MILLS MUSIC TRUST - Quarter Report: 2011 September (Form 10-Q)

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file Number — 000-02123

MILLS MUSIC TRUST

(Exact name of registrant as specified in its charter)

New York		13-6183792
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

C/O HSBC Bank USA, N/A Corporate Trust Issuer Services, 452 Fifth Avenue, New York, New York 10018-2706

(Address of principal executive offices)		(ZIP Code)
(Registrant’s telephone number, including area code		(212) 525-1349

Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

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

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

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

Indicate by check mark whether the registrant is a shell company (As defined in rule 12b-2 of the Exchange Act). YES o NO þ

The number of the Registrant’s Trust Units outstanding as of September 30, 2011 was 277,712.

 

 

PART I — FINANCIAL STATEMENTS

Item 1. Financial Information

MILLS MUSIC TRUST
STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010*
(UNAUDITED)

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2011				2010				2011				2010
Proceeds From Royalties Received		$	384,677			$	294,241			$	849,366			$	673,522
Undistributed cash at beginning of the period			66				67				67				4,457
General and administrative expenses			(42,199	)			(22,043	)			(122,917	)			(98,759	)**
Balance available for distribution			342,544				272,265				726,516				579,220
Cash distribution to unit holders			342,478				272,199				726,450				579,154
Undistributed cash at end of the period		$	66			$	66			$	66			$	66
Cash distribution per unit based 277,712 units outstanding		$	1.23			$	.98			$	2.62			$	2.09

See accompanying Notes to Statements of Cash Receipts and Disbursements.

MILLS MUSIC TRUST
NOTES TO STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

NOTE 1. ACCOUNTING POLICIES AND GENERAL INFORMATION

     Mills Music Trust (the“Trust”) was created in 1964 by a Declaration of Trust, dated December 3, 1964 (the “Declaration of Trust”) for the purpose of acquiring the rights to receive payment of a deferred contingent purchase price contract obligation, (the “Contingent Portion”), relating to certain copyright materials. The purchase price obligation arose as the result of the sale by Mills Music Inc. of its musical copyright catalogue to a newly formed company (“New Mills”) pursuant to an asset purchase agreement dated December 5, 1964 (the “Asset Purchase Agreement”). The amounts are currently payable by EMI Music (“EMI”) the current owner and administrative entity for the copyrighted materials.

     The payments of the Contingent Portion are determined quarterly and are based on a formula which takes into account gross royalty income paid to composers, authors and others, and less amounts deducted by EMI in accordance with contract terms. Commencing with the first quarter of the year 2010, the Contingent Portion payable for each quarterly period is an amount equal to 75% of the gross royalty income of New Mills and/or its affiliated companies and their successors and assigns from the exploitation of the existing copyrights for such period, less the related royalty expense. Through December 31, 2009, the Contingent Portion was calculated as the gross royalty income from existing copyrights for the applicable period, less royalty expenses and 25% to 35% of gross royalty income, and was guaranteed to be at least a minimum of $167,500 per quarter.

     Payments from EMI to the Trust of the Contingent Portion are made in March, June, September and December, based on net royalty income received by EMI for the applicable copyright material during the preceding calendar quarter. The payments received are accounted for on a cash basis, as are expenses. The Declaration of Trust requires the distribution of all funds received by the Trust to the Trust Unit holders after payment of expenses.

     The statements of cash receipts and disbursements 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 accounting principles generally accepted in the United States of America.

NOTE 2. FEDERAL INCOME TAXES

     No provision for income taxes has been made since the liability therefore is that of the Trust Unit holders and not the Trust.

NOTE 3. RELATED PARTY TRANSACTIONS

     The Declaration of Trust provides that each trustee shall receive annual compensation of $2,500 per year for services as trustee, provided that such aggregate compensation to the trustees as a group may not exceed 3% of the monies received by the Trust in any year, and reimbursement for expenses reasonably incurred in the performance of their duties. The Declaration of Trust further provides for reimbursement to HSBC Bank U.S.A. N.A. (the “Corporate Trustee”) for its clerical and administrative services to the Trust. Accordingly, the Corporate Trustee, also receives reimbursement for

MILLS MUSIC TRUST
NOTES TO STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(CONTINUED)

(UNAUDITED)

NOTE 3. RELATED PARTY TRANSACTIONS (Continued)

such services (including services performed as Registrar and Transfer Agent of the Certificates representing Trust Units).

     The Declaration of Trust also provides, that if in the future any trustee performs unusual or extraordinary services, reasonable compensation for such services shall be paid, subject to certain limitations and to prior confirmation by a majority in interest of Trust Unit holders.

Disbursements to related parties were made as follows for the three and nine months ended September 30, 2011 and 2010:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2011				2010				2011				2010
HSBC Bank USA:
Corporate Trustee Fees		$	625			$	625			$	1,875			$	2,500	*
Transfer agent and registrar		$	3,750			$	3,750			$	11,250			$	15,000	*

MILLS MUSIC TRUST
NOTES TO STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(CONTINUED)

(UNAUDITED)

NOTE 4. ROYALTIES

     Payments of the Contingent Portion made to the Trust by EMI are based upon royalty income generated from the copyright catalogue. When the existing copyrights begin to expire the size of each Contingent Portion payment may decrease unless new copyrights are acquired and successfully exploited.

     A schedule received in 2011 from EMI identifies the top 50 earning songs in the catalogue for the year 2010. Ten of the top 50 songs account for approximately 66% of the earnings attributable to the top 50 songs. Each of the top 50 songs identified on the schedule obtained copyright registration under the Copyright Act of 1909 and the songs have registration dates that range from 1922 to 1960.

     Copyright law provides for a possible 95 years of copyright protection, depending upon certain factors, including the initial registration date of each copyright. The copyright for one of the top 50 songs has expired and is in the public domain. However, for 2010, EMI has reported gross royalties for the expired song that aggregate less than 2% of the gross income of the top 50 earning songs.

     For the balance of the top 50 songs identified on the schedule, none of the copyrights will reach the 95-year expiration within the next five years. The earliest that a copyright for one of these songs will expire is 2018.

     Copyrighted works are also subject to rights of termination, which may impact whether EMI is able to retain rights during the term of certain copyrights in the catalogue. The Trust cannot determine EMI’s ability to secure renewals of any of the copyrighted works; however EMI is obligated to use its best efforts to do so.

     EMI and the Trust agreed to continue efforts to settle disputes of a net $259,500 arising from deductions taken by EMI in connection with royalty payments to the Trust in prior years, without any litigation.

     In furtherance of those efforts, on October 4, 2007, EMI and the Trust executed a Tolling Agreement, pursuant to which the parties agreed to suspend recognition of the passage of time for purposes of any relevant statute of limitations defenses to claims under the agreement governing the payment of royalties and not to commence litigation while the Tolling Agreement is in force. The Tolling Agreement, which was scheduled to initially expire on April 1, 2008, has been extended by mutual written consent through December 15, 2011.

     As of February 2, 2011, it was announced that EMI has been acquired by Citigroup. It is unclear what if any effect these events could have on EMI and/or the Trust.

     In August, 2011, the Trust engaged an accounting firm specializing in auditing royalty income to determine if the accountings by EMI to the Trust have been in accordance with the

Asset Purchase Agreement over the past several years. The initial phase of the audit will cost $17,500. Thereafter, based upon the findings, the Trust may consider expanding the scope of the audit at additional cost. The audit will begin in November 2011.

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

     The Trust’s receipts are derived principally from copyrights established prior to 1964 and such receipts fluctuate based upon public interest in the “nostalgia” appeal of older copyrighted songs.

     The Trust’s income from the Contingent Portion over the last three calendar years has averaged $1,017,229 per year. In addition to the above, there are a number of factors which create uncertainties with respect to the ability of the Trust to continue to generate the same level of income on a continuing, long-term basis. Those factors include the effect that foreign and domestic copyright laws and any changes therein have or will have on both licensing fees and renewal rights ultimately, copyright expirations under such laws, the effect of electronic copying of materials without permission and a change in the calculation of the Contingent Portion payable to the Trust from EMI beginning for the first quarter of 2010. Prior to the calculation change taking effect, the Contingent Portion payments were each guaranteed to be a minimum of $167,500 per quarter. Starting with the first quarter of 2010, however, there is no longer a guaranteed minimum payment. During the past five years, the quarterly calculation of the Contingent Portion has infrequently been below the guaranteed minimum amount. However, there can be no assurance that future quarterly Contingent Portion payments will not be below the previously guaranteed minimum amount.

     As of December 31, 2010 EMI and the Trust have agreed on the computation of the Contingent Portion for quarterly periods beginning with the first quarter of 2010. Amounts previously owing by EMI based upon the agreed upon method of calculation, were paid to the Trust in December, of 2010. See Note 1 of this quarterly report for a description of the method for calculating the Contingent Portion for quarterly periods commencing with the first quarter of 2010.

     Payments of the Contingent Portion made to the Trust by EMI are based upon royalty income generated from the copyright catalogue. When the existing copyrights begin to expire the size of each Contingent Portion payment may decrease unless new copyrights are acquired and successfully exploited.

     A schedule received in 2011 from EMI (the current owner and administrative entity for the copyright materials) identifies the top 50 earning songs in the catalogue for the year 2010. Ten of the top 50 songs account for approximately 66% of the earnings attributable to the top 50 songs. Each of the top 50 songs identified on the schedule obtained copyright registration under the Copyright Act of 1909 and the songs have registration dates that range from 1922 to 1960.

     Copyright law provides for a possible 95 years of copyright protection, depending upon certain factors, including the initial registration date of each copyright. The copyright for one of the top 50 songs has expired and is in the public domain. However, for 2010, EMI has reported

gross royalties for the expired song that aggregate less than 2% of the gross income of the top 50 earning songs.

     For the balance of the top 50 songs identified on the schedule, none of the copyrights will reach the 95-year expiration within the next five years. The earliest that a copyright for one of these songs will expire is 2018.

     Copyrighted works are also subject to rights of termination, which may impact whether EMI is able to retain rights during the term of certain copyrights in the catalogue. The Trust cannot determine EMI’s ability to secure renewals of any of the copyrighted works; however EMI is obligated to use its best efforts to do so.

     EMI and the Trust agreed to continue efforts to settle disputes of a net $259,500 arising from deductions taken by EMI in connection with royalty payments to the Trust in prior years, without any litigation.

     In furtherance of those efforts, on October 4, 2007, EMI and the Trust executed a Tolling Agreement pursuant to which the parties agreed to suspend recognition of the passage of time for purposes of any relevant statute of limitations defenses to either party could claim under the agreement governing the payment of royalties and not to commence litigation while the Tolling Agreement is in force. The Tolling Agreement, which was scheduled to initially expire on April 1, 2008, has been extended by mutual written consent through December 15, 2011.

     In August, 2011, the Trust engaged an accounting firm specializing in auditing royalty income to determine if the accountings by EMI to the Trust have been in accordance with the Asset Purchase Agreement over the past several years. The initial phase of the audit will cost $17,500. Thereafter, based upon the findings, the Trust may consider expanding the scope of the audit at additional cost. The audit will begin in November 2011.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Trust’s financial condition, changes in financial condition, revenues or expenses, results of operations or liquidity that is material to investors.

Inflation

The Trust does not believe that its activities have been materially affected by inflation.

Item 3. Quantitative and Quantitative Disclosures About Market Risk

Not applicable

Item 4. Disclosure Controls and Procedures

(a)

Controls and Procedures

As of the end of the period covered by this quarterly report, the Trust carried out an evaluation of the effectiveness of the design and operation of the Trust’s “disclosure controls and procedures” (as defined in Rules 13a-15 (e) and 15d-15 (e) of the Securities and Exchange Act of 1934, as amended) under the supervision and with the participation of the Trust’s management, including the chief financial individual providing accounting services and the trust officer of the Corporate Trustee. Based on that evaluation, the chief financial individual providing accounting services and the trust officer of the Corporate Trustee concluded that the Trust’s disclosure controls and procedures are effective.

     Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Trust’s reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Trust’s reports filed under the Exchange Act is accumulated and communicated to Trust’s management, including the chief financial individual providing accounting services and the trust officer of the Corporate Trustee, to allow timely decisions regarding required disclosure.

(b)

Changes in Internal Control over Financial Reporting

There were no changes in the Trust’s internal controls over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     None

Item 1A. Risk Factors

     The Trust is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this item.

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

     None

Item 3. Default Upon Senior Securities

     None

Item 4. Removed and Reserved

Item 5. Other Information

     None

Item 6. Exhibits

Exhibit No.		Description
31.1		Certification by the chief financial individual providing accounting services pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification by the trust officer of the Corporate Trustee pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1*		Certification by the chief financial individual providing accounting services pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2*		Certification by the trust officer for the Corporate Trustee Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS**		XBRL Instance Document
101.SCH**		XBRL Schema Document
101.CAL**		XBRL Calculation Linkbase Documents
101.LAB**		XBRL Labels Linkbase Documents
101.PRE**		XBRL Presentation Linkbase Documents

SIGNATURES

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