SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

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 NUMBER 0-24543

COST-U-LESS, INC.
(Exact name of registrant as specified in its charter)

Washington
           
91-1615590
(State or other jurisdiction of incorporation or organization)
           
(I.R.S. Employer Identification No.)

3633 136 th Place SE, Suite 110
Bellevue, Washington 98006
(Address of principal executive office) (Zip Code)

(425) 945-0213
(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 and 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. [X] Yes [  ] No.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large accelerated filer [  ]
           
Accelerated filer [  ]
         Non-accelerated filer [X]    
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] YES [X] NO.

The registrant had 4,050,618 common shares, par value $0.001, outstanding at November 9, 2007.


COST-U-LESS, INC.
INDEX TO FORM 10-Q

PART I.  FINANCIAL INFORMATION
 
   
       
 
Item 1.  
Financial Statements (Unaudited)
   
       
 
 
Condensed Consolidated Statements of Operations
3
       
 
 
Condensed Consolidated Balance Sheets
4
       
 
 
Condensed Consolidated Statements of Shareholders’ Equity
5
       
 
 
Condensed Consolidated Statements of Cash Flows
6
       
 
 
Notes to Condensed Consolidated Financial Statements
7
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
17
       
 
Item 4.
Controls and Procedures
17
       
PART II.  OTHER INFORMATION
 
   
       
 
Item 1A. 
Risk Factors
18
       
 
Item 6.
Exhibits
23
       
SIGNATURES
    24
 

2


PART I — FINANCIAL INFORMATION

ITEM 1.
  FINANCIAL STATEMENTS (UNAUDITED)

COST-U-LESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

(Unaudited)

        13 Weeks Ended
    39 Weeks Ended
   
        September 30,
2007
    October 1,
2006
    September 30,
2007
    October 1,
2006
Net sales
              $ 57,913          $ 54,613          $ 168,884          $ 162,873   
Merchandise costs
                 46,530             44,301             136,150             132,309   
Gross profit
                 11,383             10,312             32,734             30,564   
 
Operating expenses:
                                                                       
Store
                 7,866             7,719             23,125             22,254   
General and administrative
                 2,555             1,528             6,331             4,871   
Store openings
                 222              106              494              259    
Total operating expenses
                 10,643             9,353             29,950             27,384   
 
Operating income
                 740              959              2,784             3,180   
 
Other income (expense):
                                                                       
Interest income (expense), net
                 38              (101 )            33              (314 )  
Other
                 (19 )            14              (13 )            (1 )  
Income before income taxes
                 759              872              2,804             2,865   
                                                                         
Income tax provision
                 320             350             1,035             1,110   
Net income
              $ 439           $ 522           $ 1,769          $ 1,755   
 
Earnings per common share:
                                                                       
Basic
              $ 0.11          $ 0.13          $ 0.44          $ 0.44   
Diluted
              $ 0.10          $ 0.12          $ 0.41          $ 0.41   
                                                                         
Weighted average common shares outstanding, basic
                 4,049,204             4,022,798             4,038,951             4,013,937   
Weighted average common shares outstanding, diluted
                 4,306,708             4,255,781             4,283,614             4,240,312   
 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

3


COST-U-LESS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

(Unaudited)

        September 30,
2007
    December 31,
2006
ASSETS        
 
Current assets:
                                       
Cash and cash equivalents
              $ 6,102          $ 7,420   
Accounts receivable, net
                 1,124             1,133   
Inventories
                 26,079             22,829   
Other current assets
                 1,829             1,049   
Total current assets
                 35,134             32,431   
                                         
Buildings and equipment, net
                 24,273             20,881   
Deposits and other assets
                 724              723    
 
Total assets
              $ 60,131          $ 54,035   
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
 
Current liabilities:
                                       
Accounts payable
              $ 18,718          $ 15,831   
Accrued expenses and other liabilities
                 7,181             5,706   
Current portion of long-term debt
                 267              267    
Current portion of capital lease
                 327              311    
Total current liabilities
                 26,493             22,115   
                                         
Other long-term liabilities
                 1,757             1,576   
Long-term debt, less current portion
                 1,544             1,744   
Capital lease, less current portion
                 1,356             1,604   
Total liabilities
                 31,150             27,039   
 
Commitments and contingencies
                 —              —    
                                         
Shareholders’ equity
                 28,981             26,996   
 
Total liabilities and shareholders’ equity
              $ 60,131          $ 54,035   
 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

4


COST-U-LESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share data)
(Unaudited)

        Common
Stock—
Shares
    Common
Stock—
Amount
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Total
Balance at January 1, 2006
                 3,990,171          $ 13,931          $ 10,926          $ (814 )         $ 24,043   
Net income
                 —              —              1,755             —              1,755   
Foreign currency translation adjustments
                 —              —              —              9              9    
Comprehensive income
                                                                             1,764   
Stock based compensation
                 —              20              —              —              20    
Exercise of common stock options including
income tax benefit
                 33,359             184              —              —              184    
Balance at October 1, 2006
                 4,023,530          $ 14,135          $ 12,681          $ (805 )         $ 26,011   
 
Balance at December 31, 2006
                 4,028,718          $ 14,172          $ 13,594          $ (770 )         $ 26,996   
Net income
                 —              —              1,769             —              1,769   
Foreign currency translation adjustments
                 —              —              —              68              68    
Comprehensive income
                                                                             1,837   
Exercise of common stock options including
income tax benefit
                 21,900             148              —              —              148    
Balance at September 30, 2007
                 4,050,618          $ 14,320          $ 15,363          $ (702 )         $ 28,981   
 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

5


COST-U-LESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

(Unaudited)

        39 Weeks Ended
   
        September 30,
2007
    October 1,
2006
OPERATING ACTIVITIES:
                                       
Net income
              $ 1,769          $ 1,755   
Adjustments to reconcile net income to net cash provided/(used) by operating activities:
                                       
Depreciation and amortization
                 1,973             1,751   
Stock based compensation
                 —              20    
Deferred tax provision
                 (22 )            192    
(Gain)/loss on buildings and equipment
                 (4 )            60    
Cash provided by/(used in) changes in operating assets and liabilities:
                                       
Accounts receivable
                 83              289    
Inventories
                 (3,250 )            (2,436 )  
Other current assets
                 (762 )            (539 )  
Deposits and other assets
                 9              54    
Accounts payable
                 4,199             2,964   
Accrued expenses and other liabilities
                 1,152             (390 )  
Other long-term liabilities
                 185              107    
Net cash provided by operating activities
                 5,332             3,827   
                                         
INVESTING ACTIVITY:
                                       
Cash used to purchase property and equipment
                 (10,655 )            (4,224 )  
Proceeds from sale of buildings and equipment
                 5,551             8    
Net cash used by investing activities
                 (5,104 )            (4,216 )  
 
FINANCING ACTIVITIES:
                                       
Proceeds from exercise of common stock options
                 120              137    
Tax benefit from exercise of stock options
                 28              47    
Proceeds from short-term note payable
                 —              608    
Proceeds from line of credit, net
                 —              374    
Decrease in bank checks outstanding
                 (1,312 )            (752 )  
Principal payments on capital lease obligations
                 (232 )            (173 )  
Principal payments on long-term debt
                 (200 )            (200 )  
Net cash (used)/provided by financing activities
                 (1,596 )            41    
                                         
Foreign currency translation adjustments
                 50              5    
                                         
Net decrease in cash and cash equivalents
                 (1,318 )            (343 )  
                                         
Cash and cash equivalents:
                                       
Beginning of period
                 7,420             5,304   
End of period
              $ 6,102          $ 4,961   
                                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
                                       
Interest
              $ 253           $ 340    
Income taxes
              $ 763           $ 601    
Cash received during the period for:
                                       
Interest
              $ 118           $ 8    
Income taxes
              $ —           $ 45    
 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

6


COST-U-LESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.
  Nature of Business and Summary of Significant Accounting Policies

  Nature of Business

Cost-U-Less, Inc. (the “Company”) operates mid-sized warehouse club-style stores in the United States Territories (“U.S. Territories”), foreign island countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora, California. At September 30, 2007, the Company operated eleven retail stores as follows: two stores in each of Hawaii and Guam, and one store in each of St. Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten and Sonora, California. In addition, the Company is currently in the process of completing construction on a new store in Governor’s Square in Grand Cayman. Construction on the new store began in late 2006 and the Company expects to open the store in December 2007. Additionally, on May 15, 2007, the Company announced that it had signed a long-term lease agreement to open a new warehouse club-style store on the island of Aruba. The Company expects to open that store in 2009.

On August 27, 2007, the Company jointly announced with The North West Company Fund that they had entered into a definitive agreement under which The North West Company will acquire the Cost-U-Less, Inc. Under the terms of the agreement, The North West Company will acquire all of the outstanding shares of common stock of Cost-U-Less, Inc. for an aggregate price of approximately $52.2 million, or $11.75 per share in cash. The Company filed a definitive proxy statement on October 30, 2007 and has called a special meeting of shareholders on December 5, 2007 to vote on the merger.

  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the financial information includes all adjustments that the Company considers necessary for a fair presentation of the financial position at such dates and the operations and cash flows for the periods then ended. The condensed consolidated balance sheet at December 31, 2006, has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations on quarterly reporting. Operating results for the 13 and 39 week periods ended September 30, 2007, are not necessarily indicative of results that may be expected for the entire year. All quarterly periods reported consist of 13 weeks. For further information, refer to the financial statements and footnotes included in the Company’s annual report on Form 10-K filed with the SEC on March 28, 2007.

  Fiscal Year

The Company reports on a 52/53-week fiscal year, consisting of four thirteen-week periods and ending on the Sunday nearest to the end of December. Fiscal 2007, ending on December 30, 2007, and Fiscal 2006, which ended on December 31, 2006, are 52-week years.

  Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in the U.S. Virgin Islands, Cayman Islands, Netherlands Antilles, Guam, American Samoa, Nevada, Fiji and New Zealand. All significant inter-company accounts and transactions have been eliminated in consolidation.

7


COST-U-LESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Foreign Currency Translations and Comprehensive Income

The U.S. dollar is the functional currency for all locations, except for Fiji, Netherlands Antilles and the Cayman Islands, where the local currency is the functional currency. Assets and liabilities denominated in foreign currencies are translated at the applicable exchange rate on the balance sheet date. Net sales, costs and expenses are translated at the average rates of exchange prevailing during the period. Adjustments resulting from this process are reported, net of taxes, as Accumulated Other Comprehensive Income (Loss), a component of Shareholders’ Equity. Realized and unrealized gains on foreign currency transactions are included in Other Income (Expense). The cumulative translation adjustment resulting from a net investment in a country is recognized as income or expense in the period the Company has substantially liquidated operations in that country.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to: allowance for doubtful accounts; depreciable lives of assets; reserves for inventory; and deferred tax valuation allowances. Future events and their effects cannot be determined with certainty. Accordingly, the accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications of prior period balances have been made for consistent presentation with the current period.

New Accounting Pronouncement

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109,” which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the new requirements in its fiscal first quarter of 2007. The adoption of FIN 48 did not have a significant impact on the Company’s results of operations or its financial position.

2.
  Earnings Per Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period and excludes any dilutive effects of stock options and warrants. Diluted earnings per share are computed using the weighted average number of common shares and potentially dilutive shares outstanding during the period. Potentially dilutive shares are excluded from the computation if their effect is anti-dilutive.

8


COST-U-LESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The following table sets forth the computation of basic and diluted earnings per common share (dollars in thousands):

        13 Weeks Ended
    39 Weeks Ended
   
        September 30,
2007
    October 1,
2006
    September 30,
2007
    October 1,
2006
Numerator:
                                                                       
Net income
              $ 439           $ 522           $ 1,769          $ 1,755   
Denominator:
                                                                       
Denominator for basic earnings per share—weighted average shares
                 4,049,204             4,022,798             4,038,951             4,013,937   
Effect of dilutive common equivalent shares:
                                                                       
Stock options
                 257,504             232,983             244,663             226,375   
Denominator for diluted earnings per share—adjusted weighted average shares and assumed conversion of stock options
                 4,306,708             4,255,781             4,283,614             4,240,312   
Basic earnings per common share
              $ 0.11          $ 0.13          $ 0.44          $ 0.44   
Diluted earnings per common share
              $ 0.10          $ 0.12          $ 0.41          $ 0.41   
 
3.
  Line of Credit

On March 14, 2007, the Company replaced its $6.0 million asset based line of credit from Wells Fargo Business Credit with a working capital line of credit from Wells Fargo Bank. The new line of credit, which has a two-year term, consists of a $6.0 million credit line with a sublimit for letters of credit and bankers’ acceptances in the amount up to $1.0 million. Borrowings under the new line of credit bear interest at either Prime minus 0.25% or LIBOR plus 1.75%. A fee of 0.30% will be charged on the unused portion of the line of credit. The new line of credit contains various covenants, including a requirement that the Company maintain a minimum net profit, a minimum tangible net worth, and that the outstanding balances under the line of credit shall not exceed 30% of net inventory, excluding inventory in St. Maarten and the Cayman Islands. At September 30, 2007, there were no borrowings outstanding on the line of credit and no letters of credit outstanding.

The line of credit contains various covenants, all of which the Company believes it was in compliance with as of September 30, 2007.

4.
  Commitments and Contingencies

  Legal Proceedings

The Company may be subject to legal proceedings or claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these potential claims cannot be predicted with certainty, the Company does not believe that any pending legal matters will have a material adverse effect on it. However, any adverse outcome to future lawsuits against the Company may result in a material adverse effect on its financial condition.

9


COST-U-LESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

5.
  Stock Based Compensation

The Company maintains a stock incentive compensation plan that provides for the granting of various stock awards, including stock options and restricted stock, with a maximum of 1,000,000 shares of common stock available for issuance. Options issued under the plan vest at various terms ranging from immediately to five years and generally expire ten years from the date of grant. The options are generally granted at prices equal to the fair value on the date of grant. There were 357 shares available for future grant under the plan at September 30, 2007.

Effective with the first fiscal quarter of fiscal 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payments,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation.” Under SFAS 123R, stock-based compensation expense is recognized in the consolidated financial statements for stock options granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In addition, SFAS 123R requires the benefits of tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash inflows on the consolidated statement of cash flows.

The following table summarizes the stock option transactions during the 39 weeks ended September 30, 2007:

        Options
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Contractual
Life
  
Aggregate
Intrinsic
Value (a)
Outstanding at December 31, 2006
                 577,302          $ 3.35             —              —    
Granted at fair value
                 —              —              —              —    
Forfeited
                 —              —              —              —    
Exercised
                 (21,900 )         5.50             —            —    
Outstanding at September 30, 2007
                 555,402             3.26             4.54          $ 4,609,837   
 
Exercisable at September 30, 2007
                 555,402             3.26             4.54          $ 4,609,837   
 
(a)
  The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

The Company did not recognize any compensation cost related to stock options during the 13 and 39 week periods ended September 30, 2007, as all outstanding options were fully vested as of December 31, 2006, and the Company did not grant any options during the 13 and 39 week periods ended September 30, 2007.

Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the first 39 weeks of fiscal 2007 and fiscal 2006 were as follows (in thousands):

        39 Weeks Ended
   
        September 30,
2007
    October 1,
2006
Proceeds from stock options exercised
              $ 120           $ 137    
Tax benefit related to stock options exercised
                 28              47    
Intrinsic value of stock options exercised
                 6              139    
 

10


COST-U-LESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

6.
  Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no significant adjustment to the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, the Company had $0.1 million of unrecognized tax benefits, all of which would affect its effective tax rate if recognized.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2007, the Company had approximately $30,000 of accrued interest related to uncertain tax positions.

With few exceptions, the Company is no longer subject to U.S. Federal, state/local, or non-U.S. income tax examinations by tax authorities for years prior to 2003.

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ITEM 2.
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain Factors That May Affect Future Results of Operations

This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto appearing in Item 1 of this report. In addition to historical information, this quarterly report on Form 10-Q contains, and may incorporate by reference, statements which may constitute forward-looking statements which involve known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms, variations of such terms or the negative of those terms, but the absence of such terms does not mean that a statement is not forward-looking. Forward-looking statements reflect the expectations of our management at the time that they are made and do not represent an opinion about what may happen in the future. More information about factors that could affect our financial results is included in Item 1A. of Part II of this report and in the “Risk Factors That May Affect Future Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our annual report on Form 10-K for the fiscal year ended December 31, 2006, which was filed on March 28, 2007, with the Securities and Exchange Commission.

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the fiscal year ended December 31, 2006.

As used in this quarterly report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “the Company,” and “Cost-U-Less” refer to Cost-U-Less, Inc., a Washington corporation, and its subsidiaries.

Overview

We operate mid-sized warehouse club-style stores in the U.S. Territories, foreign island countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora, California. Our primary strategy is to operate in island markets, offering predominantly U.S. branded goods. We currently operate eleven retail stores as follows: two stores in each of Hawaii and Guam, and one store in each of St. Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten and Sonora, California.

Our stores are patterned after the warehouse club concept, although our stores

•  
  are smaller (averaging approximately 32,500 square feet vs. large format warehouse clubs of approximately 140,000 square feet),
•  
  generally target niche markets, mainly U.S. Territories, U.S. island states and foreign island countries, where demographics do not support large format warehouse clubs,
•  
  carry a wide assortment of local and ethnic food items, and
•  
  do not charge a membership fee.

On August 27, 2007, we entered into an Agreement and Plan of Merger with NWC (US) Holdings, Inc., a Delaware corporation, and Cougar Acquisition Corporation, a Washington corporation and wholly-owned subsidiary of NWC (US) Holdings, pursuant to which NWC (US) Holdings will acquire all of the outstanding shares of our common stock in an all cash transaction for a purchase price of $11.75 per share, or an aggregate purchase price of approximately $52.2 million. Under terms of the merger agreement, Cougar Acquisition Corporation will merge with and into Cost-U-Less, with Cost-U-Less surviving as a wholly-owned subsidiary of NWC (US) Holdings. NWC (US) Holdings is a wholly-owned subsidiary of The North West Company Inc., which is in turn a wholly-owned subsidiary of the North West Company Fund, an unincorporated, open-ended mutual fund trust established under the laws of Manitoba. The units of the North West Company Fund trade on the Toronto Stock Exchange under the symbol “NWF.UN.”

The merger agreement has been unanimously approved by our board of directors. The merger is subject to customary conditions, including the approval of our shareholders. The merger agreement contains certain covenants regarding our operation prior to closing as well as the cooperation of both parties in meeting the conditions to closing. The merger agreement also contains termination rights in favor of both Cost-U-Less and NWC (US) Holdings upon the occurrence of certain events, including the right of either party to terminate the merger agreement after January 31, 2008, and under certain circumstances after December 31, 2007, if the merger has not been completed by such date and the failure to complete the merger is not caused by a breach of the merger agreement by the terminating party.

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On October 30, 2007, we filed a proxy statement with the SEC announcing that our board of directors has called a special meeting of shareholders, scheduled to be held on December 5, 2007, to enable our shareholders to vote to approve the merger and adopt the merger agreement. The proxy statement has been sent to all our shareholders and contains important information about the proposed merger and related matters. We strongly encourage our shareholders to read this proxy statement.

On August 10, 2006, we completed the remodel and expansion of our store in St. Thomas. In addition to increasing the size of our store by approximately 6,400 square feet (an increase of approximately 18%), we also upgraded and replaced much of the store’s equipment, and added a new produce format and a rotisserie department.

In late 2006 we began construction on a new store in the Cayman Islands. This store is currently projected to open in December 2007. The store is approximately 41,000 square feet and is modeled after our store in St. Croix, USVI.

In addition, on May 15, 2007, we announced that we have signed a long-term lease agreement to open a new warehouse club-style store on the island of Aruba. We expect to open that store in 2009.

Results of Operations

Comparison of the 13 and 39 Weeks Ended September 30, 2007, to the 13and 39 Weeks Ended October 1, 2006:

Net Sales:     Net sales increased to $57.9 million for the 13 weeks ended September 30, 2007, 6.0% greater than net sales of $54.6 million for the same period in the prior year. Net sales increased to $168.9 million for the 39 weeks ended September 30, 2007, 3.7% greater than net sales of $162.9 million for the same period in the prior year. Similarly, comparable-store sales (stores open for a full 13 months) increased 5.7% and 3.7%, respectively, for the 13 and 39 weeks ended September 30, 2007, as compared to the same periods in the prior year. The comparable-store sales increase was primarily due to increased sales in our U.S. Virgin Island stores, which more than offset the decrease in sales in our store in Kauai, Hawaii. The decline in sales for our Kauai store was a result of increased competition and reduced market share, which has occurred as a consequence of Costco opening a new store in Kauai in October 2006.

Gross Profit:     Gross profit dollars increased to $11.4 million for the 13 weeks ended September 30, 2007, from $10.3 million in the same period of the prior year. Gross profit as a percentage of sales was 19.7% for the 13 weeks ended September 30, 2007, compared to 18.9% in the same period of the prior year. Gross profit dollars increased to $32.7 million for the 39 weeks ended September 30, 2007, from $30.6 million in the same period of the prior year. Gross profit as a percentage of sales was 19.4% for the 39 weeks ended September 30, 2007, compared to 18.8% in the same period of the prior year. The improvements in gross profit dollars and percent of sales for both the 13 and 39 weeks ended September 30, 2007, over the same periods in the prior year, were due to enhanced sourcing and pricing strategies, as well as a change in our mix of goods sold towards products with higher margins.

Store expenses:     Store expenses increased to $7.9 million and $23.1 million for the 13 and 39 weeks ended September 30, 2007, respectively, as compared to $7.7 million and $22.3 million for the same periods in the prior year. As a percentage of sales, store expenses were 13.6% and 13.7% of sales for the 13 and 39 weeks ended September 30, 2007, respectively, as compared to 14.1% and 13.7% for the same periods in the prior year.

For the 13 weeks ended September 30, 2007, the increase in store expense dollars was entirely attributable to higher rent as we sold our building in St. Croix on March 26, 2007, and simultaneously leased it back. This increase was partially offset by a 2.4% decrease in energy (utility) expenses as compared to the same period in the prior year.

For the 39 weeks ended September 30, 2007, approximately 44% of the dollar increase in store expenses was due to higher rent, primarily related to rent on our building in St. Croix. Another 28% of the increase was due to higher depreciation expense, primarily due to the remodel and expansion of our store in St. Thomas and new electronic point of sale equipment added to all of our stores during fiscal 2006. In addition, 23% of the dollar increase was due to higher payroll and related costs, which were approximately 2% higher than in the same period of the prior year. Payroll and related costs remained consistent as a percent of store sales at approximately 5.2% of store sales for both of the 39 week periods ended September 30, 2007 and October 1, 2006.

General and administrative expenses:     General and administrative expenses increased to $2.6 million and $6.3 million for the 13 and 39 weeks ended September 30, 2007, respectively, as compared to $1.5 million and $4.9 million for the same periods in the prior year. The increases in both the 13 and 39 weeks ended September 30, 2007, were primarily due to costs associated with our pending merger with The North West Company.

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Store opening expenses:     Store opening expenses increased to $0.2 million and $0.5 million for the 13 and 39 weeks ended September 30, 2007, respectively, as compared to $0.1 million and $0.3 million for the same periods in the prior year. Store opening expenses in both 2007 and 2006 include costs associated with our store in the Cayman Islands, including rent expense associated with our land lease for that location. Store opening expenses in 2006 also include costs related to the remodel and expansion of our store in St. Thomas. We expect store opening expenses in fiscal 2007 to be higher than those incurred in fiscal 2006 as we continue to develop our new store in the Cayman Islands prior to its expected opening in December 2007.

Interest expense, net:     During the 13 and 39 weeks ended September 30, 2007, we had net interest income of $38,000 and $33,000, respectively, compared to net interest expense of $0.1 million and $0.3 million in the same periods in the prior year, as our interest income exceeded our interest expense due to investment earnings on the proceeds we received from the sale of our building in St. Croix and the capitalization of interest related to the construction of our store in the Cayman Islands.

Other expense:     Other expense represents gains and losses on foreign currency transactions and translation of intercompany balances for transactions that exceeded our permanent investments in certain countries.

Income tax provision:     Our income tax provision for the 13 weeks ended September 30, 2007, was $0.3 million, or 42% of pre-tax income, as compared to $0.4 million, or 40% of pre-tax income, for the same period of the prior year. Our income tax provision for the 39 weeks ended September 30, 2007, was $1.0 million, or 37% of pre-tax income, as compared to $1.1 million, or 39% of pre-tax income, for the same period of the prior year. The increase in our effective tax rate for the 13 weeks ended September 30, 2007 is a result of the non-deductibility of expenses incurred as a result of our expected merger with The North West Company. The decrease in our effective tax rate for fiscal 2007 was primarily due to the implementation of new tax strategies designed to offset expenses incurred in the Cayman Islands which are not tax deductible as there are no corporate taxes in the Cayman Islands.

Net income:     Net income was $0.4 million, or $0.10 per fully diluted share, for the 13 weeks ended September 30, 2007, as compared to $0.5 million, or $0.12 per fully diluted share, in the same period of the prior year. Net income was $1.8 million, or $0.41 per fully diluted share, for the 39 weeks ended September 30, 2007, as compared to $1.8 million, or $0.41 per fully diluted share, in the same period of the prior year.

Liquidity and Capital Resources

We began construction on a new store in the Cayman Islands in late 2006, and plan to open the store in December 2007. We anticipate spending approximately $12.0 million on the building during fiscal 2007. The expected costs associated with this new building exceed those we have experienced building stores in other markets, most recently St. Croix, due in large part to the increased cost for materials, mainly steel; design and engineering costs; the addition of energy-efficient components; slab and foundation costs due to the soil types on the island of Grand Cayman; imported labor; higher supervision costs; import duties; and higher freight costs. In addition to the store construction costs, we intend to spend approximately $3.0 million for equipment for this new store during fiscal 2007.

We currently have no plans to open additional stores in new markets during fiscal 2007 and fiscal 2008. However, we plan to open a store in Aruba in 2009. The Aruba store is expected to be constructed by our landlord. Once we receive a Certificate of Completion and a Certificate of Occupancy with regard to this store, we will begin making lease payments for a period of ten years. In addition, to opening the stores in the Cayman Islands and Aruba, we are continuing to explore expansion opportunities in selected markets and additional relocation opportunities for stores in existing markets.

We hope to finance any future relocations and new stores, either through an operating lease, a sale-leaseback arrangement or long-term funding from a financial institution. We intend to continue leasing as many of our store locations as feasible. In those instances where a lease is not available on acceptable terms, we intend to finance our stores utilizing long-term funding from a financial institution (as we currently do for our St. Thomas and St. Maarten buildings).

During the 39 weeks ended September 30, 2007, we generated $5.3 million of net cash from operations, as compared to $3.8 million generated during the same period in the prior year. The increase in net cash provided from operations was primarily due to an increase in accounts payable and accrued expenses, as compared to the same period in the prior year.

Net cash used by investing activities was $5.1 million for the 39 weeks ended September 30, 2007, compared to $4.2 million used in the same period in the prior year. During the 39 weeks ended September 30, 2007, we had capital expenditures of $10.7 million offset with $5.6 million of net proceeds received on the sale and simultaneous leaseback of our St. Croix store. Of the $10.7 million used for capital expenditures, we spent approximately $9.3 million on the construction of our store and the purchase of equipment in the Cayman Islands, $0.5 million on the remodel of our St. Maarten store in order to add retail

14



enhancements such as fresh produce by the pound, and $0.3 million on a generator for our store in St. Thomas. The cash used in investing activities during the 39 weeks ended October 1, 2006, was primarily due to costs associated with renovating and expanding the size of our store in St. Thomas by approximately 6,400 square feet (an increase of approximately 18%) and the replacement of our point of sale system with a new and improved version.

We utilized $1.6 million of cash from financing activities during the 39 weeks ended September 30, 2007, as compared to generating $41,000 in the same period in the prior year. The $1.6 million decrease was primarily due to a decrease in bank checks outstanding during the 39 weeks ended September 30, 2007, and the receipt of $0.6 million of funds from a short term note payable during the 39 weeks ended October 1, 2006.

In March 2007, we replaced our asset based line of credit with a working capital line of credit with Wells Fargo Bank. The new line of credit, which has a two-year term, consists of a $6.0 million credit line with a sublimit for letters of credit and bankers’ acceptances in the amount up to $1.0 million. Borrowings under the new line of credit, at our option, bear interest at either Prime minus 0.25% or LIBOR plus 1.75%. A fee of 0.30% will be charged on the unused portion of the line of credit. At September 30, 2007, there were no borrowings outstanding on the line of credit and no letters of credit outstanding. The new line of credit contains various covenants, including a requirement that we maintain a minimum net profit, a minimum tangible net worth, and that the outstanding balances under the line of credit shall not exceed 30% of net inventory, excluding inventory in St. Maarten and the Cayman Islands. We believe that we are currently in compliance with all such covenants.

Under the terms of the line of credit with Wells Fargo, our consummation of the NWC (US) Holdings merger without Wells Fargo’s consent would be considered an event of default. Although we expect to obtain Wells Fargo’s consent to the merger, we have not yet obtained such consent and we cannot assure you that we will obtain such consent prior to the consummation of the merger. If we do not obtain Wells Fargo’s consent to the merger, Wells Fargo would have the option to declare any outstanding indebtedness under the line of credit to be due and payable immediately, to terminate its obligation to extend further credit to us and to exercise its other remedies under the line of credit agreement and applicable law.

A significant portion of our cash flow is generated by our operations. If our operating results deteriorate as a result of a decrease in customer demand, declining economic conditions in the markets in which we have stores, energy related cost increases, or pricing pressures from our customers or our competitors, our ability to generate positive cash flow from operations may be jeopardized. We believe that amounts available under our various credit facilities, existing cash available for working capital purposes, and cash flow from operations will most likely be sufficient to fund our operations through the next twelve months. However, if such sources of liquidity are unavailable or insufficient to satisfy our liquidity requirements, we may need to issue equity or debt securities, obtain additional credit facilities or consider alternative financing arrangements. There can be no assurance that we will be able to obtain additional financing when needed, or that any available financing will be on terms acceptable to us.

Contractual Obligations

As of September 30, 2007, our commitments to make future payments under long-term contractual obligations were as follows (in thousands):

        Payments Due by Period
   
Contractual Obligations
        Total
    Less than
1 year
    1 to 3
years
    4 to 5
years
After 5
years
   
 
Long-term debt
              $ 1,811          $ 267           $ 534           $ 534          $ 476       
Operating Leases (1) (2)
                 39,228             5,486             8,156             5,572   
20,014
   
Capital Lease
                 1,991             434              868              585         104        
Total
              $ 43,030          $ 6,187          $ 9,558          $ 6,691          $ 20,594       
 
(1)
  Includes the building and land lease for the St. Croix store entered into on March 26, 2007. The lease is for a term of 15 years and provides for rental payments of $42,666.67 per month, with an increase of ten percent at the end of each five-year period.

(2)
  Our lease for our Hilo, Hawaii store expired on August 31, 2007. We are presently in lease negotiations with the landlord as we operate under a month-to-month lease.

15


On May 15, 2007, we announced that we had signed a long-term lease agreement to open a new warehouse club-style store on the island of Aruba. The term of this lease is ten years and commences thirty calendar days from the date on which we receive a Certificate of Completion and a Certificate of Occupancy from the appropriate Aruba governmental authority to occupy the premises of our new store. The rent related to this lease is not included in the Contractual Obligation table, as we are not obligated to pay rent until the store is ready for occupancy. We expect to open this store in 2009.

Accounting Pronouncement

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109,” which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted the new requirements in our fiscal first quarter of 2007. The adoption of FIN 48 did not have a significant impact on our results of operations or our financial position.

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ITEM 3.
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We operate stores in foreign countries and have market risks associated with foreign currencies. However, sales are primarily made in U.S. dollars or foreign currencies with minimal trade credit extended and no borrowings exist in foreign currencies. Cash deposited from sales are remitted back to the U.S. bank account routinely.

We record gains and losses on foreign currency transactions, and translation of intercompany balances for transactions that exceed the permanent investments in those countries in Other Income (Expense). Gains and losses are primarily attributable to appreciation and (depreciation) in the Fijian dollar as compared to the U.S. dollar.

We operate in four foreign countries that function under currencies other than the US dollar. Two of the these foreign countries operate under the Netherlands Antilles Guilder and one of these foreign countries operates under the Caymans Island Dollar, both of which have historically had an exchange rate fixed to the U.S. dollar but there can be no assurance that this will continue. If the Netherlands Antilles Guilder and/or the Caymans Island Dollar is allowed to float this would lead to an increase in foreign exchange volatility and risk which could have a materially adverse effect on our business, financial condition and operating results. There is also the possibility these three foreign countries that function under currencies other than the U.S. dollar could devalue their currency against the U.S. dollar at any time and if this were to occur there could be a materially adverse effect on our business, financial condition and operating results.

We have also assessed our vulnerability to interest rate risk associated with our financial instruments, including, cash and cash equivalents, lines of credit and long term debt. Due to the nature of these financial instruments, we believe that the risk associated with interest rate fluctuations is not material. Our line of credit and long-term debt can be expected to vary in the future as a result of future business requirements, market conditions and other factors.

We did not have any derivative financial instruments as of September 30, 2007.

ITEM 4.
  CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of September 30, 2007. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of such date.

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PART II — OTHER INFORMATION

ITEM 1A.  Risk Factors


You should carefully consider the following factors that may affect future results and other information included in this quarterly report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that are currently deemed immaterial also may impair our business operations or could cause actual results to differ from historical results or those anticipated. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected.

If the merger with the NWC (US) Holdings is not approved by our shareholders, we will continue to face the risks of remaining a stand-alone company.     In recent years it had become increasingly evident to our board that, while our business model presents opportunities for continued expansion and improvements in profitability, our ability to achieve overall growth and capture improved operating results is increasingly constrained by the current scale of our business. For example, at the same time that we continue to identify growth opportunities in promising new markets, we also face increasing competition from larger direct competitors in some of our more mature markets such as in Kauai, as well as planned competition from The North West Company itself in other Pacific markets, and increasing investment costs and associated capital needs for any stores that we choose to open, expand or refurbish. Despite our success in recent years at identifying and achieving significant operating margin improvements, we have also found it increasingly difficult to achieve continued margin improvements without the added buying power and other benefits that would accompany a larger scale business. In markets where larger competitors also choose to do business, lesser buying power is a disadvantage that can lead to reduced sales and, in turn, even less buying power. Similarly, while we have developed core competencies in dealing with the particular risks that pertain to our business, such as construction techniques to protect our buildings from severe weather, the occurrence of adverse events or disruptions in only one or a few of our stores can have a significant adverse impact on our operating results and stock price, due to our relatively small overall store base.

Uncertainty about the merger and diversion of management could harm us, whether or not the merger is completed.     In response to the announcement of the merger, our existing or prospective customers or suppliers may delay or defer their purchasing or other decisions concerning our company, or they may seek to change their existing business relationship. In addition, as a result of the merger, current and prospective employees could experience uncertainty about their future with us. These uncertainties may impair our ability to retain, recruit or motivate key personnel. Completion of the merger will also require a significant amount of time and attention from management. The diversion of management attention away from ongoing operations could adversely affect ongoing operations and relationships.

Failure to complete the merger could adversely affect our stock price and our future business and financial results.     Completion of the merger is conditioned upon, among other things, approval of the merger by our shareholders, the receipt of required governmental consents and authorizations, capital expenditures for our Cayman Islands store and related facilities not exceeding $15.6 million, and approval of those persons whose consent or approval is required under certain agreements. There is no assurance that we will receive the necessary approvals or satisfy the other conditions to the completion of the merger. Failure to complete the proposed merger would prevent us from realizing the anticipated benefits of the merger. We will also remain liable for significant transaction costs, including legal, accounting and financial advisory fees. In addition, the market price of our common stock may reflect various market assumptions as to whether the merger will occur. Consequently, the completion of, or failure to complete, the merger could result in a significant change in the market price of our common stock.

Because we have a small store base, adverse store performance or increased expenses will have a more significant adverse impact on our operating and financial results than if we had a larger store base.     We opened our first store in 1989 and opened a total of 21 stores through September 2007, of which we presently operate eleven stores. Our closure of the ten other stores prior to March 2001 adversely affected our operating results. Should any existing store experience a significant decline in profitability or any new store be unprofitable, the negative effect on our business would be more significant than would be the case if we had a larger store base, and could have a material adverse effect on our business, financial condition and results of operations. For example, in October 2006, Costco opened a new store in Kauai, Hawaii, which has caused our sales, gross margin and operating results for our Kauai store to be significantly lower in fiscal 2007 than in prior years due to the increased competition and reduced market share. Although we have taken several actions to try to preserve our market position in Kauai, if the store continues to be unprofitable it will have a significant negative effect on our overall operating results and financial condition.

In addition, if our general and administrative expenses increase, the negative effect on our business and results of operations would be more significant than if we had a larger store base. Although we intend to carefully plan for the implementation of additional stores, there can be no assurance that such plans can be executed as envisioned or that the

18



implementation of those plans will not have a material adverse effect on our business, financial condition and results of operations. In addition, our ability to acquire products at a lower cost than competitors or obtain volume-based pricing can be adversely affected because of our small store base.

Our ability to operate profitably in existing markets and to expand into new markets may be adversely affected by competing warehouse clubs or discount retailers.     The warehouse club and discount retail businesses are highly competitive. If we fail to successfully respond to competitive pressures in this industry, or to effectively implement our strategies to respond to these pressures, our operating results may be negatively affected. Many of our competitors have substantially greater resources, buying power and name recognition. The cost of doing business in island markets is typically higher than on the U.S. mainland because of ocean freight and duty costs and higher facility costs. In addition, our gross margin and operating income are generally lower for stores in markets where traditional warehouse clubs and discount retailers also operate stores, due to increased price competition and reduced market share. We may be required to implement price reductions and other actions in order to remain competitive in our markets.

In October 2006, Costco opened a new store in Kauai, Hawaii, which has caused our sales, gross margin and operating results for our Kauai store to be significantly lower in fiscal 2007 than in prior years due to the increased competition and reduced market share. Prior to, and subsequent to, Costco’s opening, we have taken a number of steps in an effort to minimize the competitive impact on our position in the Kauai market, but we are unable to assure you that these efforts will succeed. If we are not successful in recapturing our market position in Kauai, the profitability and longevity of this store will be in jeopardy.

Our ability to expand into and operate profitably in new markets may be adversely affected by the existence or entry of competing warehouse clubs or discount retailers. These factors could result in reduced sales and margins or loss of market share, any of which could negatively affect our results of operations.

If energy costs and fuel surcharges continue to rise, the profitability of our stores may decline and our business and financial condition could suffer.     We have experienced increasing energy and fuel surcharge costs over the last few years and have largely been able to pass these additional costs on to our customers through higher prices. For example, during fiscal 2006, our store energy (utility) expenses were approximately 17% higher than in fiscal 2005. Energy costs have continued to increase during fiscal 2007, to a level approximately 4% higher during the first 39 weeks of fiscal 2007 over that of the same period of fiscal 2006. If these costs continue to rise, we may not be able to continue the practice of passing on these additional costs to our customers. If we are unable to effectively pass these costs on to our customers in the future, it could have a significant adverse effect on our business, results of operations and financial condition. In addition, our customers may face higher energy costs in their households, which may result in less money available to spend in our stores.

One or more of our stores may be damaged or destroyed by volatile weather or natural disasters, which would severely harm our business and financial results.     Our stores are primarily located on islands subject to volatile weather and natural disasters, such as tsunamis, hurricanes, floods, typhoons and earthquakes. If the islands on which any of our stores is located were to experience any of these or other severe weather or natural disasters, one or more of our stores could be damaged significantly or destroyed. For example, in December 2002, our two stores on the island of Guam suffered damage from Supertyphoon Pongsona, resulting in the immediate closure of both stores. Our Tamuning store lost its generator in the storm and our Dededo store had to be closed for reconstruction. Additionally, we have four stores in the Caribbean, which has, in the past few years, experienced increased activity from hurricanes and tropical storms, a risk that some scientists believe could further increase as a result of global climate change. The damage or destruction of one or more of our stores would materially harm our business, operating results and financial condition. We could also experience business interruptions, delays in shipping, delays in construction or loss of life as a result of severe weather conditions, any of which could materially affect our business.

If we were to experience a catastrophic loss as a result of severe weather conditions or otherwise, we may exceed our insurance policy limits and we may have difficulty obtaining similar insurance coverage in the future.     We maintain property, casualty and business interruption insurance coverage in amounts we consider customary in our industry for these types of events. However, insurance payments generally do not fully reimburse us for all of the damages and lost profits caused by adverse weather events. If any insurance reimbursement we receive does not fully cover the losses and business interruption caused by severe weather events or natural disasters, or if our insurance coverage is not adequate to cover such losses or we exceed our insurance policy limits, we may be required to pay substantial amounts and our financial condition and liquidity would suffer.

Additionally, we utilize a combination of insurance policies and self-insurance mechanisms to provide for the potential liabilities for property, general liability, director and officers’ liability, workers’ compensation and employee health care insurance. The costs related to obtaining our current insurance coverage have been increasing. If the costs of maintaining this insurance coverage continue to increase significantly, we would experience an associated increase in our store and administrative expenses that may negatively impact our results of operations. In addition, there is no assurance as to how casualty insurance carriers may react to increasing weather related damages in areas where our stores are located. If we are unable to maintain our

19



current or similar insurance coverage, or if an event were to occur that was not covered by our current insurance policy coverage levels (including acts of terrorism, war and actions such as government nationalizations), our business and results of operations could suffer.

If we fail to effectively manage the logistical and local operating challenges we face because our business primarily consists of island and international operations, our business and results of operations would suffer.     Our net sales from island operations represented approximately 96.6% of our total net sales for fiscal 2006 and this percentage will likely increase as we continue to develop and open stores in new island markets. We expect that our island and international operations together will continue to account for nearly all of our total net sales. The distance, as well as the time-zone differences, involved with island locations impose significant challenges to our ability to manage our operations. Logistical challenges are presented by operating individual store units in remote locations, whether in terms of information flow or transportation of goods. In addition, island operations involve uncertainties arising from items such as:

•  
  Changes in local labor markets, including unionization or inadequate labor pools,
•  
  Local business practices, language and cultural considerations, including the capacity or willingness of local business and government officials to provide necessary services,
•  
  Ability to acquire, install and maintain modern capabilities such as dependable and affordable electricity, telephone, computer, Internet and satellite connections, and other equipment, often in undeveloped regions,
•  
  Currency exchange rate fluctuations and repatriation restrictions,
•  
  Difficulty enforcing agreements or protecting intellectual property,
•  
  Collection of debts and other obligations in foreign countries, and
•  
  Volatile island operating expenses, including utilities.

Our inability to effectively manage these logistical challenges and local uncertainties inherent in our island and international operations could have a significant adverse effect on our business, results of operations and financial condition.

If shareholders cause distractions of governance or pursue a proxy challenge, our business could suffer.     In the past, shareholders have threatened to submit nominees for our board of directors and it is possible that we might receive shareholder nominations for our board at future annual meetings. If we do receive nominations, and our Nominating and Governance Committee determines that inclusion of those nominees as part of our recommended slate is not in our best interest or the best interest of our shareholders, the Committee’s fiduciary duties would dictate that it oppose the election of those nominees. In that circumstance, we could face a proxy contest and management would be required to expend substantial time and energy, which may divert management’s attention from our operations. We would likely incur significant additional costs, including legal and financial advisory fees, that would negatively impact our operating results. We could also experience management and employee distraction and may have difficulty attracting and retaining employees as a result of the uncertainty that often accompanies this type of event. Our inability to effectively manage these distractions could have a significant adverse effect on our business, results of operations and financial condition.

If the countries in which we operate experience a decrease in foreign aid, our business could suffer.     Eight of our stores are located outside the United States. Some of those locations depend on foreign aid to support their local economies. A change in the level of foreign aid provided to these countries could have a material adverse effect on our business, financial condition and results of operations.

Acts of terrorism or political instability, globally or in countries where we operate, may cause periodic declines or a prolonged decrease in tourism and air travel, which could have an indirect but significant impact on our financial performance, operations and liquidity.     The success of our operations depends to a significant extent on tourism and the travel industry. Prolonged adverse occurrences affecting tourism or air travel, particularly to non-U.S. destinations, including political instability, armed hostilities, terrorism, weather conditions, or other activity that involves or affects air travel or the tourism industry generally, could have an indirect but adverse and significant impact on our financial performance, operations, liquidity or capital resources.

We do not have operating experience in many of the markets in which we may consider opening new stores. If we are unable to adapt our operations to support any future expansion plans or if any new stores we open are not profitable, our business and financial condition could suffer.     New markets such as the Cayman Islands, Aruba and others we may enter may present operational, competitive, regulatory and merchandising challenges that are different from those we currently encounter. We do not have operating experience in many of the markets in which we may consider opening new stores. In fact, in June 2000, we closed the two stores that we had opened in New Zealand in 1999, since they had performed below expectations, due in part to competitive and merchandising challenges that are different from our other stores. Additionally, in February 2001, we closed one of our two Fiji stores, due primarily to the impact that political turmoil and the resulting economic downturn in Fiji were having on the tourist industry. We have encountered, and may continue to encounter, substantial delays, increased expenses or loss of

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potential store sites due to the complexities, cultural differences, and local political issues associated with the regulatory and permitting processes in the island markets in which we may locate our stores. For example, construction costs associated with our new store in the Cayman Islands exceeded the cost of building stores in other markets due in a large part to the costs associated with obtaining building materials in the Cayman Islands as well as design and engineering costs incurred to build on the type of soil found in the Cayman Islands. In addition, permitting delays experienced in the Cayman Islands caused us to extend the completion date of our building an additional six months past our original estimated completion date. There can be no assurance that we will be able to adapt our operations to support our future expansion plans or that any new stores will be profitable. Any failure on our part to manage our growth could have a material adverse effect on our business, financial condition and results of operations .

Due to the nature of our business model, construction costs for our Cayman Islands and Aruba stores, or stores in future markets may not necessarily reflect historical construction costs.     Despite our best efforts to estimate future construction costs, there is uncertainty as to what these costs may finally be due to unforeseen exigencies in the construction environment pertaining to a particular market. We can estimate building construction costs based on our relocated St. Croix store but, as we have found with our Cayman Islands store, the final cost may be much greater than initially estimated. We currently anticipate spending approximately $12.0 million on the Cayman Islands building during fiscal 2007 and an additional $3.0 million for equipment for this store. However, the construction costs for the Cayman Islands store have exceeded our initial estimate, and may continue to exceed our estimates. Our inability to accurately estimate construction costs for the Cayman Islands store and future construction costs may have an adverse effect on our business, financial condition and results of operation.

A decline in the general economic condition in the United States or in island markets in which we operate could have a significant impact on our financial performance.     The success of our operations depends to a significant extent on a number of factors relating to discretionary consumer spending, including employment rates, business conditions, interest rates, inflation, population and gross domestic product levels in each of our island markets, taxation, consumer spending patterns and customer preferences. We cannot fully foresee the changes in business and economic conditions that may result from domestic or foreign factors. There can be no assurance that consumer spending in our markets will not be adversely affected by these factors, thereby affecting our growth, net sales and profitability. A downturn in tourism or a decline in the national or regional economies of the United States and the U.S. Territories or any foreign countries in which we currently or will operate, could have a material adverse effect on our business, financial condition and results of operations.

The loss of key personnel or our inability to successfully hire skilled store managers could harm our business and results of operations.      Our success depends in large part on the abilities and continued service of our executive officers and other key employees. Additionally, we rely significantly on the skill and expertise of our on-site store managers, particularly in island markets where language, education and cultural factors may impose additional challenges. We do not carry key-man life insurance on any of our personnel. There can be no assurance that we will be able to hire, train and retain skilled managers and personnel to support our existing business and any growth, or that we will be able to retain the services of our executive officers and other key employees, the loss of any of whom could have a material adverse effect on our business, financial condition and results of operations.

If our information systems are disrupted, our business and results of operations could suffer.     Our business depends on communications and information systems, primarily systems provided by third-party vendors. Any failure or interruption of our systems or systems provided by third-party vendors could cause delays or other problems in our operations, which could have a material adverse effect on our business, financial condition and results of operations.

If our store employees decide to unionize, we may experience increased operating costs or other operation problems.     None of our employees is currently covered by a collective bargaining agreement. Unionization of any of our stores could result in higher employee compensation and restrictive working condition demands that could increase our operating costs and have a material adverse effect on our business, financial condition and results of operations.

We are subject to various governmental regulations and licensing requirements, which may have an adverse effect on our business.     Governmental regulations and licensing requirements in foreign countries where we plan to expand our operations might prevent or delay entry into the market or prevent or delay the introduction, or require modification, of certain of our operations. For example, construction on our new store in the Cayman Islands began in late 2006 as anticipated, but permitting delays experienced since that time have extended the completion date beyond the first half of fiscal 2007 to a currently estimated completion date in December 2007. Additionally, our ability to compete may be adversely affected by foreign governmental regulations and licensing requirements that encourage or mandate the employment of citizens of, or purchase of supplies from vendors, in a particular jurisdiction. We may also be subject to taxation in these foreign jurisdictions, and the final determination of our tax liabilities may involve the interpretation of the statutes and requirements of the various domestic and foreign taxing authorities. We may also be subject to currency repatriation restrictions. If governmental regulations or licensing requirements prevent or delay our entry into markets, require modification of our existing operations, or subject us to taxation or currency repatriation issues, our business, financial condition and results of operations could suffer.

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If we are unable to overcome challenges resulting from the isolation of store operations from our corporate management and our increased dependence on local managers, we may experience decreased productivity or other operational problems.     Our headquarters and administrative offices are located in Washington State; however, ten of our eleven stores and a majority of our employees are located on islands. Although we invest resources to hire and train our on-site managers, the inability of our executives to be physically present at our current and planned store sites on a regular basis may result in the following:

•  
  Isolation of store operations from corporate management and an increased dependence on store managers,
•  
  Diminished ability to oversee employees, which may lead to decreased productivity or other operational problems,
•  
  Construction delays or difficulties caused by inadequate supervision of the construction process, and
•  
  Communication challenges.

We may need to invest significant resources to update and expand our communications systems and information networks and to devote a substantial amount of time, effort and expense to national and international travel in order to overcome these challenges; failure to do so could have a material adverse effect on our business, financial condition and results of operations.

We may encounter disruption in the transportation of our products, which would significantly harm our business.     Our island locales require the transportation of products over great distances on water, which results in the following:

•  
  Substantial lags between the procurement and delivery of product, thus complicating merchandising and inventory control methods,
•  
  Possible loss of product due to potential damage to, or destruction of, ships or containers delivering our goods,
•  
  Tariff, customs and shipping regulation issues,
•  
  Substantial ocean freight and duty costs,
•  
  Port and container security issues, and
•  
  Interruption in the delivery of product due to labor disruption or weather related issues.

Moreover, only a limited number of transportation companies service our regions, none of which has entered into a long-term contract with us. The inability or failure of one or more key transportation companies to provide transportation services to us, changes in the regulations that govern shipping tariffs or any other disruption in our ability to transport our merchandise could have a material adverse effect on our business, financial condition and results of operations.

Our failure to adequately address barriers and challenges associated with expansion outside of the United States or its territories could cause our business to suffer.     Three of our existing stores, as well as the stores we are planning to open in the Cayman Islands and Aruba, are located outside the United States and its territories. Our future expansion plans may involve entry into additional foreign countries, which may involve additional or heightened barriers and challenges that are different from those we currently encounter, including risks associated with being further removed from the political and economic systems in the United States and anti-American sentiment as a result of political or military action. We do not currently engage in currency hedging activities. The failure to adequately address the additional challenges involved with international operations could have a material adverse effect on our business, financial condition and results of operations.

Certain provisions in our charter documents and elsewhere may discourage third parties from attempting to acquire control of our company, which may have an adverse effect on the price of our stock.     Our board of directors has the authority, without obtaining shareholder approval, to issue up to 2,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions of such shares without any further vote or action by our shareholders. Our articles of incorporation and bylaws also provide for a classified board and special advance notice provisions for proposed business at annual meetings. In addition, Washington law contains certain provisions that may have the effect of delaying, deferring or preventing a hostile takeover of our company. Further, we have a shareholder rights plan that is designed to cause substantial dilution to a person or group that attempts to acquire our company without approval of our board of directors, and thereby make a hostile takeover attempt prohibitively expensive for a potential acquirer. These provisions, among others, may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company, even if shareholders may consider such a change in control to be in their best interests, which may cause the price of our common stock to suffer.

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ITEM 6.
  EXHIBITS

Exhibit
No. 		       
Description
 
 2.1
           
Agreement and Plan of Merger, dated as of August 27, 2007, by and among NWC (US) Holdings, Inc. a Delaware corporation, Cougar Acquisition Corporation, a Washington corporation and wholly owned subsidiary of NWC (US) Holdings, Inc., and Cost-U-Less, Inc., a Washington corporation (Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on August 28, 2007)
31.1
           
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
           
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
           
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
           
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
           
Form of Voting Agreement between NWC (US) Holdings, Inc. and certain shareholders of Cost-U-Less, Inc. (Incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K filed on August 28, 2007)
99.2
           
Joint press release of Cost-U-Less, Inc. and the North West Company, dated August 27, 2007, regarding the proposed merger (Incorporated by reference to Exhibit 99.2 to the Company’s Form 8-K filed on August 28, 2007)
 

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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.

 
COST-U-LESS, INC.
 
           
Date: November 13, 2007
/s/ J. Jeffrey Meder
J. Jeffrey Meder
President and Chief Executive Officer
 
           
Date: November 13, 2007
/s/ Martin P. Moore
Martin P. Moore
Chief Financial Officer
 

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