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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
March 31, 2005 oro
    
    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
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 MARCH 31, 2005 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
    
    20Item 4.Controls and Procedures
    
    20PART II. OTHER INFORMATION:Item 1.Legal Proceedings
    
    21Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    21Item 3.Defaults Upon Senior Securities
    
    21Item 4.Submission of Matters to a Vote of Security Holders
    
    22Item 5.Other Information
    
    22Item 6.Exhibits
    
    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 As of
    
    
    As of($ in thousands)
    
    March 31, 2005
    
    
    September 30, 2004AssetsCash and cash equivalentsCash designated as available for distribution
    
    $
    2,792
    
    
    $
    3,388Reserved cash
    
    
    23,150
    
    
    
    21,471Restricted cash
    
    
    1,961
    
    
    
    9,312Other cash
    
    
    7,029
    
    
    
    204Total cash and cash equivalents
    
    
    34,932
    
    
    
    34,375Preference receivables (net of costs of
recovery of $151 and $1,029,
respectively)
    
    
    363
    
    
    
    3,149Other assets
    
    
    1,106
    
    
    
    160Total assets
    
    
    36,401
    
    
    
    37,684LiabilitiesUnimpaired and convenience claims payable
    
    
    2,937
    
    
    
    2,970Uncashed claims checks
    
    
    265
    
    
    
    142Distributions payable
    
    
    284
    
    
    
    228Estimated costs of liquidationWind-down reserve
    
    
    2,196
    
    
    
    3,518Litigation reserve
    
    
    1,272
    
    
    
    2,384Total liabilities
    
    
    6,954
    
    
    
    9,242Net Assets in Liquidation
    
    $
    29,447
    
    
    $
    28,442
 See accompanying notes to unaudited financial statements. 3




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Hechinger Liquidation TrustUnaudited Statements of Changes in Net Assets in Liquidation For the three
    
    
    For the threemonths ended
    
    
    months ended($ in thousands)
    
    March 31, 2005
    
    
    March 31, 2004Increase/(decrease) in Net Assets in LiquidationDecrease in estimated fair value
of preference receivables, net
    
    $
    (67
    )
    
    $
    (660
    )Increase in estimated costs of liquidation:Wind-down reserve
    
    
    
    
    
    
    (1,540
    )Litigation reserve
    
    
    
    
    
    
    (2,000
    )Interest income
    
    
    138
    
    
    
    62Other increases
    
    
    998
    
    
    
    732Net increase/(decrease) in Net Assets in Liquidation
before distributions authorized
    
    
    1,069
    
    
    
    (3,406
    )Distributions authorized
    
    
    (142
    )
    
    
    (329
    )Net increase/(decrease) in Net Assets in Liquidation
after distributions authorized
    
    
    927
    
    
    
    (3,735
    )Net Assets in Liquidation at beginning of period
    
    
    28,520
    
    
    
    37,004Net Assets in Liquidation at end of period
    
    $
    29,447
    
    
    $
    33,269
 For the six
    
    
    For the sixmonths ended
    
    
    months endedMarch 31, 2005
    
    
    March 31, 2004Increase/(decrease) in Net Assets in Liquidation(Decrease)/increase in
            estimated fair value of preference receivables, net
    
    $
    (67
    )
    
    $
    3,090Increase in estimated costs of liquidation:Wind-down reserve
    
    
    
    
    
    
    (1,540
    )Litigation reserve
    
    
    
    
    
    
    (2,000
    )Decrease in estimated fair value of unimpaired
and convenience claims payable
    
    
    23
    
    
    
    Interest income
    
    
    260
    
    
    
    126Other increases
    
    
    1,011
    
    
    
    772Net increase in Net Assets in Liquidation
before distributions authorized
    
    
    1,227
    
    
    
    448Distributions authorized
    
    
    (222
    )
    
    
    (1,755
    )Net increase/(decrease) in Net Assets in Liquidation
after distributions authorized
    
    
    1,005
    
    
    
    (1,307
    )Net Assets in Liquidation at beginning of period
    
    
    28,442
    
    
    
    34,576Net Assets in Liquidation at end of period
    
    $
    29,447
    
    
    $
    33,269
 See accompanying notes to unaudited financial statements. 4




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Hechinger Liquidation TrustUnaudited Statements of Cash Receipts and Disbursements For the six
    
    
    For the sixmonths ended
    
    
    months ended($ in thousands)
    
    March 31, 2005
    
    
    March 31, 2004Cash receiptsPreference collections, before
costs of recovery
    
    $
    3,670
    
    
    $
    6,222Interest income
    
    
    260
    
    
    
    126Other receipts
    
    
    65
    
    
    
    62Total cash receipts
    
    
    3,995
    
    
    
    6,410Cash disbursementsCosts of liquidationLegal and professional feesLitigation
    
    
    1,112
    
    
    
    2,162Preference recoveries
    
    
    951
    
    
    
    1,010Liquidation Trust operations
    
    
        383
    
    
    
    1,087Operating expenses
    
    
    939
    
    
    
    977Unimpaired and convenience claims
    
    
        10
    
    
    
    270Reissued/(voided) claims checks, net
    
    
    (123
    )
    
    
    212Total cash disbursements
    
    
        3,272
    
    
    
    5,718Increase in cash and cash equivalents
before distributions paid
    
    
        723
    
    
    
    692Distributions paid
    
    
        166
    
    
    
    2,112Increase/(decrease) in cash and
cash equivalents
    
    
    557
    
    
    
    (1,420
    )Cash and cash equivalents
at beginning of period
    
    
    34,375
    
    
    
    46,837Cash and cash equivalents
at end of period
    
    $
    34,932
    
    
    $
    45,417
 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 March 31, 2005, 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. Certain amounts in the financial statements as of September 30, 2004 and for the three months
and six months ended March 31, 2004 have been reclassified to conform to the presentation as of
March 31, 2005 and for the three months and six months ended March 31, 2005. Convenience Claims
payable shown separately in the financial statements as of September 30, 2004 have been combined
with Unimpaired Claims payable to conform to the presentation in the March 31, 2005 financial
statements. Increases in the Wind-Down and Litigation Reserves, presented as an aggregate amount
in the financial statements for the three months and six months ended March 31, 2004, are shown
separately herein to conform with the presentation in the financial statements for the three months
and six months ended March 31, 2005. 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. 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 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)
    
    March 31, 2005
    
    
    September 30, 2004Distributions payable
    
    $
    284
    
    
    $
    228Reserve for remaining disputed
impaired claims at 8.1%
    
    
    2,508
    
    
    
    3,160Total available cash
    
    $
    2,792
    
    
    $
    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. During January 2005, $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.
Subsequent to March 31, 2005, the Liquidation Trustee filed a Notice of Fourth Interim Distribution
with the Bankruptcy Court, indicating that an additional Distribution in the amount of 1.0% of
Impaired Claims will be made to holders of Allowed Impaired Claims during May 2005. 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 $0.4 million, net of estimated costs of
recovery of $0.2 million, for the sole remaining preference recovery action being actively pursued
and for settlement collections in progress as of March 31, 2005; 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. 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 receivables from various former vendors, service providers, and
others. During March 2005, the Liquidation Trust agreed to a settlement of $0.6 million in
connection with litigation against a group of insurance companies collectively referred to as Kemper Insurance
Company (Kemper), a former insurance company of the Debtors, which is included in other assets as
of March 31, 2005. Other assets also include a $0.4 million distribution in the liquidation of the
Debtors former company-owned life insurance policy carrier. 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)
    
    March 31, 2005
    
    
    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
    
    
    5
    
    
    
    9
 The largest remaining Unimpaired Claim is a secured Claim asserted by 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 March 31,
2005 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 March 31, 2005 and with Disputed Unimpaired Claims as
of September 30, 2004. During January 2005, the letter of credit securing the Kemper Claim was
reduced to $1.6 million pursuant to the December 2004 agreement between Kemper and the Liquidation
Trust. 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 9




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Unimpaired Claims as of March 31, 2005 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. The amount asserted by the holders of the remaining Disputed Unimpaired Claims is
insignificant as of March 31, 2005 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 March 31, 2005. 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 currently may be
reissued upon timely 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 March 31, 2005 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 March 31, 2005 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, approval has been obtained for all increases in the Litigation Reserve. The Liquidation Trustee may also determine that pursuing or defending future appeals or
re-trials in the Bondholder Action and the Committee Action is in the best interest of the holders
of Beneficial Interests in the Liquidation Trust. In order to reserve funds to carry out these
actions as needed, as of March 31, 2005, the Liquidation Trustee has designated a contingency
reserve of $4.0 million (see Note 10). None of this amount will be added to the Litigation Reserve
accrual until and unless the Liquidation 10




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Trustee determines that future action will be pursued, and
then only in accordance with the approval procedures set forth in the Plan. 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. Bankruptcy Reserves Required Reserves, other than those funded by Restricted Cash, or included in Available Cash, consist
of: As of
    
    
    As of($ in thousands)
    
    March 31, 2005
    
    
    September 30, 2004Liability ReservesWind-down (net of related escrow of $278)
    
    $
    1,918
    
    
    $
    3,240Litigation
    
    
    1,272
    
    
    
    2,384Unimpaired and convenience claims
(excluding secured claim (see Note 6))
    
    
    1,337
    
    
    
    1,370Uncashed claims checks
    
    
    265
    
    
    
    142Total liability reserves
    
    
    4,792
    
    
    
    7,136Contingency ReservesFleet
    
    
    11,000
    
    
    
    11,000Litigation appeals provision
    
    
    4,000
    
    
    
    Excess disputed unimpaired claims
    
    
    329
    
    
    
    309Preference settlement claims
    
    
    29
    
    
    
    26Minimum reserve
    
    
    3,000
    
    
    
    3,000Total contingency reserves
    
    
    18,358
    
    
    
    14,335Total reserves
    
    $
    23,150
    
    
    $
    21,471
 The litigation appeals provision represents cash held in reserve to allow the Liquidation
Trust to pursue or defend future appeals and re-trials of the Committee Action and the Bondholder
Action. The Liquidation Trustee designated this contingency reserve as of March 31, 2005 because
the anticipated future cash receipts of the Liquidation Trust may not be sufficient to fund such
actions prospectively. No liability has been accrued in connection with such possible future
actions because the Liquidation Trust has not determined that any such action will be required. 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




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11. Impaired Claims The Liquidation Trusts estimate of Impaired Claims consists of: As of
    
    
    As of($ in thousands)
    
    March 31, 2005
    
    
    September 30, 2004Allowed impaired claims
    
    $
    705,720
    
    
    $
    704,015Estimated fair value of disputed impaired claims
    
    
    17,247
    
    
    
    20,798Total estimated impaired claims
    
    $
    722,967
    
    
    $
    724,813Asserted value of disputed impaired claims
    
    $
    56,037
    
    
    $
    64,068Number of disputed impaired claims
    
    
    23
    
    
    
    47
 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 scheduled oral argument for the appeal
during June 2005. 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 the Bondholder Action and the Committee Action.
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. 13. Subsequent events Subsequent to March 31, 2005, the Liquidation Trustee filed a Notice of Fourth Interim
Distribution with the Bankruptcy Court, indicating that an additional Distribution in the amount of
1.0% of Impaired Claims will be made to holders of Allowed Impaired Claims during May 2005. 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 March
31, 2005 and September 30, 2004 and for the three months and six months ended March 31, 2005 and
March 31, 2004, 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 three months ended March 31, 2005 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 three months ended($ in thousands)
    
    March 31, 2005
    
    
    March 31, 2004Distributions authorized
    
    $
    (142
    )
    
    $
    (329
    )Changes in estimates  (decrease)/increasein net assets in liquidationPreference receivables, net
    
    
    (67
    )
    
    
    (660
    )Estimated costs of liquidation
    
    
    
    
    
    
    (3,540
    )Net other increases
    
    
    1,136
    
    
    
    794Net increase/(decrease) in net assets in liquidation
    
    $
    927
    
    
    $
    (3,735
    )
 For the six months endedMarch 31, 2005
    
    
    March 31, 2004Distributions authorized
    
    $
    (222
    )
    
    $
    (1,755
    )Changes in estimates  (decrease)/increasein net assets in liquidationPreference receivables, net
    
    
    (67
    )
    
    
    3,090Estimated costs of liquidation
    
    
    
    
    
    
    (3,540
    )Net other increases
    
    
    1,294
    
    
    
    898Net increase/(decrease) in net assets in liquidation
    
    $
    1,005
    
    
    $
    (1,307
    )
 A. Distributions authorized No new interim Distribution was authorized during the six months ended March 31, 2005 or
during the six months ended March 31, 2004. i. Distributions
authorized during the three months ended March 31, 2005 primarily related to
the Liquidation Trusts $0.1 million payment of applicable taxes on certain calendar year 2004
taxable net income and gain allocable to holders of Disputed Impaired Claims on behalf of such
holders. Distributions at the cumulative rate of 8.1% were authorized to holders of $0.7 million
and $1.0 million of Impaired Claims newly allowed during the three months and six months ended
March 31, 2005, respectively. ii. Distributions at the then cumulative rate of 6.573% were authorized to holders of $4.3
million and $26.0 million of Impaired Claims newly allowed during the three months and the six
months ended March 31, 2004, respectively. In addition, included in Distributions authorized
during the three months ended March 31, 2004, the Liquidation Trust paid applicable taxes on
certain calendar year 2003 taxable income and gain allocable to holders of Disputed Impaired Claims
on behalf of such holders. 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 The estimated fair value of preference receivables was decreased by $0.1 million for
additional collections costs during the three months ended March 31, 2005. The estimate otherwise
remained unchanged for the three months and six months ended March 31, 2005, because substantially
all of the remaining cases have been settled for the same amounts as their estimated value as of
September 30, 2004. The estimated fair value of preference receivables decreased by $0.7 million during the three
months ended March 31, 2004 and increased by a net amount of $3.1 million during the six months
then ended. The decrease during the three months ended March 31, 2004 resulted from an increase in
the estimated costs of prosecuting the remaining preference actions, which were the most difficult
and contentious cases, including the engagement of a consulting firm. The increase during the six
months ended March 31, 2004 was due to a $3.8 million settlement reached in 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. 14




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C. Changes in estimates  estimated costs of liquidation No significant change in the status of the Liquidation Trusts wind-down activities, the
Bondholder Action, or the Committee Action occurred during the three months and six months ended
March 31, 2005; therefore, no changes in estimate were recorded during those periods. No significant change in such items occurred during the three months ended December 31, 2003.
The changes discussed below all occurred during or shortly after the three months ended March  31, 2004. Several events  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 as of March 31, 2004: i. Because the December 2003 filing of a complaint against a group of insurance companies
collectively referred to as Kemper Insurance Company (Kemper) (the Kemper Complaint), did not
result in a negotiated settlement, estimated costs for counsel and experts were planned
through the scheduled March 2005 trial. ii. A number of the trials in preference actions scheduled during the three months ended March
31, 2004 were postponed by the Bankruptcy Court. Scheduled preference action trials as of March
31, 2004 extended through the end of 2004, and not all cases had been scheduled. iii. During April 2004, the Committee Action, previously scheduled for trial during January
2004, was scheduled for trial in August 2005. As a result of these delays, the resolution of the remaining Claims, final Distributions and
other wind-down matters were therefore expected to require an additional year of operations, well
into 2005. Therefore, the Wind-down Reserve was increased by $1.5 million during the three months
ended March 31, 2004 to reflect the increase in expected costs. As of December 31, 2003, an assessment of future funding of the Litigation Reserve, if any,
had been deferred pending a decision in the October 2003 trial of the Bondholder Action. In March
2004, the court ruled in favor of the defendants and against the Liquidation Trust, a ruling which
the Liquidation Trust then decided to appeal. 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. The
current status of the Bondholder Action and the Committee Action is discussed on page 21 of this
Form 10-Q under Part II  Other Information, Item 1., Legal Proceedings. D. Net other increases Net
other increases during the three months and the six months ended
March 31, 2005 consisted primarily of a $0.6
million settlement in the Kemper Complaint, a $0.4 million distribution in the
liquidation of the Debtors former company-owned life insurance policy carrier, and interest
income. Net other increases during the three months and the six months ended March 31, 2004 consisted primarily of a $0.7
million settlement in litigation against a former insurance broker of the Debtors and interest income. 15




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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 six months ended($ in thousands)
    
    March 31, 2005
    
    
    March 31, 2004Cash receiptsPreference collections, before
costs of recovery
    
    $
    3,670
    
    
    $
    6,222Other receipts
    
    
    325
    
    
    
    188Total cash receipts
    
    
    3,995
    
    
    
    6,410Cash disbursementsLegal and professional feesLitigation
    
    
    1,112
    
    
    
    2,162Preference recoveries
    
    
        951
    
    
    
    1,010Liquidation Trust operations
    
    
        383
    
    
    
    1,087Operating expenses
    
    
    939
    
    
    
    977Claims payments
    
    
        10
    
    
    
    270Reissued/(voided) claims checks, net
    
    
    (123
    )
    
    
    212Total cash disbursements
    
    
        3,272
    
    
    
    5,718Distributions paid
    
    
        166
    
    
    
    2,112Net cash in/(out)flow
    
    $
    557
    
    
    $
    (1,420
    )
 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, and are substantially complete as of
March 2005. Cash receipts from collections of preference receivables are expected to decline
significantly subsequent to the six months ended March 31, 2005. Preference collections during the six months ended March 31, 2005 were significantly lower
than during the six months ended March 31, 2004. Four substantial preference recovery actions
(totaling $3.3 million in settlement value), which were settled immediately prior to trial,
constituted most of the value of preference collections during the six months ended March 31, 2005. During the six months ended March 31, 2004, the Liquidation Trust settled and collected one
very substantial case, valued at $3.8 million (see II. B., Changes in estimates, above), in
addition to preference collections from 60 other cases. 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 available to settle and collect during the six months ended March 31, 2004 than
during the six months ended March 31, 2005. On the other hand, absent the pressure of trial dates
during early 2004, many of the more significant cases proceeded slowly during the six months ended
March 31, 2004; as a result, most of the cases settled and collected during that period were the
smaller ones. 16




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B. Legal and professional fees Legal and professional fees reflect the activity level in various areas of the Liquidation
Trusts responsibilities. 1. Litigation The litigation fees paid for the Bondholder Action and the Committee Action during the six
months ended March 31, 2005 were significantly less than those paid during the six months ended
March 31, 2004. Fees paid during the six months ended March 31, 2005 related to filing the
Liquidation Trusts appeal briefs in the Bondholder Action, and to defending various motions,
including motions for summary judgment, filed by defendants in the Committee Action. Fees paid
during the six months ended March 31, 2004 included expert fees
and legal fees 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. 2. Preference recoveries Preference recovery fees during the six months ended March 31, 2005 were not comparable, as a
percentage of preference collections, to such fees during the six months ended March 31, 2004,
primarily because of significant differences in the size of the specific cases settled and
collected. 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. i. During the six months ended March 31, 2005, substantially all of the $3.7 million of
preference recoveries related to four significant cases, for which the contingent fees were
therefore nearer the lower end of the rate scale. In addition, the Liquidation Trust paid
contingent fees of $0.2 million to its preference collections counsel with respect to the value the
Liquidation Trust received for waivers of Impaired Claims obtained in the course of preference
settlements, and $0.3 million of fees for expert reports in preparation for preference action
trials. ii. During the six months ended March 31, 2004, with respect to one settlement totaling $3.8
million, no contingent preference recovery fees were paid (see related fees discussed below).
However, the remaining $2.5 million of preference recoveries was collected from 60 different
vendors; therefore, the contingent fees for each such smaller case were near the higher end of the
rate scale, significantly higher than for the large cases settled during the six months ended March
31, 2005. In addition, the Liquidation Trust paid $0.1 million of fees for an expert report in
preparation for a preference action trial. 3. Liquidation Trust operations 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 six months ended March 31, 2004 as compared to the six
months ended March 31, 2005 resulted primarily from legal fees
associated with (a) a preference case
settled during the three months ended December 31, 2003 for $3.8 million (see II., B. Changes in
estimates, above) and (b) the Kemper Complaint filed during
December 2003. In addition, Liquidation Trust activities, and the
associated professional fees, have declined because fewer issues and
claims remain to be resolved as of each successive period. C. Operating expenses Operating expenses during the six months ended March 31, 2005 declined slightly compared to
those during the six months ended March 31, 2004. Severance paid to two key employees in the six
months ended March 31, 2005 substantially offset decreased rent expenditures for the Liquidation
Trusts much 17




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##### 



reduced office and warehouse space and decreased annual bank fees incurred with respect to the
substantially reduced letter of credit balance resulting from the December 2004 settlement of a
secured Claim asserted by Kemper (the Kemper Claim) against the Liquidation Trust. D. Claims payments Payments of Unimpaired Claims were lower during the six months ended March 31, 2005 than
during the six months ended March 31, 2004 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 six months ended March 31, 2005 or during the six months ended
March 31, 2004. During the six months ended March 31, 2005, holders of $1.1 million of Allowed
Impaired Claims received payments at the cumulative Distribution rate of 8.1%, and the Liquidation
Trust authorized and paid taxes of $0.1 million on calendar year 2004 taxable net income and gain
allocable to holders of Disputed Impaired Claims on behalf of such holders. During the six months
ended March 31, 2004, holders of $32.5 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. IV.Net Assets in Liquidation A. Assets 1. Cash and cash equivalents The Liquidation Trusts cash and cash equivalents balance of $34.9 million and $34.4 million
as of March 31, 2005 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 $2.8 million as of March 31, 2005 was based primarily on the cumulative Distribution rate
of 8.1%, for $2.6 million of Allowed but unpaid Impaired Claims plus $32.5 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 increased by $1.7 million from September 30, 2004 to March 31, 2005, to a balance of
$23.2 million, primarily as a result of the establishment of the litigation appeals provision, and
offset in part by expenditures from the Wind-down and Litigation Reserves, all as discussed below. Restricted Cash as of September 30, 2004 of $9.3 million related primarily to a letter of
credit collateralizing the Kemper Claim. During January 2005, $7.4 million of Restricted Cash was
released to 18




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##### 



Other Cash following a reduction in the letter of credit to a balance of $1.6 million, which
resulted from the December 2004 settlement of the Kemper Claim. Other Cash, which is not designated to a specific reserve or fund, increased primarily as a
result of the release of $7.4 million from Restricted Cash, as described above, and preference
collections during the six months ended March 31, 2005, offset in part by the establishment of the
litigation appeals provision, as described under C., Contingency reserves, below. Subsequent to
March 31, 2005, the Liquidation Trustee filed a Notice of Fourth Interim Distribution with the
Bankruptcy Court, indicating that an additional Distribution in the amount of 1.0% of Impaired
Claims will be made to holders of Allowed Impaired Claims during May 2005. 2. Preference receivables and other assets Preference receivables, net of costs of recovery, decreased by $2.8 million, to a balance of
$0.4 million as of March 31, 2005, compared to September 30, 2004, primarily due to ongoing
preference collections. Collections of preference receivables totaled $3.7 million, and costs to
collect, including significant non-recurring expert fees, totaled $1.0 million. Other assets increased by $0.9 million, to a balance of $1.1 million as of March 31, 2005,
compared to September 30, 2004, primarily due to the $0.6 million settlement in the Kemper
Complaint and a $0.4 million distribution announced in the
liquidation of the Debtors former
company-owned life insurance policy carrier. B. Liabilities Estimated costs of liquidation decreased by $2.4 million, to a balance of $3.5 million as of
March 31, 2005, compared to September 30, 2004. The decrease is due to disbursements totaling $1.3
million from the Wind-down Reserve and $1.1 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 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. The litigation appeals provision represents cash held in reserve to allow the Liquidation
Trust to pursue or defend future appeals and re-trials of the Committee Action and the Bondholder
Action. The Liquidation Trustee designated this contingency reserve as of March 31, 2005 because
the anticipated future cash receipts of the Liquidation Trust may not be sufficient to fund such
actions prospectively. No liability has been accrued in connection with such possible future
actions because the Liquidation Trust has not determined that any such action will be required. V.Contingencies The Liquidation Trust is pursuing litigation against various parties, in particular the cases
described as the Bondholder Action and the Committee Action, 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. 19




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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 March 31, 2005. 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. As a result of delays in implementation of certain requirements of the Sarbanes  Oxley Act of
2002, the Liquidation Trusts internal controls over financial reporting will not be subject to
audit until the fiscal year ending September 30, 2006. However, 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 when it suspends day-to-day operations. In addition to the
Liquidation Trustee, the Liquidation Trust had two employees as of March 31, 2005. In the next
three months, 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. 20




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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 scheduled oral argument for the appeal
during June 2005. 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 the Bondholder Action and the Committee Action.
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 $1.7 million,
offset by a $0.1 million prepayment held by a third-party claims administrator. During January
2005, pursuant to this agreement, Kemper reduced the letter of credit collateralizing its Claim to
$1.6 million, and released a $12.0 million bond held as additional security, which bond constitutes
most of the largest remaining Disputed Impaired Claim. During March 2005, the Liquidation Trusts claims against Kemper for the return of excess
collateral, deposits and other amounts due to the Liquidation Trust were settled for $0.6 million
under an agreement in principle, subject to approval by the Bankruptcy Court. Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. 21




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Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information Subsequent to March 31, 2005, the Liquidation Trustee filed a Notice of Fourth Interim
Distribution with the Bankruptcy Court, indicating that an additional Distribution in the amount of
1.0% of Impaired Claims will be made to holders of Allowed Impaired Claims during May 2005. Item 6. Exhibits ExhibitNumber
    
    Document31.1
    
    Certification by Liquidation Trustee32.1
    
    Liquidation Trustees Certification Pursuant to 18 U.S.C. Section 1350
 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: May 2, 2005
    
    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 Liquidation Trustee32.1
    
    Liquidation Trustees Certification Pursuant to 18 U.S.C. Section 1350
 24