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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2004

Commission file number 1-7807

Champion Parts, Inc.

(Exact name of registrant as specified in its charter)

                 Illinois                                                                       

36-2088911                

     (State or other jurisdiction of

  I.R.S. Employer Identification No.

        incorporation or organization)

         2005 West Avenue B, Hope, Arkansas 71801     

     (Address of principal executive offices)

  870-777-8821

(Registrant’s telephone number, including area code)

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

    Yes [X]    No [  ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

                                  Class                                                     Outstanding as of September 26, 2004

               Common Shares - $0.10 Par Value                                          3,655,266

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

Yes  [  ]   No [X]

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Champion Parts, Inc.

Form 10-Q

Cross Reference Index

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PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

CHAMPION PARTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements.

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CHAMPION PARTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements.

4

CHAMPION PARTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (CONDENSED)

FOR THE PERIODS ENDED

(Unaudited)

The accompanying notes are an integral part of these statements

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CHAMPION PARTS, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 (Unaudited)

The accompanying notes are an integral part of these statements

6

CHAMPION PARTS, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

The accompanying notes are an integral part of these statements.

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CHAMPION PARTS, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited)

The accompanying notes are an integral part of these statements.

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CHAMPION PARTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

_________________________________________________________________

Note 1.

The accompanying financial statements for the three months and nine months ending September 26, 2004 and September 28, 2003 have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  The condensed consolidated financial statements and these notes should be read in conjunction with the consolidated financial statements and footnotes of the Company included in the Company's Annual Report submitted on Form 10K and 10-K/A for the year ended December 31, 2003.

The consolidated balance sheet at December 31, 2003 has been derived from the audited financial statements at that date.

Certain amounts relating to December 31, 2003 and September 28, 2003 have been reclassified to conform to the current year's presentation.

The Company previously adopted Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information” and management views the Company as one business segment, the remanufacturing of replacement automobile parts for the aftermarket.

Note 2.

Basis of Presentation - The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, although the report of the independent accountant as of and for the year ended December 31, 2003 expressed substantial doubt as to the Company's ability to continue as a going concern reflecting the fact that the Company's credit facility was about to expire and had not been replaced at year-end.   The financial statements at December 31, 2003, did not include any adjustments that might result from the outcome of this uncertainty.

Note 3.

The information furnished herein reflects all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period.  Results of operations for the nine months ending September 26, 2004 are not necessarily indicative of results to be expected for the entire year.

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Note 4.

Inventories are valued at the lower of cost (first-in, first-out method) or market.  A summary of the gross inventories and reserves follows:

Note 5.

For reporting purposes, product and core returns are offset against gross sales in arriving at net sales.  Total returns for the three months ended September 26, 2004 were $1,352,000 compared to $1,438,000 at September 28, 2003.  Total returns for the nine months ended September 26, 2004 were $4,638,000 compared to $4,855,000 at September 28, 2003.

Note 6.

Long-lived Assets - The Company reviews the carrying values of its long-lived assets and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable.  Any long-lived assets held for disposal are reported at the lower of their carrying amounts or estimated fair value less cost to sell.  As of September 26, 2004 there has been no impairment of long lived-assets.

Note 7.

Assets Held for Sale - At December 31, 2003, "Assets Held For Sale" represented the land, buildings and building improvements for the Beech Creek, Pennsylvania facility that ceased operation on March 15, 2002.  Management reviewed the carrying values of these assets at December 31, 2003, for possible impairment and whether the carrying value would be recoverable.  The assets were valued at the lower of cost or market.  The sale of these assets was consummated on June 28, 2004 for the gross value of $1.5 million.  The net difference between sales proceeds received, assets held for sale and other costs of approximately $118,000 was recorded in July 2004 against the restructuring reserve provided for this transaction.

Note 8.   

Income tax expense recorded for the nine months ending September 26, 2004, represents an accrual for nine months of the estimated annual tax liability. The income tax expense attributable to operations for the three and nine months ended September 28, 2003, differed from the amounts computed by applying the federal income tax rate of 34% principally as a result of tax benefits recognized related to the carry forward of net operating losses.  

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Note 9.   

On February 6, 2004, the Company entered into an amendment to the Loan and Security Agreement with Congress Financial Corporation extending the maturity date of its revolving line of credit and its term loan from February 8, 2004 to May 8, 2004. A Second Amendment was entered into on May 7, 2004 extending the expiration date to June 8, 2004 and a third amendment was entered into on June 6, 2004 extending the expiration date to August 8, 2004.  Under the terms of the amendments, the availability to borrow on the line of credit decreased from $14,000,000 to $10,500,000. The revolving loan interest and term loan interest rates increased to 2.75% and 3.00% in excess of the lender prime rate, respectively.

On August 10, 2004, the Company entered into a three-year secured revolving credit facility with PNC Bank, National Association, replacing the Congress Financial Corporation credit facility.  Maximum credit available under the new PNC facility is $14,000,000, including available letter of credit accommodations of $1,000,000.  The interest rate on the revolving debt facility is either lender prime plus 3/4 % or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance.

Also on August 10, 2004, the Company entered into a commercial property loan on its Hope, Arkansas property with Elk Horn Bank and Trust Company acting as lead bank for a group of five lending institutions.  The loan with Elk Horn is for $900,000, with seven-year amortization and an interest rate of New York prime plus 2% adjusted quarterly.

At September 26, 2004, the balance outstanding on the Company’s loan facility with PNC Bank, National Association, was a revolver balance of $9,630,000 and letter of credit accommodations of $40,000.  Also at September 26, 2004, the balance outstanding on the Company's commercial mortgage loan with Elk Horn Bank was $892,000. The total of the loan balances was $10,522,000, which compares to a total loan balance at December 31, 2003 with Congress Financial Corporation of $9,988,000 and letter of credit accommodations of $50,000.

The carrying amount of long-term debt (excluding the restructured vendor debt) approximates fair market value because the interest rates on substantially all the debt fluctuate based on changes in market rates.

The asset purchase note represents a promissory note for the purchase of intellectual properties.  The note is payable monthly based on a percentage of sales relating to the products associated with the assets purchased.

The Company is in compliance with the fixed coverage ratio covenant contained in the PNC Bank loan agreement.

Note 10.  

At March 28, 2004 the Company met job expansion incentives under City of Hope, Arkansas $250,000 loan and the note was forgiven. The forgiveness of the debt was taken into non-operating income in March.

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

      CONDITION AND RESULTS OF OPERATIONS

Management Overview

Third quarter 2004 net sales of $4,578,000 were $422,000, or 8.4%, lower than third quarter 2003 primarily reflecting the soft market for air conditioning products. Cost of products sold for the third quarter were lower than 2003 by $342,000, or 8.1%, reflecting favorable reductions in materials, labor and overhead spending.  Operating expenses were also lower than 2003 by $144,000, or 20.6%, as a result of reductions in both Corporate and Division administrative costs.  Operating income for the quarter increased $64,000, or 62.7%, compared to the same period in 2003, with the increase principally a result of reducing the cost of products sold combined with the significantly lower administrative costs for the quarter. Interest cost for the quarter was up $34,000 over 2003, reflecting a two-percentage point interest increase that resulted from extending the expired lo an facility until August 10th. The Company’s net income for the quarter was $21,000, a $9,000 increase versus the $12,000 reported for the same period in 2003.

Nine months 2004 net sales of $15,171,000 were 16.5%, less than the nine months of 2003 reflecting the continuing market decline of carburetor net sales combined with a soft market for air conditioning products. Year-to-date cost of products sold was lower versus last year by $2,519,000, or 16.9%, slightly less than the net sales decline.  Operating expenses were $141,000, or 6.9%, below the 2003 level reflecting lower administrative costs due the reduction of operating costs for the idle Pennsylvania facility that was sold on June 28th. Operating income year-to-date was $876,000, a $338,000 decline versus $1,214,000 for the same period in 2003 and primarily is a result of the decline in net sales. Interest cost for the nine-month period was up $91,000 over 2003, reflecting a two-percentage point interest increase that resulted from extending the expired loan facility unt il August 10th. At the end of the first quarter the Company met job expansion incentives under the City of Hope, Arkansas note agreement and the $250,000 note was forgiven.  This accounts for the significant gain in non-operating income during the first nine-month period.  The Company’s net income for the nine months was $678,000, a decrease of $231,000, or 25.4%, versus the $909,000 reported for the same period in 2003.  The decline in net income principally reflects the significantly lower net sales combined with higher interest costs.  Partially mitigating this was the $250,000 gain from the forgiveness of the City of Hope, Arkansas loan and lower administrative expenses.

The Company entered into a three-year secured revolving credit facility on August 10, 2004, with PNC Bank, National Association, replacing the Congress Financial Corporation credit facility.  Maximum credit available under the new PNC facility is $14,000,000, including available letter of credit accommodations of $1,000,000.  The interest rate on the revolving debt facility is lender prime plus 3/4 % or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance.

Also on August 10, 2004, the Company entered into a commercial property loan on its Hope, Arkansas property with Elk Horn Bank and Trust Company acting as lead bank for a group of five lending institutions. The loan with Elk Horn is for $900,000, with seven-year amortization and an interest rate of New York prime plus 2% adjusted quarterly.

The Company has financed its working capital needs through the use of its bank credit facility and the cash flow generated from operations. At September 26, 2004, the total balance outstanding on the Company’s revolving loan facility with PNC Bank, National Association was $9,630,000 and letter of credit accommodations were $40,000.  Also at September 26, 2004, the balance outstanding on the Company's commercial mortgage loan with Elk Horn Bank was $892,000. The total of the loan balances was $10,522,000, which compares to a total loan balance at December 31, 2003 with Congress Financial Corporation of $9,988,000 and letter of credit accommodations of $50,000.

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Results of Operations

Three months ended September 26, 2004 compared to three months ended September 28, 2003

Net sales for the quarter ending September 26, 2004 were $4,578,000 versus net sales of $5,000,000 for the third fiscal quarter in 2003.  The $422,000, or 8.4%, decrease in net sales compared to 2003 reflects the lower seasonal demand for air conditioning products due to the cooler than expected summer weather.  Total product and core returns, which are accounted for as reductions to gross sales, were 22.4% and 21.9% of gross sales for the third quarter of 2004 and 2003, respectively.

Carburetor net sales were 50.6% and 32.0% of total net sales, respectively, for the third quarter of 2004 and 2003. Even though new vehicles sold are no longer equipped with carburetors in the United States and Canada, the Company continues to sell replacement units for older vehicles that predominantly use carburetors.  Carburetor net sales as a percentage of total net sales was up for the third quarter 2004 versus 2003, however, the Company expects that the trend in carburetor sales will continue to decline in future periods. In addition, carburetor margins may be negatively impacted in the future as customers accelerate product returns during periods of declining demand.

Cost of products sold were $3,856,000, or 84.2%, of net sales for 2004 as compared to $4,198,000, or 84.0%, for the third quarter of 2003.  The $422,000, or 8.1% decrease versus 2003 is primarily attributed to the lower net sales volume.

Selling, distribution and administrative expenses for the third quarter 2004 were $556,000 compared to $700,000 in the same quarter of 2003. The spending decrease of $144,000 reflects reduction of administrative costs relating to the Beech Creek facility that was sold June 28th and lower professional fees.

Operating income for the quarter was $166,000, compared to $102,000 for the third quarter of 2003.  The operating income increase versus 2003 can be attributed to the favorable decline in operating expenses.

Interest expense of $140,000 for the quarter was up $34,000 over 2003, reflecting a two-percentage point rate increase that resulted from extending the expired loan facility to August 10th.

Non-operating income was $2,000 for the third quarter versus $16,000 recorded in 2003. Core storage proceeds for a customer in 2003, but not repeated in 2004, account for the $14,000 difference.

Net income was $21,000 for the third quarter versus $12,000 for 2003, an increase of $9,000, or 75.0%. The increase in net income primarily reflects lower operating expenses for reasons mentioned earlier.

Nine months ended September 26, 2004 compared to nine months ended September 28, 2003

Net sales for the nine months ending September 26, 2004 were $15,171,000 versus net sales of $18,169,000 for the same fiscal period in 2003.  The $2,998,000, or 16.5%, decrease in net sales compared to 2003 reflects the continued market decline of carburetor net sales combined with lower seasonal demand for air conditioning products.  Partially offsetting these declines were slightly higher sales in the traditional markets of heavy duty and agricultural product lines. Total product and core returns, which are accounted for as reductions to gross sales, were 23.0% and 20.7% of gross sales for the nine months of 2004 and 2003, respectively. The higher percentage for the nine months of 2004 reflects the impact of product return credits issued dropping only 4.5% compared to a 14.0% drop in gross sales.

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Carburetor net sales were 48.4% and 43.3% of total net sales, respectively, for the nine months of 2004 and 2003. Even though new vehicles sold are no longer equipped with carburetors in the United States and Canada, the Company continues to sell replacement units for older vehicles that predominantly use carburetors.  Although carburetor net sales as a percentage of total net sales was up for the nine months of 2004 versus 2003, on a dollar basis they continued downward and the Company still expects that the trend in carburetor sales will continue to be a steady decline in future periods. In addition, carburetor margins may be negatively impacted in the future as customers accelerate product returns during periods of declining demand.

Cost of products sold were $12,384,000, or 81.6%, of net sales for 2004 as compared to $14,903,000, or 82.0%, for the same fiscal period of 2003.  The $2,519,000, or 16.9% decrease versus 2003 is primarily accounted for by the net sales decrease.

Selling, distribution and administrative expenses for year-to-date 2004 were $1,911,000 compared to $2,052,000 for the same period in 2003. Administrative spending was down $141,000, or 6.9%, from 2003 reflecting the reduction of operating costs for the Pennsylvania facility (taxes and insurance) that was sold on June 28th combined with lower professional fees and payroll costs.

Operating income for the nine months was $876,000 compared to $1,214,000 for the nine months of 2003.  The operating income decline versus 2003 can be attributed the significant decline in net sales, partially mitigated by lower cost of products sold and lower operating costs.

Interest expense of $440,000 for the nine months was up $91,000 over 2003, reflecting a two-percentage point interest rate increase that resulted from extending the expired loan facility to August 10th.

Non-operating income was $258,000 for the period versus $44,000 recorded in 2003. At the end of the first quarter the Company met job expansion incentives under City of Hope, Arkansas note and the $250,000 loan was forgiven.  The gain recorded from the reversal of this note accounts for the significant gain in non-operating income for the nine month period.  

Net income was $678,000 for the nine months versus $909,000 in 2003 for the same period, a decrease of $231,000, or 25.4%.  As discussed earlier, the significant decline in net sales is the primary reason for the drop in net income versus 2003. Partially mitigating this was the increase in non-operating income reflecting the loan City of Hope note write-off and lower operating expenses.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's financial statements reflect the selection and application of accounting policies that require management to make significant estimates and assumptions. Management believes that the following points are some of the more critical judgment areas in the application of accounting policies that currently affect the Company's financial condition and results of operations. Preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, and expenses and related contingent liabilities.  On an on-going basis, the Company evaluates its estimates for propriety, including those related to revenues, accounts receivable and inventory reserves, income taxes, and contingencies and litigation.  The Company bases its reserve estimates on historical experience, current market and operating trends, and on various assumptions that are believed to be reasonable under current operating circumstances.  Actual results may differ from these estimates under different assumptions or conditions.

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The Company recognizes sales when products are shipped.  Net sales reflect deductions for cores returned for credit and other customary returns and allowances.  Such deductions and returns and allowances are recorded currently based upon continuing customer relationships and other criteria.  The Company's customers are encouraged to trade-in rebuildable cores for products that are included in the Company's current product line.

Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.  At September 26, 2004, the Company’s deferred tax asset consisted principally of net inventory reserves and net operating loss carryforwards.  The Company’s deferred tax asset has been reduced by a valuation allowance to the extent such benefits are not expected to be fully utilized.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”).  In general, a variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.  FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  The consolidation requirements of FIN 46 appl y immediately to variable interest entities created after January 31, 2003.  The Company adopted the provisions of FIN 46 effective February 1, 2003 and such adoption did not have a material impact on its consolidated financial statements since it currently has no variable interest entities.  In December 2003, the FASB issued FIN 46R with respect to variable interest entities created before January 2003, which among other things revised the implementation date to the first fiscal year or interim period ending after March 15, 2004, with the exception of Special Purpose Entities (“SPE”).  The consolidation requirements apply to all SPE’s in the first fiscal year or interim period ending after December 15, 2003.  The Company adopted the provisions of FIN 46R effective December 29, 2003 and such adoption did not have a material impact on its consolidated financial statements since it currently has no SPE’s.

In April 2003, FASB issued Statement of Financial Accounting Standards No.149, Amendment of Statement 133 on Derivative instruments and Hedging Activities (“SFAS No.149”).  SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No.133.  SFAS No.149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003.  The Company adopted the provisions of SFAS No.149 effective June 30, 2003 and such adoption did not have a material impact on its consolidated financial statements since the Company has not entered into any derivative or hedging transactions.

In May 2003, FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity and requires an issuer to classify the following instruments as liabilities in its balance sheet:

1.

a financial instrument issued in the form of shares that is mandatorily redeemable and embodies an unconditional obligation that requires the issuer to redeem it by transferring its assets at a specified or determinable date or upon an event that is certain to occur;

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2.

a financial instrument, other than an outstanding share, that embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and requires the issuer to settle the obligation by transferring assets; and

3.

a financial instrument that embodies and unconditional obligation that the issuer must settle by issuing a variable number of its equity shares if the monetary value of the obligation is based solely or predominantly on (1) a fixed monetary amount, (2) variations in something other than the fair value of the issuer’s equity shares, or (3) variations inversely related to changes in the fair value of the issuer’s equity shares.

In November 2003, FASB issued FASB Staff Position No. 150-3 (“FAS 150-3”) which deferred the effective dates for applying certain provisions of SFAS No.150 related to mandatorily redeemable financial instruments of certain non-public entities and certain mandatorily redeemable non-controlling interests for public and non-public companies.  For public entities SFAS No.150 is effective for mandatorily redeemable financial instruments entered into or modified after May 31, 2003 and is effective for all other financial instruments as of the first interim period beginning after June 15, 2003.  For mandatorily redeemable non-controlling interest that would not have to be classified as liabilities by a subsidiary under the exception in paragraph 9 of SFAS No.150, but would be classified as liabilities by the parent, the classification and measurement provisions of SFAS No.150 are deferred indefi nitely.  The measurement provisions of SFAS No.150 are also deferred indefinitely for other mandatorily redeemable non-controlling interests that were issued before November 4, 2003.  For those instruments, the measurement guidance for redeemable shares and non-controlling interests in other literature shall apply during the deferral period. The adoption of SFAS No.150 did not affect the Company's revenue recognition policies, nor the results of operations, financial position or cash flows.

On December 17, 2003, the Staff of the SEC issued Staff Accounting Bulletin No. 104 (SAB No. 104), Revenue Recognition, which supersedes SAB No. 101, “Revenue Recognition in Financial Statements”.  SAB No. 104’s primary purpose is to rescind accounting guidance contained in SAB No. 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.”  Additionally, SAB No. 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB No. 101 that had been codified in SEC Topic 13, Revenue Recognition.  Selected portions of the FAQ have been incorporated into SAB No. 104.  While the wording of SAB No. 104 has changed to reflect the issuance of EITF 00-21, the revenue reco gnition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104.  The adoption of SAB No. 104 did not affect the Company's revenue recognition policies, or the results of operations, financial position or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Overview

On February 6, 2004, the Company entered into an amendment to the Loan and Security Agreement with Congress Financial Corporation extending the maturity date of its revolving line of credit and its term loan from February 8, 2004 to May 8, 2004. A Second Amendment was entered into on May 7, 2004 extending the expiration date to June 8, 2004 and a third amendment was entered into on June 6, 2004 extending the expiration date to August 8, 2004.  Under the terms of the amendments, the availability to borrow on the line of credit decreased from $14,000,000 to $10,500,000. The revolving loan interest and term loan interest rates increased to 2.75% and 3.00% in excess of the lender prime rate, respectively.

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On June 28, 2004, the Company consummated the sale of its Beech Creek facility and property. The plant was vacated after consolidating operations in March of 2002.  The gross value of the transaction was $1.5 million and the net proceeds were used to pay-down term and revolver debt in the month of July 2004. Sale of the Beech Creek property allowed the Company to proceed with replacing the Congress loan facility with new lenders.

On August 10, 2004, the Company entered into a three-year credit facility with PNC Bank, National Association, replacing the Congress Financial Corporation credit facility.  Maximum credit available under the new PNC facility is $14,000,000, with available letter of credit accommodations of $1,000,000.  The interest rate on the revolving debt facility is either lender prime plus 3/4 % or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance.

Also on August 10, 2004, the Company entered into a commercial property loan on the Hope, Arkansas property with Elk Horn Bank and Trust Company acting as lead bank for a group of five lending institutions. The loan with Elk Horn is for $900,000, with seven-year amortization and an interest rate of New York prime plus 2% adjusted quarterly.

Management believes that with the new credit facilities in place and the real estate sale completed, the Company's borrowing availability under the new revolving credit agreement, together with the cash flow generated from operations, will be sufficient to meet its working capital needs over the next fiscal year and beyond.

Working Capital

Net working capital at September 26, 2004 was a positive $10,590,000 compared to negative $1,846,000 at December 31, 2003. The current ratio at September 26, 2004 was 1.78 versus 0.92 at December 31, 2003.The significant improvement in working capital primarily reflects the classification of term and revolver debt for the new loan facilities as long-term debt (see Note 2. to the financial statements).  

For these same reasons, net working capital is $12,346,000 higher than the September 28, 2003 balance.

Net trade accounts receivable at September 26, 2004 were $9,590,000, a decrease of $366,000 versus the year-end 2003 balance of $9,956,000.  The decrease in the Company's accounts receivable balance at the end of nine months versus the year-end generally reflects the decrease in sales during the period.

When compared to the September 28, 2003 trade receivables balance of $8,944,000, the September 26, 2004 balance is up $634,000 reflecting lower collections during the third quarter of 2004 versus 2003.

Net inventories of $13,237,000 at September 26, 2004 were $2,373,000 higher compared to the year-end 2003 balance of $10,864,000.  The increase in inventory reflects higher finished goods and parts inventories partially offset by lower work-in-process balances. The finished goods inventory increase is a result of a build-up of air conditioning products inventories to service normally anticipated third quarter sales that did not materialize due to a soft market. This inventory is expected to be utilized to satisfy 2005 pre-season orders. These same reasons explain the $2,685,000 increase over the September 28, 2003 balance.

Accounts payable at September 26, 2004 were $8,166,000 compared to a balance at year-end 2003 of $7,681,000. The $485,000 increase in accounts payable is due to the higher net trade accounts payable which resulted from the tightening of the revolver loan availability by Congress Financial Corporation during the extension period of its credit facility.  Since the closing of the new PNC Bank revolver facility on August 10, 2004, trade payables have been reduced by $473,000 reflecting the plan to bring current payables up to date.

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Compared to the September 28, 2003 balance of $7,923,000, accounts payable are $243,000 higher for the same reasons.

Accrued expenses of $4,437,000 were $366,000 below the fiscal year-end 2003 balance of $4,803,000, principally reflecting a decrease in the environmental reserve for the Company's final settlement of the Puente Valley, California proceedings lawsuit.  

Compared to the September 28, 2003 balance of $4,764,000, accrued expenses are down $327,000 due to the same reason.

Debt

On February 6, 2004, the Company entered into an amendment to the Loan and Security Agreement with Congress Financial Corporation extending the maturity date of its revolving line of credit and its term loan from February 8, 2004 to May 8, 2004. A Second Amendment was entered into on May 7, 2004 extending the expiration date to June 8, 2004 and a third amendment was entered into on June 6, 2004 extending the expiration date to August 8, 2004.  Under the terms of the amendments, the availability to borrow on the line of credit decreased from $14,000,000 to $10,500,000. The revolving loan interest and term loan interest rates increased to 2.75% and 3.00% in excess of the lender prime rate, respectively.

On June 28, 2004, the Company consummated the sale of its Beech Creek facility and property. The plant was vacated after consolidating operations in March of 2002.  The gross value of the transaction was $1.5 million and the net proceeds were used to reduce term and revolver debt in July. The net difference between sales proceeds received, assets held for sale and other costs of approximately $118,000 was recorded in July 2004 against the restructuring reserve provided for this transaction. Sale of the Beech Creek property has allowed the Company to proceed with replacing the Congress loan facility with new lenders.

On August 10, 2004, the Company entered into a three-year secure revolving credit facility with PNC Bank, National Association, replacing the Congress Financial Corporation credit facility.  Maximum credit available under the new PNC facility is $14,000,000, including available letter of credit accommodations of $1,000,000.  The interest rate on the revolving debt facility is either lender prime plus 3/4 % or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance.

Also on August 10, 2004, the Company entered into a commercial property loan on its Hope, Arkansas properties with Elk Horn Bank and Trust Company acting as lead bank for a group of five lending institutions.  The loan with Elk Horn is for $900,000, with seven-year amortization and an interest rate of New York prime plus 2% adjusted quarterly.

At September 26, 2004, the balance outstanding on the Company’s loan facility with PNC Bank, National Association, was a revolver balance of $9,630,000 and letter of credit accommodations of $40,000.  Also at September 26, 2004, the balance outstanding on the Company's commercial mortgage loan with Elk Horn Bank was $892,000. The total of the loan balances was $10,522,000, which compares to a total loan balance at December 31, 2003 with Congress Financial Corporation of $9,988,000 and letter of credit accommodations of $50,000.

At March 28, 2004 the Company met job expansion incentives under City of Hope, Arkansas $250,000 loan and the note was forgiven. The forgiveness of the debt was taken into non-operating income in March.

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SEASONALITY

The Company's business is slightly seasonal in nature, primarily as a result of the impact of weather conditions and the agricultural cycle on the demand for certain automotive and agricultural replacement parts.  Historically, the Company's sales and profits are generally the highest in the first half of the year trending down through the summer and early fall months.

FUTURE OUTLOOK

Growth in revenue and operating profit from the sales of air conditioning products has partially mitigated the declining carburetor product line sales during the past two years. Management is pursuing other new products and new markets for existing products. This includes internal new product development as well as acquisition opportunities.

The Company's borrowing availability under the new revolving credit agreement, together with the cash flow generated from operations, should provide sufficient working capital to meet its needs over the next fiscal year and beyond.

FACTORS WHICH MAY AFFECT FUTURE RESULTS

This quarterly report contains forward-looking statements that are subject to risks and uncertainties, including but not limited to the statements under "Future Outlook" and to the following:

The competitive environment continues to cause changes in the distribution channels between volume retailers and traditional warehouse/distributors.  The Company has diversified its customer base and currently serves all major aftermarket segments, including large volume automotive retailers, original equipment manufacturers of automotive equipment and automotive warehouse distributors. The decline in carburetor product sales over the longer term could impact future results. The Company expects the growth in air conditioning product sales to partially offset this impact. There is no assurance that the sales increases in air conditioning products will exceed the decreases in carburetor sales or the contribution of carburetor sales to net income.

The Company’s six largest customers accounted for a total of 80.7% of the Company’s net sales during the nine months ending September 26, 2004, with the four largest customers aggregating 71.5% of the total. For the same period in 2003, the Company’s six largest customers accounted for a total of 91.1 % of the Company’s net sales, with the four largest customers comprising 82.1% of the total. A significant reduction in the level of net sales or the loss of a large customer could have a materially adverse impact on the Company’s financial condition and results of operations.

While the Company has established reserves for potential environmental liabilities that it believes to be adequate, there can be no assurance that the reserves will be adequate to cover actual costs incurred or that the Company will not incur additional environmental liabilities in the future. See Part II, “Legal Proceedings” for additional information.

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ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has a revolving credit facility and mortgage loan, which bear interest at various rates that are based on the bank prime rate. Interest on $10,522,000, or 84.5%, of the Company's debt was variable based on the lender’s or New York prime rate. Consequently, a general increase of 1% in the lender’s prime rate would result in additional interest cost of approximately $105,000 if the same debt level and structure were to be maintained.

ITEM 4.    CONTROLS AND PROCEDURES

The Company has carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures provide reasonable assurance that such disclosure controls and procedures are effective in timely providing them with material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings. There have been no signifi cant changes in the Company’s internal controls over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect financial reporting.

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PART II.     OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Beech Creek, Pennsylvania Soil and Ground Water Contamination, Double Eagle Superfund Proceeding, and Asbestos Litigation.

See Registrant’s Annual Report on Form 10-K, December 31, 2003, Environmental Section, pages 7 through 9, for the current background on these proceedings. The Company settled the Puente Valley California Superfund proceeding with the former operator and certain of its insurance carriers on February 9, 2004. The Company's share of the payment was accrued for in reserves established for environmental liability at December 31, 2003.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

1.

Exhibit 31.1 – CEO Section 302 Officer Certification - CEO

2.

Exhibit 31.2 – CFO Section 302 Officer Certification - CFO

3.

Exhibit 32.1 – CEO Section 906 Certification - CEO

4.

Exhibit 32.2 – CFO Section 906 Certification - CFO

(b)

Reports on Form 8-K

1.

The Company filed a Current Report on Form 8-K on August 13, 2004. The Form 8-K reported that in accordance with “Item 12. Regulation FD Disclosure”, on August 13, 2004, Champion Parts, Inc. issued a press release announcing earnings for the Second Quarter of 2004 ended June 27, 2004.  The Company’s Form 10-Q was filed with the Securities and Exchange Commission on August 11, 2004.

2.

The Company filed a Current Report on Form 8-K on August 11, 2004. The Form 8-K reported that in accordance with “Item 5. Other Events and Regulation FD Disclosure”, on August 11, 2004, the Registrant issued a press release announcing it has entered into a three-year secured revolving credit facility on August 10, 2004, with PNC Bank, National Association, replacing its prior credit facility. The Registrant also announced in the press release that it had entered into a commercial property loan on its Hope, Arkansas properties with Elk Horn Bank and Trust Company acting as lead bank for a group of five lending institutions.

3.

The Company filed a Current Report on Form 8-K on July 20, 2004. The Form 8-K reported that in accordance with “Item 4. Change in Accountants”, on July 20, 2004, Champion Parts, Inc. dismissed BDO Seidman, LLP as independent auditors and engaged Cogen Sklar LLP as independent auditors. The Company’s audit committee approved the dismissal of BDO Seidman, LLP and the engagement of Cogen Sklar LLP.

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(b) Reports on Form 8-K (Continued)

4.

The Company filed a Current Report on Form 8-K on July 6, 2004. The Form 8-K reported that in accordance with “Item 5. Other Events and Regulation FD Disclosure”, on June 28, 2004, the Company consummated the sale of its Beech Creek, Pennsylvania plant and property.

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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.

CHAMPION PARTS, INC.

(Registrant)

Date:   November 10, 2004

                                                                        By:    /s/ Jerry A. Bragiel

                                                                             Jerry A. Bragiel

                                                                             President, Chief Executive Officer   

                                                                        By:   /s/ Richard W. Simmons

                                                                             Richard W. Simmons

                                                                             Vice President Finance, Chief Financial Officer

                                                                             and Secretary

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 Exhibit 31.1

SECTION 302 OFFICERS CERTIFICATION

Date:     November 10, 2004

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Exhibit 31.2

SECTION 302 OFFICERS CERTIFICATION

Date:     November 10, 2004

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Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PERSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Champion Parts, Inc., (the “Company”) on Form 10-Q for the quarter ended September 26, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jerry A. Bragiel, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 10, 2004

A signed original of this written statement required by Section 906 has been provided to Champion Parts, Inc. and will be retained by Champion Parts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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Exhibit 32.2

CERTIFICATION PERSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PERSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Champion Parts, Inc.  (the “Company”) on Form 10-Q for the quarter ended September 26, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard W. Simmons, Vice President Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 10, 2004

A signed original of this written statement required by Section 906 has been provided to Champion Parts, Inc. and will be retained by Champion Parts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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