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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q Check one þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the quarterly period ended December 31, 2004 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission file number 000-50160 HECHINGER LIQUIDATION TRUST  Delaware
    
    52-7230151(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)405 East Gude Drive, Suite 206, Rockville, Maryland
    
    20850(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (301) 838-4311 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ                               No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o                               No þ 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 þ                               No o




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HECHINGER LIQUIDATION TRUST
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004 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 and
Results of Operations
    
    
    13Item 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, Use of Proceeds and Issuer Purchases of
Equity Securities
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    20SIGNATURES
    
    
    21INDEX TO EXHIBITS
    
    
    22
 2




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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, 2004
    
    
    September 30, 2004AssetsCash and cash equivalentsCash designated as available for distribution
    
    $
    3,034
    
    
    $
    3,388Reserved cash
    
    
    19,871
    
    
    
    21,471Restricted cash
    
    
    9,340
    
    
    
    9,312Other cash
    
    
    1,697
    
    
    
    204Total cash and cash equivalents
    
    
    33,942
    
    
    
    34,375Preference receivables (net of costs of
recovery of $332 and $1,029,
respectively)
    
    
    2,074
    
    
    
    3,149Other assets
    
    
    124
    
    
    
    160Total assets
    
    
    36,140
    
    
    
    37,684LiabilitiesUnimpaired and convenience claims payable
    
    
    2,937
    
    
    
    2,970Uncashed claims checks
    
    
    175
    
    
    
    142Distributions payable
    
    
    227
    
    
    
    228Estimated costs of liquidationWind-down reserve
    
    
    2,773
    
    
    
    3,518Litigation reserve
    
    
    1,508
    
    
    
    2,384Total liabilities
    
    
    7,620
    
    
    
    9,242Net Assets in Liquidation
    
    $
    28,520
    
    
    $
    28,442
 See accompanying notes to unaudited financial statements. 3




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Hechinger Liquidation Trust
Unaudited Statements of Changes in Net Assets in Liquidation ($ in thousands) For the quarter
    
    
    For the quarterended
    
    
    endedDecember 31, 2004
    
    
    December 31, 2003Increase in Net Assets in LiquidationIncrease in estimated fair value of
preference receivables, net
    
    $
    
    
    
    $
    3,750Decrease in estimated fair value of
unimpaired and convenience
claims payable
    
    
    23
    
    
    
    Interest income
    
    
    121
    
    
    
    63Other increases
    
    
    13
    
    
    
    40Net increase in Net Assets in Liquidation
before distributions authorized
    
    
    157
    
    
    
    3,853Distributions authorized
    
    
    (      79
    )
    
    
    ( 1,426
    )Net increase in Net Assets
in Liquidation after
distributions authorized
    
    
    78
    
    
    
    2,427Net Assets in Liquidation at beginning of period
    
    
    28,442
    
    
    
    34,576Net Assets in Liquidation at end of period
    
    $
    28,520
    
    
    $
    37,003
 See accompanying notes to unaudited financial statements. 4




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Hechinger Liquidation Trust
Unaudited Statements of Cash Receipts and Disbursements ($ in thousands) For the quarter
    
    
    For the quarterended
    
    
    endedDecember 31, 2004
    
    
    December 31, 2003Cash receiptsPreference collections, before
costs of recovery
    
    $
    1,772
    
    
    $
    1,239Interest income
    
    
    121
    
    
    
    64Other receipts
    
    
    49
    
    
    
    40Total cash receipts
    
    
    1,942
    
    
    
    1,343Cash disbursementsCosts of liquidationLegal and professional feesLitigation
    
    
    875
    
    
    
    1,490Preference recoveries
    
    
    697
    
    
    
    490Liquidation Trust operations
    
    
    237
    
    
    
    720Operating expenses
    
    
    508
    
    
    
    600Unimpaired and convenience claims
    
    
    11
    
    
    
    126Reissued/(voided) claims checks, net
    
    
    (33
    )
    
    
    127Total cash disbursements
    
    
    2,295
    
    
    
    3,553Decrease in cash and cash equivalents
before distributions paid
    
    
    (353
    )
    
    
    (2,210
    )Distributions paid
    
    
    80
    
    
    
    1,666Decrease in cash and cash equivalents
    
    
    (433
    )
    
    
    (3,876
    )Cash and cash equivalents
at beginning of period
    
    
    34,375
    
    
    
    46,837Cash and cash equivalents
at end of period
    
    $
    33,942
    
    
    $
    42,961
 See accompanying notes to unaudited financial statements. 5




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Hechinger Liquidation TrustNotes 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
under the terms of 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) (each a Class) 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. Through December 31, 2004, the Liquidation Trust has authorized Distributions to holders of
Beneficial Interests (i.e., to holders of Allowed Impaired Claims) of 8.1% of the Allowed amount of
the Impaired Claims, and established a reserve of 8.1% of the estimated amount of Disputed Impaired
Claims, based on the estimated amount of such Claims approved by the Bankruptcy Court for reserve
purposes (the Disputed Impaired Claims Reserve). 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 6




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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. The unpaid amount of the authorized Distributions to holders of
Allowed Impaired Claims is also reflected as a liability. 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, 2004 and September 30, 2003, and for the fiscal years ended
September 30, 2004 and September 30, 2003, and for the period 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. Convenience Claims payable shown in the financial statements as of September 30, 2004 have
been combined with Unimpaired Claims payable to conform to their presentation in the December 31,
2004 financial statements. 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: cash designated as available for distribution, reserved cash, restricted cash, and
other cash (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
are treated as grantors; accordingly, their pro rata share of all items of income, gain, loss,
deduction and credit is included in the income tax returns of the holders of Beneficial Interests. The Liquidation Trust pays applicable taxes on the taxable net income and gain allocable to
holders of Disputed Impaired Claims on behalf of such holders. When such Disputed Claims are
ultimately resolved, holders whose Disputed Claims were determined to be Allowed Claims receive
Distributions from the Liquidation Trust net of taxes, if any, which the Liquidation Trust
previously paid on their behalf. 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. 7




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3. Cash and Cash Equivalents 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 (see Note 10). Cash designated as available for distribution (Available Cash) is designated to
assure the availability of funds for payment to holders of Impaired Claims who have not received
their Distributions. As such, Available Cash includes Distributions payable (see Note 8) and the
Disputed Impaired Claims Reserve (see Note 10). Available Cash does not include reserved cash,
restricted cash, or other cash, each further described below. Available Cash consists of: As of
    
    
    As of($ in thousands)
    
    December 31, 2004
    
    
    September 30, 2004Distributions payable
    
    $
    227
    
    
    $
    228Reserve for remaining disputed
impaired claims at 8.1%
    
    
    2,807
    
    
    
    3,160Total available cash
    
    $
    3,034
    
    
    $
    3,388
 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 and cash
held in an escrow account. Subsequent to December 31, 2004, $7.4 million of restricted cash was
released to other cash following a reduction in the letter of credit to a balance of $1.6 million,
which resulted from settlement of the related secured Claim (see Note 6). Other
cash is cash and cash equivalents not designated to a specific
reserve or fund, which the Liquidation Trustee may designate from
time to time as required for reserves or as additional Available Cash
for Distributions.
As a result of the change in restricted cash described above, the balance in other cash increased
by $7.4 million subsequent to December 31, 2004. There can
be no assurance as to the timing and amount, if any, of an additional
interim Distribution. The amount of a Distribution, if any, would
depend on various factors, including the Liquidation Trustees determination of the amount of cash
needed to assure funding of the Liquidation Trusts remaining
litigation until its ultimate resolution. 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 $2.1 million, net of estimated costs of
recovery of $0.3 million, for the sole remaining preference recovery action being actively pursued
and for settlement collections in progress as of December 31, 2004; and $3.1 million, net of
estimated costs of recovery of $1.0 million, for 10 preference recovery actions being actively
pursued and for settlement collections in progress as of September 30, 2004. Estimated costs of
recovery accrued as of September 30, 2004 and paid during the quarter ended December 31, 2004
include $0.2 million of fees for two expert reports prepared for preference recovery action trials. 8




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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. 5. Other Assets Other assets consist of receivables from various former vendors, service providers, and
others. Other assets are 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 and Convenience 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. Convenience Claims, also
included in this classification,
are not significant. Unimpaired and Convenience Claims payable consists of: As of
    
    
    As of($ in thousands)
    
    December 31, 2004
    
    
    September 30, 2004Allowed unimpaired claims
    
    $
    2,935
    
    
    $
    1,339Estimated fair value of disputed unimpaired claimsKemper claim, net
    
    
    
    
    
    
    1,600Other disputed unimpaired claims
    
    
    
    
    
    
    29Total estimated fair value of disputed unimpaired claims
    
    
    
    
    
    
    1,629Convenience claims
    
    
    2
    
    
    
    2Total
    
    $
    2,937
    
    
    $
    2,970Number of disputed unimpaired claims
    
    
    8
    
    
    
    9
 The largest remaining Unimpaired Claim is a secured Claim asserted by a group of insurance
companies collectively referred to as Kemper Insurance Company (Kemper) for payment of certain
workers compensation claims against the Debtors (the Kemper Claim). The Liquidation Trust
recorded the estimated net fair value of the Kemper Claim at $1.6 million as of December 31, 2004
and September 30, 2004. This value was based on an agreement reached between Kemper and the
Liquidation Trust during December 2004 to settle the Kemper Claim for $1.7 million, offset by a
$0.1 million prepayment held by a third-party claims administrator. The Kemper Claim was therefore
included with Allowed Unimpaired Claims as of December 31, 2004 and with Disputed Unimpaired Claims
as of September 30, 2004. Subsequent to December 31, 2004, the letter of credit securing the
Kemper Claim was reduced to $1.6 million. Pursuant to the Plan, certain fees and expenses which Kmart Corporation (Kmart) incurred in
connection with the Debtors bankruptcy filing were allowed as an Unimpaired Claim. Allowed
Unimpaired Claims as of December 31, 2004 and September 30, 2004 include this Claim, which has not
yet been substantiated by Kmart as required by the Plan, at its estimated amount of $1.3 million. 9




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The
amount asserted by the holders of the remaining other Disputed Unimpaired Claims is
insignificant as of December 31, 2004 and September 30, 2004. The Liquidation Trust anticipates
that each of these Claims will be expunged or waived; accordingly, no liability has been recorded
with respect to the remaining Disputed Unimpaired Claims as of December 31, 2004. 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. 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 8.1% of the Allowed amount of Impaired Claims for
which the Liquidation Trust had not yet paid Distributions as of December 31, 2004 and September
30, 2004, respectively. As of these dates, a number of holders of such Allowed Claims, while
otherwise eligible for Distributions, had either not yet provided all 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). Substantially all of the day-to-day operations of the Liquidation Trust are
planned to cease in the near future; however, provision has been made for certain necessary
administrative, legal and accounting processes to be completed thereafter through December 2005. Pursuant to the Plan, the Liquidation Trust also established and funded a reserve to pay the
costs of pursuing certain actions referred to as the Bondholder Action and the Committee Action
(the Litigation Reserve). The amount of the Litigation Reserve as of December 31, 2004 and
September 30, 2004 is intended to fund the pursuit of the Bondholder Action through an appeal and
the Committee Action through trial (see Note 12). In accordance with the procedures set forth in
the Plan, increases in the Litigation Reserve require approval. The Liquidation Trust is in the
process of obtaining such approval with respect to an increase of $0.6 million, which was included
in the Litigation Reserve balance as of December 31, 2004 and September 30, 2004. 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.
Actual costs are likely to differ from the estimated costs and these differences may be
significant. 10




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10. Bankruptcy Reserves Required Reserves,
other than those funded by restricted cash, or included in Available Cash, consist
of: As of
    
    
    As of($ in thousands)
    
    December 31, 2004
    
    
    September 30, 2004Liability ReservesWind-down (net of related escrow of $278)
    
    $
    2,495
    
    
    $
    3,240Litigation
    
    
    1,508
    
    
    
    2,384Unimpaired and convenience claims
(excluding secured claim (see Note 6))
    
    
    1,337
    
    
    
    1,370Uncashed claims checks
    
    
    175
    
    
    
    142Total liability reserves
    
    
    5,515
    
    
    
    7,136Contingency ReservesFleet
    
    
    11,000
    
    
    
    11,000Excess disputed unimpaired claims
    
    
    329
    
    
    
    309Preference settlement claims
    
    
    27
    
    
    
    26Minimum reserve
    
    
    3,000
    
    
    
    3,000Total contingency reserves
    
    
    14,356
    
    
    
    14,335Total reserves
    
    $
    19,871
    
    
    $
    21,471
 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 ultimately prevail in one or both of such
actions. No liability has been accrued in connection with the Fleet Reserve because the
Liquidation Trust has appealed the adverse decision and judgment in the Bondholder Action (see Note
12), does not consider Fleet likely to ultimately prevail in either of these actions, and has no
access to information to estimate the amount, if any, that Fleet may validly assert against the
Fleet Reserve. The Liquidation Trust also maintains the Disputed Impaired Claims Reserve, which, as an equity
reserve, is designated as part of Available Cash (see Note 3), for Distribution to holders of
Disputed Impaired Claims should such Claims become Allowed. The reserve for the remaining Disputed
Impaired Claims is determined based on the then current cumulative Distribution rate and on the
estimated amount of remaining Disputed Impaired Claims. 11. Impaired Claims The Liquidation Trusts estimate of Impaired Claims consists of: As of
    
    
    As of($ in thousands)
    
    December 31, 2004
    
    
    September 30, 2004Allowed impaired claims
    
    $
    705,008
    
    
    $
    704,015Estimated fair value of disputed impaired claims
    
    
    18,911
    
    
    
    20,798Total estimated impaired claims
    
    $
    723,919
    
    
    $
    724,813Asserted value of disputed impaired claims
    
    $
    58,316
    
    
    $
    64,068Number of disputed impaired claims
    
    
    31
    
    
    
    47
 11




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No assurance can be given as to the ultimate allowance, disallowance or settlement of the
remaining Disputed Impaired Claims, individually or in the aggregate. 12. Contingencies The Bondholder Action In March 2004, following a non-jury trial held in October 2003, the Court issued an opinion
and order (collectively, the Decision) in the Bondholder Action, directing the entry of judgment
in favor the defendants. In April 2004, the Liquidation Trust filed an appeal from the Decision
and related judgment. The Liquidation Trust and the defendants each completed the filing of appeal
briefs during September 2004. The Court of Appeals has not heard oral argument and no date for
such argument has yet been set. The timing of a ruling is unknown. Also see the discussion of the Fleet Reserve in Note 10. The Committee Action In April 2004, the Committee Action was assigned to the judge who presided in the Bondholder
Action, who has scheduled the Committee Action for trial in August 2005. During December 2004 and
January 2005, the Court heard oral argument on motions, including motions for summary judgment,
filed by various defendants. The timing of a decision on defendants motions is unknown. 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 in the appeal of the Bondholder
Action. The Liquidation Trust cannot predict with any certainty the
outcome of the  litigation or the amount or range of potential recoveries. The Kemper Complaint During December 2004, Kemper and the Liquidation Trust reached an agreement to settle Kempers
secured Claim, for unliquidated workers compensation claims against the Debtors, for the net
amount of $1.6 million (see Note 6). Kemper also agreed to reduce the letter of credit
collateralizing its Claim to $1.6 million, and to release a $12.0 million bond held as additional
security, which bond constitutes most of the largest remaining Disputed Impaired Claim. The Liquidation Trusts claims against Kemper for the return of excess collateral, deposits
and other amounts due to the Liquidation Trust remain unresolved. The trial with respect to the
unresolved matters is scheduled for March 2005. Any recovery will further reduce the settlement
amount for Kempers Claim. The Liquidation Trust cannot predict with any certainty the outcome of
the litigation or the amount or range of potential recoveries. 12




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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, 2004 and September 30, 2004 and for the quarters ended December 31, 2004 and December
31, 2003, and the notes thereto (the Unaudited Liquidation Trust Financial Statements), included
as Item 1. 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, 2004 and September 30, 2003, and for the fiscal
years ended September 30, 2004 and September 30, 2003, and for the period 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, 2004 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, including estimates and assumptions
concerning 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, 2004. II.Changes in Net Assets in Liquidation Significant financial activities of the Liquidation Trust during the periods reflected below
include Distributions and Claims payments, resolution of Claims asserted, pursuit of preference
recovery actions 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. 13




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The following table summarizes the significant changes in net assets in liquidation for the
periods as indicated: For the quarter ended($ in thousands)
    
    December 31, 2004
    
    
    December 31, 2003Distributions authorized
    
    $
    (79
    )
    
    $
    (1,426
    )Changes in estimates  increase
in preference receivables, net
    
    
    
    
    
    
    3,750Net other increases
    
    
    157
    
    
    
    103Net increase in net assets in liquidation
    
    $
    78
    
    
    $
    2,427
 A. Distributions authorized No new interim Distribution was authorized during the quarter ended December 31, 2004 or
during the quarter ended December 31, 2003. Distributions at the rate of 8.1%, totaling $0.1
million, were authorized during the quarter ended December 31, 2004 to holders of $1.0 million of
Impaired Claims newly allowed during the period. 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. As a result of the ongoing Claims
resolution process, fewer Impaired Claims remain to be resolved as of each successive period. B. Changes in estimates
 estimated fair value of preference receivables There was no change in estimate related to the fair value of preference receivables during the
quarter ended December 31, 2004, because the largest remaining cases have been settled at their
estimated value as of September 30, 2004. 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. C. Net other increases Net
other increases consist primarily of interest income from the Liquidation Trusts cash and
cash equivalents. 14




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III.Cash Receipts and Disbursements The following table summarizes the cash receipts and disbursements for the periods as
indicated: For the quarter ended($ in thousands)
    
    December 31, 2004
    
    
    December 31, 2003Cash receiptsPreference collections, before
costs of recovery
    
    $
    1,772
    
    
    $
    1,239Other receipts
    
    
    170
    
    
    
    104Total cash receipts
    
    
    1,942
    
    
    
    1,343Cash disbursementsLegal and professional feesLitigation
    
    
    875
    
    
    
    1,490Preference recoveries
    
    
    697
    
    
    
    490Liquidation Trust operations
    
    
    237
    
    
    
    720Operating expenses
    
    
    508
    
    
    
    600Claims payments
    
    
    11
    
    
    
    126Reissued/(voided) claims checks, net
    
    
    (33
    )
    
    
    127Total cash disbursements
    
    
    2,295
    
    
    
    3,553Distributions paid
    
    
    80
    
    
    
    1,666Net cash outflow
    
    $
    (433
    )
    
    $
    (3,876
    )
 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. Preference collections during the
quarter ended December 31, 2004 were higher than during the quarter ended December 31, 2003. The
increase is primarily because of three substantial preference recovery actions (totaling $1.4
million), among others, which were settled immediately prior to trial and collected during
the quarter ended December 31, 2004. During the quarter ended December 31, 2003, on the other hand, no trial calendar had been set,
and therefore settlements, especially significant settlements, proceeded more slowly absent the
pressure of trial dates. However, there were 90 preference cases being actively pursued as of
September 30, 2003, compared to 10 as of September 30, 2004. Therefore, more cases were settled
and collected during the quarter ended December 31, 2003 than during the quarter ended December 31,
2004. Cash receipts from collections of preference receivables are expected to decline
significantly, subsequent to the quarter ending March 31, 2005. 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 paid for the Bondholder Action and the Committee Action during the quarter
ended December 31, 2004 were significantly less than those paid during the quarter ended December
31, 2003. Fees paid during the quarter ended December 31, 2004 related to filing the Liquidation
Trusts appeal briefs in the Bondholder Action, and to defending various motions, including motions
for summary 15




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judgment, filed by defendants in the Committee Action. Fees paid during the quarter ended
December 31, 2003 related to the higher activity level of the October 2003 trial and post-trial
briefs in the Bondholder Action, as well as discovery and trial preparation for, and defending
various motions related to, the Committee Action. The Committee Action, now scheduled for trial in
August 2005, had been scheduled for trial in January 2004, prior to its adjournment during
September 2003. Preference recovery fees during the quarter ended December 31, 2004 were comparable, as a
percentage of preference collections, to such fees during the quarter ended December 31, 2003. The
collection fees for most preference settlements are contingent, and are set at a declining rate
(generally ranging from 35% to 7% of collections) for larger cases. In contrast with the smaller,
more expensive cases settled during the quarter ended December 31, 2003, several large cases were
settled during the quarter ended December 31, 2004, decreasing collection fees relative to
collections. Offsetting the relative decrease in collection fees, during the quarter ended
December 31, 2004, the Liquidation Trust incurred $0.2 million of fees for two expert reports in
preparation for preference action trials. Legal and professional fees for Liquidation Trust operations include all legal, accounting,
and other support services except for the expenses of prosecuting the Bondholder Action and the
Committee Action, and expenses related to preference collections pursued on a contingency-fee
basis. Certain of the largest preference claims suits were handled by Liquidation Trust counsel on
an hourly basis and the related fees included in Liquidation Trust operations. The higher fees for
Liquidation Trust operations during the quarter ended December 31, 2003 as compared to the quarter
ended December 31, 2004 resulted primarily from legal fees associated with a preference case
settled during the quarter ended December 31, 2003 for $3.8 million (see II., B. Changes in
estimates, above). C. Operating expenses Operating expenses during the quarter ended December 31, 2004 were substantially lower than
those during the quarter ended December 31, 2003, primarily because, during the quarter ended
December 31, 2003, the Liquidation Trust made a lump sum pre-payment of rent for office space. In
contrast, following a July 2004 relocation of its offices, the
Liquidation Trust paid rent monthly on smaller
and less expensive office and document warehouse space during the quarter ended December 31, 2004. D. Claims payments Payments of Unimpaired Claims were lower during the quarter ended December 31, 2004 than
during the quarter ended December 31, 2003 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. No new interim Distribution
was authorized or paid during the quarter ended December 31, 2004 or during the quarter ended
December 31, 2003. During the quarter ended December 31, 2004, holders of $1.1 million of Allowed
Impaired Claims received payments at the cumulative Distribution rate of 8.1%, while during the
quarter ended December 31, 2003, holders of $25.9 million of Allowed Impaired Claims received
payments at the then cumulative Distribution rate of 6.573%. In general, as a result of the
ongoing Claims resolution process, fewer Impaired Claims remain to be resolved and paid as of each
successive period. 16




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IV.Net Assets in Liquidation A. Assets The Liquidation Trusts cash and cash equivalents balance of $33.9 million and $34.4 million
as of December 31, 2004 and September 30, 2004, respectively, is classified as either (a) cash
designated as available for distribution (Available Cash), (b) reserved cash, (c) restricted cash
or (d) other cash. 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 $3.0 million as of December 31, 2004 was based primarily on the cumulative Distribution
rate of 8.1%, for $1.9 million of Allowed but unpaid Impaired Claims plus $35.1 million of Disputed
Impaired Claims (at their estimated value for reserve purposes). The required amount of Available
Cash of $3.4 million as of September 30, 2004 was also based primarily on the cumulative
Distribution rate of 8.1%, for $1.9 million of Allowed but unpaid Impaired Claims plus $39.5
million of Disputed Impaired Claims (at their estimated value for reserve purposes). The value of
Disputed 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. 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 $1.6 million from September 30, 2004 to December 31, 2004, to a balance
of $19.9 million, primarily as a result of decreases in the Wind-down and Litigation Reserves, as
discussed below. Restricted cash of $9.3 million related primarily to a letter of credit collateralizing a
secured Claim asserted by a group of insurance companies collectively referred to as Kemper
Insurance Company (Kemper) (the Kemper Claim). Subsequent to December 31, 2004, $7.4 million
of restricted cash was released to other cash following a reduction in the letter of credit to a
balance of $1.6 million, which resulted from the settlement of the Kemper Claim. Other cash, which is not designated to a specific reserve or fund, increased primarily as a
result of preference collections during the quarter ended
December 31, 2004. As a result of the change in restricted cash
described above, the balance in other cash increased by $7.4 million
subsequent to December 31, 2004. The Liquidation Trustee may
designate other cash from time to time as required for reserves or as
additional Available Cash for Distributions. There can be no
assurance as to the timing and amount, if any, of an additional
interim Distribution. The amount of a Distribution, if any, would
depend on various factors, including the Liquidation Trustees
determination of the amount of cash needed to assure funding of the
Liquidation Trusts remaining litigation until its ultimate
resolution. Preference receivables, net of costs of recovery, decreased by $1.1 million, to a balance of
$2.0 million as of December 31, 2004, compared to September 30, 2004, primarily due to ongoing
preference collections. Collections of preference receivables totaled $1.8 million, and costs to
collect, including significant non-recurring expert fees, totaled $0.7 million. B. Liabilities Estimated costs of liquidation decreased by $1.6 million, to a balance of $4.3 million as of
December 31, 2004, compared to September 30, 2004. The decrease is due to disbursements totaling
$0.7 million from the Wind-down Reserve and $0.9 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 ultimately
prevail in one or both of such actions. No liability has
been recorded in connection with the Fleet Reserve because the Liquidation Trust has appealed the
adverse decision and judgment in the 17




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Bondholder Action, does not consider Fleet likely to ultimately prevail in either of these
Actions, and has no access to information to estimate the amount, if any, that Fleet may validly
assert against the Fleet Reserve. V.Contingencies The Liquidation Trust is pursuing litigation against various parties, in particular the cases
described as the Bondholder Action, the Committee Action, and the Kemper Complaint, as described in
Legal Proceedings, below. The Liquidation Trust cannot predict with any certainty the ultimate
outcome of any 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 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, 2004. 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. The Liquidation Trusts internal controls over financial reporting will be subject to audit as
of September 30, 2005. The requirements of the Sarbanes  Oxley Act of 2002 have been taken into
account in planning for the future administrative requirements of the
Liquidation Trust. In addition to the Liquidation
Trustee, the Liquidation Trust had 4 employees as of December 31,
2004. In the near future, the Liquidation Trust expects to cease much
of its day-to-day operations and to minimize staffing accordingly, which may result in deficiencies
in internal accounting controls related to a lack of segregation of duties. 18




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PART II  OTHER INFORMATION Item 1. Legal Proceedings Further background information about the following cases is disclosed in Part I, Item 3 
Legal Proceedings, of the Liquidation Trusts Form 10-K for the fiscal year ended September 30,
2004. Federal Court Cases The Bondholder Action In March 2004, following a non-jury trial held in October 2003, the Court issued an opinion
and order (collectively, the Decision) in the Bondholder Action, directing the entry of judgment
in favor of the defendants. In April 2004, the Liquidation Trust filed an appeal from the Decision
and related judgment. The Liquidation Trust and the defendants each completed the filing of appeal
briefs during September 2004. The Court of Appeals has not heard oral argument and no date for
such argument has yet been set. The timing of a ruling is unknown. The Committee Action In April 2004, the Committee Action was assigned to the judge who presided in the Bondholder
Action, who has scheduled the Committee Action for trial in August 2005. During December 2004 and
January 2005, the Court heard oral argument on motions, including motions for summary judgment,
filed by various defendants. The timing of a decision on defendants motions is unknown. 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 in the appeal of
the Bondholder Action. The Liquidation Trust cannot predict with any certainty the outcome of the
litigation or the amount or range of potential recoveries. Bankruptcy Court Case The Kemper Complaint During December 2004, Kemper and the Liquidation Trust reached an agreement to settle Kempers
secured Claim, for unliquidated workers compensation claims against the Debtors, for the net
amount of $1.6 million. Kemper also agreed to reduce the letter of credit collateralizing its
Claim to $1.6 million, and to release a $12.0 million bond held as additional security, which bond
constitutes most of the largest remaining Disputed Impaired Claim. The Liquidation Trusts claims against Kemper for the return of excess collateral, deposits
and other amounts due to the Liquidation Trust remain unresolved. The trial with respect to the
unresolved matters is scheduled for March 2005. Any recovery will further reduce the settlement
amount for Kempers Claim. 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, Use of Proceeds and Issuer Purchases of Equity Securities None. Item 3. Defaults Upon Senior Securities None. 19




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Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits ExhibitNumber
    
    Document31.1
    
    Certification by Liquidation Trustee32.1
    
    Liquidation Trustees Certification Pursuant to 18 U.S.C. Section 1350
 20




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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 14, 2005
    By:
    /s/       Conrad F. HockingName:
    Conrad F. HockingTitle:
    Liquidation Trustee 21




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INDEX TO EXHIBITS
FORM 10-Q Exhibit No. 31.1           Certification by Liquidation Trustee 31.1           Liquidation Trustees Certification Pursuant to 18 U.S.C. Section 1350 22