Hechinger Liquidation Trust 10Q 2005 Q1 Quarterly report

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 1934
		for the quarterly period ended December 31, 2004 or


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 000-50160

HECHINGER LIQUIDATION TRUST

(Exact name of Registrant as specified in its charter)


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

405 East Gude Drive, Suite 206, Rockville, Maryland		20850
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (301) 838-4311

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

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

Yeso Noþ

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.

Yesþ Noo

HECHINGER LIQUIDATION TRUST
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004


Description	Page

PART I. FINANCIAL INFORMATION:

Item 1. Financial Statements
Unaudited Statements of Net Assets in Liquidation		3
Unaudited Statements of Changes in Net Assets in Liquidation		4
Unaudited Statements of Cash Receipts and Disbursements		5
Notes to Unaudited Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		18
Item 4. Controls and Procedures		18

PART II. OTHER INFORMATION:

Item 1. Legal Proceedings		19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		19
Item 3. Defaults Upon Senior Securities		19
Item 4. Submission of Matters to a Vote of Security Holders		20
Item 5. Other Information		20
Item 6. Exhibits		20

SIGNATURES		21

INDEX TO EXHIBITS		22

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Hechinger Liquidation Trust
Unaudited Statements of Net Assets in Liquidation

($ in thousands)


	As of		As of
	December 31, 2004		September 30, 2004

Assets
Cash and cash equivalents
Cash designated as available for distribution	$	3,034	$	3,388
Reserved cash		19,871		21,471
Restricted cash		9,340		9,312
Other cash		1,697		204


Total cash and cash equivalents		33,942		34,375

Preference receivables (net of costs of recovery of $332 and $1,029, respectively)		2,074		3,149
Other assets		124		160


Total assets		36,140		37,684


Liabilities
Unimpaired and convenience claims payable		2,937		2,970
Uncashed claims checks		175		142
Distributions payable		227		228
Estimated costs of liquidation
Wind-down reserve		2,773		3,518
Litigation reserve		1,508		2,384


Total liabilities		7,620		9,242


Net Assets in Liquidation	$	28,520	$	28,442

See accompanying notes to unaudited financial statements.

Hechinger Liquidation Trust
Unaudited Statements of Changes in Net Assets in Liquidation

($ in thousands)


	For the quarter			For the quarter
	ended			ended
	December 31, 2004			December 31, 2003

Increase in Net Assets in Liquidation
Increase in estimated fair value of preference receivables, net	$	—		$	3,750
Decrease in estimated fair value of unimpaired and convenience claims payable		23			—
Interest income		121			63
Other increases		13			40


Net increase in Net Assets in Liquidation before distributions authorized		157			3,853

Distributions authorized		( 79	)		( 1,426	)


Net increase in Net Assets in Liquidation after distributions authorized		78			2,427

Net Assets in Liquidation at beginning of period		28,442			34,576


Net Assets in Liquidation at end of period	$	28,520		$	37,003

See accompanying notes to unaudited financial statements.

Hechinger Liquidation Trust
Unaudited Statements of Cash Receipts and Disbursements

($ in thousands)


	For the quarter			For the quarter
	ended			ended
	December 31, 2004			December 31, 2003

Cash receipts
Preference collections, before costs of recovery	$	1,772		$	1,239
Interest income		121			64
Other receipts		49			40

Total cash receipts		1,942			1,343


Cash disbursements
Costs of liquidation
Legal and professional fees
Litigation		875			1,490
Preference recoveries		697			490
Liquidation Trust operations		237			720
Operating expenses		508			600
Unimpaired and convenience claims		11			126
Reissued/(voided) claims checks, net		(33	)		127

Total cash disbursements		2,295			3,553


Decrease in cash and cash equivalents before distributions paid		(353	)		(2,210	)

Distributions paid		80			1,666


Decrease in cash and cash equivalents		(433	)		(3,876	)

Cash and cash equivalents at beginning of period		34,375			46,837


Cash and cash equivalents at end of period	$	33,942		$	42,961

See accompanying notes to unaudited financial statements.

Hechinger Liquidation Trust
Notes to Unaudited Financial Statements

1. Background and Basis of Presentation

Background

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

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

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

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

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

Through December 31, 2004, the Liquidation Trust has authorized Distributions to holders of Beneficial Interests (i.e., to holders of Allowed Impaired Claims) of 8.1% of the Allowed amount of the Impaired Claims, and established a reserve of 8.1% of the estimated amount of Disputed Impaired Claims, based on the estimated amount of such Claims approved by the Bankruptcy Court for reserve purposes (the “Disputed Impaired Claims Reserve”).

Basis of Presentation

The Liquidation Trust’s financial statements have been prepared using the liquidation basis of accounting. Under this method of accounting, the Statements of Net Assets in Liquidation reflect all assets

and liabilities, including the projected total cost of liquidating the assets and winding down the affairs of the Liquidation Trust, at estimated fair value. Unimpaired Claims, to be paid in full, are reflected in the Statements of Net Assets in Liquidation as liabilities at estimated aggregate settlement amounts. The unpaid amount of the authorized Distributions to holders of Allowed Impaired Claims is also reflected as a liability. The Statements of Changes in Net Assets in Liquidation primarily reflect any authorized Distributions to holders of Beneficial Interests and changes in the estimated fair value of the Liquidation Trust’s assets and liabilities. The Liquidation Trust’s fiscal year ends on September 30.

The accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments that are, in the opinion of the Liquidation Trustee, necessary for a fair statement of the results for the interim periods presented. Such financial statements and these notes thereto should be read in conjunction with the audited Liquidation Trust financial statements as of September 30, 2004 and September 30, 2003, and for the fiscal years ended September 30, 2004 and September 30, 2003, and for the period from October 26, 2001 (Effective Date) through September 30, 2002, and the notes thereto.

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

Convenience Claims payable shown in the financial statements as of September 30, 2004 have been combined with Unimpaired Claims payable to conform to their presentation in the December 31, 2004 financial statements.

2. Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

The Liquidation Trust considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Liquidation Trust holds substantially all cash balances in operating and investment accounts in excess of federally insured limits. Cash is classified as: cash designated as available for distribution, reserved cash, restricted cash, and other cash (see Note 3).

Taxes

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

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

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

3. Cash and Cash Equivalents

Cash is invested in highly liquid investments with a maturity of three months or less, and in accordance with Section 345 of the Bankruptcy Code or as otherwise permitted by order of the Bankruptcy Court. Under the terms of the Plan, the Liquidation Trust is not required to segregate funds for reserves (see Note 10).

Cash designated as available for distribution (“Available Cash”) is designated to assure the availability of funds for payment to holders of Impaired Claims who have not received their Distributions. As such, Available Cash includes Distributions payable (see Note 8) and the Disputed Impaired Claims Reserve (see Note 10). Available Cash does not include reserved cash, restricted cash, or other cash, each further described below.

Available Cash consists of:


	As of		As of
($ in thousands)	December 31, 2004		September 30, 2004

Distributions payable	$	227	$	228
Reserve for remaining disputed impaired claims at 8.1%		2,807		3,160

Total available cash	$	3,034	$	3,388

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

Restricted cash consists of cash held as collateral for a letter of credit and cash held in an escrow account. Subsequent to December 31, 2004, $7.4 million of restricted cash was released to other cash following a reduction in the letter of credit to a balance of $1.6 million, which resulted from settlement of the related secured Claim (see Note 6).

Other cash is cash and cash equivalents not designated to a specific reserve or fund, which the Liquidation Trustee may designate from time to time as required for reserves or as additional Available Cash for Distributions. As a result of the change in restricted cash described above, the balance in other cash increased by $7.4 million subsequent to December 31, 2004. There can be no assurance as to the timing and amount, if any, of an additional interim Distribution. The amount of a Distribution, if any, would depend on various factors, including the Liquidation Trustee’s determination of the amount of cash needed to assure funding of the Liquidation Trust’s remaining litigation until its ultimate resolution.

4. Preference Receivables

The Liquidation Trust’s preference receivables are reflected in the accompanying Statements of Net Assets in Liquidation at their estimated fair value of $2.1 million, net of estimated costs of recovery of $0.3 million, for the sole remaining preference recovery action being actively pursued and for settlement collections in progress as of December 31, 2004; and $3.1 million, net of estimated costs of recovery of $1.0 million, for 10 preference recovery actions being actively pursued and for settlement collections in progress as of September 30, 2004. Estimated costs of recovery accrued as of September 30, 2004 and paid during the quarter ended December 31, 2004 include $0.2 million of fees for two expert reports prepared for preference recovery action trials.

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

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

5. Other Assets

Other assets consist of receivables from various former vendors, service providers, and others. Other assets are reported at estimated net fair value, based on either the amount paid (generally in the form of cash deposits) or the estimated recoverable amount, whichever is more determinable. The eventual net realizable value of these assets is likely to differ from their estimated net fair value and these differences may be significant.

6. Unimpaired and Convenience Claims Payable

Unimpaired Claims payable represents the estimated aggregate settlement amount of Unimpaired Claims against the Debtors prior to the Effective Date of the Plan, which will be paid out at 100% of their Allowed amount. Such Claims are valued at the Liquidation Trust’s best estimate of the amount that will ultimately be allowed. Convenience Claims, also included in this classification, are not significant.

Unimpaired and Convenience Claims payable consists of:


	As of		As of
($ in thousands)	December 31, 2004		September 30, 2004

Allowed unimpaired claims	$	2,935	$	1,339


Estimated fair value of disputed unimpaired claims
Kemper claim, net		—		1,600
Other disputed unimpaired claims		—		29


Total estimated fair value of disputed unimpaired claims		—		1,629

Convenience claims		2		2


Total	$	2,937	$	2,970


Number of disputed unimpaired claims		8		9

The largest remaining Unimpaired Claim is a secured Claim asserted by a group of insurance companies collectively referred to as Kemper Insurance Company (“Kemper”) for payment of certain workers’ compensation claims against the Debtors (the “Kemper Claim”). The Liquidation Trust recorded the estimated net fair value of the Kemper Claim at $1.6 million as of December 31, 2004 and September 30, 2004. This value was based on an agreement reached between Kemper and the Liquidation Trust during December 2004 to settle the Kemper Claim for $1.7 million, offset by a $0.1 million prepayment held by a third-party claims administrator. The Kemper Claim was therefore included with Allowed Unimpaired Claims as of December 31, 2004 and with Disputed Unimpaired Claims as of September 30, 2004. Subsequent to December 31, 2004, the letter of credit securing the Kemper Claim was reduced to $1.6 million.

Pursuant to the Plan, certain fees and expenses which Kmart Corporation (“Kmart”) incurred in connection with the Debtors’ bankruptcy filing were allowed as an Unimpaired Claim. Allowed Unimpaired Claims as of December 31, 2004 and September 30, 2004 include this Claim, which has not yet been substantiated by Kmart as required by the Plan, at its estimated amount of $1.3 million.

The amount asserted by the holders of the remaining other Disputed Unimpaired Claims is insignificant as of December 31, 2004 and September 30, 2004. The Liquidation Trust anticipates that each of these Claims will be expunged or waived; accordingly, no liability has been recorded with respect to the remaining Disputed Unimpaired Claims as of December 31, 2004.

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

7. Uncashed Claims Checks

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

8. Distributions Payable

Distributions payable primarily represents 8.1% of the Allowed amount of Impaired Claims for which the Liquidation Trust had not yet paid Distributions as of December 31, 2004 and September 30, 2004, respectively. As of these dates, a number of holders of such Allowed Claims, while otherwise eligible for Distributions, had either not yet provided all information necessary for payment, or were subject to an offsetting claim by the Liquidation Trust which had not yet been resolved. Until all such issues are resolved, the holder of an Allowed Claim may not receive a Distribution.

9. Estimated Costs of Liquidation

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

Under the Plan, the Liquidation Trust was required to establish and fund a reserve to pay administration costs and costs of holding and liquidating the Liquidation Trust’s assets (the “Wind-down Reserve”). Substantially all of the day-to-day operations of the Liquidation Trust are planned to cease in the near future; however, provision has been made for certain necessary administrative, legal and accounting processes to be completed thereafter through December 2005.

Pursuant to the Plan, the Liquidation Trust also established and funded a reserve to pay the costs of pursuing certain actions referred to as the Bondholder Action and the Committee Action (the “Litigation Reserve”). The amount of the Litigation Reserve as of December 31, 2004 and September 30, 2004 is intended to fund the pursuit of the Bondholder Action through an appeal and the Committee Action through trial (see Note 12). In accordance with the procedures set forth in the Plan, increases in the Litigation Reserve require approval. The Liquidation Trust is in the process of obtaining such approval with respect to an increase of $0.6 million, which was included in the Litigation Reserve balance as of December 31, 2004 and September 30, 2004.

The fair value of the estimated costs of liquidation is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. Actual costs are likely to differ from the estimated costs and these differences may be significant.

10. Bankruptcy Reserves Required

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


	As of		As of
($ in thousands)	December 31, 2004		September 30, 2004

Liability Reserves
Wind-down (net of related escrow of $278)	$	2,495	$	3,240
Litigation		1,508		2,384
Unimpaired and convenience claims (excluding secured claim (see Note 6))		1,337		1,370
Uncashed claims checks		175		142


Total liability reserves		5,515		7,136


Contingency Reserves
Fleet		11,000		11,000
Excess disputed unimpaired claims		329		309
Preference settlement claims		27		26
Minimum reserve		3,000		3,000


Total contingency reserves		14,356		14,335


Total reserves	$	19,871	$	21,471

The Fleet Reserve, established pursuant to a stipulated order between Fleet Retail Finance Inc. (“Fleet”) and the Liquidation Trust, is likely to be drawn upon if Fleet, as a defendant in the Committee Action and the Bondholder Action, should ultimately prevail in one or both of such actions. No liability has been accrued in connection with the Fleet Reserve because the Liquidation Trust has appealed the adverse decision and judgment in the Bondholder Action (see Note 12), does not consider Fleet likely to ultimately prevail in either of these actions, and has no access to information to estimate the amount, if any, that Fleet may validly assert against the Fleet Reserve.

The Liquidation Trust also maintains the Disputed Impaired Claims Reserve, which, as an equity reserve, is designated as part of Available Cash (see Note 3), for Distribution to holders of Disputed Impaired Claims should such Claims become Allowed. The reserve for the remaining Disputed Impaired Claims is determined based on the then current cumulative Distribution rate and on the estimated amount of remaining Disputed Impaired Claims.

11. Impaired Claims

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


	As of		As of
($ in thousands)	December 31, 2004		September 30, 2004

Allowed impaired claims	$	705,008	$	704,015
Estimated fair value of disputed impaired claims		18,911		20,798


Total estimated impaired claims	$	723,919	$	724,813


Asserted value of disputed impaired claims	$	58,316	$	64,068


Number of disputed impaired claims		31		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 not heard oral argument and no date for such argument has yet been set. The timing of a ruling is unknown. Also see the discussion of the Fleet Reserve in Note 10.

The Committee Action

In April 2004, the Committee Action was assigned to the judge who presided in the Bondholder Action, who has scheduled the Committee Action for trial in August 2005. During December 2004 and January 2005, the Court heard oral argument on motions, including motions for summary judgment, filed by various defendants. The timing of a decision on defendants’ motions is unknown.

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

The Kemper Complaint

During December 2004, Kemper and the Liquidation Trust reached an agreement to settle Kemper’s secured Claim, for unliquidated workers’ compensation claims against the Debtors, for the net amount of $1.6 million (see Note 6). Kemper also agreed to reduce the letter of credit collateralizing its Claim to $1.6 million, and to release a $12.0 million bond held as additional security, which bond constitutes most of the largest remaining Disputed Impaired Claim.

The Liquidation Trust’s claims against Kemper for the return of excess collateral, deposits and other amounts due to the Liquidation Trust remain unresolved. The trial with respect to the unresolved matters is scheduled for March 2005. Any recovery will further reduce the settlement amount for Kemper’s Claim. The Liquidation Trust cannot predict with any certainty the outcome of the litigation or the amount or range of potential recoveries.

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

Reference is made to the unaudited financial statements of the Liquidation Trust as of December 31, 2004 and September 30, 2004 and for the quarters ended December 31, 2004 and December 31, 2003, and the notes thereto (the “Unaudited Liquidation Trust Financial Statements”), included as Item 1. of this Form 10-Q. The following information concerning the Liquidation Trust’s financial performance and condition should be read in conjunction with the audited Liquidation Trust financial statements as of September 30, 2004 and September 30, 2003, and for the fiscal years ended September 30, 2004 and September 30, 2003, and for the period from October 26, 2001 (Effective Date) through September 30, 2002, and the notes thereto.

The Unaudited Liquidation Trust Financial Statements have been prepared on the same basis as the audited Liquidation Trust financial statements, using the liquidation basis of accounting, and, in the opinion of the Liquidation Trustee, contain all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the Liquidation Trust’s results for such periods. The Liquidation Trust’s results for the quarter ended December 31, 2004 are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year. All amounts are rounded and are therefore approximate.

I.Accounting Policies and Estimates

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

The Liquidation Trust’s critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Liquidation Trust’s annual report on Form 10-K for the year ended September 30, 2004.

II.Changes in Net Assets in Liquidation

Significant financial activities of the Liquidation Trust during the periods reflected below include Distributions and Claims payments, resolution of Claims asserted, pursuit of preference recovery actions and other litigation, and carrying out the liquidation activities of the Liquidation Trust.

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

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

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


	For the quarter ended
($ in thousands)	December 31, 2004			December 31, 2003

Distributions authorized	$	(79	)	$	(1,426	)
Changes in estimates – increase in preference receivables, net		—			3,750
Net other increases		157			103

Net increase in net assets in liquidation	$	78		$	2,427

A. Distributions authorized

No new interim Distribution was authorized during the quarter ended December 31, 2004 or during the quarter ended December 31, 2003. Distributions at the rate of 8.1%, totaling $0.1 million, were authorized during the quarter ended December 31, 2004 to holders of $1.0 million of Impaired Claims newly allowed during the period. Distributions at the rate of 6.573%, totaling $1.4 million, were authorized during the quarter ended December 31, 2003 to holders of $21.7 million of Impaired Claims newly allowed during the period. As a result of the ongoing Claims resolution process, fewer Impaired Claims remain to be resolved as of each successive period.

B. Changes in estimates — estimated fair value of preference receivables

There was no change in estimate related to the fair value of preference receivables during the quarter ended December 31, 2004, because the largest remaining cases have been settled at their estimated value as of September 30, 2004.

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

C. Net other increases

Net other increases consist primarily of interest income from the Liquidation Trust’s cash and cash equivalents.

III.Cash Receipts and Disbursements

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


	For the quarter ended
($ in thousands)	December 31, 2004			December 31, 2003

Cash receipts
Preference collections, before costs of recovery	$	1,772		$	1,239
Other receipts		170			104


Total cash receipts		1,942			1,343


Cash disbursements
Legal and professional fees
Litigation		875			1,490
Preference recoveries		697			490
Liquidation Trust operations		237			720
Operating expenses		508			600
Claims payments		11			126
Reissued/(voided) claims checks, net		(33	)		127


Total cash disbursements		2,295			3,553


Distributions paid		80			1,666


Net cash outflow	$	(433	)	$	(3,876	)

A. Cash receipts

Most of the cash receipts are from collections of preference receivables, which have been ongoing since the preference actions were filed in mid-2001. Preference collections during the quarter ended December 31, 2004 were higher than during the quarter ended December 31, 2003. The increase is primarily because of three substantial preference recovery actions (totaling $1.4 million), among others, which were settled immediately prior to trial and collected during the quarter ended December 31, 2004.

During the quarter ended December 31, 2003, on the other hand, no trial calendar had been set, and therefore settlements, especially significant settlements, proceeded more slowly absent the pressure of trial dates. However, there were 90 preference cases being actively pursued as of September 30, 2003, compared to 10 as of September 30, 2004. Therefore, more cases were settled and collected during the quarter ended December 31, 2003 than during the quarter ended December 31, 2004. Cash receipts from collections of preference receivables are expected to decline significantly, subsequent to the quarter ending March 31, 2005.

B. Legal and professional fees

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

The litigation fees paid for the Bondholder Action and the Committee Action during the quarter ended December 31, 2004 were significantly less than those paid during the quarter ended December 31, 2003. Fees paid during the quarter ended December 31, 2004 related to filing the Liquidation Trust’s appeal briefs in the Bondholder Action, and to defending various motions, including motions for summary

judgment, filed by defendants in the Committee Action. Fees paid during the quarter ended December 31, 2003 related to the higher activity level of the October 2003 trial and post-trial briefs in the Bondholder Action, as well as discovery and trial preparation for, and defending various motions related to, the Committee Action. The Committee Action, now scheduled for trial in August 2005, had been scheduled for trial in January 2004, prior to its adjournment during September 2003.

Preference recovery fees during the quarter ended December 31, 2004 were comparable, as a percentage of preference collections, to such fees during the quarter ended December 31, 2003. The collection fees for most preference settlements are contingent, and are set at a declining rate (generally ranging from 35% to 7% of collections) for larger cases. In contrast with the smaller, more expensive cases settled during the quarter ended December 31, 2003, several large cases were settled during the quarter ended December 31, 2004, decreasing collection fees relative to collections. Offsetting the relative decrease in collection fees, during the quarter ended December 31, 2004, the Liquidation Trust incurred $0.2 million of fees for two expert reports in preparation for preference action trials.

Legal and professional fees for Liquidation Trust operations include all legal, accounting, and other support services except for the expenses of prosecuting the Bondholder Action and the Committee Action, and expenses related to preference collections pursued on a contingency-fee basis. Certain of the largest preference claims suits were handled by Liquidation Trust counsel on an hourly basis and the related fees included in Liquidation Trust operations. The higher fees for Liquidation Trust operations during the quarter ended December 31, 2003 as compared to the quarter ended December 31, 2004 resulted primarily from legal fees associated with a preference case settled during the quarter ended December 31, 2003 for $3.8 million (see II., B. “Changes in estimates,” above).

C. Operating expenses

Operating expenses during the quarter ended December 31, 2004 were substantially lower than those during the quarter ended December 31, 2003, primarily because, during the quarter ended December 31, 2003, the Liquidation Trust made a lump sum pre-payment of rent for office space. In contrast, following a July 2004 relocation of its offices, the Liquidation Trust paid rent monthly on smaller and less expensive office and document warehouse space during the quarter ended December 31, 2004.

D. Claims payments

Payments of Unimpaired Claims were lower during the quarter ended December 31, 2004 than during the quarter ended December 31, 2003 because, as a result of the ongoing Claims resolution process, fewer Unimpaired Claims remain to be resolved and paid as of each successive period.

E. Distributions paid

Distributions paid depend primarily on the amount of Allowed Impaired Claims, including Claims newly allowed, and on the Distributions authorized from time to time. No new interim Distribution was authorized or paid during the quarter ended December 31, 2004 or during the quarter ended December 31, 2003. During the quarter ended December 31, 2004, holders of $1.1 million of Allowed Impaired Claims received payments at the cumulative Distribution rate of 8.1%, while during the quarter ended December 31, 2003, holders of $25.9 million of Allowed Impaired Claims received payments at the then cumulative Distribution rate of 6.573%. In general, as a result of the ongoing Claims resolution process, fewer Impaired Claims remain to be resolved and paid as of each successive period.

IV.Net Assets in Liquidation

A. Assets

The Liquidation Trust’s cash and cash equivalents balance of $33.9 million and $34.4 million as of December 31, 2004 and September 30, 2004, respectively, is classified as either (a) cash designated as available for distribution (“Available Cash”), (b) reserved cash, (c) restricted cash or (d) other cash.

Available Cash is designated to assure the availability of funds for payment to holders of Impaired Claims who have not received authorized Distributions. The required amount of Available Cash of $3.0 million as of December 31, 2004 was based primarily on the cumulative Distribution rate of 8.1%, for $1.9 million of Allowed but unpaid Impaired Claims plus $35.1 million of Disputed Impaired Claims (at their estimated value for reserve purposes). The required amount of Available Cash of $3.4 million as of September 30, 2004 was also based primarily on the cumulative Distribution rate of 8.1%, for $1.9 million of Allowed but unpaid Impaired Claims plus $39.5 million of Disputed Impaired Claims (at their estimated value for reserve purposes). The value of Disputed Claims, for the purpose of establishing adequate reserves, was estimated by the Liquidation Trust and approved by the Bankruptcy Court in an order establishing the amounts of Disputed Claims Reserves.

Reserved cash is held by the Liquidation Trust to assure payment of the Liquidation Trust’s obligations. Under the terms of the Plan, reserved cash is intended to provide for (a) operating expenses of the Liquidation Trust, (b) estimated payments to holders of Allowed Unimpaired and Convenience Claims in accordance with the Plan, and (c) payments which may become necessary if and as Disputed Unimpaired Claims become allowed, or if certain specific contingencies should occur. Reserved cash decreased by $1.6 million from September 30, 2004 to December 31, 2004, to a balance of $19.9 million, primarily as a result of decreases in the Wind-down and Litigation Reserves, as discussed below.

Restricted cash of $9.3 million related primarily to a letter of credit collateralizing a secured Claim asserted by a group of insurance companies collectively referred to as Kemper Insurance Company (“Kemper”) (the “Kemper Claim”). Subsequent to December 31, 2004, $7.4 million of restricted cash was released to other cash following a reduction in the letter of credit to a balance of $1.6 million, which resulted from the settlement of the Kemper Claim.

Other cash, which is not designated to a specific reserve or fund, increased primarily as a result of preference collections during the quarter ended December 31, 2004. As a result of the change in restricted cash described above, the balance in other cash increased by $7.4 million subsequent to December 31, 2004. The Liquidation Trustee may designate other cash from time to time as required for reserves or as additional Available Cash for Distributions. There can be no assurance as to the timing and amount, if any, of an additional interim Distribution. The amount of a Distribution, if any, would depend on various factors, including the Liquidation Trustee’s determination of the amount of cash needed to assure funding of the Liquidation Trust’s remaining litigation until its ultimate resolution.

Preference receivables, net of costs of recovery, decreased by $1.1 million, to a balance of $2.0 million as of December 31, 2004, compared to September 30, 2004, primarily due to ongoing preference collections. Collections of preference receivables totaled $1.8 million, and costs to collect, including significant non-recurring expert fees, totaled $0.7 million.

B. Liabilities

Estimated costs of liquidation decreased by $1.6 million, to a balance of $4.3 million as of December 31, 2004, compared to September 30, 2004. The decrease is due to disbursements totaling $0.7 million from the Wind-down Reserve and $0.9 million from the Litigation Reserve.

C. Contingency reserves

The most significant component in contingency reserves is the Fleet Reserve, established at a total of $11.0 million pursuant to a stipulated order between Fleet Retail Finance Inc. (“Fleet”) and the Liquidation Trust. The Fleet Reserve is likely to be drawn upon if Fleet, as a defendant in the Committee Action and the Bondholder Action, should ultimately prevail in one or both of such actions. No liability has been recorded in connection with the Fleet Reserve because the Liquidation Trust has appealed the adverse decision and judgment in the

Bondholder Action, does not consider Fleet likely to ultimately prevail in either of these Actions, and has no access to information to estimate the amount, if any, that Fleet may validly assert against the Fleet Reserve.

V.Contingencies

The Liquidation Trust is pursuing litigation against various parties, in particular the cases described as the Bondholder Action, the Committee Action, and the Kemper Complaint, as described in “Legal Proceedings,” below. The Liquidation Trust cannot predict with any certainty the ultimate outcome of any of the litigation or the amount or range of potential recoveries.

VI.Forward-Looking Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

The Liquidation Trust, including the Liquidation Trustee, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Liquidation Trustee concluded that the Liquidation Trust’s disclosure controls and procedures are effective as of December 31, 2004.

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

The Liquidation Trust’s internal controls over financial reporting will be subject to audit as of September 30, 2005. The requirements of the Sarbanes – Oxley Act of 2002 have been taken into account in planning for the future administrative requirements of the Liquidation Trust. In addition to the Liquidation Trustee, the Liquidation Trust had 4 employees as of December 31, 2004. In the near future, the Liquidation Trust expects to cease much of its day-to-day operations and to minimize staffing accordingly, which may result in deficiencies in internal accounting controls related to a lack of segregation of duties.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Further background information about the following cases is disclosed in Part I, Item 3 – Legal Proceedings, of the Liquidation Trust’s Form 10-K for the fiscal year ended September 30, 2004.

Federal Court Cases

The Bondholder Action

In March 2004, following a non-jury trial held in October 2003, the Court issued an opinion and order (collectively, “the Decision”) in the Bondholder Action, directing the entry of judgment in favor of the defendants. In April 2004, the Liquidation Trust filed an appeal from the Decision and related judgment. The Liquidation Trust and the defendants each completed the filing of appeal briefs during September 2004. The Court of Appeals has not heard oral argument and no date for such argument has yet been set. The timing of a ruling is unknown.

The Committee Action

Bankruptcy Court Case

The Kemper Complaint

During December 2004, Kemper and the Liquidation Trust reached an agreement to settle Kemper’s secured Claim, for unliquidated workers’ compensation claims against the Debtors, for the net amount of $1.6 million. Kemper also agreed to reduce the letter of credit collateralizing its Claim to $1.6 million, and to release a $12.0 million bond held as additional security, which bond constitutes most of the largest remaining Disputed Impaired Claim.

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

None.

Item 6. Exhibits


Exhibit
Number		Document

31.1		Certification by Liquidation Trustee

32.1		Liquidation Trustee’s Certification Pursuant to 18 U.S.C. Section 1350

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 TRUST
Date: February 14, 2005	By:	/s/ Conrad F. Hocking
	Name:		Conrad F. Hocking
	Title:		Liquidation Trustee

INDEX TO EXHIBITS
FORM 10-Q

Exhibit No.

31.1 Certification by Liquidation Trustee

31.1 Liquidation Trustee’s Certification Pursuant to 18 U.S.C. Section 1350

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore V bad

Hechinger Liquidation Trust Inactive 10-Q2005 Q1 Quarterly report

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