Accounting Policies and General Information

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Accounting Policies and General Information

NOTE 1. ACCOUNTING POLICIES AND GENERAL INFORMATION

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 Trust’s 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.

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.

Contingent Portion Payments

Payments of the Contingent Portion to the Trust are ordinarily made on a quarterly basis, approximately two to three months after a quarter ends. The Trust distributes 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 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 the exploitation of the Catalogue for each quarterly period, less royalty expenses. 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. 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 the exploitation of the Catalogue for each quarterly period, less royalty related expenses (the “New Calculation Method”). However, EMI has disputed that the New Calculation Method is the correct interpretation of the Asset Purchase Agreement. As a result of EMI not applying the New Calculation Method, EMI’s payments of the Contingent Portion have been deficient, in the Trust’s view, by the following amounts (the “Underpayments”):

Quarterly Payment Period	Amount of Deficiency
March 31, 2016	$	79,889
September 30, 2016	$	37,529
March 31, 2017	$	85,359
September 30, 2017	$	41,557
March 31, 2018	$	98,901
September 30, 2018	$	75,712
March 31, 2019	$	71,489
June 30, 2019	$	41,786
September 30, 2019	$	68,571
Total	$	600,793

As of the date hereof, the Trust has not received the Underpayments, and EMI has expressly disagreed with the Trust. The Trust can offer no assurance that it will be able to recover any of the Underpayments or that it will resolve favorably the ongoing dispute relating to the New Calculation Method with respect to future payments of the Contingent Portion.

Recent Audit Settlement Payment

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 during the period beginning on October 1, 2011 and ending on December 31, 2015 (the “Audit Period”). Prager’s final report (the “Prager Report”) was delivered to Sony/ATV on August 14, 2017. The audit cost the Trust an aggregate of $130,284, all of which has been paid to date. The Prager Report identified multiple asserted royalty omissions and expense over-deductions from the Contingent Portion during the Audit Period.

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 “2019 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.

Unit Holder Distributions and Trust Expenses

Recent Payments

During the year ended December 31, 2019, the Trust received a total of $2,058,976 from EMI, $1,000,000 of which was attributable to the 2019 Settlement payment and the remainder of which was attributable to ordinary Contingent Portion Payments which EMI made to the Trust during the 2019 calendar year. During the year ended December 31, 2018, the Trust received a total of $1,036,335 from EMI, all of which was attributable to ordinary Contingent Portion Payments which EMI made to the Trust during the 2018 calendar year

Recent Distributions

During the year ended December 31, 2019, the Trust made cash distributions to Unit Holders in the aggregate amount of $1,805,109 ($6.50 per Trust Unit), as compared to cash distribution to Unit Holders in the aggregate amount of $790,184 ($2.85 per Trust Unit), during the year ended December 31, 2018. For computation details regarding the distributions made during the year ended December 31, 2019, please refer to the quarterly distribution report, dated December 23, 2019, attached as Exhibit 99.1 to the Current Report on Form 8-K, which the Trust filed with the Securities and Exchange Commission on December 23, 2019.

Cash and Administrative Expenses

As of December 31, 2019 the Trust had $1,425 unpaid administrative expenses for services rendered to the Trust. As of March 20, 2020, the Trust had received invoices for an aggregate of $14,472 in unpaid administrative expenses for services rendered to the Trust.

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 Declaration of Trust provides for the distribution of all funds received by the Trust to the Unit Holders after expenses are paid.

The Trust’s 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.