Chapters Inc., Canada's largest book retailer, will spin off its Internet division into a separate company that it plans to take public this fall in hopes of raising more than C$20 million.

'We think there is a significant growth opportunity, and we need the capital to finance that,' Tamara Lawson, chief financial officer of Chapters Inc., told PW.

According to Chapters' prospectus, the company anticipates incurring significant losses for the foreseeable future, due to increased marketing initiatives, additional strategic alliances, enhancements to the online store and technological and hardware improvements. Chapters Online may also use a portion of the net proceeds to acquire or invest in complementary business, technologies, services or products.

For the first quarter, ended July 3, 1999, Chapters Online posted revenues of C$3.7 million, about two and a half times the C$1.5 million in the fourth quarter of the previous year. Total revenues for Chapters Inc. increased 21.5% to C$122.4 million for the quarter.

Chapters Inc.'s net loss from the period jumped to C$9.4 million, consisting of a C$3.8 million loss from Chapters Online, a C$1.3 million loss from the consolidation of the company's distribution facilities and a seasonal net loss of C$4.3 million from the retail business. The loss from the retail business compares to a consolidated net loss of C$3.3 million for the same period last year. According to the prospectus, Chapters Online has had an accumulated loss of C$11.2 million since its launch.

The Sequoia Group, a leading North American high-tech venture capital fund based in Silicon Valley, has agreed to acquire a 10% equity interest in Chapters Online Inc., which will be completed prior to the offering. Sequoia has agreed to subscribe for 1.1 million shares of Chapters Online for aggregate gross proceeds of C$15 million. Chapters Inc. will retain 8.9 million common shares, or 89% of the company, before the IPO is made available to the public.

Underwriting the offering are CIBC World Markets Inc., Yorkton Securities Inc., Merrill Lynch Canada Inc. and ScotiaMcLeod Inc.

Chapters Online's database lists more than 2.5 million book titles, 46,000 music CD titles and 28,000 videotape and DVD titles. It also offers a limited selection of software products, which the company intends to expand in the near future.

Since it opened in October 1998 Chapters Online has sold products not only in Canada but in the U.S., Japan, South Africa and New Zealand, but Lawson said the focus of the site ( ) will be on the domestic market.