10-K: Mills Music Trust Reports 2023 Financial Results Amidst Ongoing Royalty Dispute

Mills Music Trust reports its 2023 financial results, highlighting a slight increase in receipts and distributions while navigating a persistent dispute over royalty payments.

Summary

• Mills Music Trust's 2023 receipts from EMI totaled $1,237,548, a slight increase from $1,127,613 in 2022.
• The Trust distributed $863,852 to unit holders in 2023, equating to $3.11 per unit, compared to $800,903 or $2.88 per unit in 2022.
• The Trust is engaged in an ongoing dispute with EMI regarding the calculation of contingent royalty payments, with the Trust claiming underpayments of $1,310,400 since 2016.
• A special audit identified additional royalty omissions and expense over-deductions, which EMI disputes.
• The Trust's financial statements are prepared on a cash basis, not an accrual basis, and do not include a balance sheet or statement of cash flows.
• The Trust relies on EMI to collect royalties and remit a portion to the Trust, and the Trust does not own the music catalog or any copyrights.
• The music catalog consists of over 12,000 titles, with approximately 1,430 generating royalty income in recent years, primarily from songs copyrighted before 1960.
• The top 50 earning songs for 2023 were listed, including their writers, original copyright dates, renewal dates, and public domain entry dates.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the ongoing dispute with EMI over royalty payments and the uncertainty surrounding the recovery of underpayments. While distributions increased, the unresolved issues and dependence on a third party for revenue generation create a cautious outlook.

Positives

• The Trust saw an increase in receipts from EMI in 2023 compared to 2022.
• Cash distributions to unit holders also increased in 2023 compared to 2022.
• The Trust is actively pursuing the resolution of the royalty underpayment dispute with EMI.
• The Trust has secured extensions to the tolling agreement with EMI to allow for continued negotiations.

Negatives

• The Trust is involved in a significant dispute with EMI over the calculation of contingent royalty payments, resulting in substantial underpayments.
• EMI disputes the findings of the special audit, creating uncertainty about the recovery of additional funds.
• The Trust's income is dependent on EMI's ability to maintain rights to the copyrighted songs, which are subject to expiration and termination rights.
• The Trust's financial statements are prepared on a cash basis, which may not provide a complete picture of its financial position.

Risks

• The ongoing dispute with EMI over royalty payments could negatively impact the Trust's future income.
• The expiration of copyrights for the songs in the catalog could lead to a decline in royalty income over time.
• The Trust is dependent on EMI's ability to collect royalties and maintain rights to the copyrighted songs.
• Cybersecurity threats to the systems of the Corporate Trustee and third parties could lead to corruption or miscalculation of royalty income.
• The Trust does not have its own cybersecurity risk management program and relies on third parties for data security.

Future Outlook

The Trust is in ongoing discussions with EMI to resolve the dispute over royalty payments and to potentially extend the tolling agreement. The Trust's future income is dependent on the resolution of this dispute and the continued performance of the music catalog.

Management Comments

• The Trust is 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.
• EMI has disputed that the New Calculation Method is the correct interpretation of the Asset Purchase Agreement.
• The Trust can offer no assurance that it will be able to recover any of the Underpayments or other amounts identified in the Citrin Report, or that it will resolve the dispute relating to the New Calculation Method with respect to future payments of the Contingent Portion.

Industry Context

The music publishing industry is characterized by complex royalty agreements and the management of extensive copyright catalogs. The dispute between Mills Music Trust and EMI highlights the challenges in ensuring accurate and timely royalty payments, particularly for older catalogs. The reliance on third-party administrators like Sony/ATV also adds a layer of complexity.

Comparison to Industry Standards

• The Mills Music Trust operates under a unique structure as a trust receiving contingent payments based on a historical catalog sale, unlike typical music publishing companies that directly own and manage copyrights.
• While companies like Universal Music Publishing Group, Sony Music Publishing, and Warner Chappell Music manage vast catalogs and generate revenue through various licensing streams, the Trust's income is solely dependent on the contingent payments from EMI.
• The Trust's reliance on a fixed percentage of gross royalty income, as opposed to the more complex revenue models of major publishers, makes its financial performance directly tied to the success of the catalog and the accuracy of EMI's reporting.
• The ongoing dispute over royalty calculations is not uncommon in the industry, as royalty accounting can be complex and subject to interpretation, but the scale of the claimed underpayments is significant for a trust of this size.
• The Trust's lack of direct control over the catalog and its reliance on EMI for royalty collection and reporting is a key difference from standard industry practices where publishers actively manage their catalogs.

Management Changes

Related Party Transactions

• The Trustees are paid in accordance with the Declaration of Trust, with annual compensation of $2,500 each, not to exceed 3% of the Contingent Portion amounts received by the Trust in any year.
• The Trust reimburses the Trustees for expenses reasonably incurred in the performance of their duties, including clerical and administrative services.
• The Corporate Trustee also receives fees for its services as the Registrar and Transfer Agent of the Trust Units.

Stakeholder Impact

• Unit holders are impacted by the ongoing dispute with EMI, which could affect future distributions.
• The Trust's reliance on EMI for royalty payments and catalog management creates a dependency that could affect the long-term value of the Trust.
• The resignation of an Individual Trustee may require the Trust to seek a replacement, potentially impacting governance.

Next Steps

• The Trust will continue discussions with EMI to resolve the royalty payment dispute.
• The Trust may seek further extensions to the tolling agreement with EMI.
• The Trust will continue to monitor the performance of the music catalog and its impact on royalty income.
• The Trust will continue to distribute available funds to unit holders after payment of expenses.

Key Dates

Keywords

Mills Music Trust, royalty payments, copyright catalog, EMI, contingent portion, music publishing, trust units, distributions, underpayments, copyrights