##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Check one

ý
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended December 31, 2003 or ̈
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


Commission file number 000-50160

HECHINGER LIQUIDATION TRUST
(Exact name of Registrant as specified in its charter)

Delaware
    
    52-7230151(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification No.)


1801 McCormick Drive, Largo, Maryland
    
    20774(Address of principal executive offices)
    
    (Zip Code)


Registrants telephone number, including area code: (301) 883-4501

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 ý     No  ̈

Indicate by mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).

Yes  ̈     No ý

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes ý     No  ̈





---



##### 



HECHINGER LIQUIDATION TRUST
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003

Description
    
    PagePART I.   FINANCIAL INFORMATION:Item 1.   Financial StatementsUnaudited Statements of Net Assets in Liquidation
    
    
    3Unaudited Statements of Changes in Net Assets in Liquidation
    
    
    4Unaudited Statements of Cash Receipts and Disbursements
    
    
    5Notes to Unaudited Financial Statements
    
    
    6Item 2.   Managements Discussion and Analysis of Financial Condition andResults of Operations
    
    
    12Item 3.   Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4.   Controls and Procedures
    
    
    18PART II.   OTHER INFORMATION:Item 1.   Legal Proceedings
    
    
    19Item 2.   Changes in Securities and Use of Proceeds
    
    
    19Item 3.   Defaults Upon Senior Securities
    
    
    19Item 4.   Submission of Matters to a Vote of Security Holders
    
    
    19Item 5.   Other Information
    
    
    20Item 6.   Exhibits and Reports on Form 8-K
    
    
    20SIGNATURES
    
    
    21INDEX TO EXHIBITS
    
    
    22


2



---



##### 



PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

Hechinger Liquidation Trust
Unaudited Statements of Net Assets in Liquidation
($ in thousands)

As of
    
    As ofDecember 31,
    
    September 30,2003
    
    2003AssetsCash and cash equivalentsDesignated as available for
distribution to holders of
impaired claims
    
    $
    4,284
    
    
    $
    7,136Reserved
    
    
    21,203
    
    
    
    24,288Restricted
    
    
    9,657
    
    
    
    9,730Other
    
    
    7,817
    
    
    
    5,683Total cash and cash equivalents
    
    
    42,961
    
    
    
    46,837Preference receivables (net of costs of
recovery of $1,001 and $1,491,
respectively)
    
    
    8,955
    
    
    
    5,955Other assets
    
    
    1,503
    
    
    
    1,503Total assets
    
    
    53,419
    
    
    
    54,295LiabilitiesUnimpaired claims payable
    
    
    10,919
    
    
    
    11,044Convenience claims payable
    
    
    21
    
    
    
    22Uncashed claims checks
    
    
    250
    
    
    
    377Distributions payable to holders of
allowed impaired claims
    
    
    425
    
    
    
    665Estimated costs of liquidation
    
    
    4,801
    
    
    
    7,611Total liabilities
    
    
    16,416
    
    
    
    19,719Net Assets in Liquidation
    
    $
    37,003
    
    
    $
    34,576


See accompanying notes to unaudited financial statements.



3



---



##### 



Hechinger Liquidation Trust
Unaudited Statements of Changes in Net Assets in Liquidation
($ in thousands)

For the Quarter
    
    For the QuarterEnded
    
    EndedDecember 31, 2003
    
    December 31, 2002Increase/(decrease) in Net Assets in LiquidationIncrease in estimated fair value of
preference receivables, net
    
    $
    3,750
    
    
    $
    Decrease in estimated fair value of
unimpaired claims payable
    
    
    
    
    
    
    584Interest income
    
    
    63
    
    
    
    176Other increases
    
    
    40
    
    
    
    47Increase in Net Assets in Liquidation
before distributions authorized
    
    
    3,853
    
    
    
    807Distributions authorized
    
    
    1,426
    
    
    
    970Net increase/(decrease) in Net Assets in Liquidation
after distributions authorized
    
    
    2,427
    
    
    
    (163
    )Net Assets in Liquidation at beginning of period
    
    
    34,576
    
    
    
    44,182Net Assets in Liquidation at end of period
    
    $
    37,003
    
    
    $
    44,019


See accompanying notes to unaudited financial statements.



4



---



##### 



Hechinger Liquidation Trust
Unaudited Statements of Cash Receipts and Disbursements
($ in thousands)

For the Quarter
    
    For the QuarterEnded
    
    EndedDecember 31, 2003
    
    December 31, 2002Cash receiptsPreference collections, before costs of recovery
    
    $
    1,239
    
    
    $
    3,738Interest income
    
    
    64
    
    
    
    176Other receipts
    
    
    40
    
    
    
    554Total cash receipts
    
    
    1,343
    
    
    
    4,468Cash disbursementsCosts of liquidationLegal and professional feesLitigation
    
    
    1,490
    
    
    
    2,093Trust operations
    
    
    720
    
    
    
    510Preference recoveries
    
    
    490
    
    
    
    528Operating expenses
    
    
    600
    
    
    
    659Unimpaired and convenience claims
    
    
    126
    
    
    
    575Reissued/(voided) claims checks, net
    
    
    127
    
    
    
    (63
    )Total cash disbursements
    
    
    3,553
    
    
    
    4,302(Decrease)/increase in cash and cash equivalents
before distributions paid
    
    
    (2,210
    )
    
    
    166Distributions paid
    
    
    1,666
    
    
    
    2,595Decrease in cash and cash equivalents
    
    
    (3,876
    )
    
    
    (2,429
    )Cash and cash equivalents at beginning of period
    
    
    46,837
    
    
    
    62,641Cash and cash equivalents at end of period
    
    $
    42,961
    
    
    $
    60,212


See accompanying notes to unaudited financial statements.

5



---



##### 



Hechinger Liquidation Trust
Notes to Unaudited Financial Statements

1. Background and Basis of Presentation

Background

Hechinger Liquidation Trust (the Liquidation Trust) was established
effective October 26, 2001 (the Effective Date) in accordance with the
Revised First Amended Consolidated Plan of Liquidation (the Plan) for
Hechinger Investment Company of Delaware, Inc. and affiliates, (the Debtors)
confirmed by the United States Bankruptcy Court for the District of Delaware
(the Bankruptcy Court) by an order dated October 5, 2001.

The Liquidation Trust has no authority to engage in any trade or business.
The purpose of the Liquidation Trust is to (i) liquidate any and all remaining
assets of the Debtors; (ii) pursue causes of action assigned to the Liquidation
Trust, including preference, fraudulent conveyance and other avoidance actions;
(iii) resolve, either consensually or through litigation, all disputed claims
asserted against the Debtors (Disputed Claims), pursuant to the Plan; and
(iv) make all distributions required under the Plan (Distributions), and
payments to holders of claims allowed pursuant to the Plan (Allowed Claims
and, together with the Disputed Claims, the Claims). The Liquidation Trust
will terminate upon the earlier of (a) the fulfillment of its purpose by the
liquidation of all of its assets and the distribution of the proceeds of the
liquidation thereof in accordance with the Plan, or (b) by October 26, 2005,
unless the Bankruptcy Court approves an extension of the term.

Pursuant to the Bankruptcy Code, certain types of Allowed Claims will be
paid in full under the Plan. Such Claims are therefore referred to as
Unimpaired Claims. The Plan defines which types of Claims are paid in full.

The Liquidation Trust exists primarily for the benefit of the majority of
claimants who will not be repaid in full for the amounts the Debtors owed them
as of the bankruptcy filing. These Claims are referred to as Impaired Claims
because the rights of the claimants have been impaired by the Debtors
bankruptcy. Each holder of an Allowed Claim in the Plans Class 4A (Senior
Unsecured Claims), Class 4B (General Unsecured Claims), and Class 5
(Subordinated Debentures Claims) is deemed to hold a pro rata beneficial
interest (the Beneficial Interests) in the Liquidation Trust based upon the
amount of their Allowed Impaired Claim as compared to the total amount of all
Impaired Claims ultimately Allowed. When and to the extent Disputed Impaired
Claims become Allowed Impaired Claims, holders of such Claims become holders of
Beneficial Interests in accordance with the Plan.

The holders of Beneficial Interests receive all remaining net proceeds of
the Liquidation Trust, if any, after the expenses and all creditors of the
Liquidation Trust, including Allowed Unimpaired and Convenience Claims (certain
small Claims to be paid at 7.5% of their Allowed amounts in accordance with the
Plan) are paid, and all contingencies are resolved. Holders of each Class of
Beneficial Interests (i.e., each Class of Impaired Claims) have the same
rights, except with respect to payment of Distributions.

During August 2002, the Bankruptcy Court authorized the Liquidation Trust
to make an initial Distribution to holders of Beneficial Interests (i.e., to
holders of Allowed Impaired Claims), at the rate of 4.515% of the Allowed
amount of the Impaired Claims. The Liquidation Trust also established a
reserve of 4.515% of the estimated amount of Disputed Impaired Claims, using
the estimated value of such Claims approved by the Bankruptcy Court for reserve
purposes. During June 2003, the Liquidation Trust made a second interim
Distribution at the rate of 2.058%, and increased the reserve for each
remaining Disputed Impaired Claim based on the cumulative 6.573% Distribution
rate.

6



---



##### 



Basis of Presentation

The Liquidation Trusts financial statements have been prepared using the
liquidation basis of accounting. Under this method of accounting, the
Statements of Net Assets in Liquidation reflect all assets and liabilities,
including the projected total cost of liquidating the assets and winding down
the affairs of the Liquidation Trust, at estimated fair value. Unimpaired
Claims, to be paid in full, are reflected in the Statements of Net Assets in
Liquidation as liabilities at estimated aggregate settlement amounts.
Convenience Claims are also recorded as liabilities, at their estimated payment
amount. The Statements of Changes in Net Assets in Liquidation primarily
reflect any authorized Distributions to holders of Beneficial Interests and
changes in the estimated fair value of the Liquidation Trusts assets and
liabilities. The Liquidation Trusts fiscal year ends on September 30.

The accompanying unaudited financial statements reflect all adjustments,
consisting only of normal recurring adjustments that are, in the opinion of the
Liquidation Trustee, necessary for a fair statement of the results for the
interim periods presented. Such financial statements and these notes thereto
should be read in conjunction with the audited Liquidation Trust financial
statements as of September 30, 2003 and September 30, 2002, and for the periods
from October 1, 2002 through September 30, 2003 and from October 26, 2001
(Effective Date) through September 30, 2002, and the notes thereto.

The amounts shown in this document are rounded and are therefore
approximate.

Certain amounts in the unaudited financial statements for the quarter
ended December 31, 2002 have been reclassified to conform to the presentation
for the current period.

2. Significant Accounting Policies

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires the Liquidation Trustee to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities. Actual
results are likely to differ from those estimates and those differences may be
significant.

Cash and Cash Equivalents

The Liquidation Trust considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents. The
Liquidation Trust holds substantially all cash balances in operating and
investment accounts in excess of federally insured limits. Cash is classified
as: Designated as Available for Distribution to Holders of Impaired Claims,
Reserved, Restricted, and Other (see Note 3).

Taxes

The Liquidation Trust is intended to qualify as a liquidating trust for
federal income tax purposes, and therefore should be taxable as a grantor
trust. The holders of Beneficial Interests will be treated as grantors;
accordingly, their pro rata share of all items of income, gain, loss, deduction
and credit will be included in the income tax returns of the holders of
Beneficial Interests.

The Liquidation Trust will pay applicable taxes on the taxable income and
gain allocable to holders of Disputed General Unsecured Claims on behalf of
such holders and, when such Disputed Claims are ultimately resolved, holders
whose Disputed Claims were determined to be Allowed Claims will receive
Distributions from the Liquidation Trust, net of taxes, if any, which the
Liquidation Trust previously paid on their behalf.

7



---



##### 



The Liquidation Trust incurs no taxable income or gain on its own behalf;
therefore, no tax provision is recorded in the financial statements of the
Liquidation Trust.

3. Cash

Cash is invested in highly liquid investments with a maturity of three
months or less, and in accordance with Section 345 of the Bankruptcy Code or as
otherwise permitted by order of the Bankruptcy Court. Under the terms of the
Plan, the Liquidation Trust is not required to segregate funds for reserves.

Cash Designated as Available for Distribution to Holders of Impaired
Claims (Available Cash) is designated to assure the availability of funds for
payment to holders of Impaired Claims who have not received their
Distributions. The amount pertaining to the reserve for Disputed Impaired
Claims is based on the estimated amount of Disputed Impaired Claims approved by
the Bankruptcy Court pursuant to the Reserve Order. Available Cash
does not include Reserved Cash, Restricted Cash, or Other Cash, each
further described below.

Available Cash consists of:

($ in thousands)
    
    As of
    
    As ofDecember 31, 2003
    
    September 30, 2003Distributions payable
    
    $
    425
    
    
    $
    665Reserve for remainingDisputed Impaired Claims at 6.573%
    
    
    3,859
    
    
    
    6,471Total Available Cash
    
    $
    4,284
    
    
    $
    7,136


Reserved Cash is held by the Liquidation Trust to assure payment of the
Liquidation Trusts obligations in accordance with the Plan. Under the terms
of the Plan, Reserved Cash is intended to provide for (a) operating expenses of
the Liquidation Trust, (b) estimated payments to holders of Allowed Unimpaired
and Convenience Claims in accordance with the Plan, and (c) payments which may
become necessary if and as Disputed Unimpaired Claims become Allowed, or if
certain specific contingencies should occur. See Note 10 for details of
specific reserves and their related amounts.

Restricted Cash consists of cash held as collateral for a letter of credit
(see Note 6) and cash held in an escrow account.

Other Cash is cash and cash equivalents not designated to a specific
reserve or fund.

4. Preference Receivables

The Liquidation Trusts preference receivables are reflected in the
accompanying Statements of Net Assets in Liquidation at their estimated fair
value of $9.0 million, net of estimated costs of recovery of $1.0 million, for
75 preference cases being actively pursued and for settlement collections in
progress at December 31, 2003; and $5.9 million, net of estimated costs of
recovery of $1.5 million, for 90 preference cases being actively pursued and
for settlement collections in progress at September 30, 2003.

The Liquidation Trust originally assigned no value to certain of the
largest potential preference cases until fact-finding and initial negotiation
indicated that some collection was likely. During the quarter ended December
31, 2003, the last remaining such preference case was settled for $3.8 million,
resulting in an increase in the estimated fair value of preference receivables
of that amount.

The fair value of Liquidation Trust assets is reassessed at least
quarterly and adjustments to estimated fair values are reflected in the period
in which they become known. The eventual net realizable value of preference
receivables is likely to differ from their estimated net fair value and these
differences may be significant.

8



---



##### 



5. Other Assets

Other assets consists mainly of a receivable from Kemper Insurance Company
(Kemper), the insurer for the Debtors workers compensation claims for a
number of years, which is potentially subject to offset as collateral for the
Kemper Claim (see Note 6). Additionally, the Liquidation Trust holds
miscellaneous receivables from various former vendors, service providers, and
others. Other assets is reported at estimated net fair value, based on either
the amount paid (generally in the form of cash deposits) or the estimated
recoverable amount, whichever is more determinable. The eventual net
realizable value of these assets is likely to differ from their estimated net
fair value and these differences may be significant.

6. Unimpaired Claims Payable

Unimpaired Claims payable represents the estimated aggregate settlement
amount of Unimpaired Claims against the Debtors prior to the Effective Date of
the Plan, which will be paid out at 100% of their Allowed amount. Such Claims
are valued at the Liquidation Trusts best estimate of the amount that will
ultimately be allowed.

Unimpaired Claims payable consists of:

($ in thousands)
    
    As of
    
    As ofDecember 31, 2003
    
    September 30, 2003Allowed Claims
    
    $
    1,396
    
    
    $
    1,392Estimated fair value of Disputed Claims
    
    
    9,523
    
    
    
    9,652Total Unimpaired Claims payable
    
    $
    10,919
    
    
    $
    11,044Asserted value of Disputed Claims
    
    $
    9,643
    
    
    $
    10,008Number of Disputed Claims
    
    
    14
    
    
    
    22


The largest remaining Disputed Unimpaired Claim is a secured Claim
asserted by Kemper (the Kemper Claim) for payment of certain liability claims
against the Debtors (the Insurance Claims). In addition to certain amounts
payable to the Liquidation Trust (see Note 5), Kemper holds an irrevocable
cash-collateralized letter of credit with a balance of $8.9 million and $9.0
million as of December 31, 2003 and September 30, 2003, respectively. The Liquidation Trust
believes that the value of these Insurance Claims is substantially lower than
the collateral held by Kemper. Kemper and the Liquidation Trust have not established a mutually agreeable basis for
determining the fair value of the Insurance Claims; as a result, the
Liquidation Trust has continued to value the Kemper Claim in Unimpaired Claims payable at the full amount of the letter of credit
held by Kemper. On December 3, 2003, the Liquidation Trust filed a complaint
in the Bankruptcy Court requesting, among other things, that the Bankruptcy
Court fix the amount of the Kemper Claim and compel the return of excess
collateral, deposits and other amounts held by Kemper to the Liquidation Trust
(see Note 12). The ultimate fair value of this Claim is likely to differ from
its estimated fair value and the difference may be significant.

Unimpaired Claims are valued by reviewing the facts available to the
Liquidation Trust, including the Debtors records and information submitted by
the claimants, and estimating the ultimate settlement value of the Claims. The
fair value of Unimpaired Claims payable is reassessed at least quarterly and
adjustments to estimated fair values are reflected in the period in which they
become known. However, no assurance can be given as to the ultimate allowance,
disallowance or settlement of the remaining Disputed Unimpaired Claims,
individually or in the aggregate.

9



---



##### 



7. Uncashed Claims Checks

Pursuant to the Plan, any Claims payments and Distributions which remain
uncashed for 90 days following their issuance date are forfeited to the
Liquidation Trust for Distribution to other holders of Allowed Claims. Pending
a final order from the Bankruptcy Court, the Liquidation Trust has treated such
items as a liability. Such checks may be reissued upon request of the payee,
subject to applicable fees.

8. Distributions Payable

Distributions payable primarily represents 6.573% of the Allowed amount of
Impaired Claims for which the Liquidation Trust had not yet paid Distributions.
A number of holders of such Allowed Claims, while otherwise eligible for
Distributions, had either not yet provided all the information necessary for
payment, or were subject to an offsetting claim by the Liquidation Trust which
had not yet been resolved. Until all such issues are resolved, the holder of
an Allowed Claim may not receive a Distribution.

9. Estimated Costs of Liquidation

The Wind-down Reserve and Litigation Reserve described below together
constitute the estimated costs of liquidation in the accompanying Statements of
Net Assets in Liquidation.

Under the Plan, the Liquidation Trust was required to establish and fund a
reserve to pay administration costs and costs of holding and liquidating the
Liquidation Trusts assets (the Wind-down Reserve). The Liquidation Trust
believes the Wind-down Reserve of $3.8 million as of December 31, 2003 is
sufficient to cover the projected costs of operating the Liquidation Trust,
consisting mainly of personnel, facilities and professional fees, through its
anticipated termination. Substantially all of the operations of the
Liquidation Trust are expected to cease in early 2004, followed by certain
necessary legal and accounting processes to be completed thereafter.

Pursuant to the Plan, the Liquidation Trust also established and funded a
reserve to pay the costs of pursuing certain actions, primarily those referred
to as the Bondholder Action and the Committee Action (the Litigation
Reserve). The Liquidation Trust believes the Litigation Reserve of $1.0
million as of December 31, 2003 is sufficient to cover the costs of pursuing
both the Bondholder Action and the Committee Action through a decision in the
Bondholder Action, expected during 2004. The trial of the Committee Action,
previously scheduled for January 2004, was adjourned without a new date,
pending the outcome of the Bondholder Action trial held in October
2003. The delay in holding the
Committee Action trial, as well as the potential effect the outcome of the
Bondholder Action trial could have on the remaining course of the Committee
Action, may affect the adequacy of the Litigation Reserve. Any future funding
of the Litigation Reserve for the Committee Action can only be assessed after a
decision is received in the Bondholder Action. Because any increase in the
Litigation Reserve requires approval, as provided for in the Plan, an increased
estimate would not be reflected in the financial statements of the Liquidation
Trust until such time as this estimate of additional future costs, if any, can
be determined and the requisite approval is obtained.

The
fair value of the estimated costs of liquidation is reassessed at least
quarterly and adjustments to estimated fair values are reflected in the period
in which they become known.

10



---



##### 



10. Bankruptcy Reserves Required

Reserves, other than those funded by Restricted Cash, or included in
Available Cash, consist of:

($ in thousands)
    
    As of
    
    As ofDecember 31, 2003
    
    September 30, 2003Liability ReservesWind-down (net of related escrow of $278)
    
    $
    3,552
    
    
    $
    4,873Litigation
    
    
    970
    
    
    
    2,460Unimpaired Claims (net of collateralized letter
of credit of $8,918 and $9,002, respectively)
    
    
    2,001
    
    
    
    2,042Uncashed Claims checks
    
    
    250
    
    
    
    377Convenience Claims
    
    
    21
    
    
    
    22Total Liability Reserves
    
    
    6,794
    
    
    
    9,774Contingency ReservesFleet
    
    
    11,000
    
    
    
    11,000Excess Disputed Unimpaired Claims
    
    
    350
    
    
    
    425Preference settlement Claims
    
    
    59
    
    
    
    89Minimum reserve
    
    
    3,000
    
    
    
    3,000Total Contingency Reserves
    
    
    14,409
    
    
    
    14,514Total Reserves
    
    $
    21,203
    
    
    $
    24,288


The Fleet reserve, established pursuant to a stipulated order between
Fleet Retail Finance Inc. (Fleet) and the Liquidation Trust, is likely to be
drawn upon if Fleet, as a defendant in the Committee Action and the Bondholder
Action, should prevail. No liability has been accrued in connection with the
Fleet reserve because the Liquidation Trust does not consider Fleet likely to
prevail in either of these actions.

11. Impaired Claims

The Liquidation Trusts estimate of Impaired Claims consists of:

($ in thousands)
    
    As of
    
    As ofDecember 31, 2003
    
    September 30, 2003Allowed Claims
    
    $
    696,202
    
    
    $
    674,508Estimated fair value of Disputed
Claims
    
    
    56,621
    
    
    
    84,219Total estimated Impaired Claims
    
    $
    752,823
    
    
    $
    758,727Asserted value of Disputed Claims
    
    $
    85,271
    
    
    $
    128,213Number of Disputed Claims
    
    
    128
    
    
    
    172


No assurance can be given as to the ultimate allowance, disallowance or
settlement of the remaining Disputed Impaired Claims, individually or in the
aggregate. The decrease in estimated fair value from September 30, 2003 to
December 31, 2003 resulted primarily from (i) the settlement of a number of
lease rejection Claims at less than the previously estimated amounts and (ii)
vendor waivers of Claims, which had previously been included in the fair value
estimate, as a result of preference settlement negotiations.

11



---



##### 



12. Contingencies

On December 3, 2003, the Liquidation Trust filed a complaint in the United
States Bankruptcy Court for the District of Delaware styled Hechinger
Liquidation Trust, Plaintiff, vs. Broadspire Services, Inc., Kemper Risk
Management Group, American Motorists Insurance Company, Lumbermans Mutual
Casualty Company, American Manufacturers Mutual Insurance Company, American
Protection Insurance Company, and National Loss Control Services Corporation,
Defendants (the Kemper Complaint).

In the Kemper Complaint, arising under various insurance policies that the
Debtors purchased from Kemper, the Liquidation Trust seeks, among other things,
an estimate under Section 502(c) of the Bankruptcy Code of the aggregate loss
amounts owed by the Liquidation Trust for the Insurance Claims, a reduction in
the letter of credit securing the amount owed by the Liquidation Trust with
respect to such Insurance Claims, and the return of excess collateral, deposits
and other amounts held by Kemper to the Liquidation Trust. Kemper holds an
irrevocable cash-collateralized letter of credit with a balance of $8.9 million
and $9.0 million as of December 31, 2003 and September 30, 2003, respectively,
to secure payment of the Insurance Claims. In addition, Kemper holds certain
other collateral, deposits, and amounts due to the Liquidation Trust. In the
Kemper Complaint, the Liquidation Trust alleges that its estimated liability
for the Insurance Claims is less than $1.0 million, substantially lower than
the letter of credit balance and other amounts held by Kemper. While the
Liquidation Trust is pursuing this litigation with the intent to obtain a very
substantial recovery, the Liquidation Trust cannot predict with any certainty
the outcome of the litigation or the amount or range of potential recoveries.

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

Reference is made to the unaudited financial statements of the Liquidation
Trust as of December 31, 2003 and September 30, 2003 and for the quarters ended
December 31, 2003 and December 31, 2002, and the notes thereto (the Unaudited
Liquidation Trust Financial Statements), included in Part I of this Form 10-Q.
The following information concerning the Liquidation Trusts financial
performance and condition should be read in conjunction with the audited
Liquidation Trust financial statements as of September 30, 2003 and September
30, 2002 and for the periods from October 1, 2002 through September 30, 2003
and from October 26, 2001 (Effective Date) through September 30, 2002, and the
notes thereto.

The Unaudited Liquidation Trust Financial Statements have been prepared on
the same basis as the audited Liquidation Trust financial statements, using the
liquidation basis of accounting, and, in the opinion of the Liquidation
Trustee, contain all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of the Liquidation Trusts results for such
periods. The Liquidation Trusts results for the quarter ended December 31,
2003 are not necessarily indicative of the results to be expected for any other
interim period or any future fiscal year. All amounts are rounded and are
therefore approximate.

I. Accounting Policies and Estimates

The following discussion and analysis of the Liquidation Trusts changes
in net assets in liquidation, cash receipts and disbursements, and net assets
in liquidation is based on the Unaudited Liquidation Trust Financial Statements
which have been prepared in accordance with accounting principles generally
accepted in the United States of America and in accordance with the liquidation
basis of accounting. During preparation of these financial statements, the
Liquidation Trustee is required to make certain estimates and assumptions which
affect the reported amounts of assets and liabilities in liquidation at
estimated fair value, resolution of disputed claims, resolution of current and
potential litigation and the fair value, and related disclosure, of contingent
assets and liabilities. On an ongoing basis, the Liquidation Trustee evaluates
and updates these estimates and assumptions based on historical experience and
on various other assumptions the Liquidation Trustee believes are reasonable
under the circumstances. Actual results may differ from these estimates and
different assumptions would lead to different estimates.

The
Liquidation Trusts critical accounting policies are described
in Managements Discussion and Analysis of Financial Condition
and Results of Operations in the Liquidation Trusts annual
report on Form 10-K for the year ended September 30, 2003.

12



---



##### 



II. Changes in Net Assets in Liquidation

Significant financial activities of the Liquidation Trust during the
periods reflected below include Distributions authorized and payments to
claimants of various Classes, settlement of Claims asserted, pursuit of
preference receivables and other litigation, and carrying out the liquidation
activities of the Liquidation Trust.

Net assets in liquidation are subject to material change when either (a)
Distributions to holders of Allowed Impaired Claims are authorized, or (b)
estimates of the fair value of the Liquidation Trusts assets and/or
liabilities change. Both the authorization of Distributions and changes in
estimates are non-cash changes. These changes are shown in the Liquidation
Trusts Statements of Changes in Net Assets in Liquidation and are discussed
below.

Most cash transactions, on the other hand, such as collection of
receivables and payments of liabilities and Distributions, cause offsetting
changes in the associated components of assets and liabilities, but do not
change net assets in liquidation. The Liquidation Trusts Statements of Cash
Receipts and Disbursements show the results of these transactions, which are
also discussed later under the heading Cash Receipts and Disbursements.

The following table summarizes the significant changes in net assets in
liquidation for the periods as indicated:

($ in thousands)
    
    For the quarter
    
    For the quarterended
    
    endedDecember 31, 2003
    
    December 31, 2002Distributions authorized
    
    $
    (1,426
    )
    
    $
    (970
    )Changes in
estimates  increase/(decrease)
in net assets in liquidation:Preference receivables
    
    
    3,750
    
    
    
    Unimpaired claims payable
    
    
    
    
    
    
    584Net other increases
    
    
    103
    
    
    
    223Net increase/(decrease) in net assets in liquidation
    
    $
    2,427
    
    
    $
    (163
    )


A. Distributions authorized

Distributions at the rate of 6.573%, totaling $1.4 million, were
authorized during the quarter ended December 31, 2003 to holders of $21.7
million of Impaired Claims newly allowed during the period. Distributions at
the rate of 4.515%, totaling $1.0 million, were authorized during the quarter
ended December 31, 2002 to holders of $21.5 million of Impaired Claims newly
allowed during the period.

B. Changes in estimates



|1. |  | Estimated fair value of preference receivables
|-- |  | ----------------------------------------------

The estimated fair value of preference receivables increased by $3.8
million during the quarter ended December 31, 2003. The increase was due to
the settlement of the last remaining large preference case to which the
Liquidation Trust had not previously assigned a value, as the case was not
previously sufficiently developed to value.

There was no change in the estimated fair value of preference receivables
during the quarter ended December 31, 2002 as (i) none of the larger cases was
sufficiently developed to value, and (ii) not enough of the preference cases
estimated in the aggregate had been settled for amounts substantially different
from the previous estimates to substantiate a material change in the fair value
estimate for the remaining cases.

13



---



##### 





|2. |  | Estimated fair value of unimpaired claims payable
|-- |  | -------------------------------------------------

The fair value of Unimpaired Claims payable is reassessed at least
quarterly and adjustments to estimated fair values are reflected in the period
in which they become known. As a result of the ongoing Claims resolution
process, fewer Disputed Unimpaired Claims remain as of each successive
valuation date, and the Liquidation Trust becomes more familiar with the
validity of each remaining Disputed Unimpaired Claim.

Based on its quarterly assessments, the estimated fair value of the
remaining Disputed Unimpaired Claims as of December 31, 2003 remained
unchanged, while the estimated fair value of Unimpaired Claims payable was
decreased by $0.6 million as of December 31, 2002.

III. Cash Receipts and Disbursements

The following table summarizes the cash receipts and disbursements for the
periods as indicated:

($ in thousands)
    
    For the quarter
    
    For the quarterended
    
    endedDecember 31, 2003
    
    December 31, 2002Cash receipts
    
    $
    1,343
    
    
    $
    4,468Cash disbursements:Legal and professional fees:Litigation
    
    
    1,490
    
    
    
    2,093Trust operations
    
    
    720
    
    
    
    510Preference recoveries
    
    
    490
    
    
    
    528Operating expenses
    
    
    600
    
    
    
    659Claims paid
    
    
    253
    
    
    
    512Total cash disbursements
    
    
    3,553
    
    
    
    4,302Distributions paid
    
    
    1,666
    
    
    
    2,595Net cash outflow
    
    $
    (3,876
    )
    
    $
    (2,429
    )


A. Cash receipts

Most of the cash receipts are from collections of preference receivables,
which have been ongoing since the preference actions were filed in mid-2001.
Cash receipts during the quarter ended December 31, 2003 were significantly
lower than during the quarter ended December 31, 2002 mainly for two reasons.
A single preference case resulted in a collection of $1.7 million during the
quarter ended December 31, 2002. Additionally, fewer preference cases were
settled, and proceeds collected, during the quarter ended December 31, 2003
than during the quarter ended December 31, 2002, because the number of
remaining preference cases decreased as a result of ongoing preference
settlement efforts.

B. Legal and professional fees

Legal and professional fees reflect the activity level in various areas of
the Liquidation Trusts responsibilities.

The litigation fees, for the Bondholder Action and the Committee Action,
during the quarter ended December 31, 2003 were substantially lower than during
the quarter ended December 31, 2002 primarily due to a decrease in fees related
to the Committee Action trial, which was adjourned during September 2003
without a new date, pending the outcome of the Bondholder Action trial. The
Committee Action case was in the discovery phase, incurring significant fees
during the quarter ended December 31,

14



---



##### 



2002. The decrease in fees related to
the Committee Action was partially offset by fees related to the Bondholder
Action trial held in October 2003.

Legal and professional fees for Liquidation Trust operations include all
legal, accounting, and other support services except for the services of
counsel prosecuting the Bondholder Action and the Committee Action, and the
firm pursuing preference collections on a contingency-fee basis. Certain of
the largest preference claims suits are handled by Liquidation Trust counsel on an hourly basis
and the related fees are included in Liquidation Trust operations. The
increase in fees for Liquidation Trust operations during the quarter ended
December 31, 2003 as compared to the quarter ended December 31, 2002 results
primarily from legal fees associated with a preference case settled for $3.8
million (see II., B. Changes in estimates, above).

Preference recovery fees during the quarter ended December 31, 2003 were
comparable to those during the quarter ended December 31, 2002, although
preference receipts decreased significantly during the current period when
compared to the prior period, primarily because preference recovery fees were
unusually low, relative to collections, for the quarter ended December 31,
2002. The fees for most preference settlements are contingent, and are set at
a declining rate for larger cases, a number of which were settled during that
prior period. Additionally, a case resulting in a $1.7 million collection
during the quarter ended December 31, 2002 was handled by counsel for
Liquidation Trust operations, and the related expense included in the
Statements of Cash Receipts and Disbursements under Legal and
professional fees  Trust operations as incurred.

C. Operating expenses

Operating expenses during the quarter ended December 31, 2003 were
comparable to those during the quarter ended December 31, 2002. The number of
Liquidation Trust employees decreased during the current period, resulting in
lower payroll, offset in part by a lump sum pre-payment for office space.

D. Claims payments

Payments of Unimpaired Claims were significantly lower during the quarter
ended December 31, 2003 than during the quarter ended December 31, 2002
because, as a result of the ongoing Claims resolution process, fewer Unimpaired
Claims remain to be resolved and paid as of each successive period.

E. Distributions paid

Distributions paid depend primarily on the amount of Allowed Impaired
Claims, including Claims newly allowed, and on the Distributions authorized
from time to time. An initial Distribution was authorized during August 2002
at a rate of 4.515%, and a second interim Distribution during June 2003 at the
rate of 2.058%. As a result, during the quarter ended December 31, 2003, the
holders of Allowed Impaired Claims received the cumulative Distribution rate of
6.573% compared to the initial Distribution rate of 4.515% during the quarter
ended December 31, 2002. Offsetting the Distribution rate increase, however,
as a result of the ongoing Claims resolution process, fewer Impaired Claims
remain to be resolved and paid as of each successive period.

IV. Net Assets in Liquidation

A. Cash and cash equivalents and preference receivables

The Liquidation Trusts cash and cash equivalents balance of $43.0 million
and $46.8 million as of December 31, 2003 and September 30, 2003, respectively,
is classified as either (a) Available Cash, (b) Reserved, (c) Restricted or (d)
Other.

Available Cash is designated to assure the availability of funds for
payment to holders of Impaired Claims who have not received authorized
Distributions. The required amount of Available Cash of $4.3

15



---



##### 



million as of
December 31, 2003 was based primarily on the cumulative Distribution rate of
6.573%, for $5.9 million of Allowed but unpaid Impaired Claims plus $58.7
million of Disputed Impaired Claims (at their estimated value for reserve
purposes). The required amount of Available Cash of $7.1 million as of
September 30, 2003 was also based primarily on the cumulative Distribution rate
of 6.573%, for $9.3 million of Allowed but unpaid Impaired Claims plus $98.4
million of Disputed Impaired Claims (at their estimated value for reserve
purposes). The value of Disputed Impaired Claims, for the purpose of
establishing adequate reserves, was estimated by the Liquidation Trust and
approved by the Bankruptcy Court in an order establishing the amounts of
Disputed Claims Reserves (the Reserve Order).

Reserved Cash is held by the Liquidation Trust to assure payment of the
Liquidation Trusts obligations. Under the terms of the Plan, Reserved Cash is
intended to provide for (a) operating expenses of the Liquidation Trust, (b)
estimated payments to holders of Allowed Unimpaired and Convenience Claims in
accordance with the Plan, and (c) payments which may become necessary if and as
Disputed Unimpaired Claims become allowed, or if certain specific contingencies
should occur. Reserved Cash decreased by $3.1 million from September 30, 2003
to December 31, 2003, to a balance of $21.2 million, as a result of decreases
in various liability and contingency reserves, as discussed below and itemized
in Note 11 to the Unaudited Liquidation Trust Financial Statements filed
herein.

As of December 31, 2003, Restricted Cash of $9.7 million related primarily
to the Kemper Claim discussed in Liabilities, below.

Preference receivables, net of costs of recovery, increased by $3.0
million from September 30, 2003 to December 31, 2003, to a balance of $9.0
million primarily due to an increase in estimated fair value of the remaining
preference receivables of $3.8 million, partially offset by preference
collections during the period of $0.8 million, net of costs of recovery. This
increase in the estimated fair value is discussed in Changes in estimates,
above.

B. Liabilities

Unimpaired Claims payable as of December 31, 2003 consisted of Disputed
Unimpaired Claims with an estimated fair value of $9.6 million and Allowed but
unpaid Unimpaired Claims totaling $1.4 million. The remaining Disputed
Unimpaired Claims consists of 14 Claims asserted (or estimated for reserve
purposes if no Claim amount was specified) at $9.9 million. Most of this
amount consists of a Claim filed by Kemper relating to certain insurance
claims. The Kemper Claim is secured by a letter of credit, and its fair value
is estimated at the outstanding letter of credit balance of $8.9 million as of
December 31, 2003 (see Contingencies, below). If all remaining Disputed
Unimpaired Claims were to be allowed at their asserted or reserved amounts, net
assets in liquidation would not be materially reduced.

Estimated costs of liquidation decreased by $2.8 million from September
30, 2003 to December 31, 2003, to a balance of $4.8 million. The decrease is
due to disbursements totaling $1.3 million from the Wind-down Reserve and $1.5
million from the Litigation Reserve.

C. Contingency reserves

The most significant component in contingency reserves is the Fleet
reserve, established at a total of $11.0 million pursuant to a stipulated order
between Fleet Retail Finance Inc. (Fleet) and the Liquidation Trust. The
Fleet reserve is likely to be drawn upon if Fleet, as a defendant in the
Committee Action and the Bondholder Action, should prevail. No liability has
been accrued in connection with the Fleet reserve because the Liquidation Trust
does not consider Fleet likely to prevail in either of these actions.

16



---



##### 



V. Contingencies

Cases before the United States District Court

The Bondholder Action trial was held in October 2003. In accordance with
a summary judgement decision issued by the presiding judge in December 2002,
the principal issue at trial was whether the value of certain assets and
liabilities acquired during a 1997 merger transaction was less than $153
million and, if so, by how much. Accordingly, the trial was largely centered
around reports by and examination of valuation experts. The post-trial process
calls for the parties to the case to submit briefs to the judge, who is
expected to make a ruling during 2004. The trial of the Committee Action,
previously scheduled for January 2004, was adjourned without a new date,
pending the outcome of the Bondholder Action trial.

The various defendants are vigorously opposing these actions. There is no
assurance that the Liquidation Trust will prevail on the claims asserted in the
Committee Action and the Bondholder Action. The Liquidation Trust cannot predict with any certainty the outcome of the
litigation or the amount or range of potential recoveries.

Cases before the Bankruptcy Court

On December 3, 2003, the Liquidation Trust filed a complaint in the United
States Bankruptcy Court for the District of Delaware styled Hechinger
Liquidation Trust, Plaintiff, vs. Broadspire Services, Inc., Kemper Risk
Management Group, American Motorists Insurance Company, Lumbermans Mutual
Casualty Company, American Manufactures Mutual Insurance Company, American
Manufacturers Mutual Insurance Company, American Protection Insurance Company,
and National Loss Control Services Corporation, Defendants (the Kemper
Complaint).

In the Kemper Complaint, arising under various insurance policies that the
Debtors purchased from Kemper, the Liquidation Trust seeks, among other things,
an estimate under Section 502(c) of the Bankruptcy Code of the aggregate loss
amounts owed by the Liquidation Trust for unliquidated workers compensation
claims against the Debtors (the Insurance Claims), a reduction in the letter
of credit securing the amount owed by the Liquidation Trust with respect to
such Insurance Claims, and the return of excess collateral, deposits and other
amounts held by Kemper to the Liquidation Trust. Kemper holds an irrevocable
cash-collateralized letter of credit with a balance of $8.9 million as of
December 31, 2003 to secure payment of the Insurance Claims. In addition,
Kemper holds certain other collateral, deposits, and amounts due to the
Liquidation Trust. In the Kemper Complaint, the Liquidation Trust alleges that
its estimated liability for the Insurance Claims is less than $1.0 million,
substantially lower than the letter of credit balance and other amounts held by
Kemper. The Liquidation Trust cannot
predict with any certainty the outcome of the litigation or the amount or range
of potential recoveries.

VI. Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements
about the business, financial condition and prospects of the Liquidation Trust.
The actual results of the Liquidation Trust could differ materially from those
indicated by the forward-looking statements because of various risks and
uncertainties, including, without limitation, the Liquidation Trusts success
in securing claims settlements on the terms currently contemplated in ongoing
negotiations and in other estimates of settlement value, the effect of
substantial delays in settling contingent assets and liabilities, resulting in
a prolonged period of liquidation, economic conditions, changes in tax and
other government rules and regulations applicable to the Liquidation Trust and
other risks. These risks are beyond the ability of the Liquidation Trust to
control, and in many cases, the Liquidation Trust cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by any forward-looking statements included in this

17



---



##### 



Form 10-Q.
When used in this quarterly report, the words believes, estimates, plans,
expects, anticipates and other similar expressions as they relate to the
Liquidation Trust or the Liquidation Trustee are intended to identify
forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Liquidation Trust does not hold any market risk sensitive instruments.

Item 4. Controls and Procedures

The Liquidation Trust has designed and maintains disclosure controls and
procedures to ensure that information required to be disclosed in its reports
filed or submitted under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Commissions rules and
regulations. These controls and procedures are also designed to ensure that
such information is communicated to the Liquidation Trustee, to allow him to
make timely decisions about required disclosures.

The Liquidation Trust, including the Liquidation Trustee, has conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15. Based on that evaluation, the Liquidation Trustee
concluded that the Liquidation Trusts disclosure controls and procedures are
effective as of December 31, 2003.

There has been no change in the Liquidation Trusts internal control over
financial reporting that occurred during the Liquidation Trusts most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Liquidation Trusts internal control over financial
reporting.

18



---



##### 



PART II  OTHER INFORMATION

Item 1. Legal Proceedings

Cases before the United States District Court

The Bondholder Action trial was held in October 2003. In accordance with
a summary judgement decision issued by the presiding judge in December 2002,
the principal issue at trial was whether the value of certain assets and
liabilities acquired during a 1997 merger transaction was less than $153
million and, if so, by how much. Accordingly, the trial was largely centered
around reports by and examination of valuation experts. The post-trial process
calls for the parties to the case to submit briefs to the judge, who is
expected to make a ruling during 2004. The trial of the Committee Action,
previously scheduled for January 2004, was adjourned without a new date,
pending the outcome of the Bondholder Action trial.

The various defendants are vigorously opposing these actions. There is no
assurance that the Liquidation Trust will prevail on the claims asserted in the
Committee Action and the Bondholder Action. The Liquidation Trust cannot predict with any certainty the outcome of the
litigation or the amount or range of potential recoveries.

Cases before the Bankruptcy Court

On December 3, 2003, the Liquidation Trust filed a complaint in the United
States Bankruptcy Court for the District of Delaware styled Hechinger
Liquidation Trust, Plaintiff, vs. Broadspire Services, Inc., Kemper Risk
Management Group, American Motorists Insurance Company, Lumbermans Mutual
Casualty Company, American Manufactures Mutual Insurance Company, American
Manufacturers Mutual Insurance Company, American Protection Insurance Company,
and National Loss Control Services Corporation, Defendants (the Kemper
Complaint).

In the Kemper Complaint, arising under various insurance policies that the
Debtors purchased from Kemper, the Liquidation Trust seeks, among other things,
an estimate under Section 502(c) of the Bankruptcy Code of the aggregate loss
amounts owed by the Liquidation Trust for unliquidated workers compensation
claims against the Debtors (the Insurance Claims), a reduction in the letter
of credit securing the amount owed by the Liquidation Trust with respect to
such Insurance Claims, and the return of excess collateral, deposits and other
amounts held by Kemper to the Liquidation Trust. Kemper holds an irrevocable
cash-collateralized letter of credit with a balance of $8.9 million as of
December 31, 2003 to secure payment of the Insurance Claims. In addition,
Kemper holds certain other collateral, deposits, and amounts due to the
Liquidation Trust. In the Kemper Complaint, the Liquidation Trust alleges that
its estimated liability for the Insurance Claims is less than $1.0 million,
substantially lower than the letter of credit balance and other amounts held by
Kemper. The Liquidation Trust cannot
predict with any certainty the outcome of the litigation or the amount or range
of potential recoveries.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

19



---



##### 



Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number
    
    Document31.1
    
    Certification by Trustee pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1
    
    Liquidation Trustees Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.


(b) Reports on Form 8-K

None.

20



---



##### 



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.

HECHINGER LIQUIDATION TRUSTDate: February 13, 2004
    
    By:
    
    /s/  Conrad F. Hocking
Name:  Conrad F. Hocking
Title:  Liquidation Trustee


21



---



##### 



INDEX TO EXHIBITS
FORM 10-Q

Exhibit No.31.1
    
    Certification by Trustee pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Liquidation Trustees Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of
2002.


22