an Audit Committee. The Trust has established a policy with regard to audit, audit-related
and certain non-audit engagements of
its independent auditors. Under this policy, the Trust annually approves certain limited, specified recurring services which may be provided by the
Trusts accountant or independent auditors. All other engagements for services to be performed by the Trusts independent auditors must
be separately pre-approved by the
Trust.
Joel Faden of Schulman Lobel et al. LLP acts as Chief Financial Individual providing accounting services for the Trust.
NOTE 4. RELATED PARTY
TRANSACTIONS
The Trustees are paid in accordance with the Declaration of Trust, which provides that each Trustee shall receive annual compensation of
$2,500, provided that such aggregate compensation to the Trustees as a group may not exceed 3% of the Contingent Portion amounts received by the Trust in any year. The Declaration of Trust also provides for the reimbursement of expenses reasonably
incurred in the performance of a Trustees duties to the Trust, including clerical and administrative services. Accordingly, the Trustees are entitled to receive annual compensation and reimbursement for services performed for the Trust,
including the Corporate Trustees services as the Registrar and Transfer Agent of the certificates representing the Trust Units. The Declaration of Trust also provides that if a Trustee performs unusual or extraordinary services, reasonable
compensation for such services shall be paid, subject to the terms and conditions of the Declaration of Trust.
5
Pursuant to the Declaration of Trust, disbursements were made as follows to the Trustees for the three months
ended March 31, 2019 and March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31
|
|
|
|
2019
|
|
|
2018
|
|
Corporate Trustee Fees
|
|
$
|
625
|
|
|
$
|
625
|
|
Individual Trustee Fees
|
|
$
|
1,250
|
|
|
$
|
1,250
|
|
Transfer Agent Registrar Fees
(1)
|
|
$
|
3,750
|
|
|
$
|
3,750
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,625
|
|
|
$
|
5,625
|
|
(1)
|
These services are performed by the Corporate Trustee.
|
The administrative office of the Trust is located at the offices of the Corporate Trustee, HSBC Bank, USA, N.A., Corporate Trust Issuer Services, 452 Fifth
Avenue, New York, New York 10018. Except for fees paid to the Corporate Trustee in accordance with the Declaration of Trust, no expense is being charged or paid by the Trust for the office space and office equipment of the Corporate Trustee that is
being utilized for the Trust.
NOTE 5. SUBSEQUENT EVENTS
In
January 2016, the Trustees engaged Prager Metis CPAs, LLC (
Prager
), an accounting firm specializing in auditing royalty income, to conduct a special audit of the books and records of EMI administered by Sony/ATV to determine if
payments of the Contingent Portion by EMI have been properly made in accordance with the Asset Purchase Agreement for the period beginning on October 1, 2011 and ending on December 31, 2015 (the
Audit Period
).
Pragers final report (the
Prager Report
) was delivered to the Trustees on August 14, 2017 and identified multiple asserted royalty omissions and expense over-deductions from the Contingent Portion during the Audit
Period. Prager excluded the Underpayments (defined below) from the Prager Report, raising questions as to their materiality and collectability.
As of
April 23, 2019, EMI, the Trust and the Trustees entered into an audit settlement agreement pursuant to which EMI agreed to pay the Trust $1,000,000 in full and final settlement (the
Settlement
) of (i) all Trust claims
related to the underpayments identified by the Prager Report and (ii) that portion of the Underpayments attributable to the Audit Period. The Settlement does not cover any claims for any periods of time after expiration of the Audit Period, nor
does it adjust the parties entitlements arising from the consequences of any future writer royalty underpayment audits relating to the Audit Period.
6