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 October 2, 2005



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 October 2, 2005

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







|PART I  | FINANCIAL INFORMATION                                      | PAGE 
|------- | ---------------------------------------------------------- | -----
|        |                                                            |      
|ITEM 1. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                |      
|        | Balance Sheets  Assets                                    | 3    
|        | Balance Sheets - Liabilities & Stockholders' Equity        | 4    
|        | Statements of Income                                       | 5    
|        | Statement of Stockholders' Equity                          | 6    
|        | Statements of Comprehensive Income                         | 7    
|        | Statements of Cash Flows                                   | 8    
|        | Notes to Financial Statements                              | 9-11 
|        |                                                            |      
|ITEM 2. | MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL            |      
|        | CONDITION AND RESULTS OF OPERATIONS                        |      
|        | Management Overview                                        | 12   
|        | Results of Operations                                      |      
|        | Three Months Ended October 2, 2005                         | 13   
|        | Nine Months Ended October 2, 2005                          | 14   
|        | Critical Accounting Policies and Estimates                 | 15   
|        | Recent Accounting Pronouncements                           | 15   
|        | Liquidity and Capital Resources                            |      
|        | Liquidity Overview & Financing                             | 16   
|        | Working Capital                                            | 16-17
|        | Seasonality                                                | 17   
|        | Future Outlook                                             | 17   
|        | Factors Which May Affect Future Results                    | 18   
|        | Off-Balance Sheet Arrangements                             | 18   
|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK | 19   
|        |                                                            |      
|ITEM 4. | CONTROLS AND PROCEDURES                                    | 19   



|PART II  | OTHER INFORMATION                 |   
|-------- | --------------------------------- | --
|         |                                   |   
|ITEM 5.  | LEGAL PROCEEDINGS                 | 20
|         |                                   |   
|ITEM 6.  | EXHIBITS AND REPORTS ON FORM 8-K  | 20
|         |                                   |   
|         | SIGNATURE PAGE                    | 21
|         |                                   |   
|EXHIBITS |                                   |   
|31.1     | SECTION 302 OFFICER CERTIFICATION | 22
|32.1     | SECTION 906 CERTIFICATION         | 23









2





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PART I.    FINANCIAL INFORMATION







ITEM 1.    FINANCIAL STATEMENTS







CHAMPION PARTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS





|                                                             | October 2, 2005 | December 31, 2004
|------------------------------------------------------------ | --------------- | -----------------
|ASSETS                                                       | (Unaudited)     | (Audited)        
|                                                             |                 |                  
|CURRENT ASSETS:                                              |                 |                  
|Cash                                                         | $   511,000     | $   358,000      
|Accounts receivable trade, less allowance for uncollectibles |                 |                  
|of $1,241,000 and $1,121,000 in 2005 and 2004, respectively  | 8,597,000       | 10,410,000       
|                                                             |                 |                  
|Miscellaneous receivables                                    | 192,000         | 197,000          
|                                                             |                 |                  
|Inventories, net of reserves                                 | 11,598,000      | 12,710,000       
|                                                             |                 |                  
|Prepaid expenses and other assets                            | 571,000         | 634,000          
|                                                             |                 |                  
|Deferred income tax asset                                    | 73,000          | 73,000           
|Total current assets                                         | 21,542,000      | 24,382,000       
|                                                             |                 |                  
|PROPERTY, PLANT AND EQUIPMENT:                               |                 |                  
|Land                                                         | 70,000          | 70,000           
|Buildings                                                    | 4,457,000       | 4,453,000        
|Machinery and equipment                                      | 14,503,000      | 14,383,000       
|Gross property, plant & equipment                            | 19,030,000      | 18,906,000       
|Less:  Accumulated depreciation                              | 16,961,000      | 16,625,000       
|Net property, plant & equipment                              | 2,069,000       | 2,281,000        
|                                                             |                 |                  
|Total other assets                                           | 398,000         | 408,000          
|                                                             |                 |                  
|Total assets                                                 | $24,010,000     | $27,071,000      





The accompanying notes are an integral part of these statements.





3





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CHAMPION PARTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS





|                                                              | October 2, 2005 | December 31, 2004
|------------------------------------------------------------- | --------------- | -----------------
|LIABILITIES AND STOCKHOLDERS EQUITY                          | (Unaudited)     | (Audited)        
|                                                              |                 |                  
|CURRENT LIABILITIES:                                          |                 |                  
|Accounts payable                                              | $8,344,000      | $8,001,000       
|Accrued expenses:                                             |                 |                  
|Salaries, wages and employee benefits                         | 469,000         | 393,000          
|Other accrued expenses                                        | 5,009,000       | 4,833,000        
|Taxes other than income                                       | 104,000         | 51,000           
|Current maturities of long-term debt:                         |                 |                  
|Current maturities  mortgage note                            | 112,000         | 104,000          
|Current maturities  subordinated debt                        | -0-             | 6,000            
|Total current maturities of long-term debt                    | 112,000         | 110,000          
|                                                              |                 |                  
|Total current liabilities                                     | 14,038,000      | 13,388,000       
|                                                              |                 |                  
|DEFERRED INCOME TAXES                                         | 73,000          | 73,000           
|                                                              |                 |                  
|LONG-TERM DEBT:                                               |                 |                  
|Long-term notes payable  revolver                            | 6,292,000       | 10,195,000       
|Long-term notes payable  mortgage note                       | 676,000         | 762,000          
|Long-term notes payable  subordinated debt                   | 1,793,000       | 1,793,000        
|Long-term notes payable  asset purchase note                 | 130,000         | 130,000          
|Total long-term debt                                          | 8,891,000       | 12,880,000       
|                                                              |                 |                  
|STOCKHOLDERS' EQUITY:                                         |                 |                  
|                                                              |                 |                  
|Preferred stock - No par value; authorized, 10,000,000        |                 |                  
|shares; issued and outstanding, none                          | -0-             | -0-              
|Common stock - $.10 par value; authorized, 50,000,000 shares, |                 |                  
|issued and outstanding, 3,655,266 shares                      | 366,000         | 366,000          
|Additional paid-in capital                                    | 15,578,000      | 15,578,000       
|Accumulated (deficit)                                         | (12,793,000)    | (12,972,000)     
|Accumulated other comprehensive (loss)                        | (2,242,000)     | (2,242,000)      
|Total stockholders equity                                    | 1,008,000       | 730,000          
|                                                              |                 |                  
|Total liabilities and stockholders equity                    | $24,010,000     | $27,071,000      



The accompanying notes are an integral part of these statements.







4





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CHAMPION PARTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (CONDENSED)

FOR THE PERIODS ENDED

(Unaudited)





|                                                             | Nine Months
Oct. 2, 2005 | Nine Months
Sept. 26, 2004 | Three Months
Oct. 2, 2005 | Three Months
Sept. 26, 2004
|------------------------------------------------------------ | ------------------------ | -------------------------- | ------------------------- | ---------------------------
|Net Sales                                                    | $17,128,000              | $15,171,000                | $5,320,000                | $4,578,000                 
|Costs and Expenses:                                          |                          |                            |                           |                            
|Cost of products sold                                        | 14,733,000               | 12,384,000                 | 4,752,000                 | 3,856,000                  
|Selling, distribution & administrative                       | 1,701,000                | 1,911,000                  | 562,000                   | 556,000                    
|Total costs and expenses                                     | 16,434,000               | 14,295,000                 | 5,314,000                 | 4,412,000                  
|                                                             |                          |                            |                           |                            
|Operating income                                             | 694,000                  | 876,000                    | 6,000                     | 166,000                    
|                                                             |                          |                            |                           |                            
|Non-operating expense/(income):                              |                          |                            |                           |                            
|Interest expense, net                                        | 450,000                  | 440,000                    | 128,000                   | 140,000                    
|Other non-operating (income)                                 | (89,000)                 | (258,000)                  | (3,000)                   | (2,000)                    
|Total non-operating expense/(income)                         | 361,000                  | 182,000                    | 125,000                   | 138,000                    
|                                                             |                          |                            |                           |                            
|Income/(Loss) before income taxes                            | 333,000                  | 694,000                    | (119,000)                 | 28,000                     
|                                                             |                          |                            |                           |                            
|Income taxes                                                 | 54,000                   | 16,000                     | 19,000                    | 7,000                      
|                                                             |                          |                            |                           |                            
|Net income/(Loss)                                            | $   279,000              | $   678,000                | $   (138,000)             | $   21,000                 
|                                                             |                          |                            |                           |                            
|Weighted Average Common Shares
Outstanding at April 3, 2005: |                          |                            |                           |                            
|Basic                                                        | 3,655,266                | 3,655,266                  | 3,655,266                 | 3,655,266                  
|Diluted                                                      | 3,741,424                | 3,755,203                  | 3,732,721                 | 3,757,166                  
|                                                             |                          |                            |                           |                            
|Earnings Per Common Share - Basic:                           |                          |                            |                           |                            
|Net income/(Loss) per common share - basic                   | $  0.08                  | $  0.19                    | $  (0.04)                 | $  0.01                    
|                                                             |                          |                            |                           |                            
|Earnings Per Common Share - Diluted:                         |                          |                            |                           |                            
|Net income/(loss) per common share - diluted                 | $  0.07                  | $  0.18                    | $  (0.04)                 | $  0.01                    





The accompanying notes are an integral part of these statements





5





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CHAMPION PARTS, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)







|                            | Common
Shares | Common
Stock
Amount | Additional
Paid-in
Capital | Accumulated
(Deficit) | Accumulated Comprehensive
(Loss)
|--------------------------- | ------------- | ------------------- | -------------------------- | --------------------- | --------------------------------
|                            |               |                     |                            |                       |                                 
|BALANCE  December 31, 2004 | 3,655,266     | $  366,000          | $ 15,578,000               | $(12,972,000)         | $ (2,242,000)                   
|                            |               |                     |                            |                       |                                 
|Net Income                  | -0-           | -0-                 | -0-                        | 279,000               | -0-                             
|                            |               |                     |                            |                       |                                 
|BALANCE  October 2, 2005   | 3,655,266     | $  366,000          | $ 15,578,000               | $(12,693,000)         | $ (2,242,000)                   





The accompanying notes are an integral part of these statements













6





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CHAMPION PARTS, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)





|                                                 | Nine Months
Oct. 2, 2005 | Nine Months
Sept. 26, 2004 | Three Months
Oct. 2, 2005 | Three Months
Sept. 26, 2004
|------------------------------------------------ | ------------------------ | -------------------------- | ------------------------- | ---------------------------
|                                                 |                          |                            |                           |                            
|Net income/(Loss) and other comprehensive income | $   279,000              | $  678,000                 | $   (138,000)             | $  21,000                  





The accompanying notes are an integral part of these statements.





7





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CHAMPION PARTS, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                            | Nine Months
October 2, 2005 | Nine Months
September 26, 2004
|------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |                             |                               
|                                                                                            |                             |                               
|Net income                                                                                  | $   279,000                 | $   678,000                   
|                                                                                            |                             |                               
|Adjustments to reconcile net income to net cash
provided by/(used in) operating activities: |                             |                               
|Depreciation and amortization                                                               | 345,000                     | 360,000                       
|Provision for inventory write-offs                                                          | 171,000                     | 383,000                       
|Provision for doubtful accounts                                                             | 120,000                     | 96,000                        
|Net cash from sale of assets                                                                |                             | 1,368,000                     
|Write-off City of Hope, Arkansas note                                                       | -0-                         | (250,000)                     
|Changes in assets and liabilities:                                                          |                             |                               
|Accounts receivable  gross                                                                 | 1,693,000                   | 270,000                       
|Other accounts receivable                                                                   | 5,000                       | 1,000                         
|Inventories  gross                                                                         | 941,000                     | (2,756,000)                   
|Prepaid expenses                                                                            | 63,000                      | (313,000)                     
|Accounts payable                                                                            | 299,000                     | 486,000                       
|Accrued liabilities and other                                                               | 349,000                     | (284,000)                     
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                   | 4,265,000                   | 39,000                        
|                                                                                            |                             |                               
|CASH FLOW FROM INVESTING ACTIVITIES:                                                        |                             |                               
|Capital expenditures                                                                        | (124,000)                   | (149,000)                     
|NET CASH USED IN INVESTING ACTIVITIES                                                       | (124,000)                   | (149,000)                     
|                                                                                            |                             |                               
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |                             |                               
|(Payments) under term loan agreement                                                        | -0-                         | -0-                           
|Net (payments)/borrowing under revolving loan agreement                                     | (3,903,000)                 | 1,977,000                     
|(Payments) on mortgage note obligation                                                      | (79,000)                    | -0-                           
|(Payments) on term note obligations                                                         | -0-                         | (1,443,000)                   
|(Payments) under long-term subordinate debt obligations                                     | (6,000)                     | (61,000)                      
|NET CASH FROM/(USED IN) FINANCING ACTIVITIES                                                | (3,994,000)                 | 473,000                       
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                   | 147,000                     | 363,000                       
|                                                                                            |                             |                               
|CASH AND CASH EQUIVALENTS - Beginning of period                                             | 358,000                     | 135,000                       
|                                                                                            |                             |                               
|CASH AND CASH EQUIVALENTS - End of period                                                   | $   511,000                 | $   498,000                   
|                                                                                            |                             |                               
|Supplemental disclosures of cash flow information                                           |                             |                               
|Cash paid during the nine months:                                                           |                             |                               
|Income taxes                                                                                | $         99,828            | $         38,000              
|Interest                                                                                    | 450,000                     | 459,000                       





The accompanying notes are an integral part of these statements.









8





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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 October 2, 2005 and September 26, 2004 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 10-K for the year ended December 31, 2004.



The consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at that date.



Certain amounts relating to September 26, 2004 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 auto parts.



Note2.

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 October 2, 2005 are not necessarily indicative of results to be expected for the entire year.



Note 3.

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



|                         | October 2, 2005 | December 31, 2004
|------------------------ | --------------- | -----------------
|Gross Inventories:       |                 |                  
|Raw cores                | $    7,011,000  | $    7,019,000   
|Parts                    | 2,986,000       | 2,766,000        
|Sub-total raw materials  | 9,997,000       | 9,785,000        
|Work-in-process          | 3,304,000       | 3,321,000        
|Finished goods           | 5,758,000       | 6,894,000        
|                         |                 |                  
|Total gross inventories  | $  19,059,000   | $  20,000,000    
|                         |                 |                  
|Inventory Reserves:      |                 |                  
|Core devaluation         | $  (3,619,000)  | $  (3,384,000)   
|Obsolescence             | (3,247,000)     | (3,298,000)      
|Valuation reserves       | (595,000)       | (608,000)        
|Total inventory reserves | $  (7,461,000)  | $  (7,290,000)   
|                         |                 |                  
|Total net inventories    | $  11,598,000   | $  12,710,000    







9





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Note 4.

For reporting purposes, product and core returns are offset against gross sales in arriving at net sales. Total returns for the three months ended October 2, 2005 were $1,349,000 compared to $1,352,000 at September 26, 2004.  Total returns for the nine months ended October 2, 2005 were $4,998,000 compared to $4,638,000 at September 26, 2004.



Note 5.

In the third quarter of 2005, net sales to the Company's four largest customers accounted for approximately 70% of total net sales.  In the third quarter of 2004, net sales to the Company's four largest customers were approximately 72% of total net sales.

A reduction in the level of sales to or the loss of one or more of these customers would have a material adverse effect on the Companys financial condition and results of operations.



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.  As of October 2, 2005 there has been no impairment of long lived-assets.



Note 7.

The income tax expense attributable to operations for the three and nine months ended October 2, 2005 and September 26, 2004, 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 and provision for state income taxes.



Note 8.

Debt - 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 lender prime plus 0.25 % 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.



On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement dated August 10, 2004 with PNC Bank, National Association. Amendment No. 1 set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lenders interpreting the formula for calculating Eligible Receivables; the definition of collateral monitoring fees; and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.



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 property term debt 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 against the asset restructuring reserve provided for this transaction. A $200,000 escrow account was established at the closing of the sale of the property to cover future EPA issues. Sale of the Beech Creek property allowed the Company to proceed with replacing the Congress loan facility with the new lenders.





10





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Note 8. (Continued)



At October 2, 2005, the balance outstanding on the Companys revolver loan facility with PNC Bank, National Association was $6,291,969 and letter of credit accommodations were $40,000. Also at October 2, 2005, the balance outstanding on the Companys commercial mortgage loan with Elk Horn Bank was $675,564. The total of the loan balances was $6,967,533, which compares to total loan balances at December 31, 2004 of $11,061,000 and letter of credit accommodations of $40,000.



At October 2, 2005, the Company was in compliance with the amended fixed charge coverage ratio covenant.



Note 9.



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





11





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ITEM 2.   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS





Management Overview



Third quarter 2005 net sales of $5,320,000 were $742,000, or 16.2%, higher than the same period in 2004 reflecting stronger sales of constant velocity axles, heavy duty and agricultural products, and air conditioning products.  Cost of products sold for the quarter as a percentage of net sales increased from 84.2% to 89.3% and was higher than 2004 by $896,000, as a result of significantly higher sales, product mix and increased costs of raw materials.  Selling, distribution and administrative expenses for the quarter were higher than the third quarter 2004 by $6,000, or 1.1%, due to higher sales. Operating income for the quarter was $6,000 versus $166,000 in third quarter 2004, a decrease of $160,000.



Interest expense for the quarter was $12,000 less compared to 2004, reflecting a lower revolver balance, partially offset by higher interest rates.





Nine months 2005 net sales of $17,128,000 were $1,957,000, or 12.9%, higher than the same period in 2004 primarily reflecting stronger sales of constant velocity axles, heavy duty and agricultural products, and air conditioning products.  Cost of products sold for the nine months as a percentage of net sales increased from 81.6% to 86.0% and was higher than 2004 by $2,249,000, as a result of significantly higher sales, product mix and increased costs of raw materials.  Selling, distribution and administrative expenses for the nine months were lower than 2004 by $210,000, or 11.0%, primarily due to lower administrative salaries and elimination of costs associated with the Beech Creek, Pennsylvania facility that was sold in June of last year. Operating income for the nine months was $694,000 versus $876,000 in same period of 2004, a decrease of $182,000, or 20.8%.



Interest cost for the nine months was up $10,000 over 2004, reflecting higher interest rates. On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement with PNC Bank. The amendment set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lenders interpreting the formula for calculating Eligible Receivables; the definition of collateral monitoring fees; and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.  Interest rates have subsequently returned to the level originally specified in the Loan Agreement, 0.25% above bank prime (6.50%).



Non-operating income for the nine months was $89,000 versus $258,000 in the same period of 2004, a $169,000 decrease. At the end of the first quarter of 2004, the Company met job expansion incentives and the $250,000 City of Hope, Arkansas note was forgiven. In 2005, the company earned $78,000 in rebates from the State of Arkansas for meeting job expansion incentives.  Net income for the nine months was $279,000 versus $678,000 in 2004. The $399,000 decline in net income partially reflects the recognition of the $250,000 loan forgiveness in the prior years net income.  On a comparable basis, net income for the first half of 2005 was $149,000 lower compared to the same period in 2004.











12





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RESULTS OF OPERATIONS



Three months ended October 2, 2005 compared to three months ended September 26, 2004



Net sales for the quarter ending October 2, 2005 were $5,320,000 versus net sales of $4,578,000 for the same fiscal quarter in 2004.  The $742,000 or 16.2% increase in net sales compared to 2004 reflected stronger sales of constant velocity axles, heavy duty, agricultural, and air conditioning products.  Total product and core returns, which are accounted for as reductions to gross sales, were 20.1% and 22.4% of gross sales for the third quarter of 2005 and 2004, respectively. Product and core returns are accounted for on an accrual basis when sales are made; consequently the lower percentage for the third quarter of 2005 reflects the impact of the lower carburetor sales.



Carburetor net sales were 44.3% and 50.6% of total net sales, respectively, for the third quarter of 2005 and 2004. 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, which predominantly use carburetors.  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.







13





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Cost of products sold was $4,752,000, or 89.3%, of net sales for 2005 as compared to $3,856,000, or 84.2%, for the third quarter of 2004.  The $896,000, increase versus 2004 is primarily due to significantly higher sales, product mix, and increased cost of raw materials.   Prices also increased significantly in 2005 for purchased materials that are petroleum based.



Selling, distribution and administrative expenses for the third quarter 2005 were $562,000 compared to $556,000 in third quarter of 2004. The spending increase of $6,000 reflects the higher sales.



Operating income for the quarter was $6,000, compared to $166,000 for the third quarter of 2004.  The change in operating income versus 2004 is attributed to higher costs of products sold as described above.



Interest expense of $128,000 for the quarter was $12,000 less than 2004, reflecting a lower revolver balance this year.  This was partially offset by higher interest rates.  The revolving interest rate is 0.25% above bank prime.  The commercial property loan rate is New York prime plus 2% adjusted quarterly.



Non-operating income for the quarter was $3,000 versus $2,000 in the same period of 2004.



Net loss was $138,000 for the third quarter versus a net profit of $21,000 for 2004.  The $159,000 decline resulted from higher cost of products sold.







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Nine months ended October 2, 2005 compared to nine months ended September 26, 2004



Net sales for the nine months ending October 2, 2005 were $17,128,000 versus net sales of $15,171,000 for the same fiscal period in 2004.  The $1,957,000 or 12.9% increase in net sales compared to 2004 reflected stronger sales of constant velocity axles, heavy duty, agricultural, and air conditioning products.  Carburetor sales in the nine months of 2005 were also moderately higher than the same period of 2004.  Total product and core returns, which are accounted for as reductions to gross sales, were 22.3% and 23.0% of gross sales for the same period of 2005 and 2004, respectively. Product and core returns are accounted for on an accrual basis when sales are made.



Carburetor net sales were 44.2% and 48.4% of total net sales, respectively, for the nine months of 2005 and 2004. 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, which predominantly use carburetors.  The Company expects that the market for carburetors 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 was $14,733,000, or 86.0%, of net sales for 2005 as compared to $12,384,000, or 81.6%, for the first half of 2004.  The $2,349,000, increase versus 2004 is primarily due to significantly higher sales, product mix and increased costs of raw materials.  Prices increased in 2005 for purchased materials that are petroleum based.



Selling, distribution and administrative expenses year-to-date in 2005 were $1,701,000 compared to $1,911,000 in the same period of 2004. The spending decrease of $210,000 primarily reflects the elimination of residual operating costs recorded in administrative overhead last year for the idle Pennsylvania facility (taxes, insurance and utilities), sold in June of 2004.  Administrative salaries and associated fringe costs were also lower than last year due to reductions in personnel.



Operating income for the nine months was $694,000, compared to $876,000 for the same period of 2004.  The operating income decrease versus 2004 is attributed to higher cost of products sold.



Interest expense of $450,000 for the nine months was up $10,000 over 2004, reflecting higher interest rates. On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement with PNC Bank. The amendment set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lenders interpreting the formula for calculating Eligible Receivables; the definition of collateral monitoring fees; and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.  Interest rates have subsequently returned to the level originally specified in the Loan Agreement.  Bank prime (6.50% on October 2, 2005) is significantly higher compared to 2004 (4.75% on September 26, 2004).



Non-operating income for the period was $89,000 versus $258,000 recorded in 2004, a $169,000 decrease. At the end of the first quarter of 2004, the Company met job expansion incentives and the $250,000 City of Hope, Arkansas note was forgiven. In 2005, the company earned $78,000 in rebates from the State of Arkansas for meeting job expansion incentives.



Net income was $279,000 for the nine months versus $678,000 for 2004.  The $399,000, or 58.8% decline, partially reflects the recognition of the $250,000 loan forgiveness in last years net income.







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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 October 2, 2005, 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 December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123, as revised, requires recognition of the cost of employee services provided in exchange for stock options and similar equity instruments based on the fair value of the instrument at the date of grant. Statement 123, as originally issued, is effective until the provisions of Statement 123(R) are fully adopted. Statement 123(R) is effective the beginning of the next fiscal year. The Company will adopt this guidance as of January 1, 2006 and begin recognizing compensation expense related to stock options should any be issued.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS No. 151).  SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).  This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities.  The Company does not expect the adoption of the statement to have a material effect on its financial statements, which is effective with fiscal years beginning after June 15, 2005.









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LIQUIDITY AND CAPITAL RESOURCES



Liquidity Overview& Financing



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 lender prime plus 0.25% or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance.





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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.



On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement dated August 10, 2004 with PNC Bank, National Association. Amendment No. 1 set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lenders interpreting the formula for calculating Eligible Receivables, the definition of collateral monitoring fees and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis. Interest rates have subsequently returned to the original level specified in the Loan Agreement, 0.25% above bank prime (6.50%).



At October 2, 2005, the balance outstanding on the Companys revolver loan facility with PNC Bank, National Association was $6,291,969 and letter of credit accommodations were $40,000. Also at October 2, 2005, the balance outstanding on the Companys commercial mortgage loan with Elk Horn Bank was $675,564. The total of the loan balances was $6,967,533, which compares to total loan balances at December 31, 2004 of $11,061,000 and letter of credit accommodations of $40,000.



At October 2, 2005, the Company was in compliance with the amended fixed charge coverage ratio covenant.



Management believes that the Company will be able to finance its working capital needs in the current year and the foreseeable future through the use of borrowings and cash flows generated from operations.





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Working Capital



Net working capital at October 2, 2005 was $7,504,000 compared to $10,994,000 at December 31, 2004. The reduction of $3,490,000 primarily reflects lower trade accounts receivables and a reduction in inventories.



Compared to the September 26, 2004 net working capital balance of $10,590,000, the decrease of $3,086,000 reflects lower trade accounts receivables and a reduction in inventories in 2005.



Net trade accounts receivable at October 2, 2005 were $8,597,000, a decrease of $1,813,000 versus the year-end 2004 balance of $10,410,000.  The decrease in the Company's accounts receivable balances at quarter-end versus the year-end reflects improved collections and lower sales in the quarter.



When compared to the September 26, 2004 trade receivables balance of $9,590,000, the quarter-end balance is $993,000 lower reflecting higher collections in the third quarter of 2005.



Net inventories of $11,598,000 at October 2, 2005 were $1,112,000 lower as compared to the year-end 2004 balance of $12,710,000.  The decrease in net inventory primarily reflects a $1,136,000 decrease in finished goods. Although raw core, work-in-process and parts inventories decreased in the third quarter, the balances were up slightly compared to year-end 2004. The change in inventory levels is due to a concerted effort to reduce on-hand balances.



Compared to the September 26, 2004 balance of $13,237,000, inventories are $1,639,000 lower for the same reason.



Accounts payable at October 2, 2005 were $8,344,000 compared to a balance at year-end 2004 of $8,001,000. The $343,000 increase in accounts payable is due to the higher net trade accounts payable which have resulted from increased raw materials spending in the past period.



Compared to the September 26, 2004 balance of $8,166,000, accounts payable have increased $178,000 for the same reason.



Accrued expenses of $5,009,000 were up $176,000 from the fiscal year-end 2004 balance of $4,833,000, principally reflecting increased reserves for customer returns based upon higher sales in 2005.



Compared to the September 26, 2004 balance of $4,437,000, accrued expenses are higher by $572,000 reflecting increased reserves for customer returns mentioned above, and increased pension reserves.





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 months.





FUTURE OUTLOOK



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



Management believes that the Company will be able to finance its working capital needs in the current year and the foreseeable future through the use of borrowings and cash flows generated from operations.







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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 has caused and is continuing 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 growth in air conditioning product sales to partially offset this impact. There is no assurance that sales of air conditioning products will increase, or, if they do, that any increase 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 81% of the Companys net sales in the nine months ending October 2, 2005, with the four largest customers aggregating 70% of the total. For the same period in 2004, the Companys six largest customers accounted for a total of 81% of the Companys net sales, with the four largest customers comprising 72% 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.



Accordingly, actual results may differ materially from those set forth in forward-looking statements.





OFF-BALANCE SHEET ARRANGEMENTS



The company does not have any off-balance sheet arrangements.





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ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company has credit facilities that bear interest at various rates based on the bank prime rate. Interest on $6,968,000, or 77.4%, of the Company's debt was variable based on the lenders prime rate. Consequently, a general increase of 1% in the lenders prime rate would result in additional interest cost of approximately $69,680 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 significant 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, such internal controls.





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PART II.     OTHER INFORMATION







ITEM 5.    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, 2004, Environmental Section, pages 7 through 9, for the current background on these proceedings.





ITEM 6.    EXHIBITS



(a)

Exhibits

1.

Exhibit 31.1  Section 302 Officer Certification

3.

Exhibit 32.1  Section 906 Certification







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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 16, 2005                                 By:/s/ Jerry A. Bragiel

Jerry A. Bragiel

President, Chief Executive Officer and Acting Chief                                                                                      Financial Officer





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 31.1



SECTION 302 OFFICERS CERTIFICATION





|I, Jerry A. Bragiel, President, Chief Executive Officer and Acting Chief Financial Officer, certify that:
|---------------------------------------------------------------------------------------------------------



|1. |  | I have reviewed this quarterly report on Form 10-Q of Champion Parts, Inc.;
|-- |  | ---------------------------------------------------------------------------



|2. |  | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |    | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have:
|-- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | a) |                                                                                                                                                                               
|   | b) |                                                                                                                                                                               
|   | c) |                                                                                                                                                                               



|5. |    | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
|-- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | a) |                                                                                                                                                                                                                                             
|   | b) |                                                                                                                                                                                                                                             



|Dated:  November 16, 2005 |  | /s/  Jerry A. Bragiel |  |                                                                                       
|------------------------- |  | --------------------- |  | --------------------------------------------------------------------------------------
|                          |  |                       |  | Jerry A. Bragiel
President, Chief Executive Officer and Acting Chief Financial Officer







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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 2003





In connection with the Quarterly Report of Champion Parts, Inc., (the Company) on Form 10-Q for the quarter ended October 2, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Jerry A. Bragiel, President, Chief Executive Officer and Acting 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 2003, 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 16, 2005 | /s/ Jerry A. Bragiel
Jerry A. Bragiel
President, Chief Executive Officer and Acting Chief Financial Officer
|----------------- | -----------------------------------------------------------------------------------------------------------







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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