##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q Check one [X]
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2004 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  Delaware
(State or other jurisdiction of incorporation or organization)
    
    52-7230151
(I.R.S. Employer Identification No.)405 East Gude Drive, Suite 206, Rockville, Maryland
(Address of principal executive offices)
    
    20850
(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 [X]    No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
[   ]    No [X] 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 [X]
   No [   ]




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HECHINGER LIQUIDATION TRUST
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATION:Item 1. Legal Proceedings
    
    
    21Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits and Reports on Form 8-K
    
    
    22SIGNATURES
    
    
    23INDEX TO EXHIBITS
    
    
    24
 2




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PART I  FINANCIAL INFORMATION Item 1. Financial Statements Hechinger Liquidation TrustUnaudited Statements of Net Assets in Liquidation($ in thousands) As of
    
    As ofJune 30,
    
    September 30,2004
    
    2003AssetsCash and cash equivalentsDesignated as available for distribution
to holders of impaired claims
    
    $
    2,994
    
    
    $
    7,136Reserved
    
    
    21,839
    
    
    
    24,288Restricted
    
    
    9,569
    
    
    
    9,730Other
    
    
    11,164
    
    
    
    5,683Total cash and cash equivalents
    
    
    45,566
    
    
    
    46,837Preference receivables (net of costs of
recovery of $898 and $1,491,
respectively)
    
    
    3,569
    
    
    
    5,955Other assets
    
    
    316
    
    
    
    1,503Total assets
    
    
    49,451
    
    
    
    54,295LiabilitiesClaims payableUnimpaired claims payable
    
    
    5,442
    
    
    
    11,044Convenience claims payable
    
    
    2
    
    
    
    22Uncashed claims checks
    
    
    128
    
    
    
    377Distributions payable to holders of
allowed impaired claims
    
    
    218
    
    
    
    665Estimated costs of liquidationWind-down reserve
    
    
    3,961
    
    
    
    5,151Litigation reserve
    
    
    2,184
    
    
    
    2,460Total liabilities
    
    
    11,935
    
    
    
    19,719Net Assets in Liquidation
    
    $
    37,516
    
    
    $
    34,576
 See accompanying notes to unaudited financial statements. 3




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Hechinger Liquidation TrustUnaudited Statements of Changes in Net Assets in Liquidation($ in thousands) For the three months endedJune 30, 2004
    
    June 30, 2003Increase/(decrease) in Net Assets in LiquidationDecrease in estimated fair value of
unimpaired claims payable
    
    $
    3,806
    
    
    $
    1,576Increase in estimated fair value of
preference receivables, net
    
    
    447
    
    
    
    4,123Increase in estimated costs of liquidation:Litigation reserve
    
    
    
    
    
    
    (3,000
    )Interest income
    
    
    65
    
    
    
    112Other increases
    
    
    63
    
    
    
    105Increase in Net Assets in Liquidation
before distributions authorized
    
    
    4,381
    
    
    
    2,916Distributions authorized
    
    
    134
    
    
    
    14,053Net increase/(decrease) in Net Assets in Liquidation
after distributions authorized
    
    
    4,247
    
    
    (
    11,137
    )Net Assets in Liquidation at beginning of period
    
    
    33,269
    
    
    
    43,761Net Assets in Liquidation at end of period
    
    $
    37,516
    
    
    $
    32,624
 For the nine months endedJune 30, 2004
    
    June 30, 2003Increase/(decrease) in Net Assets in LiquidationDecrease in estimated fair value of
unimpaired claims payable
    
    $
    3,806
    
    
    $
    1,912Increase in estimated fair value of
preference receivables, net
    
    
    3,537
    
    
    
    5,311Increase in estimated costs of liquidation:Wind-down reserve
    
    
    (1,540
    )
    
    
    Litigation reserve
    
    
    (2,000
    )
    
    
    (3,000
    )Interest income
    
    
    191
    
    
    
    412Other increases
    
    
    835
    
    
    
    348Increase in Net Assets in Liquidation
before distributions authorized
    
    
    4,829
    
    
    
    4,983Distributions authorized
    
    
    1,889
    
    
    
    16,541Net increase/(decrease) in Net Assets in Liquidation
after distributions authorized
    
    
    2,940
    
    
    (
    11,558
    )Net Assets in Liquidation at beginning of period
    
    
    34,576
    
    
    
    44,182Net Assets in Liquidation at end of period
    
    $
    37,516
    
    
    $
    32,624
 See accompanying notes to unaudited financial statements. 4




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Hechinger Liquidation TrustUnaudited Statements of Cash Receipts and Disbursements($ in thousands) For the nine months endedJune 30, 2004
        
        June 30, 2003Cash receiptsPreference collections,
            before costs of recovery
        
        $
        7,294
        
        
        $
        10,071Interest income
        
        
        191
        
        
        
        412Other receipts
        
        
        832
        
        
        
        1,575Total cash receipts
        
        
        8,317
        
        
        
        12,058Cash disbursementsCosts of liquidationLegal and professional
            feesLitigation
        
        
        2,276
        
        
        
        2,884Preference recoveries
        
        
        1,371
        
        
        
        1,779Trust operations
        
        
        1,319
        
        
        
        1,224Operating expenses
        
        
        1,411
        
        
        
        2,008Unimpaired and convenience
            claims
        
        
        626
        
        
        
        2,282Reissued/(voided)
            claims checks, net
        
        
        249
        
        
        
        (237
        )Total cash disbursements
        
        
        7,252
        
        
        
        9,940Increase in cash
            and cash equivalents before distributions paid
        
        
        1,065
        
        
        
        2,118Distributions paid
        
        
        2,336
        
        
        
        19,606Decrease in cash
            and cash equivalents
        
        
        (1,271
        )
        
        (
        17,488
        )Cash and cash equivalents
            at beginning of period
        
        
        46,837
        
        
        
        62,641Cash and cash equivalents
            at end of period
        
        $
        45,566
        
        
        $
        45,153
 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) 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




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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 as of September 30,
2003 and for the nine months ended June 30, 2003 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 are treated as grantors;
accordingly, their pro rata share of all items of income, gain, loss, deduction
and credit are included in the income tax returns of the holders of Beneficial
Interests. The Liquidation Trust pays 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 receive Distributions from
the Liquidation Trust net of taxes, if any, which the Liquidation Trust
previously paid on their behalf. 7




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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: As of
    
    As of($ in thousands)
    
    June 30, 2004
    
    September 30, 2003Distributions payable
    
    $
    218
    
    
    $
    665Reserve for remainingDisputed Impaired Claims at 6.573%
    
    
    2,776
    
    
    
    6,471Total Available Cash
    
    $
    2,994
    
    
    $
    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 Cashis 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 $3.6 million, net of estimated costs of recovery of $0.9 million, for
39 preference cases being actively pursued and for settlement collections in
progress at June 30, 2004; and $6.0 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 nine months ended June
30, 2004, the last remaining such preference case was settled for $3.8 million
and the settlement collected in full. 8




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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 various receivables from various former
vendors, service providers, and others. Prior to June 30, 2004, other assets
included a $1.2 million receivable from a group of insurance companies commonly
known as Kemper Insurance Company (Kemper), the insurer for the Debtors
workers compensation claims for a number of years, which was subject to offset
as collateral for certain Insurance Claims (see Note 6). During the quarter
ended June 30, 2004, Kemper provided the Liquidation Trust with documents
asserting that this collateral had been applied against the Insurance Claims.
Accordingly, the Liquidation Trust has applied the receivable against the
related Claim liability. 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 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: As of
    
    As of($ in thousands)
    
    June 30, 2004
    
    September 30, 2003Allowed Claims
    
    $
    1,485
    
    
    $
    1,392Estimated fair value of Disputed ClaimsKemper Claim
    
    
    3,925
    
    
    
    9,002Other Disputed Claims
    
    
    32
    
    
    
    650Total Unimpaired Claims payable
    
    $
    5,442
    
    
    $
    11,044Reserved or restricted value of Disputed ClaimsKemper Claim (restricted amount)
    
    $
    8,839
    
    
    $
    9,002Other Disputed Claims (reserved amount)
    
    
    337
    
    
    
    1,075Total
    
    $
    9,176
    
    
    $
    10,077Number of Disputed Claims
    
    
    10
    
    
    
    22
 For the purpose of establishing adequate reserves, the value of Disputed
Claims was estimated by the Liquidation Trust and approved by the Bankruptcy
Court in an order establishing the amounts of Disputed Claims Reserves.
Secured Claims are, in effect, reserved for by the restrictions on the related
collateral. 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). Kemper has not provided the
Liquidation Trust with sufficient information to determine the fair value of each of
the Insurance Claims. Therefore, the Liquidation Trust valued the Kemper Claim
in Unimpaired Claims payable at the full amount of the irrevocable
cash-collateralized letter of credit held by Kemper to assure payment of the
Insurance Claims. As a result, the Kemper Claim was valued at $9.0 million as
of September 30, 2003. 9




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In December 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). During May 2004, Kemper provided documents to the Liquidation Trust
indicating (a) that Kemper had applied certain deposits and other cash
collateral previously recorded as assets of the Liquidation Trust (see Note 5)
against the Insurance Claims, and (b) that after application of such
collateral, Kemper estimated the remaining collateral required to secure the
Insurance Claims at $3.9 million. The Liquidation Trust has therefore reduced
its estimate of the value of the Kemper Claim to the $3.9 million collateral
estimate. The ultimate value of the Insurance Claims could be higher or lower than
Kempers current collateral estimate. This collateral estimate is neither an
offer by Kemper to settle the Kemper Claim nor an amount at which the
Liquidation Trust believes this Claim should or will be settled. Kemper has
not agreed or offered to reduce the letter of credit. 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. 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 resolution of
preference receivables and other litigation, including the Kemper Complaint,
and the related Claims, is expected to extend into 2005, followed by certain
necessary legal and accounting processes to be completed thereafter. The
Liquidation Trust believes the Wind-down Reserve of $4.0 million as of June 30,
2004 is sufficient to cover the projected total costs of operating the
Liquidation Trust, consisting mainly of personnel and professional fees,
through its anticipated termination. 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). In
March 2004, the court ruled in favor of the defendants and against the
Liquidation Trust in the Bondholder Action (see Note 12). In April 2004, the
Liquidation Trust filed an appeal from this ruling. 10




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Also in April 2004, the Committee Action was assigned to the judge who
presided in the Bondholder Action, who has set a briefing schedule for summary
judgment and other motions and has scheduled the Committee Action for trial in
August 2005. The Liquidation Trust believes the Litigation Reserve balance of
$2.2 million as of June 30, 2004 is sufficient to cover the estimated total
costs of pursuing an appeal of the Bondholder Action and the trial in the
Committee Action scheduled for August 2005. 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. Bankruptcy Reserves Required Reserves, other than those funded by Restricted Cash, or included in
Available Cash, consist of: As of
    
    As of($ in thousands)
    
    June 30, 2004
    
    September 30, 2003Liability ReservesWind-down (net of related escrow of $278)
    
    $
    3,683
    
    
    $
    4,873Litigation
    
    
    2,184
    
    
    
    2,460Unimpaired Claims (net of applicable letter
of credit collateral of $3,925 and $9,002,
respectively (see Note 6))
    
    
    1,517
    
    
    
    2,042Uncashed Claims checks
    
    
    128
    
    
    
    377Convenience Claims
    
    
    2
    
    
    
    22Total Liability Reserves
    
    
    7,514
    
    
    
    9,774Contingency ReservesFleet
    
    
    11,000
    
    
    
    11,000Excess Disputed Unimpaired Claims
    
    
    305
    
    
    
    425Preference settlement Claims
    
    
    20
    
    
    
    89Minimum reserve
    
    
    3,000
    
    
    
    3,000Total Contingency Reserves
    
    
    14,325
    
    
    
    14,514Total Reserves
    
    $
    21,839
    
    
    $
    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 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 order and judgment in the Bondholder Action (see
Note 12) and does not believe Fleet will ultimately prevail in either of these
actions. 11




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11. Impaired Claims The Liquidation Trusts estimate of Impaired Claims consists of: As of
    
    As of($ in thousands)
    
    June 30, 2004
    
    September 30, 2003Allowed Claims
    
    $
    702,629
    
    
    $
    674,508Estimated fair value of Disputed Claims
    
    
    40,968
    
    
    
    84,219Total estimated Impaired Claims
    
    $
    743,597
    
    
    $
    758,727Asserted value of Disputed Claims
    
    $
    66,277
    
    
    $
    128,213Number of Disputed Claims
    
    
    61
    
    
    
    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
June 30, 2004 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. 12. Contingencies The Kemper Complaint In December 2003, the Liquidation Trust filed a complaint against Kemper
and various related entities (the Kemper Complaint). In the Kemper
Complaint, which arises 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 $8.8 million
and $9.0 million as of June 30, 2004 and September 30, 2003, respectively, to
secure payment of the Insurance Claims. 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.
Kempers response to the Complaint disputes the Liquidation Trusts estimates.
During May 2004, Kemper provided documents to the Liquidation Trust indicating
(a) that Kemper had applied certain deposits and other cash collateral
previously recorded as assets of the Liquidation Trust against the Insurance
Claims, and (b) that after application of such collateral, Kemper estimated the
remaining collateral required to secure the Insurance Claims at $3.9 million. The ultimate value of the Insurance Claims could be higher or lower than
Kempers current collateral estimate. This collateral estimate is neither an
offer by Kemper to settle the Kemper Claim nor an amount at which the
Liquidation Trust believes this Claim should or will be settled. Kemper has
not agreed or offered to reduce the letter of credit. Discovery in the
proceeding is expected to continue at least through the balance of the fiscal
year. The trial is scheduled for March 2005. 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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The Bondholder Action In March 2004, following a non-jury trial held in October 2003, the
United States District Court for the District of Delaware issued an opinion and
order (collectively, the Decision) in the Bondholder
Action, which the Liquidation Trust is pursuing against Fleet and General
Electric Credit Corp. (GECC), directing the entry of judgment in favor of
Fleet and GECC. In April 2004, the Liquidation Trust filed an appeal from the
Decision and related judgment. There can be no assurance of the outcome of the
appeal. 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 set a briefing schedule for summary judgment
and other motions and has scheduled the Committee Action for trial in August
2005. 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 June 30, 2004 and September 30, 2003 and for the three months and
nine months ended June 30, 2004 and June 30, 2003, 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 three months ended June 30,
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, 2003. 13




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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: For the three months ended($ in thousands)
    
    June 30, 2004
    
    June 30, 2003Distributions authorized
    
    $
    (134
    )
    
    $
    (14,053
    )Changes in estimates  increase/(decrease)
in net assets in liquidation:Unimpaired claims payable
    
    
    3,806
    
    
    
    1,576Preference receivables
    
    
    447
    
    
    
    4,123Costs of liquidation:Litigation reserve
    
    
    
    
    
    
    (3,000
    )Net other increases
    
    
    128
    
    
    
    217Net increase/(decrease) in net assets in liquidation
    
    $
    4,247
    
    
    $
    (11,137
    )
 For the nine months ended($ in thousands)
    
    June 30, 2004
    
    June 30, 2003Distributions authorized
    
    $
    (1,889
    )
    
    $
    (16,541
    )Changes in estimates  increase/(decrease)
in net assets in liquidation:Unimpaired claims payable
    
    
    3,806
    
    
    
    1,912Preference receivables
    
    
    3,537
    
    
    
    5,311Costs of liquidation:Wind-down reserve
    
    
    (1,540
    )
    
    
    Litigation reserve
    
    
    (2,000
    )
    
    
    (3,000
    )Net other increases
    
    
    1,026
    
    
    
    760Net increase/(decrease) in net assets in liquidation
    
    $
    2,940
    
    
    $
    (11,558
    )
 14




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A. Distributions authorized The primary difference between Distributions authorized during the three
months and the nine months ended June 30, 2004 and during the three months and
the nine months ended June 30, 2003 was the
second interim Distribution of 2.058% authorized during June 2003 to all
holders of Allowed Impaired Claims, whose Claims totaled $663.1 million as of
June 30, 2003. In addition, Distributions at the aggregate rate of 6.573%
were authorized to holders of a significantly lower amount of Impaired Claims
newly allowed during the three months and the nine months ended June 30, 2004
than during the three months and the nine months ended June 30, 2003, because,
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 1. Estimated fair value of unimpaired claims payable Claims liabilities are recorded at estimated aggregate settlement amounts,
which requires estimates of claims resolution results. Claims are evaluated by
reviewing the facts available to the Liquidation Trust, including the Debtors
records and information submitted by the claimants, and estimating the ultimate
settlement amount of each Claim based on currently available information. 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. The estimated fair value of Unimpaired Claims payable decreased by $3.8
million during the nine months ended June 30, 2004, compared to a decrease of
$1.9 million during the nine months ended June 30, 2003. The change in estimated fair value of Unimpaired Claims payable during the
three months and the nine months ended June 30, 2004 results primarily from the
Liquidation Trust receiving more information related to the largest remaining
Disputed Unimpaired Claim. This Claim is a secured Claim asserted by a group
of insurance companies commonly known as Kemper Insurance Company (Kemper)
(the Kemper Claim) for payment of certain liability claims against the
Debtors (the Insurance Claims). Kemper did not provide the Liquidation Trust
with sufficient information to determine the fair value of each of the Insurance
Claims. Therefore, the Liquidation Trust valued the Kemper Claim in Unimpaired
Claims payable at the full amount of the irrevocable cash-collateralized letter
of credit held by Kemper to assure payment of the Insurance Claims. As a
result, the Kemper Claim was valued at $9.0 million as of September 30, 2003. During May 2004, Kemper provided documents to the Liquidation Trust
indicating (a) that Kemper had applied certain deposits and other cash
collateral previously recorded as assets of the Liquidation Trust against the
Insurance Claims, and (b) that after application of such collateral, Kemper
estimated the remaining collateral required to secure the Insurance Claims at
$3.9 million. As of June 30, 2004, therefore, the Liquidation Trust netted the
previously recorded receivable of $1.2 million against the related estimated
Claim liability, and then reduced its estimate of the remaining value of the
Kemper Claim to the $3.9 million collateral estimate. The ultimate value of
the Insurance Claims could be higher or lower than Kempers current collateral
estimate. This collateral estimate is neither an offer by Kemper to settle the
Kemper Claim nor an amount at which the Liquidation Trust believes this Claim
should or will be settled. Adjustments in the estimated fair value of Unimpaired Claims payable for
the three months and the nine months ended June 30, 2003 resulted from the
Liquidation Trusts periodic evaluation of various claims. 2. Estimated fair value of preference receivables The estimated fair value of net preference receivables increased by $3.5
million during the nine months ended June 30, 2004, compared to an increase of
$5.3 million during the nine months ended June 30, 2003. 15




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The increase in the estimated fair value of preference receivables during
the nine months ended June 30, 2004 resulted from favorable preference case
settlements, partially offset by an increase in estimated expenses to collect.
During the three months ended December 31, 2003, a $3.8 million settlement was
reached in a preference case to which the Liquidation Trust had not previously
assigned a value, as the case was not previously sufficiently developed to
value (see below). During the three months ended March 31, 2004, the
Liquidation Trust increased its estimate of the costs of prosecuting the
remaining preference actions, which are the most difficult and contentious
cases, including the engagement of experts, by $0.7 million, decreasing the
estimated fair value of net preference receivables. An increase of $0.4
million in the estimated fair value of preference receivables during the three
months ended June 30, 2004 was primarily based on the Liquidation Trusts
ongoing collections in excess of previously estimated amounts. The increase in the estimated fair value of preference receivables for the
nine months ended June 30, 2003 was based on two main factors:  i)
    
    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
period from October 1, 2002 through June 30, 2003, some of these cases
were settled and others were more fully developed by entering into the
fact-finding and initial negotiation processes, resulting in increases
in estimates of $1.8 million.ii)
    
    Based on the Liquidation Trusts aggregate collections experience
to date, which was favorable compared to the previous estimate, the
Liquidation Trust increased the estimated fair value of the cases
remaining open as of June 30, 2003 by $3.5 million. A total of $4.1 million of this increase was recorded during the three
months ended June 30, 2003, based on the Liquidation Trusts settlement and
collections experience, the maturity of the cases, and the progress of the
fact-finding and negotiation process during that period. 3. Costs of liquidation The estimated costs of liquidation, representing the projected costs of
operating the Liquidation Trust through its termination, consist of the
Wind-down Reserve and the Litigation Reserve. These costs, which include
personnel, facilities and professional fees, among other things, are based on
various assumptions regarding the number of employees, the use of professionals
(particularly in connection with continuing claims resolution and litigation),
the anticipated termination date of the Liquidation Trust, and other matters.
These estimates are reviewed and updated based on changes in the circumstances
of the Liquidation Trust, particularly in the scheduling of the litigation the
Liquidation Trust is pursuing. During the three months ended June 30, 2004, no such changes in estimate
were required based on the status and progress of the Liquidation Trust.
However, several events during the three months ended March 31, 2004 caused the
Liquidation Trust to revise its estimates of the costs of winding down its
operations and prosecuting the actions provided for in the Litigation Reserve:  
    
    The December 2003 filing of a complaint against Kemper and various related entities (the Kemper Complaint) did not result in a
negotiated settlement; therefore estimated costs for counsel and
experts were planned through the scheduled March 2005 trial.
    
    A number of the trials in preference actions scheduled during
spring 2004 were postponed in the Bankruptcy Court.
    
    As a result, the resolution of the remaining Claims, final
Distributions and other wind-down matters were expected to extend
well into 2005. Certain limited operations of the Liquidation Trust
must continue until these matters have been addressed. 16




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Therefore, the Wind-down Reserve was increased by $1.5 million during the
three months ended March 31, 2004. The Litigation Reserve was established to cover the costs of the
Bondholder Action and of the Committee Action, for which a trial is now
scheduled in August 2005. In March 2004, the court ruled in favor of the
defendants and against the Liquidation Trust in the Bondholder Action. In April
2004, the Liquidation Trust filed an appeal from this ruling. As of December 31, 2003, an assessment of future increased funding of the
Litigation Reserve, if any, was deferred pending a decision in the Bondholder
Action. Based on a review of the Bondholder Action ruling and any potential
implications for the Committee Action, and of the Liquidation Trusts
alternatives in these matters, the Litigation Reserve was increased by $2.0
million during the three months ended March 31, 2004, in accordance with the
procedures set forth in the Plan. With respect to the three months and nine months ended June 30, 2003, the
Litigation Reserve was increased by $3.0 million during June 2003 as a result
of a higher than planned level of activity and duration of litigation,
primarily in connection with the Committee Action. The initial plan for the
case did not anticipate the number and scope of discovery requests,
depositions, and motions, and various delays in scheduling and proceeding with
the case. Additionally, the defenses raised by the defendants required
expenditures, at levels not originally anticipated for experts in insolvency
and valuation. In addition, the trial date for the Committee Action,
originally expected to be in late 2002, had, at that time, been deferred to January 2004. During the nine months ended June 30, 2003, there were no changes in the
status of the Liquidation Trust that would require a revision of the estimated
costs reflected in the Wind-down Reserve. III. Cash Receipts and Disbursements The following table summarizes the cash receipts and disbursements for the
periods as indicated: For the nine months ended($ in thousands)
        
        June 30, 2004
        
        June 30, 2003Cash receipts:Preference collections
        
        $
        7,294
        
        
        $
        10,071Other receipts
        
        
        1,023
        
        
        
        1,987Total cash receipts
        
        
        8,317
        
        
        
        12,058Cash disbursements:Legal and professional
            fees:Litigation
        
        
        2,276
        
        
        
        2,884Preference recoveries
        
        
        1,371
        
        
        
        1,779Liquidation Trust
            operations
        
        
        1,319
        
        
        
        1,224Operating expenses
        
        
        1,411
        
        
        
        2,008Claims paid, net
        
        
        875
        
        
        
        2,045Total cash disbursements
        
        
        7,252
        
        
        
        9,940Distributions paid
        
        
        2,336
        
        
        
        19,606Net cash outflow
        
        $
        (1,271
        )
        
        $
        (17,488
        )
 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 nine months ended June 30, 2004 were significantly
lower than during the nine months ended June 30, 2003, both because the
remaining preference cases are the most difficult and contentious cases and
therefore are settled more slowly, and
because the number of remaining preference cases available to settle has
decreased significantly as a result of ongoing preference settlement efforts. 17




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Likewise, other receipts, mainly resulting from settlement of various
amounts which were owed to the Debtors, have declined over time, because the
number and significance of open matters decreases as of each successive period. 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 nine months ended June 30, 2004 were somewhat less than those
paid during the nine months ended June 30, 2003. During the nine months ended
June 30, 2003, the Committee Action case was in the discovery phase, incurring
significant fees for counsel and experts. Fees related to the Committee
Action case, adjourned during September 2003 pending the outcome of the
Bondholder Action trial, declined substantially during the nine months ended
June 30, 2004. This decrease was offset by an increase in fees related to the
October 2003 trial in the Bondholder Action, a matter which was relatively less
active during the nine months ended June 30, 2003. While preference recovery fees declined as an absolute amount, preference
recovery fees during the nine months ended June 30, 2004 were higher, relative
to the applicable preference collections, than during the nine months ended
June 30, 2003. Cases resulting in $3.8 million in preference collections
during the nine months ended June 30, 2004 and $2.7 million in preference
collections during the nine months ended June 30, 2003 were handled by counsel
for Liquidation Trust operations, and the related expense was included in the
Statements of Cash Receipts and Disbursements under Legal and professional
fees  Liquidation Trust operations as incurred, rather than in preference
recovery fees. The fees for all other 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 nine months ended June 30, 2004, a number of large
cases were settled during the nine months ended June 30, 2003. Additionally,
during the nine months ended June 30, 2004, the Liquidation Trust incurred
significant fees and expenses for two expert reports in preparation for
upcoming preference action trials. 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. The increase
in fees for Liquidation Trust operations during the nine months ended June 30,
2004, as compared to the nine months ended June 30, 2003, results from
increased legal fees associated with certain preference case settlements (see
the $3.8 million and $2.7 million in collections noted above), and fees
associated with the Kemper Complaint, offset in part by a general decrease in
the number and type of open matters. C. Operating expenses Operating expenses during the nine months ended June 30, 2004 were
substantially lower than those during the nine months ended June 30, 2003,
primarily because the number of Liquidation Trust employees decreased
significantly between the two periods, resulting in lower payroll expense. D. Claims payments Payments of Unimpaired Claims were significantly lower during the nine
months ended June 30, 2004 than during the nine months ended June 30, 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. 18




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##### 



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%. During the nine months ended June 30, 2003, holders of
substantially all Allowed Impaired Claims, valued at $663.1 million, received
the second interim Distribution at the rate of 2.058% of the Allowed amount of
their Claims. No new interim Distribution was authorized or paid during the
nine months ended June 30, 2004. In addition, during both the nine months
ended June 30, 2004 and the nine months ended June 30, 2003, holders of newly
Allowed Impaired Claims received payments at the 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 to receive their accumulated
Distributions, as of each successive period. IV. Net Assets in Liquidation A. Assets The Liquidation Trusts cash and cash equivalents balance of $45.6 million
and $46.8 million as of June 30, 2004 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 $3.0 million as of June
30, 2004 was based primarily on the cumulative Distribution rate of 6.573%, for
$3.0 million of Allowed but unpaid Impaired Claims plus $42.9 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 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 $2.4 million from September 30, 2003
to June 30, 2004, to a balance of $21.8 million, primarily as a result of
decreases in the Wind-down and Unimpaired Claims reserves, as discussed below
and itemized in Note 10 to the Unaudited Liquidation Trust Financial Statements
filed herein. As of June 30, 2004, Restricted Cash of $9.6 million related primarily to
the Kemper Claim discussed in Liabilities, below. Other assets decreased by $1.2 million from September 30, 2003 to June 30,
2004, to a balance of $0.3 million, because Kemper provided documents to the
Liquidation Trust asserting that it had applied certain deposits and other cash
collateral previously recorded as assets of the Liquidation Trust against the
Insurance Claims. The Liquidation Trust recorded the application of such
amounts, decreasing other assets and decreasing the estimated Kemper Claim
accordingly. 19




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##### 



Preference receivables, net of costs of recovery, decreased by $2.4
million from September 30, 2003 to June 30, 2004, to a balance of $3.6 million,
primarily due to ongoing preference collections. Collections of preference
receivables accrued as of September 30, 2003 totaled $3.5 million, and
costs to collect totaled $1.4 million. In addition, the Liquidation Trust
increased its estimated costs to collect, generally related to expert fees
incurred in preparation for upcoming preference action trials, offset in part
by favorable preference case settlements. Collections during the period also
included a $3.8 million settlement agreed to, recorded and collected during the
nine months ended June 30, 2004, as discussed in Changes in estimates, above,
which therefore had no net effect on the balance of preference receivables as
of September 30, 2003 and as of June 30, 2004. B. Liabilities Unimpaired Claims payable as of June 30, 2004 consisted of Disputed
Unimpaired Claims with an estimated fair value of $3.9 million and Allowed but
unpaid Unimpaired Claims totaling $1.5 million. The remaining Disputed
Unimpaired Claims, estimated at $3.9 million, consist of 10 Claims either
estimated for reserve purposes or collateralized with restricted cash in a
total amount of $9.2 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 was previously estimated at the
outstanding letter of credit balance. This Claims estimated value was reduced
to $3.9 million as of June 30, 2004, based on additional information received
from Kemper (see Changes in estimates, above). If the remaining Disputed
Unimpaired Claims, excluding the Kemper Claim, were to be allowed at their
reserved amounts, net assets in liquidation would not be materially reduced. Estimated costs of liquidation decreased by $1.5 million from September
30, 2003 to June 30, 2004, to a balance of $6.1 million. The decrease is due
to disbursements totaling $2.7 million from the Wind-down Reserve and $2.3
million from the Litigation Reserve, partially offset by increases of $1.5
million to the Wind-down Reserve and $2.0 million to the Litigation Reserve, as
discussed in Changes in estimates, above. 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 actions. No liability has been accrued in connection with the Fleet
reserve because the Liquidation Trust has appealed the adverse order and
judgment in the Bondholder Action and does not believe Fleet will ultimately
prevail in either of the Actions. 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 20




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##### 



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 June 30, 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. 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 filed
December 22, 2003, and in Part II, Item 1  Legal Proceedings, of the
Liquidation Trusts Form 10-Q filed February 13, 2004. Cases before the United States District Court The Bondholder Action The Bondholder Action trial was held in October 2003. In March 2004 Court
issued an opinion and order (collectively, the Decision) in the Bondholder
Action, directing the entry of judgment in favor of Fleet and GECC. In April
2004, the Liquidation Trust filed an appeal to the Decision and related
judgment. There can be no assurance of the outcome of the appeal. The Committee Action The trial of the Committee Action, previously scheduled for January 2004,
was adjourned in September 2003 without a new date, pending the outcome of the
Bondholder Action trial. In April 2004, the Committee Action was assigned to
the judge who presided in the Bondholder Action, who has set a briefing
schedule for summary judgment and other motions and has scheduled the Committee
Action for trial in August 2005. 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. 21




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Cases before the Bankruptcy Court In
    December 2003, the Liquidation Trust filed the Kemper Complaint. In the
    Kemper Complaint, which arises 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. 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. Kempers
    response to the Complaint disputes the Liquidation Trusts estimates.
    (Also see Changes in Estimates  Estimated fair value of unimpaired
    claims payable above.) Discovery in the proceeding is expected to continue
    at least through the balance of the fiscal year. The trial is scheduled for
    March 2005. 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. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information Subsequent
    to June 30, 2004, the Liquidation Trustee informed the Committee which
    represents the interests of the beneficiaries of the Liquidation Trust that
    he intends to authorize a third interim Distribution of approximately 1.5%
    of the amount of Impaired Claims to holders of Allowed Impaired Claims. The
    Distribution is expected to be authorized and made by September 2004. Also subsequent to June 30, 2004 and as part of the wind-down of its
operations, the Liquidation Trust prepared to close its 9,000 square-foot
records warehouse and moved from its previous 6,000 square-foot leased office
to a 1,500 square-foot office at a significantly reduced rent. 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) under the Exchange Act32.1
    
    Liquidation Trustees Certification Pursuant to 18 U.S.C.
Section 1350
 (b) Reports on Form 8-K None. 22




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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: August 13, 2004
    
    By:
    
    /s/ Conrad F. HockingName:
    
    Conrad F. HockingTitle:
    
    Liquidation Trustee
 23




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INDEX TO EXHIBITS
FORM 10-Q Exhibit No.  31.1
    
    Certification by Trustee pursuant to Rule 13a-14(a) and 15d-14(a) under
the Exchange Act32.1
    
    Liquidation Trustees Certification Pursuant to 18 U.S.C. Section 1350 24