Kaliedoscope, Tassimo, Debenhams Chapters, Canada . Buy Now Pay Later With Interest Free Credit | Littlewoods Index Chapters operating results improve 11.3 million in first quarter TORONTO, Aug. 7 - Chapters Inc., Canada's largest book retailer reported that the initial results of new initiatives and restructuring activities at Chapters Retail, Chapters Online and the Central Distribution Centre have resulted in a meaningful improvement in the Company's consolidated operating results for the first quarter. The consolidated loss before interest, taxes, depreciation and amortization ("EBITDA") was reduced by $11.3 million or 87% to $1.7 million compared to an EBITDA loss of $13.0 million in this period last year. The net loss for the period was reduced by $5.8 million or 45% to $7.0 million. The net loss per share for the quarter was $0.57 compared to a net loss per share of $1.12 in the same period last year. "I am pleased about the speed and impact of the initial changes we have implemented." said Ms Heather Reisman, CEO of Chapters Inc. "The rapid process of integration allowed us to accelerate the cost reduction program and turn our focus to key areas of the business that are under-performing. Morale in the company is high as we head into the all important fall and holiday selling season." "During the quarter we were able to strengthen the retail field organization, implement new merchandising standards, improve core inventory in key categories and continue to implement process improvements in the warehouse. We also re-established positive relationships with our suppliers." Ms Reisman said. "This is the first step toward reversing the negative trends of the past 12 months." Chapters Retail For the 13 weeks ended June 30, 2001, revenues at the 77 Chapters superstores, including the World's Biggest Bookstore, grew to $87.2 million, a 4.6% increase over last year. In the 71 comparable stores, a sales decline of 2.3% was a significant improvement over the negative 5.7% decline in the fourth quarter of 2000. The total space occupied by superstores at the end of the quarter was 2,025,000 square feet. This compares to 1,912,000 square feet of superstore space at the end of the same quarter last year. Comparable store sales for traditional stores increased 3.6% in the quarter, a significant improvement over the negative 3.0% experienced in the fourth quarter last year. Total revenues in the traditional stores declined 4% to $35.7 million in the first quarter due to store closures. It is the first time in over two years that comparable store sales in this segment have been positive. At the end of the first quarter, the Company operated 198 traditional stores occupying 562,000 square feet as compared to 221 stores and 623,000 square feet last year. Initial operating and financial improvements were realized at head office, the stores and in the Central Distribution Centre as a result of the reorganization and restructuring. At the Central Distribution Centre, productivity improvements were realized despite significant reductions in labour, freight and maintenance costs. As a result of the above, Chapters Retail's EBITDA loss reduced by $3.2 million to an EBITDA loss of $269,000 Chapters Online Chapters Online reported that EBITDA improved $8.1 million in the quarter with an EBITDA loss of $1.4 million compared to an EBITDA loss of $9.5 million in the same quarter last year. Revenues for the quarter were $9.4 million compared to $12.7 million for the prior year quarter ended July 1, 2000. This decline in revenues was offset by an improvement in gross profit margin to 25.5% for the first quarter compared to 22.4% in the corresponding period a year ago. The net loss for the quarter improved by 73% to $2.7 million, or 29% of net revenues, compared with $9.9 million, or 78% of net revenues for the same period last year. Chapters Inc. has a 69.6% ownership stake in Chapters Online Inc. Chapters Online Highlights First Quarter Fiscal 2002 - Increased availability of popular titles for 24 hour delivery - Reduced delivery time for titles not held in inventory - Customer service response rate vastly improved - Costs cut by $8.5 million About Chapters Inc. Chapters is a Canadian company and the largest book retailer in Canada, operating bookstores in all provinces under the names Chapters, Coles, SmithBooks, and World's Biggest Bookstore. Chapters is majority owner of Chapters Online Inc., operating www.chapters.indigo.ca, an online retailer of books, music, videos and DVDs. Chapters is a publicly traded company, listed on the TSE under the stock symbol CHP, and included in the TSE's top 300 companies, as well as in the S&P/TSE Canadian SmallCap Index. To learn more about Chapters, please visit www.chapters.indigo.ca/ir. Consolidated Statements of Financial Position Unaudited ------------------------------------------------------------------------- As at As at June 30, 2001 July 1, 2000 $ (thousands) $ (thousands) ------------------------------------------------------------------------- Assets Cash 367 6,891 Short term investments - 25,000 Accounts receivable 13,036 13,969 Inventories 207,141 261,912 Income taxes receivable 8,152 6,917 Prepaid expenses 4,995 5,967 Future income tax assets 5,281 925 ------------------------------------------------------------------------- Total current assets 238,972 321,581 ------------------------------------------------------------------------- Capital assets, net 131,643 141,781 Future income taxes assets 6,405 3,967 Deferred pension charges - 101 Goodwill 8,051 1,560 ------------------------------------------------------------------------- Total assets 385,071 468,990 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Bank indebtedness 69,033 74,502 Accounts payable and accrued liabilities 170,220 170,535 Deferred revenue 5,354 6,259 ------------------------------------------------------------------------- Total current liabilities 244,607 251,296 ------------------------------------------------------------------------- Accrued benefit obligations 1,416 - Long-term debt 54,000 54,000 Non-controlling interest 896 11,235 ------------------------------------------------------------------------- Total liabilities 300,919 316,531 ------------------------------------------------------------------------- Shareholders' equity Share capital 144,775 132,044 Retained earnings (deficit) (60,623) 20,415 ------------------------------------------------------------------------- Total shareholders' equity 84,152 152,459 ------------------------------------------------------------------------- Total liabilities and shareholders' equity 385,071 468,990 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Earnings Unaudited ------------------------------------------------------------------------- 13-week 13-week period ended period ended June 30, 2001 July 1, 2000 $ (thousands(*)) $ (thousands(*)) ------------------------------------------------------------------------- Revenue Superstores 87,233 83,406 Traditional bookstores 35,733 37,481 Internet 9,356 12,680 Other 2,963 3,313 ------------------------------------------------------------------------- 135,285 136,880 ------------------------------------------------------------------------- Cost of product, purchasing, selling and administration 136,978 149,839 ------------------------------------------------------------------------- (1,693) (12,959) ------------------------------------------------------------------------- Amortization of capital assets 7,301 6,542 Amortization of pre-opening store costs 195 347 Amortization of goodwill 250 134 ------------------------------------------------------------------------- Loss before the undernoted items (9,439) (19,982) ------------------------------------------------------------------------- Interest on long-term debt 978 978 Interest on current debt 1,162 742 ------------------------------------------------------------------------- Loss before income tax expense and non-controlling interest (11,579) (21,702) ------------------------------------------------------------------------- Income tax recovery (3,802) (5,222) ------------------------------------------------------------------------- Net loss before non-controlling interest (7,777) (16,480) ------------------------------------------------------------------------- Non-controlling interest (820) (3,766) ------------------------------------------------------------------------- Net loss for the period (6,957) (12,714) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net loss per common share $ (0.57) $ (1.12) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average common shares outstanding 12,281 11,358 Summary of loss per common share: Retail $ (0.41) $ (0.51) Chapters Online $ (0.15) $ (0.61) ------------------------------------------------------------------------- $ (0.57) $ (1.12) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (*) Except per share data. Fully diluted earnings per share have not been presented as the effects are anti-dilutive. Consolidated Statements of Retained Earnings (Deficit) Unaudited ------------------------------------------------------------------------- As at As at June 30, 2001 July 1, 2000 $ (thousands) $ (thousands) ------------------------------------------------------------------------- Opening balance (53,666) 33,129 Net loss (6,957) (12,714) ------------------------------------------------------------------------- Closing balance (60,623) 20,415 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Cash Flows Unaudited ------------------------------------------------------------------------- 13-week 13-week period ended period ended June 30, 2001 July 1, 2000 $ (thousands) $ (thousands) ------------------------------------------------------------------------- Cash flows from operating activities Net loss for the period (6,957) (12,714) Add (deduct) items not affecting cash Amortization 7,746 7,023 Future income taxes (1,003) (2,176) Non-controlling interest (820) (3,766) Deferred pension charges 250 75 ------------------------------------------------------------------------- (784) (11,558) ------------------------------------------------------------------------- Net changes in non-cash working capital related to operations (30,419) (9,344) ------------------------------------------------------------------------- Cash used in operating activities (31,203) (20,902) ------------------------------------------------------------------------- Cash flows from investing activities Decrease in short term investments 3,850 - Purchase of capital assets, net (102) (6,432) ------------------------------------------------------------------------- Cash provided by (used in) investing activities 3,748 (6,432) ------------------------------------------------------------------------- Cash flows from financing activities Increase in bank indebtedness 16,428 5,290 ------------------------------------------------------------------------- Cash provided by financing activities 16,428 5,290 ------------------------------------------------------------------------- Net decrease in cash during the period (11,027) (22,044) Cash, beginning of period 11,394 28,935 ------------------------------------------------------------------------- Cash, end of period 367 6,891 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information Interest paid 2,157 2,628 Income taxes paid - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes to the Interim Consolidated Financial Statements June 30, 2001 Unaudited 1. Disclosure These interim financial statements ("the statements") do not contain all disclosures required by Canadian generally accepted accounting principles for annual financial statements and accordingly, the financial statements should be read in conjunction with the most recently prepared annual financial statements for the 52 week period ended March 31, 2001. 2. Seasonality of Operations The Company's business follows a seasonal pattern, with sales of merchandise being higher in the 3rd quarter due to consumer holiday buying patterns. As a result, a disproportionate portion of total annual revenues are typically earned in the 3rd quarter. Therefore, the earnings for the 13 weeks ended June 30, 2001 and July 1, 2000 are not indicative of the earnings for the other quarters. 3. Accounting Policies These interim financial statements follow the same accounting policies and the method of application, thereof, as the most recently prepared annual financial statements for the 52 week period ended March 31, 2001. 4. Segmented Information ------------------------------------------------------------------------- 13 week period ended June 30, 2001 Retail Online Total $ (thousands) $ (thousands) $ (thousands) ------------------------------------------------------------------------- Segment loss Revenue 125,929 9,356 135,285 Loss before interest, amortization and income taxes (269) (1,424) (1,693) Amortization 6,439 1,307 7,746 Interest expense (income) 2,174 (34) (2,140) Segment loss before income taxes (8,882) (2,697) (11,579) Segment loss (5,080) (2,697) (7,777) ------------------------------------------------------------------------- Reconciliation segment loss Segment loss (7,777) Non-controlling interest (820) ------------------------------------------------------------------------- Net loss (6,957) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Segment total assets Segment assets 380,151 10,645 390,796 Capital expenditures, net 100 2 102 ------------------------------------------------------------------------- Reconciliation segment assets Segment assets 390,796 Intercompany receivables and investment in Online (5,725) ------------------------------------------------------------------------- 385,071 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 13 week period ended July 1, 2000 Retail Online Total $ (thousands) $ (thousands) $ (thousands) ------------------------------------------------------------------------- Segment loss Revenue 124,200 12,680 136,880 Loss before interest, amortization and income taxes (3,456) (9,503) (12,959) Amortization 6,043 980 7,023 Interest expense (income) 2,263 (543) 1,720 Segment loss before income taxes (11,762) (9,940) (21,702) Segment loss (6,540) (9,940) (16,480) ------------------------------------------------------------------------- Reconciliation segment loss Segment loss (16,480) Non-controlling interest (3,766) ------------------------------------------------------------------------- Net loss (12,714) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Segment total assets Segment assets 452,766 51,317 504,083 Capital expenditures, net 6,006 426 6,432 ------------------------------------------------------------------------- Reconciliation segment assets Segment assets 504,083 Intercompany receivables and investment in Online (35,093) ------------------------------------------------------------------------- 468,990 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company has two reportable segments, for the 13 weeks ended June 30, 2001 as opposed to three for the 52 weeks ended March 31, 2001. The two segments consist of Chapters Retail, which operates a chain of retail bookstores across Canada and Chapters Online, an e-commerce retailer selling books and other products. 5. Share Capital Outstanding share data as at June 30, 2001 12,281,236 common shares issued and outstanding Employees' Stock Plan (Options and Share Grants) 596,992 options outstanding, of which 494,384 are exercisable under the Plan 6. Long Term Debt The Company is currently in discussion with lenders regarding a possible re-financing of the Notes ($54 million at June 31, 2001, $54 million at July 1, 2000) on a long-term basis. The availability of this financing in either its existing or re-financed form will be subject to compliance with certain financial covenants. 7. Comparative Figures Certain comparative figures have been reclassified to conform to the current period's presentation. 8. Subsequent Event On July 27, 2001, the Special Committee of Chapters Online Inc. ("Chapters Online") agreed, in principle, to the terms under which the Company would purchase all of the outstanding shares of Chapters Online not already owned by it on the basis of one share of the Company for every 7.14 shares of Chapters Online. The transaction will result in the Company issuing approximately 758,000 common shares to the minority shareholders of Chapters Online. The transaction is expected to be voted on by Chapters Online shareholders in October 2001 and is subject to creditor and regulatory approvals as well as customary conditions and settlement of all required documentation. It is also subject to the receipt by the Chapters Online board of directors of an independent fairness opinion. For further information: please contact: Tracy Nesdoly, Vice President Communications, Chapters Inc., Ph. 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