MILLS MUSIC TRUST - Quarter Report: 2012 September (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2012

OR

For the transition period from              to             

Commission file Number — 000-02123

MILLS MUSIC TRUST

(Exact name of registrant as specified in its charter)

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 and 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  x    No  ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of the Registrant’s Trust Units outstanding as of September 30, 2012 was 277,712.

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PART I – FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS

MILLS MUSIC TRUST

STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30,

2011

(UNAUDITED)

The accompanying notes are an integral part of the unaudited financial statements.

The Trust does not prepare a balance sheet or a statement of cash flows.

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MILLS MUSIC TRUST

NOTES TO UNAUDITED STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30,

2011

(UNAUDITED)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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 rights 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”). The amounts are currently payable by EMI Music Publishing (“EMI”), the current owner and administrative entity for the copyrighted materials. 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.

HSBC BANK USA, N.A. (“HSBC”) acts as the Corporate Trustee for the Trust.

Proceeds from Contingent Portion Payments

The Trust receives quarterly payments of the Contingent Portion from EMI and distributes the amounts it receives to the owners of the units of beneficial interest in the Trust (the “Unit Holders”), after payment of expenses and liabilities of the Trust. The Declaration of Trust provides that these are the Trust’s sole responsibilities and that the Trust is prohibited from engaging in any business activities.

Payments of the Contingent Portion made to the Trust by EMI are based on royalty income generated by the Catalogue and collected by EMI. The Trust does not own the Catalogue 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 and conditions of the Asset Purchase Agreement.

Calculation of 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 how the Contingent Portion is calculated and a disagreement between EMI and the Trust regarding the calculation method see “Calculation of Contingent Portion” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Cash Distributions to Unit Holders

The Declaration of Trust requires the distribution of all funds received by the Trust to Unit Holders after payment of expenses on a quarterly basis. See the table headed “Statement of Cash Receipts and Disbursements” for information regarding cash disbursements made to Unit Holders during the three months and nine months ended September 30, 2012 and September 30, 2011.

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Accounting Policies

Payments from EMI to the Trust of the Contingent Portion are typically made in March, June, September and December for the prior calendar quarter. The payments received are accounted for on a cash basis, as are 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 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 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 its services, 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. The Declaration of Trust also provides for the reimbursement of expenses reasonably incurred in the performance of a trustee’s duties to the Trust, including clerical and administrative services.

Accordingly, HSBC receives annual compensation and reimbursement for services it performs to the Trust 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 certain limitations and to prior confirmation by Unit Holders holding a majority interest in the Trust.

Pursuant to the terms and conditions of the Declaration of Trust, disbursements to HSBC were made as follows for the three months and nine months ended September 30, 2012 and September 30, 2011:

The administrative office of the Trust is located at HSBC Bank, USA, National Association, Corporate Trust Issuer Services, 452 Fifth Avenue, New York, New York 10018. No expense is being charged or paid by the Trust for the office space and office equipment that is being utilized for the Trust.

NOTE 4. AUDIT OF ROYALTY INCOME

In August 2011 the Trust engaged Prager & Fenton (“Prager”), an accounting firm specializing in auditing royalty income, to determine if payments of the Contingent Portion by EMI to the Trust have been properly made in accordance with the Asset Purchase Agreement. The audit will cost the Trust $50,000 in total, of which $10,000 has been paid to date. For information regarding the audit and its results see “Audit of Royalty Income” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Contingent Portion Payments

The Trust distributes the amounts it receives from EMI to the Unit Holders, after payment of expenses and liabilities of the Trust. The Declaration of Trust provides that these are the Trust’s sole responsibilities and that the Trust is prohibited from engaging in any business activities.

The Trust does not own the Catalogue 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 and conditions of the Asset Purchase Agreement.

Payments of the Contingent Portion are ordinarily distributed to the Trust by EMI approximately two to three months after a quarter ends. The Trust’s annual income from payments of the Contingent Portion over the 2009, 2010 and 2011 calendar years has averaged $1,048,338 per year.

Calculation of Contingent Portion

The amount of each payment of the Contingent Portion is based on a formula provided in the Asset Purchase Agreement. Prior to the first quarter of 2010, the Contingent Portion was calculated as an amount ranging from 65% to 75% of gross royalty income from EMI’s exploitation of the Catalogue for each quarterly period, less royalty expenses (the “Old Calculation Method”). In addition, the Contingent Portion was guaranteed to be at least a minimum of $167,500 per quarter (the “Minimum Payment Obligation”).

Beginning with the first quarter of 2010, the Asset Purchase Agreement provides for certain changes with respect to the calculation of the Contingent Portion. Both EMI and the Trust agree that one such change is that the Minimum Payment Obligation is no longer in effect. The Trust is also of the view that the Contingent Portion payable to the Trust changed to a fixed 75% of gross royalty income from EMI’s exploitation of the Catalogue for each quarterly period, less royalty related expenses (the “New Calculation Method”).

From the first quarter of 2010 through the quarter ended March 31, 2012, EMI made Contingent Portion payments to the Trust in accordance with the New Calculation Method. However, starting with the quarter ended June 30, 2012, EMI reverted back to calculating the Contingent Portion using the Old Calculation Method. As a result of EMI’s use of the Old Calculation Method instead of the New Calculation Method, EMI’s payments of the Contingent Portion for the quarters ended June 30, 2012 and September 30, 2012 were deficient by $77,096 and $13,398, respectively.

Upon being notified of these deficient payments, EMI responded that it believes the payments were proper because the Old Calculation Method remains in effect. EMI also indicated to the Trust that (a) it plans to continue using the Old Calculation Method, (b) the Old Calculation Method should have been used during all prior periods and (c) certain overpayments were made to the Trust as a result of its use of the New Calculation Method during prior periods.

The Trust notified EMI that (a) it does not agree with EMI’s continued use of the Old Calculation Method, (b) the New Calculation Method should be used for all periods since the first quarter of 2010 and (c) that it does not agree that overpayments were made to the Trust in prior periods.

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The Trust is currently in discussions with EMI to attempt to resolve this matter. In furtherance of these discussions EMI and the Trust executed a tolling agreement, dated as of August 17, 2012 (the “2012 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 the parties could claim in connection with the parties’ disagreement regarding the proper calculation method and not to commence litigation without complying with notice provisions contained in the 2012 Tolling Agreement. The 2012 Tolling Agreement also covers potential claims that the Trust may have against EMI concerning underpayments of the Contingent Portion. See “Audit of Royalty Income” under this Item below.

The Trust can offer no assurance that it will be able to recover any additional amounts in connection with the disagreement discussed above or that EMI will ultimately agree with the Trust’s position on the calculation of the Contingent Portion.

The Catalogue

The Catalogue is estimated to be composed of over 25,000 music titles, of which approximately 1,600 produced royalty income in recent years. Most of the royalty income generated by the Catalogue during recent years has been produced by a relatively small number of copyrights established prior to 1964 and is produced by sources in the United States, but the Catalogue also generates royalty income in Canada and other foreign countries in which copyright is claimed.

The Trust’s income is dependent, in part, on EMI’s ability to maintain its rights in the copyrighted songs contained in the Catalogue (the “Copyrighted Songs”) through copyright protection. As the copyrights for the Copyrighted Songs expire, less royalty income will be generated and the size of each payment of the Contingent Portion will be reduced accordingly.

EMI has provided the Trust with a listing of the top 50 earning songs in the Catalogue for the Trust during the 2011 calendar year (the “Top 50 Songs”), together with the Contingent Portion payments made to the Trust during the 2011 calendar year and certain copyright information with respect to each of the Top 50 Songs (the “Listing”). The Listing does not include any information about the copyrights for the 2012 calendar year. A copy of the Listing, as provided by EMI, is included in the Trust’s annual report on Form 10-K for the fiscal year ended December 31, 2011.

Based on the Listing, the Top 50 Songs obtained copyright registration under the United States Copyright Act of 1909 (the “1909 Act”) between 1921 and 1965. For copyrighted works subject to the 1909 Act, copyright law generally provides for a possible 95 years of copyright protection, subject to certain factors, including the initial registration date of each copyright and compliance with certain statutory provisions including notice and renewal. The Copyright expiration dates for the Top 50 Songs range between 1996 and 2060, as set forth in the Listing.

The Copyrighted Songs are subject to statutory rights of termination of transfers, which may impact whether EMI is able to retain its ownership of the Copyrighted Songs during their term of copyright protection. For copyrights governed by the 1909 Act, this termination right vests at the end of two different renewal terms, which vary for each Copyrighted Song.

As the owner of the Catalogue, EMI (and not the Trust) is responsible for administrating the Catalogue and seeking renewals of the Copyrighted Songs. EMI does not provide detailed information to the Trust with respect to the status of renewals. However, the Asset Purchase Agreement provides that EMI is obligated to use its “best efforts” to secure renewals.

The 2007 Tolling Agreement

In 2007 a dispute arose between EMI and the Trust regarding $259,500 in deductions taken by EMI against its payments to the Trust of the Contingent Portion (the “Dispute”). EMI claimed the deductions were made in connection with certain expenses it incurred in years prior to 2007. As of the date of this

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report, the Dispute has not been settled. However, on October 4, 2007, EMI and the Trust executed a tolling agreement (the “2007 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 the parties could claim and not to commence litigation without complying with notice provisions contained in the 2007 Tolling Agreement. The 2007 Tolling Agreement, which was initially scheduled to expire on April 1, 2008, has been extended by mutual written consent through December 15, 2012.

Audit of Royalty Income

In August 2011 the Trust engaged Prager, an accounting firm specializing in auditing royalty income, to determine if payments of the Contingent Portion by EMI to the Trust have been properly made in accordance with the Asset Purchase Agreement. Prager’s final audit report (the “Prager Report”), which covers the period from January 1, 2000 to June 30, 2011 (the “Audit Period”), was delivered to the Trust on September 25, 2012. The audit will cost the Trust $50,000 in total, of which $10,000 has been paid to date.

The Prager Report identified multiple underpayments of the Contingent Portion during the Audit Period. The Trust is currently discussing the results of the audit with EMI and is attempting to seek recovery of the underpayments. In furtherance of these discussions EMI and the Trust agreed that the 2012 Tolling Agreement would cover any claims that had not already expired relating to Contingent Portion payments made during the Audit Period, in addition to claims relating to the calculation method disagreement discussed in this Item above. The Trust can offer no assurance that it will be able to recover any additional amounts from EMI related to the underpayments identified by the Prager Report.

Status of EMI

In 2011 it was announced that EMI was acquired by Citigroup and that Citigroup subsequently sold EMI’s music publishing business entity, which owns the Catalogue, to a group led by Sony Corp. EMI has informed the Trust that it does not anticipate the sale having a material impact on the Trust.

Inflation

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

Liquidity and Capital Resources

The Declaration of Trust requires the distribution of all funds received by the Trust to the Unit Holders after payment of expenses on a quarterly basis. See the table headed “Statement of Cash Receipts and Disbursements” under Part 1, “Financial Statements” for information regarding cash disbursements made to Unit Holders during the three months and nine months ended September 30, 2012 and September 30, 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.

ITEM 3. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

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ITEM 4. 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.

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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 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.