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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to

Commission File No. 1-7807

  CHAMPION PARTS, INC.       

(Exact name of Registrant as specified in its charter)

Illinois

36-2088911                         

    (State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)

2005 West Avenue B, Hope, Arkansas

 71801   

             (Address of Principal Executive Offices)

 (Zip Code)

Registrant's telephone number, including area code:                     (870) 777-8821

Securities Registered Pursuant to Section 12(b) of the Act:            None

Securities Registered Pursuant to Section 12(g) of the Act:           Common Shares, $.10 Par Value

                                                     (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this

Form 10-K.   [X]

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

Yes  [  ]   No [X]

As of March 25, 2004, 3,655,266 Common Shares were outstanding and the aggregate market value of the Common Shares held by non-affiliates of the Registrant, based on the closing price, was $2,352,803, and was $1,709,312 as of June 30, 2003.  For information as to persons considered to be affiliates for purposes of this calculation, see "Item 5, Market for the Company's Common Shares and Related Shareholder Matters".

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Champion Parts, Inc.

Form 10-K

Cross Reference Index

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PART I

Item 1.      Business

Unless context indicates otherwise, the term  "Company" as used herein means Champion Parts, Inc. and its subsidiaries.

Products

The Company remanufactures and sells replacement fuel system components (carburetors and diesel fuel injection components) and air conditioning compressors for substantially all makes and models of domestic and foreign automobiles, trucks and marine applications. It also remanufactures and sells replacement constant velocity drive assemblies, electrical and mechanical products for certain passenger car, agricultural, marine and heavy-duty truck original equipment applications. The Company is reporting one operating business segment in the same format as reviewed by the Company's senior management.

During the fiscal years ended December 31, 2003, 2002 and 2001, the Company's net sales of parts for automobiles (including light duty trucks) accounted for 83%, 87% and 83%, respectively, of the Company's total net sales; while sales of parts for heavy duty trucks, farm equipment and marine applications accounted for 17%, 13% and 17%, respectively, of total net sales.

Marketing and Distribution

The Company's products are marketed throughout the continental United States and, in a limited way, in Canada.  The Company sells carburetors to aftermarket retail chains that distribute products through their stores. In addition, the Company sells electrical, mechanical and constant velocity drive products to manufacturers of automobiles, trucks and farm equipment, which purchase the Company's products for resale through their dealers. The Company also sells carburetors, air conditioning compressors, electrical and mechanical products to automotive and marine warehouse distributors, which in turn sell to jobber stores and through them to service stations, automobile and marine repair shops and individual motorists.

Of the Company's net sales in the year ended December 31, 2003, approximately 45% were to retailers; approximately 26% were to manufacturers of automobiles, trucks and farm equipment and heavy duty fleet specialists; and approximately 29% were to automotive warehouse distributors, marine distributors and other customers.

The Company exhibits its products at trade shows. The Company also prepares and publishes catalogs of its products, including a guide with information as to the various vehicle models for which the Company's products may be used and a pictorial product identification guide to assist customers in the return of used units.  The Company's sales representatives and sales agents call on customers and prospective customers to familiarize them with the Company's products, and the applications of its products.

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During the fiscal year ended December 31, 2003, the four largest customers of the Company accounted for approximately 77% of net sales (23%, 21%, 17% and 16%).  In 2002, the same customers of the Company accounted for approximately 84% of net sales (26%, 23%, 18% and 17%), and in 2001, they accounted for approximately 84% of net sales  (35%, 24%, 20% and 5%).  No other customers accounted for more than 10% of net sales in any of the three years.

The Company has various methods available to its customers to place orders into the Company's order entry system. The Company also utilizes direct Electronic Data Interchange with its largest customers.

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 and second quarters, and then declining through the summer months.

Materials

In its remanufacturing operations, the Company obtains and utilizes used units, commonly known as "cores". A majority of the units remanufactured by the Company are acquired from customers as trade-ins, generally referred to as "core returns", which are encouraged by the Company in the sale of remanufactured units. The remainder of the core requirements are filled by purchasing cores on the open market.

The price of a finished product is usually comprised of a separately invoiced amount for the core included in the product ("core value") and an amount for remanufacturing.  Upon receipt of a core as a trade-in, credit is given to the customer for the then current core value of the part returned.  The Company limits trade-ins to cores for units included in its sales catalogs and in rebuildable condition, and credit for cores is allowed only against purchases by the customer of similar remanufactured products within a specified time period.  The dollar volume of the core sales further limits a customer's total allowable credit for core trade-ins.  The Company also permits warranty and stock adjustment returns (generally referred to as "product returns") pursuant to established policies.  The Company's produc t return policies are consistent with industry practice, whereby remanufacturers accept product returns from current customers regardless of whether the remanufacturer actually sold the product.  The Company has no obligation to accept product returns from customers that no longer purchase units from the Company.

Patents, Trademarks, Etc.

The Company has no material patents, trademarks, licenses, franchises or concessions.

Backlog

The Company did not have a significant order backlog at December 31, 2003 and 2002.

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Competition

The remanufactured automotive parts industry is highly competitive as the Company competes with a number of other companies, including certain original equipment manufacturers, that sell remanufactured automotive parts.  The Company competes with several large regional remanufacturers and with remanufacturers that are franchised by certain original equipment manufacturers to remanufacture their products for regional distribution.  The Company also competes with numerous remanufacturers that serve local areas. In addition, sales of remanufactured parts compete with sales of similar new replacement parts. Manufacturers of kits used by mechanics to rebuild carburetors may also be deemed to be competitors of the Company.

The Company competes in a number of ways, including price, quality, product performance, prompt order fill, service and warranty policy.  The Company believes its technical expertise in the niche product lines it sells has been an important factor in enabling the Company to compete effectively.

Engineering

Product engineers support each of the Company’s main product lines.  Engineers participate in product planning, product line structuring, cataloging and engineering of the Company's products and in developing manufacturing processes.  The primary activities of the product engineers include improving the quality of existing products, formulating specifications and procedures for remanufactured products for use on makes and models of vehicles for which they were originally designed, converting cores for use amongst different makes and models and developing specifications, supplies and procedures for remanufacturing newly introduced products.

The engineers also design and build new tools, machines and testing equipment for use in all the Company's plants and develop specifications for certain components manufactured by the Company for use in its remanufacturing operations.  Additionally, the engineers design and test new methods of reassembling components and cleaning parts and cores. The Company believes such activities improve the Company's ability to serve the needs of its customers.

Quality Assurance personnel conduct periodic quality audits of the Company's plants under its quality improvement program to test product quality and compliance with specifications.

Environmental Matters

The Company is subject to various federal, state and local environmental laws and regulations incidental to its business.  The Company continues to modify, on an ongoing basis, processes that may have an environmental impact. Although management believes that the current level of environmental reserves are adequate to satisfy the future compliance with the environmental laws, the ultimate outcome of its environmental matters and potential insurance settlements are undeterminable.  Accordingly, there can be no assurance that these reserves will be adequate. See Item 3, "Legal Proceedings - Environmental Matters" for additional discussion.  

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Employees

As of December 31, 2003, the Company employed 430 people including the corporate headquarters, plant and warehouse facilities.   

The Collective Bargaining Agreement between the Company and the International Brotherhood of Electrical Workers at the Company's Pennsylvania facilities was dissolved on August 31, 2002.  The Union signed a shutdown agreement on March 15, 2002 accepting the Company’s terms for closing the facility in Beech Creek, Pennsylvania (see Item 7). There are no Collective Bargaining Agreements in place at any of the Company’s present facilities.

Item 2.      Properties

The Company's corporate headquarters occupies office space at the Hope Division facility, 2005 West Avenue B, Hope, Arkansas.  This facility houses the Company's corporate office functions, including executive, administration, finance and data processing.  

The following table sets forth certain information with respect to each of the Company's remanufacturing, warehousing and service facilities other than the corporate headquarters:

(1)  On March 15, 2004, the Company entered into a contract for the sale of this facility. The contract is subject to certain conditions, including satisfaction of the buyer as to environmental matters.  See Item 3 for details.

The Company's facilities currently operating are well maintained and are in good condition and repair. The net cost of the Beech Creek facility is currently being reported under "Assets Held for Sale" on the balance sheet.

A substantial portion of the machinery and equipment has been designed by the Company for its particular purposes and, in many instances, has been built by it.

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Item 3.      Legal Proceedings

1.   Beech Creek, Pennsylvania Facility Soil and Groundwater Contamination  

In May 1991, the Pennsylvania Department of Environmental Protection ("PADEP") notified the Company that there was evidence of trichloroethylene and trichloroethane in the soil, and possibly the groundwater under the Beech Creek facility.  Further, PADEP was concerned that the contamination had migrated off site.  PADEP demanded that the Company conduct an investigation to determine the source and extent of the contamination, and perform any required cleanup.

The Company retained a qualified environmental consultant to prepare a site investigation plan.  In June of 1992 PADEP approved the investigation plan.  The plan, which included extensive soil testing and groundwater monitoring, was completed in 1995.

Cleanup commenced in 1995 at the Beech Creek plant.  Cleanup activities consist of the venting of volatile organic gases from soil, and the pumping and treating of groundwater. The maintenance and operation of the system has been approximately $26,000 per year.  In November 1998 the Company submitted a plan to PADEP to monitor groundwater and to stop operation of the remediation system under Pennsylvania's "Act Two."  PADEP approved the plan.  In January 2001, PADEP indicated that a minimum of eight quarterly rounds of sampling would be needed before an Act Two liability release could be considered by PADEP.

The Company also has demanded indemnity from its insurance carriers regarding this matter.  One of its carriers settled with the Company.  The Company plans to vigorously pursue all remaining applicable coverage.

2.   Puente Valley, California Superfund Proceeding

The Company formerly operated a manufacturing facility at 825 Lawson Street, City of Industry, California.  Champion and the other former owners and operators of the Lawson Street property were identified by the United States Environmental Protection Agency (USEPA) as potentially responsible parties (“PRPs”) for the Puente Valley operable unit of the San Gabriel Valley Superfund Site (the “Puente Valley Site”), because of the location of the Lawson Street property.  The USEPA issued a Record of Decision identifying the preferred cleanup approach for the Puente Valley Site.

One of the other former operators of the Lawson Street property entered into an agreement with another Puente Valley Site PRP to resolve the liability of all the 825 Lawson Street parties including the Company for the Puente Valley Site cleanup.  Litigation was then initiated by that former operator against the Company and certain other former owners and operators of the 825 Lawson Street property to determine their contribution portion of the settlement. The Company settled 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. The Company also plans to vigorously pursue its other insurance carrier to recover the portion it paid.

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3.   Spectron, Maryland Superfund Proceeding

On September 20, 1995, the USEPA notified the Company (along with several hundred other companies) of potential liability for response actions at the Spectron Superfund Site.  The USEPA letter asks the Company and the other PRPs to negotiate with USEPA for their performance of a remedial investigation/feasibility study at the Spectron Site.

In August 2003, the Company received a de minimis settlement offer from the USEPA for approximately $154,000.  The Company did not accept the settlement offer.

The Company has demanded defense and indemnity from its insurance carriers for any liability at the Spectron Site, and one of the carriers has settled with the Company.  The Company plans to vigorously pursue all remaining applicable coverage, if necessary.  Further, the Company believes that its former solvent supplier and waste solvent transporter are responsible for a share of any liability the Company incurs for the Spectron Site cleanup. The Company plans to vigorously pursue the transporter for this claim.

4.   Double Eagle Superfund Proceeding

In January 2003, the Company received a "Notice of Liability" letter from the former owner and PRP at the Double Eagle Refinery Superfund Site (DER Site). The former owner is liable for remediation costs under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). According to DER Site records, the Company sent approximately 46,000 gallons of waste oil to the DER Site from 1985 through 1988 and, as such, also faces potential PRP liability for DER Site remediation costs. The Company has been informed that 4,500 PRPs have been identified at the DER Site accounting for 8.5 million gallons of waste.  Many of these PRPs apparently are small companies which sent relatively small quantities of waste to the DER Site, but approximately 100 PRPs have been identified who sent more than 10,000 gallons each.  The USEPA has threatened the former owner and several other PRPs with whom USEPA has a tolling agreement with a $21-22 million cost recovery action concerning the USEPA's remediation of soil and groundwater contamination of the DER Site.  (The USEPA is barred from pursuing the Company, and many other PRPs, by the applicable statute of limitations.) In response to the threatened cost recovery action, the former owner sent Notice of Liability letters to approximately 100 PRPs and hosted a February 25, 2003 meeting asking the PRPs to form a PRP Group to negotiate with the USEPA and allocate liability.  The stated intent, in the absence of the formation of such a group, is to pursue, when appropriate, a private party contribution action against the PRPs.  To date, no PRP Group has been formed and private party contribution action has not been initiated.  The Company's liability at the DER Site, if any, will likely be based on an as yet undetermined volume allocation.

The Company has put its insurance carriers on notice of this potential claim. The primary carrier has denied coverage but the Company plans to vigorously pursue the carrier for coverage.

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5.

Asbestos Litigation

In 2003 and certain prior years, the Company was one of numerous defendants named in suits for personal injuries caused by exposure to products containing asbestos. The Company put its insurance carriers on notice and its attorneys have filed answers denying the allegations in the complaints. The Company’s insurance carriers have agreed to defend the Company under a reservation of rights.

While it is not possible to predict the course these cases may take in the future, less than five percent of the cases filed are still open.

Summary

From time to time, the Company may be named in lawsuits during the normal course of its business. Management intends to vigorously defend any lawsuits that may arise.  In the opinion of Management, the environmental legal matters now pending will not have a material adverse effect on the consolidated financial position of the Company.

The Company has available established reserves of $240,000, as of December 31, 2003, for potential environmental and other legal liabilities that it believes to be adequate.   However, 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 or other legal liabilities in the future.

Item 4.      Submission of Matters to a Vote of Shareholders  

None

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PART II

Item 5.      Market for the Registrant's Common Stock and Related Shareholder Matters

The Company's Common Shares are traded over the counter on the NASD Electronic Bulletin Board under the symbol "CREB.OB".  As of December 31, 2003, there were 633 holders of record of the Company's Common Shares.  This number does not include beneficial owners of Common Shares whose shares are held in the name of banks, brokers, nominees or other fiduciaries.

The information appearing in the following table on the range of high and low trade prices for the Company's Common Shares was obtained from NASDAQ quotations provided in the OTC Market Report published by the National Quotation Bureau. Such high and low bids reflect interdealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

Under the Company's credit agreement, the Company is not permitted to pay dividends.

Only for purposes of the calculation of aggregate market value of the Common Shares held by non-affiliates of the Company as set forth on the cover page of this report, the Common Shares held by RGP Holding, Inc., the Company's Employee Stock Ownership, and shares held by two of the Company's directors were included in the shares held by affiliates. Certain of such individuals and entities may not be affiliates.

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Item 6.      Selected Financial Data

Selected Financial Data - Notes

Note 1:

In 2002, the Company incurred expenses totaling $582,000 for inventory and equipment relocation, severance and other restructuring costs, which could not be accrued in 2001, as they did not qualify as “exit costs”.  All restructuring expenditures were completed in 2002.

Included in the 2001 operating costs is a one time charge of $154,000 to establish a restructuring reserve for the expenses associated with the shut-down of the Beech Creek, Pennsylvania, facility.  It was determined in the second quarter of 2002 that the estimated restructuring charge was higher than needed, and consequently, a reversal of $127,000 was recorded in May 2002.

Note 2:

Included in the 2000 disposal of assets is a $26,000 gain from the sale of tooling.  

Note 3: