S-1 1 d65082sv1.htm FORM S-1 sv1
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As filed with the Securities and Exchange Commission on November 12, 2008
Registration No. 333-      
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
Alon Brands, Inc.
(Exact name of registrant as specified in its charter)
 
         
Delaware
(State or other jurisdiction of
incorporation or organization
)
  5412
(Primary Standard Industrial
Classification Code Number
)
  74-2966583
(I.R.S. Employer
Identification Number
)
 
 
 
 
Alon Brands, Inc.
7616 LBJ Freeway, 3rd Floor
Dallas, Texas 75251
(972) 367-3900
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
Kyle McKeen
President and Chief Executive Officer
Alon Brands, Inc.
7616 LBJ Freeway, 3rd Floor
Dallas, Texas 75251
(972) 367-3900
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
         
Mark E. Betzen, Esq.
Jones Day
2727 North Harwood Street
Dallas, Texas 75201-1515
Telephone: (214) 220-3939
Facsimile: (214) 969-5100
  W. Stuart Ogg, Esq.
Jones Day
555 South Flower Street
Fiftieth Floor
Los Angeles, California 90071
Telephone: (213) 489-3939
Facsimile: (213) 243-2539
  Kris F. Heinzelman, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Telephone: (212) 474-1336
Facsimile: (212) 474-3700
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the registration statement becomes effective.
 
 
 
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
CALCULATION OF REGISTRATION FEE
 
                     
      Proposed Maximum
      Amount of
 
Title of Each Class of
    Aggregate
      Registration
 
Securities to be Registered     Offering Price(1)       Fee  
Common Stock, $0.01 par value per share
    $ 100,000,000       $ 3,930  
                     
 
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 2008
 
                  Shares
 
(ALON BRANDS LOGO)
 
Alon Brands, Inc.
 
Common Stock
 
 
This is an initial public offering of shares of common stock of Alon Brands, Inc. We will pay a portion of the net proceeds of this offering to our parent company. See “Use of Proceeds.”
 
Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $      and $      per share. We intend to apply to list our common stock on the New York Stock Exchange under the symbol “ABO.”
 
The underwriters have an option to purchase a maximum of           additional shares from us at the offering price less the underwriting discount, within 30 days from the date of this prospectus, to cover over-allotments of shares.
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.
 
                         
          Underwriting
    Proceeds, Before
 
          Discounts and
    Expenses, to
 
    Price to Public     Commissions     Alon Brands, Inc.  
 
Per Share
  $                $                $             
Total
  $                $                $             
 
Delivery of the shares of common stock will be made on or about          .
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
Joint Book-Running Managers
 
Credit Suisse Merrill Lynch & Co.

The date of this prospectus is          .


 

 
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 EX-21.1
 EX-23.1
 EX-23.2
 
 
You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
 
 
Dealer Prospectus Delivery Obligation
 
Until          ,          (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.


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Industry and Market Data
 
In this prospectus, we rely on and refer to information and statistics regarding our industry, the size of certain markets and our position within the sectors in which we compete. Some of the market and industry data contained in this prospectus are based on information from independent industry trade associations such as the National Association of Convenience Stores, or NACS, or other publicly available information, while other information is based on our good faith estimates, which are derived from our review of internal surveys, and our management’s knowledge and experience in the markets in which we operate. Our estimates have also been based on information obtained from our customers, suppliers and other contacts in the markets in which we operate. Although we believe that these independent sources and our internal data are reliable, we have not independently verified the accuracy or completeness of the information contained in them, and we cannot assure you as to the accuracy or completeness of this information. As a result, you should be aware that the market and industry data and the market share estimates set forth in this prospectus, and our beliefs and estimates based thereon, may not be reliable.
 
 
We own and use the “Alon Brands” and “Skinny’s” names and logos as our trademarks. This prospectus also refers to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective owners.


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PROSPECTUS SUMMARY
 
This summary highlights certain information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the risks discussed under “Risk Factors” and the financial statements and related notes included elsewhere in this prospectus. In this prospectus, all references to “Alon Brands,” “we,” “us” and “our” refer to Alon Brands, Inc. and its subsidiaries except where the context otherwise requires or where otherwise indicated. All references to Alon Energy refer to Alon USA Energy, Inc., our indirect parent company, and its consolidated subsidiaries. Unless otherwise indicated, the information contained in this prospectus assumes the completion of the corporate reorganization transactions we expect to consummate with Alon Energy immediately prior to the consummation of this offering. EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles, or GAAP, but we believe such measure is useful to help investors understand our results of operations. However, EBITDA has limitations and should not be considered as a substitute for net income or as a better indicator of our operating performance than measures that are presented in accordance with GAAP. See “— Summary Historical Combined and Unaudited Pro Forma Condensed Combined Financial and Operating Data” and “Selected Historical Combined Financial and Operating Data” for a discussion of our use of EBITDA in this prospectus and a reconciliation of EBITDA to net income for the periods presented. Unless otherwise indicated, the pro forma financial information in this prospectus gives effect to this offering, our acquisition of Skinny’s, Inc. in June 2007, and the corporate reorganization transactions we expect to consummate with Alon Energy immediately prior to the consummation of this offering.
 
Our Company
 
We are the largest 7-Eleven licensee in the United States, and we are the sole licensee of the FINA brand for motor fuels in the South Central and Southwestern United States. Our business consists of two operating segments: retail and wholesale marketing. As of June 30, 2008, our retail segment operated 306 convenience stores in Central and West Texas and New Mexico, substantially all of which are operated under the 7-Eleven and FINA brands. Through our 7-Eleven licensing agreement, we have the exclusive right to operate 7-Eleven stores in substantially all of our existing retail markets and many surrounding areas. Our wholesale marketing segment markets and supplies motor fuels under the FINA brand and provides brand support and payment card processing services to distributors supplying over 1,000 retail locations, including our company-owned stores that sell motor fuel. In certain markets, we also sub-license the FINA brand and provide the same brand support and payment card processing services to distributors outside of our supply network representing approximately 100 additional retail locations. We believe our leading brand offerings, advantageous fuel supply agreement, strong market positions and complementary business model provide us with competitive advantages and position us well for continued growth.
 
Historically, most of our business was accounted for as an operating segment of Alon Energy, an independent refining company listed on the New York Stock Exchange, or NYSE, under the symbol “ALJ.” Alon Energy owns and operates four crude oil refineries located in Big Spring, Texas; Paramount and Long Beach, California; and Krotz Springs, Louisiana. After completion of this offering, Alon Energy, through its wholly-owned subsidiary, Alon USA, LP, will continue to own approximately     % of our common stock and all of our convertible preferred stock. Alon Energy is majority-owned by Alon Israel Oil Company, Ltd., or Alon Israel, an Israeli limited liability company and one of the largest operators of retail gasoline and convenience stores in Israel. Our ongoing relationships with Alon Energy and Alon Israel provide us with secure fuel supply and retail operating expertise, which we believe provide us with a competitive advantage.
 
Our 7-Eleven convenience stores offer well-known proprietary products, including Slurpee® frozen carbonated beverages, Big Gulp® beverages and Big Bite® hot dogs, as well as a variety of other food products, tobacco products, alcoholic and non-alcoholic beverages, general merchandise and convenience services, such as ATMs, lottery tickets, money orders, prepaid telephone cards and gift cards. We believe customer recognition of the 7-Eleven brand provides us with a competitive advantage and its proprietary products have contributed to our merchandise margin, which is in excess of the industry average. We sell


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motor fuels under the FINA brand in 297 of our convenience stores, which are supplied by our wholesale marketing segment under our long-term fuel supply agreement with Alon Energy. For the year ended December 31, 2007, our retail segment generated revenues of $480.1 million and gross profit of $88.0 million.
 
Immediately prior to the consummation of this offering, our wholesale marketing segment will enter into a strategic, 20-year fuel supply and licensing agreement with our parent, which will allow us to purchase motor fuels produced by its refineries. This agreement will provide us with cost-advantaged pricing, a secure fuel supply, access to distribution terminals in our primary markets and a platform for growth into existing and new markets where Alon Energy owns and operates refineries. Our third-party distributors take possession of their motor fuels directly from Alon Energy’s and other third-party terminals. As a result, our wholesale marketing segment is not subject to inventory valuation and transportation risks. In addition to motor fuels, we offer our wholesale distributors a number of ancillary services, including payment card processing, branding and construction incentives, and signage and marketing incentives, designed to support their retail fuel operations and the FINA brand. We also provide these services and sub-license the FINA brand for motor fuels in certain markets outside of our supply network. Our payment card processing and sub-licensing activities, in particular, provide us with additional sources of consistent revenue. For the year ended December 31, 2007, our wholesale marketing segment purchased and resold 458.6 million gallons of branded motor fuel and generated revenues of $794.4 million and gross profit of $28.3 million.
 
Our total revenues for the year ended December 31, 2007, and for the six months ended June 30, 2008, were $1,274.5 million and $690.9 million, respectively. Our net income (loss) for the year ended December 31, 2007, and for the six months ended June 30, 2008, was $11.9 million and $(3.7) million, respectively. Our EBITDA for the year ended December 31, 2007, and for the six months ended June 30, 2008, was $34.8 million and $4.3 million, respectively. Our pro forma net income for the year ended December 31, 2007, and for the six months ended June 30, 2008, was $      million and $      million, respectively. Our pro forma EBITDA for the year ended December 31, 2007, and for the six months ended June 30, 2008, was $      million and $      million, respectively.
 
Industry Trends
 
Convenience Stores.  Our retail segment operates within the large and growing U.S. convenience store industry. According to NACS, sales in the industry have grown from $337.0 billion in 2003 to $577.4 billion in 2007, which represents a compounded annual growth rate, or CAGR, of 14.4%. This industry is highly fragmented, with the 10 largest convenience store operators controlling less than 9% of the total convenience stores in 2007. Furthermore, convenience store operators with 50 or fewer stores accounted for approximately 75% of all convenience stores in 2007. We believe we will continue to benefit from several key industry trends and characteristics, including:
 
  •  Continuing shift of consumer food and general merchandise purchases away from traditional supermarkets to convenience stores and other alternative formats;
 
  •  Increasing size and complexity of the big box retail format, driving consumers to small box retailers, such as convenience stores, to meet their demand for speed and convenience in daily shopping needs;
 
  •  Changing consumer demographics and eating patterns resulting in more food consumed away from home;
 
  •  Increasing significance of the advantages of scale given the highly fragmented nature of the industry; and
 
  •  Continuing opportunities to grow through acquisitions given industry fragmentation and continued divestitures of retail convenience stores by major oil companies.


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Motor Fuel Marketing and Supply.  In recent years, the market for wholesale distribution of motor fuel products has experienced a number of changes that we believe provide opportunities to grow our wholesale marketing segment, including:
 
  •  Consolidation among major petroleum product producers over the last 20 years, which has resulted in fewer recognizable brands available to consumers;
 
  •  A 37% reduction in the number of operating crude oil refineries over the last 25 years, which has resulted in less access to product and increased the importance of obtaining a secure fuel supply source; and
 
  •  Increased scrutiny by oil companies and refiners in selecting distributors, with a preference for larger distributors capable of handling higher volumes, limiting smaller distributors’ access to product.
 
Our Competitive Strengths
 
We believe the following competitive strengths differentiate us from our competitors:
 
Leading 7-Eleven Convenience Store Brand.  7-Eleven is the most recognized brand for convenience stores in the United States and around the world. We are the largest 7-Eleven licensee in the United States and we have an exclusive license to use the 7-Eleven brand in substantially all of our retail markets and many surrounding areas. Our licensing arrangement allows us to offer well-known proprietary products, including Slurpee® frozen carbonated beverages, Big Gulp® beverages and Big Bite® hot dogs, which contribute to our merchandise margin, which is in excess of the industry average. Additionally, we benefit from access to 7-Eleven’s successful and innovative new product development, marketing techniques, national advertising campaigns and proprietary retail information.
 
Exclusive FINA Brand Offering.  With approximately 1,100 branded locations and a history reaching back to 1963, the FINA name is well-known in the South Central and Southwestern United States. We believe FINA-branded products are an important market differentiator for both our retail operations and for those of our distributors. We have an exclusive license to market motor fuels under the FINA brand in Texas, Oklahoma, New Mexico, Arizona, Arkansas, Louisiana, Colorado and Utah.
 
Attractive Wholesale Marketing Segment.  Our wholesale marketing segment supplies distributors with motor fuel under the FINA brand and provides payment card processing, branding and construction incentives, and signage and marketing incentives. We provide these services only to distributors, as opposed to individual dealers or retailers, which lowers our credit risk by concentrating our customer base to a smaller number of more creditworthy accounts. Furthermore, the relatively low operating costs and capital requirements of our wholesale marketing segment have historically generated excess free cash flow. We believe this segment will continue to generate free cash flow in the future which we plan to utilize to fund our growth strategy.
 
Advantageous Long-Term Fuel Supply Agreement.  Immediately prior to the consummation of this offering, we will enter into a long-term supply agreement with Alon Energy to secure substantially all of our motor fuel requirements. This new agreement will provide cost-advantaged pricing and a secure fuel supply. This agreement will also provide us a platform for growth in existing and new markets, such as Louisiana and Southern California, where Alon Energy owns and operates refineries.
 
Leading Market Position in Attractive Markets.  We believe we are the largest convenience store operator by number of stores in the cities of Abilene, Big Spring, El Paso, Lubbock, Midland, Odessa and Wichita Falls, Texas. We also have a significant presence in Albuquerque, New Mexico. Approximately 92% of our stores are located in Central and West Texas, which include population and employment growth areas exceeding the national averages based on U.S. Census Bureau and other demographic information. We believe we will continue to benefit from the regional economy’s focus on energy and agriculture and the stability provided by military bases in the region.


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Complementary Business Model.  We believe our wholesale marketing operations and related brand sub-licensing provide us with a diverse source of revenues to complement our retail operations. In addition to increasing our overall scale and providing us with additional sales and income opportunities over other convenience store operators, our complementary wholesale operations also minimize some of the risks that convenience store-only operators face, such as higher payment card expenses and volatility in retail motor fuel margins. For example, revenues generated from our wholesale marketing segment’s payment card processing services partially offset our retail segment’s payment card expenses. Furthermore, we believe our complementary operations also enhance our flexibility to grow in existing and new markets and enhance the overall stability of our business.
 
Experienced Management with Significant Operating Expertise.  Our senior management team averages 19 years of relevant experience in the retail and fuel marketing industries. We believe our management team’s experience and accomplishments position us well for continued growth. We also benefit from the management and transactional expertise provided through our relationships with Alon Energy and Alon Israel, which has grown since its formation in 1989 to become one of the largest operators of retail gasoline and convenience stores in Israel.
 
Our Growth Strategy
 
We believe there are significant opportunities to continue to expand our businesses and increase our sales and profitability through the implementation of the following strategies:
 
Improve Our Retail Operations.  Following our separation from Alon Energy and this offering, we believe we will be better able to invest our capital to improve our retail operations. Specifically, we plan to drive increased volumes and overall profitability by:
 
  •  Introducing new products and services;
 
  •  Realizing the benefits of our recent fuel equipment upgrades;
 
  •  Optimizing our fuel pricing to improve overall retail profits and drive in-store traffic;
 
  •  Completing selective retail store remodels and equipment upgrades;
 
  •  Improving product positioning of higher margin, high volume product categories; and
 
  •  Better utilizing our point-of-sale technologies.
 
Increase Sales of Higher Margin Foodservice Products.  The industry average in-store sales contribution from prepared on-site food programs was 6.6% for the year ended December 31, 2007. Our prepared on-site food contribution was 1.3% for the same period. We believe there is a significant opportunity to increase our sales from higher margin prepared food offerings, which in turn will drive ancillary revenues from other higher margin foodservice products, such as fountain and hot-dispensed beverages. Through our 7-Eleven license agreement, we have access to 7-Eleven’s entire program of proprietary foodservice products. In addition, our 7-Eleven license agreement allows us to offer third-party foodservice products. We plan to increase our foodservice sales by better leveraging 7-Eleven’s foodservice program, implementing an independent hot food program and significantly improving our beverage offerings, all of which carry higher margins than other retail products.
 
Grow Our Retail Store Base.  Over the last three years, we have increased our retail store count from 167 to 306 by completing and integrating two acquisitions. In doing so, we have improved our profitability at these acquired stores through rebranding them to the 7-Eleven brand and realizing the benefits of increased scale. We believe our acquisition experience and our scalable infrastructure form a strong platform for future growth and that acquisitions of additional stores provide us the opportunity to increase our overall profitability. We expect to continue to grow our retail store base through acquisitions in markets where we are the exclusive licensee of the 7-Eleven brand.


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Improve Our Wholesale Marketing Operations.  We have implemented and continue to implement changes to our wholesale marketing programs to increase the ratability, or consistency, of our distributors’ purchases of motor fuel products, which further enhances our profitability. We plan to continue to grow our distributor network in our current markets through our offering of the FINA brand, reliable fuel supply and brand support and payment card processing services. In addition, we intend to expand our branded fuel supply offering into new markets, including markets in which Alon Energy now operates, or in the future may, acquire refineries.
 
Risks Related to Our Business and Strategy
 
Our business is subject to numerous risks that are described in more detail in the section captioned “Risk Factors.” These risks include, but are not limited to: high volatility in motor fuel prices; our dependence on one supplier for our fuel supply requirements and a limited number of suppliers for a majority of our merchandise requirements; maintaining our FINA and 7-Eleven license agreements; competition in our industries; changes in economic conditions, generally, and in the markets we serve; changes in consumer behavior and travel trends; and the effects of and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations. These risks, together with the others identified under “Risk Factors,” could prevent us from successfully executing our growth and business strategies and could materially adversely affect our business, prospects, financial condition, cash flows and result of operations.
 
 
Principal Executive Offices
 
Alon Brands, Inc. was converted from a Texas limited liability company, formed in September 2002, to a Delaware corporation in November 2008. Upon completion of this offering and the corporate reorganization transactions described in this prospectus, Alon Brands will become a holding company for our retail and wholesale marketing operations. Our principal executive offices are located at 7616 LBJ Freeway, 3rd Floor, Dallas, Texas 75251, and our telephone number at this address is (972) 367-3900. Our website is www.alonbrands.com. Information on, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.


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The Offering
 
Common stock offered by us           shares (or           shares, if the underwriters exercise their over-allotment option in full)
 
Common stock to be outstanding immediately after this offering           shares (or           shares, if the underwriters exercise their over-allotment option in full)
 
Use of proceeds We estimate that our net proceeds from this offering, after deducting underwriting discounts, commissions and estimated offering expenses, will be approximately $      million, or approximately $      million if the underwriters exercise their over-allotment option in full.
 
We intend to use these net proceeds to:
 
• return $      million of parent investment to Alon USA, LP; and
 
• for general corporate purposes, including growth capital.
 
Dividend policy We intend to pay quarterly cash dividends on our common stock at an initial annual rate of $      per share commencing in the          quarter of 2009. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal requirements, prior payments of preferred stock dividends and other factors our board of directors deems relevant.
 
Risk factors You should carefully read and consider the information set forth under “Risk Factors,” together with all of the other information set forth in this prospectus, before deciding to invest in shares of our common stock.
 
Proposed NYSE symbol ABO
 
Unless we indicate otherwise, the number of shares of common stock shown to be outstanding after this offering:
 
  •  excludes           shares of our common stock reserved for issuance under our equity incentive plan;
 
  •  excludes           shares of our common stock reserved for issuance upon conversion of our series A convertible preferred stock issued to Alon USA, LP in connection with the corporate reorganization transactions; and
 
  •  assumes that the underwriters will not exercise their over-allotment option.


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Summary Historical Combined and Unaudited Pro Forma
Condensed Combined Financial and Operating Data
 
The following tables set forth our summary historical combined and unaudited pro forma condensed combined financial and operating data as of and for the periods indicated below. The summary historical combined financial data for the years ended December 31, 2005, 2006 and 2007, have been derived from our audited combined financial statements, which are included elsewhere in this prospectus. The summary historical combined financial data for the six months ended June 30, 2007 and 2008 and as of June 30, 2008, are derived from our unaudited combined financial statements, which are included elsewhere in this prospectus. We have prepared our unaudited combined financial statements on the same basis as our audited combined financial statements and have included all adjustments, consisting of normal and recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for the unaudited periods. The summary historical combined financial and operating data for the six months ended June 30, 2008 and as of June 30, 2008 are not necessarily indicative of the results that may be obtained for a full year.
 
During the periods covered by our historical financial and operating data, most of our business was accounted for as an operating segment of Alon Energy. Our combined financial statements include allocations of certain corporate functions provided to us by Alon Energy, including general corporate expenses, where allocations are based on estimates of effort or resources incurred on our behalf. Certain other costs incurred by Alon Energy for our direct benefit, such as rent, salaries and benefits, have also been included in our combined financial statements. However, our combined financial statements do not purport to represent and may not necessarily reflect what our financial position, results of operations and cash flows actually would have been if we had operated as a stand-alone company during the periods presented. Accordingly, our historical financial data also do not purport to represent, and may not be indicative of, our results of operations or cash flows for any future period or financial position as of any future date.
 
On June 29, 2007, we completed the acquisition of Skinny’s, Inc., or Skinny’s, a privately-held company that operated 102 stores in Central and West Texas. The aggregate purchase price for Skinny’s was approximately $75.3 million after adjustments for working capital, debt and certain other post-closing adjustments. The operations of Skinny’s have been included in our combined statements of operations since the acquisition date.
 
The summary unaudited pro forma condensed combined financial data for the year ended December 31, 2007, and the six months ended June 30, 2008 and as of June 30, 2008, are derived from the unaudited pro forma condensed combined statements of operations and the unaudited pro forma condensed combined balance sheet set forth under “Unaudited Pro Forma Condensed Combined Financial Data.” The summary unaudited pro forma condensed combined financial and operating data for the year ended December 31, 2007 give effect to the Skinny’s transaction, the corporate reorganization transactions, this offering and the application of net proceeds thereof as if they had each occurred as of January 1, 2007. The summary unaudited pro forma condensed combined financial and operating data for the six months ended June 30, 2008 give effect to the corporate reorganization transactions, this offering and the use of net proceeds therefrom as if they had each occurred as of January 1, 2008. The summary unaudited pro forma condensed combined balance sheet data as of June 30, 2008 give effect to the corporate reorganization transactions, this offering and the application of net proceeds thereof as if they had occurred as of June 30, 2008.
 
The unaudited pro forma condensed combined financial data are included for informational purposes only and do not purport to reflect our financial position or results of operations that would have occurred had the transactions referenced above occurred on the dates indicated. In addition, the pro forma adjustments described herein are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the above transactions on our historical combined financial data. The unaudited pro forma financial data also do not purport to represent, and may not be indicative of, our results of operations for any future period or our financial position as of any future date.
 
The information presented below should be read in conjunction with “Use of Proceeds,” “Capitalization,” “Selected Historical Combined Financial and Operating Data,” “Unaudited Pro Forma Condensed Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited combined financial statements and related notes included elsewhere in this prospectus.
 


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    Historical       Pro Forma  
                                          Six Months
 
                      Six Months Ended
      Year Ended
    Ended
 
    Year Ended December 31,     June 30,       December 31,
    June 30,
 
    2005     2006     2007     2007     2008       2007     2008  
    (Dollars in thousands, except as noted)  
                                             
Statement of Operations Data:
                                                         
Revenues:
                                                         
Motor fuel — retail
  $ 193,232     $ 194,025     $ 259,287     $ 101,555     $ 169,184       $            $        
Merchandise — retail
    128,466       150,899       213,433       86,206       124,807                    
Other, net — retail(1)
    4,879       6,255       7,374       3,084       2,931                    
                                                           
Total retail
    326,577       351,179       480,094       190,845       296,922                    
Motor fuel — wholesale
    831,004       910,959       792,273       411,112       392,597                    
Other, net — wholesale(2)
    2,432       2,455       2,149       919       1,390                    
                                                           
Total wholesale
    833,436       913,414       794,422       412,031       393,987                    
                                                           
Total revenues
    1,160,013       1,264,593       1,274,516       602,876       690,909                    
Gross profit:
                                                         
Motor fuel — retail
    14,985       14,555       19,478       8,910       10,077                    
Merchandise — retail
    37,954       42,500       61,113       23,605       36,028                    
Other, net — retail
    4,879       6,254       7,375       3,084       2,930                    
                                                           
Total retail
    57,818       63,309       87,966       35,599       49,035                    
                                                           
Motor fuel — wholesale
    (7,096 )     13,897       26,141       12,152       (110 )                  
Other, net — wholesale
    2,431       2,456       2,149       919       1,390                    
                                                           
Total wholesale
    (4,665 )     16,353       28,290       13,071       1,280                    
                                                           
Total gross profit
    53,153       79,662       116,256       48,670       50,316                    
Operating and selling expenses:
                                                         
Operating, selling and administrative
    58,668       64,256       81,933       34,607       46,261                    
Depreciation, amortization and accretion
    5,026       6,205       10,245       3,580       6,898                    
                                                           
Total operating and selling expenses
    63,694       70,461       92,178       38,187       53,159                    
Operating income (loss)
    (10,541 )     9,201       24,078       10,483       (2,843 )                  
Interest expense
    3,848       5,864       5,202       1,842       2,683                    
Rental, interest and other income
    168       229       484       124       274                    
Gain (loss) on sale of assets
    (55 )     (30 )     68       49       (21 )                  
                                                           
Income (loss) before income tax expense (benefit)
    (14,276 )     3,536       19,428       8,814       (5,273 )                  
Income tax expense (benefit)
    (5,040 )     1,336       7,543       3,364       (1,570 )                  
                                                           
Net income (loss)
  $ (9,236 )   $ 2,200     $ 11,885     $ 5,450     $ (3,703 )     $       $  
                                                           
Earnings per share:
                                                         
Basic
    $       $    
Diluted
    $       $    
Weighted-average shares outstanding:
                                                         
Basic
                 
Diluted
                 

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    Historical       Pro Forma  
                                          Six Months
 
                      Six Months Ended
      Year Ended
    Ended
 
    Year Ended December 31,     June 30,       December 31,
    June 30,
 
    2005     2006     2007     2007     2008       2007     2008  
    (Dollars in thousands, except as noted)  
                                             
Other Financial Data:
                                                         
EBITDA (unaudited) (3)
  $ (5,420 )   $ 15,575     $ 34,810     $ 14,224     $ 4,292       $       $    
Net cash provided by (used in):
                                                         
Operating activities
    (16,915 )     14,860       10,143       (5,588 )     (17,102 )                  
Investing activities
    (6,216 )     (38,280 )     (85,841 )     (79,237 )     (1,469 )                  
Financing activities
    24,560       23,547       81,429       94,099       13,795                    
Capital expenditures(4)
    6,216       10,902       11,027       2,051       1,469                    
Operating Data (unaudited):
                                                         
Number of retail stores (end of period)(5)
    167       207       307       206       306                    
Retail fuel gallons sold
    87,714       75,969       91,945       38,026       49,285                    
Average gasoline retail price (dollars per gallon sold)
  $ 2.20     $ 2.55     $ 2.82     $ 2.67     $ 3.43       $       $    
Average per retail store(6):
                                                         
Retail merchandise sales
    769       806       831       418       407                    
Retail fuel gallons sold
    535       414       364       188       164                    
Comparable merchandise store sales growth(7)
    3.1 %     4.8 %     3.1 %     3.5 %     (2.7 )%       %     %
Retail merchandise gross margin(8)
    33.3 %     32.3 %     32.1 %     31.0 %     31.2 %       %     %
Retail fuel margin (cents per gallon)(9)
    17.1 ¢     19.2 ¢     21.2 ¢     23.4 ¢     20.4 ¢       ¢     ¢
Number of stores supplied through wholesale distributor network (end of period)(10)
    1,079       983       776       925       765                    
Wholesale fuel gallons sold(11)
    598,965       543,788       458,581       239,811       184,540                    
Wholesale fuel margin (cents per gallon)
    (0.8     3.0 ¢     6.2 ¢     5.5 ¢     0.7¢         ¢     ¢ 
 
                   
    Historical     Pro Forma
    As of
    As of
    June 30, 2008     June 30, 2008
    (Dollars in thousands, except as noted)
           
Balance Sheet Data (end of period):
                 
Cash and cash equivalents
  $ 5,602       $        
Working capital(12)
    48,429            
Total assets
    240,661            
Total liabilities
    127,049            
Total member’s interest and equity/stockholders’ equity
    113,612            
 
 
(1) Includes revenues from, lottery, money orders, money wire and ATM commissions, and other commissions earned on gift cards and ancillary services.
 
(2) Includes payment card processing fees, broadband and equipment rents, and other marketing and trade agreement fees.
 
(3) We define EBITDA as net income (loss) before net interest expense, income tax expense (benefit) and depreciation, amortization and accretion. We believe that EBITDA is useful to investors in evaluating our operating performance because:
 
• securities analysts and investors often use such calculations as a measure of financial performance and debt service capabilities;

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• it facilitates management’s ability to measure operating performance of our business on a consistent basis since it removes the impact of items not directly resulting from our retail and wholesale marketing operations; and
 
• it is used by our management for internal planning purposes, including aspects of our consolidated operating budget, capital expenditures, as well as for segment and individual site operating targets.
 
EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for an analysis of our results as reported under GAAP. Some of these limitations include:
 
• it does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
 
• it does not reflect changes in, or cash requirements for, working capital;
 
• it does not reflect significant interest expense, or the cash requirements necessary to service interest or principal payments on our credit facilities;
 
• it does not reflect payments made or future requirements for income taxes;
 
• although depreciation, amortization and accretion are non-cash charges, the assets being depreciated and amortized may be replaced in the future, and EBITDA does not reflect cash requirements for such replacements; and
 
• because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies.
 
The following table presents a reconciliation of net income (loss) to EBITDA:
 
                                                         
    Historical   Pro Forma
                Six Months Ended
  Year Ended
  Six Months
    Year Ended December 31,   June 30,   December 31,
  Ended June 30,
    2005   2006   2007   2007   2008   2007   2008
 
Net income (loss)
  $ (9,236 )   $ 2,200     $ 11,885     $ 5,450     $ (3,703 )   $             $          
Depreciation, amortization and accretion
    5,026       6,205       10,245       3,580       6,898                  
Interest expense, net
    3,830       5,834       5,137       1,830       2,667                  
Income tax expense (benefit)
    (5,040 )     1,336       7,543       3,364       (1,570 )                
                                                         
EBITDA
  $ (5,420 )   $ 15,575     $ 34,810     $ 14,224     $ 4,292     $             $          
                                                         
 
(4) Excludes capital assets acquired in business acquisitions.
 
(5) Store count at June 30, 2007 excludes 102 stores acquired on June 29, 2007 because no results of operation are included in the six months ended June 30, 2007.
 
(6) Average retail merchandise sales and motor fuel gallons sold are based on total merchandise sales or motor fuel gallons sold divided by total store months.
 
(7) Includes only stores operated in both periods.
 
(8) Retail merchandise gross margin represents the difference between (a) merchandise sales revenues and other retail sales and services revenues and (b) the delivered cost of merchandise purchases, net of rebates and commissions, expressed as a percentage of merchandise sales revenues. Retail merchandise gross margins, also referred to as in-store margins, are commonly used in the retail industry to measure in-store, or non-fuel, operating results.
 
(9) Retail fuel margin represents the difference between motor fuel revenues and net cost of purchased fuel, including transportation costs and associated motor fuel taxes, expressed on a cents per gallon basis. Motor fuel margins are frequently used in the retail industry to measure operating results related to motor fuel sales.
 
(10) Excludes convenience stores we own and operate.
 
(11) Includes motor fuel gallons sold to our convenience stores.
 
(12) Working capital is defined as total current assets, excluding cash and cash equivalents, less total current liabilities.


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RISK FACTORS
 
An investment in our common stock involves various risks. Before making an investment in our common stock, you should carefully consider the following risks, as well as the other information contained in this prospectus. The risks described below are those which we believe are currently the material risks we face, but are not the only risks facing us and our business prospects. Any of the risk factors described below and elsewhere in this prospectus could materially adversely affect our business, prospects, financial condition, cash flows and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial could materially adversely affect our business, prospects, financial condition, cash flows and results of operations in the future. As a result, the trading price of our common stock could decline and you may lose part or all of your investment.
 
Risks Relating to Our Business
 
Historical prices for motor fuel have been volatile and significant changes in such prices in the future may materially adversely affect our business.
 
Over the past twelve months, crude oil prices have risen and fallen dramatically, resulting in unprecedented volatility in the wholesale and retail prices of motor fuels. Sustained high prices for motor fuel products and a resulting decrease in gasoline demand can negatively influence our motor fuel sales volumes, fuel margins and retail merchandise sales, which in turn could materially adversely affect our business. For example, U.S. weekly gasoline demand declined by 4.3% in the week ended September 29, 2008 versus the comparable week a year earlier as the average national retail price per gas gallon sold increased from $2.79 to $3.63. In addition, because our wholesale marketing segment sells motor fuels to distributors on credit, our credit risk increases as wholesale prices increase. Conversely, sharp declines in retail fuel prices can also reduce our retail margins per gallon if we sell inventory purchased at higher wholesale costs at lower retail prices.
 
Our wholesale and retail fuel margins are generally expressed on a cents per gallon, or cpg, basis, representing the difference between our sales price over our procurement costs. Since 2005, our quarterly wholesale margins have ranged between (8.5) cpg and 12.4 cpg and our quarterly retail margins have ranged between 10.6 cpg and 21.7 cpg. A significant amount of our retail segment’s sales are purchased with payment cards, which incur additional fees. Retail operating income can be negatively affected by these fees as the retail price of motor fuel increases. Payment card fees are made up of two components, a fixed transaction fee and a processing fee that ranges from 1.0% to 4.0% of the total amount charged. As a result, higher retail prices of motor fuel cause us to recognize a higher expense associated with payment card processing fees, which increases our expenses on a per gallon basis. Additionally, some customers purchase fewer gallons per visit as the retail price of motor fuels increases. As a result, the fixed amount of the transaction fee is allocated across a smaller number of gallons, which further increases our overall payment card expenses on a per gallon basis.
 
We depend on our parent company to supply substantially all of our motor fuel marketed through our wholesale marketing segment, which in turn supplies substantially all of the motor fuel sold through our retail segment. Any disruption in supply or any change in our relationship with our parent company could materially adverse effect our business.
 
Prior to the completion of this offering, we will enter into a new 20-year fuel supply agreement with our parent company to supply substantially all of the motor fuel marketed by our wholesale marketing segment, including the motor fuel sold to our retail convenience stores. Accordingly, in the event that our parent company is unable to fulfill its obligations under this agreement or otherwise fails to provide us with motor fuel, we may be unable to obtain our requirements for motor fuel through third-party suppliers or we may need to pay significantly greater costs in procuring such motor fuel. For example, on February 18, 2008, our parent company experienced an extended outage following a major fire at its Big Spring refinery. Although our parent company is required to offer alternative supply through third parties and pay related increased transportation costs, in some instances the supply from these alternative supply sources may be unavailable or


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inadequate to meet our requirements and our wholesale marketing segment and retail convenience stores may experience decreased sales volumes or increased procurement costs.
 
We sub-license the FINA brand from our parent company under our fuel supply agreement. Our parent company’s rights to the FINA brand are provided under a license agreement with Total S.A., and the loss of this license could materially adversely affect our business. Also, our ability to expand into new markets under the FINA brand could require an amendment to Alon Energy’s existing license agreement.
 
We sub-license the FINA brand from our parent company under our fuel supply agreement. Our parent company licenses the FINA brand from a subsidiary of Total S.A. under an agreement which gives our parent company the exclusive right to use the FINA brand for motor fuels marketing in the states of Texas, Oklahoma, New Mexico, Arizona, Arkansas, Louisiana, Colorado and Utah. The license agreement expires in 2012. Termination of the license agreement would result in our retail and wholesale marketing segments losing the use of the FINA brand name. In this event, we would need to obtain the rights to or develop a new brand, which would require the expenditure of funds to change signage and rebrand our motor fuel products. Also, there can be no assurance that a new brand will replace the FINA brand effectively.
 
In order for our wholesale marketing segment to use the FINA brand in additional markets not currently covered under our parent company’s existing license agreement, our parent company will need to amend the agreement to provide it the right to use the FINA brand in these additional markets. There can be no assurance that our parent company or Total S.A. will agree to such an amendment. If our parent company is not able to obtain such an amendment, we will need to develop or obtain rights to the use of an alternative fuel brand in these new markets.
 
The motor fuel marketing and supply industry is characterized by intense competition and fragmentation, and our failure to effectively compete could materially adversely affect our business.
 
The market for distribution of wholesale motor fuel is highly competitive. Some of our competitors have significantly greater resources and name recognition than we do. We rely on our strong brand name, ability to provide reliable supply, brand support and payment card processing services, and controlling our operating costs to maintain our margins and competitive position. If we fail to maintain the quality of our services, customers could choose alternative distribution sources, and our competitive position could be materially adversely affected. Furthermore, we compete against major oil companies with integrated marketing segments. Through their greater resources and access to crude oil, these companies may be better able to compete on the basis of price, which could materially adversely affect our fuel margins.
 
Substantially all of our convenience stores conduct their operations under a license agreement with 7-Eleven, and the loss of this license or the diminution of 7-Eleven’s brand and marketing initiatives could adversely affect our business.
 
We operate 281 of our convenience stores under the 7-Eleven name pursuant to our perpetual license agreement with 7-Eleven, Inc. 7-Eleven may terminate the license if we default on our obligations under the agreement, including compliance with minimum operating standards required of all 7-Eleven stores. Termination of the license agreement would result in our convenience stores losing the use of the 7-Eleven brand name, the benefits accompanying 7-Eleven’s advertising and certain other brand names and products used exclusively by 7-Eleven, including Slurpee® and Big Gulp® beverages and Big Bite® hot dogs. Additionally, 7-Eleven provides our retail convenience stores with various national brand promotional and marketing initiatives for our in-store merchandise offerings. Any diminution of the national brand image or decline in marketing support initiatives made available to us by 7-Eleven could materially adversely affect our retail segment. In order for our retail segment to use the 7-Eleven brand in markets not currently covered under our existing license agreement, we will need to amend the license agreement to provide us the right to use the 7-Eleven brand in these additional markets. Such an amendment may not be obtainable if existing franchisees or licensees are operating in those markets.


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The convenience store industry is highly competitive and affected by new entrants, and an increase in competition in the markets in which our stores operate could materially adversely affect our business.
 
The geographic areas in which we operate are highly competitive and marked by ease of entry and constant change in the number and type of retailers offering products and services of the type we sell in our convenience stores. We compete with other convenience stores, gasoline service stations, supermarket chains, discounters, wholesale clubs, drug stores, fast food operations and other retail outlets. Increasingly, national high-volume grocery and dry-goods retailers have entered the gasoline retailing business. These non-traditional motor fuel retailers have captured a significant share of the motor fuel market, and we expect their market share will continue to grow. Many of these competitors are substantially larger than we are. Because of their diversity, integration of operations and greater resources, these companies may be better able to withstand volatile market conditions or levels of low or no profitability in their retail business. In addition, these retailers may use promotional pricing or discounts, both at the pump and in the store, to encourage in-store merchandise sales.
 
We compete with other businesses in our market to attract and retain qualified employees, and a failure to attract or retain such qualified employees could materially adversely affect our business.
 
Our continued success depends on our ability to attract and retain qualified personnel in all areas of our business. Convenience store operations require a substantial number of employees and generally experience high employee turnover. We compete with other businesses in our market to attract and retain qualified employees. A tight labor market, increased overtime and a higher full-time employee ratio may cause labor costs to increase. A shortage of qualified employees may require us to enhance wage and benefits packages in order to compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees. No assurance can be given that our labor costs will not increase or that such increases can be recovered through increased prices charged to customers.
 
Our payment card processing services are subject to compliance with the extensive rules and regulations under the Payment Card Industry (PCI) Data Security Standard, and failure to comply with the applicable standards may subject us to substantial fines and penalties.
 
A significant portion of our sales and those of our branded sub-licensee distributors are made with payment cards and processed by our wholesale marketing segment. As a Level 1 merchant, we are subject to quarterly network security scans and annual on-site audits to ensure that we are protecting confidential customer information and bank card data in accordance with the applicable PCI standards, and continuing compliance with such standards may require us to devote substantial time and incur additional costs to ensure we maintain our ability to process payment card transactions. Additionally, in the event that the card associations or our sponsoring bank determine that the manner in which we process payment card transactions is not in compliance with existing rules and regulations, or if the card associations adopt new rules or regulations, we may be subject to substantial penalties and fines or forced to modify the manner in which we process payment card transactions, which may increase our overall costs.
 
Wholesale cost increases in tobacco products, including excise tax increases on cigarettes, or a reduction in the use of manufacturer rebates offered to retailers on tobacco products could materially adversely affect our business.
 
Sales of tobacco products account for a significant portion of our retail segment’s merchandise sales. Significant increases in wholesale costs of tobacco products and tax increases on cigarettes could materially adversely affect the demand for tobacco products. Cigarettes are subject to substantial and increasing excise taxes at both a state and federal level. For example, the Texas legislature increased cigarette taxes by $1 per pack, effective January 1, 2007. Further significant increases in cigarette-related taxes and fees have been proposed and are likely to continue to be proposed or enacted at the federal level. Increased excise taxes may result in declines in overall sales volume, as well as reduced gross profit margin due to lower consumption levels and to a shift in consumer purchases from premium to non-premium or discount cigarettes or to other low-priced or low-taxed tobacco products or to the import of cigarettes from territories, states or countries


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with lower, or no, excise taxes on such items. Moreover, regulations reducing display allowances for cigarettes may also reduce sales of cigarettes.
 
Currently, major manufacturers of tobacco products offer rebates to retailers. We include these rebates as a component of our gross margin from sales of tobacco products. In the event these rebates are no longer offered, or decreased, our wholesale costs of tobacco products will increase accordingly. In general, we attempt to pass price increases on to our customers. However, due to competitive pressures in our markets, we may not be able to do so. These factors could materially adversely affect our retail price of tobacco products, tobacco product unit volume and revenues, merchandise gross profit and overall customer traffic.
 
Future legislation and campaigns to discourage smoking could materially adversely affect our business.
 
Future legislation and national, state and local campaigns to discourage smoking have had, and may continue to have, a substantial effect on our business as consumers adjust their behaviors in response to such legislation and campaigns. Reduced demand for cigarettes could materially adversely affect sales of, and margins for, the cigarettes we sell.
 
Decreases in consumer spending resulting from changes in local economic conditions or travel in our markets could materially adversely affect our business.
 
In the convenience store industry, customer traffic is generally driven by consumer preferences and spending trends, growth in automobile and commercial truck traffic and trends in local economies, travel and weather. Changes in economic conditions generally or in markets in which we operate could materially adversely affect consumer spending patterns and travel in our markets.
 
The local economies where we have our convenience stores may be adversely affected by the recent broader general economic decline in the United States or if the current trend continues or gets worse. A weak economy could affect the purchasing patterns of consumers which could materially adversely affect our business.
 
Our business is subject to seasonal trends, which may cause our results of operations to fluctuate, affecting our cash flow.
 
We experience more demand for our merchandise, food and motor fuel during the late spring and summer months than during the fall and winter. Travel and recreation are typically higher in these months in the geographic areas in which we operate, increasing the demand for the products that we sell and distribute. Therefore, our volumes and related traffic are typically higher in the second and third quarters of our year. As a result, our results from operations may vary widely from period to period, affecting our cash flow.
 
Any devaluation of the Mexican peso, or imposition of restrictions on the access of citizens of Mexico to the United States, could adversely affect our business by lowering our sales volumes for our stores located near the U.S.-Mexico border.
 
Even though we do not currently accept the Mexican peso for purchases made at our convenience stores, a devaluation of the Mexican peso could negatively affect the exchange rate between the Mexican peso and the U.S. dollar, which would result in reduced purchasing power on the part of our customers who are citizens of Mexico. Approximately 28% of our convenience stores, which accounted for 12% of our 2007 revenues, are located in El Paso, Texas, which is on the border with Mexico. In the event of a devaluation in the Mexican peso, revenues attributable to those stores could be reduced.
 
In recent years, there have been a variety of legislative proposals to limit immigration to the United States. If one or more proposals were to be adopted and had the effect of curtailing such immigration, this may limit the ability of citizens of Mexico to cross the border into the United States. In that case, revenues attributable to our convenience stores regularly frequented by citizens of Mexico could be reduced.


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Our growth depends in part on our ability to identify profitable new retail convenience store acquisitions in existing and new markets and to successfully integrate acquired sites and businesses in the future.
 
We may not be able to identify and successfully pursue the acquisition of new convenience stores discussed in our growth strategy, and any new stores we acquire may be unprofitable. Additionally, acquiring sites and businesses in the future involves risks that could cause our actual growth or operating results to differ adversely from expectations. There are several factors that could affect our ability to successfully identify and integrate new acquisitions. These factors include:
 
  •  competition in targeted market areas and limitations on re-branding acquired stores under our existing 7-Eleven and FINA license agreements;
 
  •  difficulties during the acquisition process in identifying all the liabilities of the businesses we acquire;
 
  •  difficulties associated with the expansion of our existing financial controls, information systems, management resources and human resources needed to support retail store growth;
 
  •  difficulties with hiring, training and retaining skilled personnel, including store managers;
 
  •  difficulties in adapting distribution and other operational and management systems to an expanded retail store network;
 
  •  difficulties in obtaining adequate financing to fund our expansion;
 
  •  difficulties in obtaining governmental and other third-party consents, permits and licenses needed to operate additional stores;
 
  •  difficulties in achieving the cost savings and financial improvements we anticipate from acquired stores;
 
  •  the diversion of our senior management’s attention from focusing on our core business due to an increased focus on acquisitions; and
 
  •  other challenges associated with the consummation and integration of any future acquisitions.
 
We depend on one wholesaler for a significant portion of our convenience store merchandise, and a disruption in supply by our wholesaler or change in our relationship with it could materially adversely affect our business.
 
For the year ended December 31, 2007, we purchased approximately 50% of our general merchandise for our retail stores, including most tobacco products and grocery items, from a single wholesale grocer, McLane Company, Inc., or McLane. We currently have a supply agreement with McLane that expires in December 2011. A change of merchandise suppliers, including as a result of our inability to renew our contract with McLane on terms acceptable to us or at all, a disruption in supply or a significant change in our relationship with McLane could lead to an increase in our cost of goods sold or a reduction in the reliability of timely deliveries.
 
In addition, we receive merchandise rebates on certain items from McLane. If these favorable arrangements were discontinued, we may incur higher merchandising costs that we may not be able to pass on to our retail customers resulting in a reduction in sales volume and gross profit on these merchandise offerings.
 
We rely substantially on third-party providers of information technology in our retail operations, and any material failure, inadequacy, interruption or security failure of our technology systems could materially disrupt our retail operations and could materially adversely affect our business.
 
We rely substantially on information technology systems across our retail operations, including for management of point-of-sale processing in our stores, pump control, daily operations reporting, inventory management and various other processes and transactions. These technology systems are provided to and supported in our convenience stores by third-party service providers. Our ability to effectively manage our retail business depends significantly on the reliability and capacity of these systems. The failure of these


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systems to operate effectively, problems with transitioning to upgraded or replacement systems, a dispute with or failure to perform by our third-party providers or a breach in security of these systems could materially disrupt our retail motor fuel and merchandise sales, and significant capital investments could be required to remediate the problem.
 
We rely on third-party transportation providers for the transportation of a portion of our motor fuel sold at our retail convenience stores, and a disruption in service or inability to timely secure transportation services could materially adversely affect our business.
 
Our retail convenience stores are responsible for the transportation of motor fuels purchased for resale from our wholesale marketing segment or other suppliers. Although our retail segment owns and leases trucks for the purpose of transporting motor fuel to our retail stores, we also procure approximately 6% of our motor fuel transportation needs from third-party transportation providers. If we are unable to timely arrange such transportation or find alternative transportation sources in the event of a service disruption with one of our contracted motor fuel transport providers, we may experience shortages in motor fuel supply at some of our retail convenience stores.
 
Compliance with or liability under the Petroleum Marketing Practices Act could materially adversely affect our business.
 
The Petroleum Marketing Practices Act, or PMPA, is a federal law that governs the relationship between a supplier and a distributor pursuant to which the supplier permits a distributor to use a trademark in connection with the sale or distribution of motor fuel. We are subject to the provisions of the PMPA because we sub-license the FINA brand to our distributors in connection with their distribution and sale of motor fuels. Under the PMPA, we may not terminate or fail to renew these distributor contracts unless certain enumerated preconditions or grounds for termination or nonrenewal are met, and we also comply with the prescribed notice requirements. The PMPA provides that our distributors may enforce the provisions of the act through civil actions against us. If we terminate or fail to renew one or more of our distributor contracts without complying with the PMPA, those distributors may file lawsuits against us to compel continuation of their contracts or to recover damages from us. See “Business — Governmental Regulation and Environmental Matters.”
 
Compliance with and liability under state and federal environmental regulations, including those that require investigation and remediation activities, may require significant expenditures or result in liabilities that could materially adversely affect our business.
 
Our business is subject to various federal, state and local environmental laws and regulations, including those relating to underground storage tanks, the release or discharge of regulated materials into the air, water and soil, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to hazardous materials, remediation of contaminated soils and groundwater and the health and safety of our employees. For example, we store motor fuel in underground storage tanks at our retail locations and are required to make financial expenditures to comply with federal, state and local regulations governing the operation and closure of such tanks and the remediation of any leaks therefrom. In addition, the federal Clean Air Act and similar state laws regulate emissions to the air from motor fueling activities in certain areas of the country, including those that do not meet state or national ambient air quality standards. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims and capital expenditures for equipment upgrades, as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations. Such costs could materially adversely affect our business. Furthermore, new laws, new interpretations of existing laws, increased governmental enforcement of existing laws or other developments, including legislative, regulatory and other legal developments in various phases of discussion or implementation that may limit greenhouse gas emissions or increase fuel economy standards, could require us to make additional capital expenditures, incur additional liabilities or negatively affect the market for motor fuel. See “Business — Governmental Regulation and Environmental Matters.”


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The dangers inherent in the storage and transportation of motor fuel could cause disruptions and could expose us to potentially significant losses, costs or liabilities.
 
We store motor fuel in underground storage tanks at our retail locations and provide or arrange for transportation for distribution to our retail locations. Our operations are subject to significant hazards and risks inherent in handling, transporting and storing motor fuel. These hazards and risks include, but are not limited to, fires, explosions, traffic accidents, spills, discharges and other releases, any of which could result in distribution difficulties and disruptions, environmental pollution, governmentally-imposed fines or cleanup obligations, personal injury or wrongful death claims and other damage to our properties and the properties of others.
 
Our motor fuel operations are subject to inherent risk, and insurance, if available, may not adequately cover any such exposure, which could materially adversely affect our business.
 
We sell motor fuel to our wholesale customers and operate retail outlets that sell refined petroleum products. The presence of flammable and combustible products at our facilities provides the potential for fires and explosions that could destroy both property and human life. These products, almost all of which are liquids, also have the potential to cause environmental damage if improperly handled or released. Insurance is not available against all operational risks, especially environmental risks, and there is no assurance that insurance will be available or adequate in the future. In addition, as a result of factors affecting insurance providers, insurance premiums with respect to renewed insurance policies may increase significantly compared to what we currently pay.
 
Pending or future consumer or other litigation could materially adversely affect our business.
 
We are periodically party to individual personal injury claims, claims of fuel being contaminated or off-specification, product liability claims and other legal actions in the ordinary course of our business. If any such action or actions shall ultimately be determined adversely to us in a material way, our business could be materially adversely affected. Additionally, we are occasionally exposed to industry-wide or class-action claims arising from the products we carry or industry-specific business practices. For example, various petroleum marketing retailers, distributors and refiners are currently defending class-action claims alleging that the sale of unadjusted volumes of fuel at temperatures in excess of 60 degrees Fahrenheit violates various state consumer protection laws due to the expansion of the fuel with the increase of fuel temperatures. While industry-specific or class action litigation of this type is less frequent in occurrence than individual consumer claims, the cost of defense and ultimate disposition could be significant.
 
Litigation and publicity concerning food quality, health and other related issues could result in significant liabilities or litigation costs and cause consumers to avoid our convenience stores, which could materially adversely affect our business.
 
Convenience store businesses and other foodservice operators can be adversely affected by litigation and complaints from customers or government agencies resulting from food quality, illness or other health or environmental concerns or operating issues stemming from one or more locations. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from purchasing gasoline, merchandise or foodservice at one or more of our convenience stores. We could also incur significant liabilities if a lawsuit or claim results in a decision against us or substantial litigation costs regardless of results and may divert time and money away from our operations and hurt our performance.
 
If a food-borne illness or other food safety issue occurs at one of our convenience stores, we may receive negative publicity, be required to temporarily cease foodservice at that location or become subject to litigation. The occurrence of food-borne illnesses or food safety issues regarding one or more ingredients in our food products could materially adversely affect the price and availability of the affected ingredients.


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Failure to comply with state laws regulating the sale of alcohol and cigarettes may result in the loss of necessary licenses and the imposition of fines, penalties or forfeitures on us.
 
State laws regulate the sale of alcohol and cigarettes. A violation or change of these laws could materially adversely affect our business because state and local regulatory agencies have the power to approve, revoke, suspend or deny applications for, and renewals of, permits and licenses relating to the sale of these products or to seek other remedies.
 
Failure to comply with the other state and federal regulations we are subject to may result in penalties or costs that could materially adversely affect our business.
 
Our business is subject to various other state and federal regulations including, but not limited to, employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements, citizenship requirements and other laws and regulations. Any appreciable increase in the statutory minimum wage rate or overtime pay, adoption of mandated health benefits or changes to immigration laws and citizenship requirements would likely result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums or regulations, could materially adversely affect our business. State or federal lawmakers or regulators may also enact new laws or regulations applicable to us that could materially adversely affect our business.
 
If we lose any of our key personnel, our ability to manage and grow our business could be materially adversely affected.
 
Our future performance depends to a significant degree upon the continued contributions of our senior management team. We do not currently maintain key man life insurance with respect to any member of our senior management team. The loss or unavailability to us of any member of our senior management team could significantly harm us. We face competition for these professionals from our competitors, our customers and other companies operating in our industry. To the extent the services of members of our senior management team would be unavailable to us for any reason, we would be required to hire other personnel to manage and operate our company and to develop our products and technology. We cannot assure you we would be able to locate or employ such qualified personnel on acceptable terms, or at all.
 
Covenants in our retail subsidiaries’ debt instruments could limit our ability to undertake certain types of transactions and materially adversely affect our liquidity.
 
The amended and restated credit agreement, dated June 29, 2007, between Southwest Convenience Stores, LLC (“SCS”), one of our retail segment’s operating subsidiaries, and Wachovia Bank, N.A., as administrative agent (the “Amended Wachovia Credit Facility”), contains negative operating covenants and events of default that may limit our financial flexibility and ability to undertake certain types of transactions. For example, our retail subsidiaries are subject to negative covenants that restrict their activities, including restrictions on creating liens, engaging in mergers, consolidations, sales of assets and change-of-control transactions, incurring additional indebtedness, entering into certain lease obligations and making certain restricted payments. Should we desire to undertake a transaction that is limited by the negative covenants in our retail subsidiaries’ credit agreement, we may need to obtain the consent of those lenders or refinance the credit facility. Such refinancings may not be possible or may not be available on commercially acceptable terms, or at all.
 
We depend on cash flows generated by our subsidiaries, and a failure to receive distributions from our subsidiaries may mean we are unable to meet our financial obligations.
 
We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets. Repayment of our indebtedness and our ability to pay cash dividends to stockholders in the future, if any, is dependent on the generation of cash flows by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Each of our subsidiaries is a distinct legal entity. Under certain circumstances,


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legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries, and our subsidiaries may not be able to, or be permitted to, make distributions to us.
 
It may be difficult to serve process on or enforce a United States judgment against certain of our directors.
 
Four of our directors reside in Israel. In addition, a substantial portion of the assets of these directors are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in United States courts against these persons in any action, including actions based upon the civil liability provisions of United States federal or state securities laws. Furthermore, there is substantial doubt that the courts of the State of Israel would enter judgments in original actions brought in those courts predicated on United States federal or state securities laws.
 
Terrorist attacks and threatened or actual war could materially adversely affect our business.
 
Our business is affected by general economic conditions and fluctuations in consumer confidence and spending, which can decline as a result of numerous factors outside of our control. Terrorist attacks or threats, whether within the United States or abroad, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions affecting our suppliers or our customers could materially adversely affect our operations. As a result, there could be delays or losses in the delivery of supplies to us, decreased sales of our products and extension of time for payment of accounts receivable from our customers. Specifically, strategic targets such as energy-related assets (which could include refineries that produce the motor fuel we purchase or ports in which crude oil is delivered) may be at greater risk of future terrorist attacks than other targets in the United States. These occurrences could materially adversely affect energy prices, including prices for our products, and an adverse effect on the margins from our operations. In addition, disruption or significant increases in energy prices could result in government-imposed price controls.
 
Risks Relating to Our Relationship with Alon Energy
 
Alon Energy controls the direction of our business, and the concentrated ownership of our common stock and certain governance arrangements will prevent you and other stockholders from influencing significant decisions.
 
After the completion of this offering, Alon USA, LP, a wholly-owned subsidiary of Alon Energy, will own     % of the outstanding shares of our common stock and all of our convertible preferred stock (     % if the underwriters exercise their over-allotment option in full). As long as Alon USA, LP owns a majority of our common stock, Alon Energy will be able to control any corporate action requiring a stockholder vote irrespective of the vote of, and without prior notice to, any other stockholder. As a result, Alon Energy will have the ability to control significant corporate activities, including:
 
  •  the election of our board of directors and, through our board of directors, decision-making with respect to our business direction and policies, including the appointment and removal of our officers;
 
  •  acquisitions or dispositions of businesses or assets, mergers or other business combinations;
 
  •  our capital structure;
 
  •  payment of dividends; and
 
  •  the number of shares available for issuance under our equity incentive plan for our prospective and existing employees.
 
This voting control or influence may discourage transactions involving a change of control of our company, including transactions in which you as a holder of our common stock might otherwise receive a premium for your shares. Furthermore, Alon Energy generally has the right at any time to spin-off our common stock that Alon USA, LP owns or to sell a controlling interest in us to a third party after the


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expiration of the 180-day lock-up period, in either case without your approval and without providing for a purchase of your shares. See “Shares Eligible for Future Sale.”
 
Even if Alon USA, LP’s ownership interest is reduced to less than a majority of the outstanding shares of our common stock, so long as Alon USA, LP remains our largest shareholder, Alon Energy will have the ability to substantially influence these significant corporate activities.
 
Our historical and pro forma financial information as a business segment of Alon Energy may not be representative of our results as an independent public company.
 
The historical and pro forma financial information we have included in this prospectus may not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an independent entity during the historical periods presented. The historical costs and expenses reflected in our combined financial statements include an allocation for certain corporate functions historically provided by Alon Energy, including tax, accounting, treasury, legal and human resources services. We have not adjusted our historical or pro forma financial information to reflect all of the significant changes that will occur in our cost structure, funding and operations as a result of our transition to becoming a public company, including changes in our employee base, potential increased costs associated with reduced economies of scale and increased costs associated with being a publicly traded, stand-alone company, subject to SEC reporting and NYSE requirements. Therefore, our historical and pro forma financial information may not necessarily be indicative of what our results of operations, financial position or cash flows will be in the future.
 
Our ability to operate our business effectively may suffer if we are unable to cost-effectively establish our own administrative and other support functions in order to operate as a stand-alone company after the expiration of our transitional services agreements with Alon Energy.
 
As a subsidiary of Alon Energy, we have relied on administrative and other resources of Alon Energy to operate our business. In connection with this offering, we will enter into various service agreements to retain the ability for specified periods to use these Alon Energy resources. See “Certain Relationships and Related Party Transactions.” These services may not be provided at the same level as when we were a wholly-owned subsidiary of Alon Energy, and we may not be able to obtain the same benefits that we received prior to this offering. These services may not be sufficient to meet our needs, and after our agreements with Alon Energy expire, we may not be able to replace these services or obtain these services at prices and on terms as favorable as we currently have with Alon Energy. We will need to create our own administrative and other support systems or contract with third parties to replace Alon Energy’s systems. In addition, we have received informal support from Alon Energy, which may not be addressed in the agreements we will enter into with Alon Energy. The level of this informal support may diminish as we become a more independent company. Any failure or significant downtime in our own administrative systems or in Alon Energy’s administrative systems during the transitional period could result in unexpected costs, materially adversely affect our results or prevent us from paying our suppliers or employees and performing other administrative services on a timely basis.
 
We may not be able to resolve favorably potential disputes that may arise between us and Alon Energy with respect to our past and ongoing relationships.
 
Disputes may arise between Alon Energy and us in a number of areas relating to our ongoing relationships, including:
 
  •  the terms of the fuel supply and trademark licensing agreement;
 
  •  labor, tax, employee benefit, indemnification and other matters arising from our separation from Alon Energy;
 
  •  employee retention and recruiting;
 
  •  business combinations involving us;


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  •  sales or dispositions by Alon Energy of all or any portion of its ownership interest in us; and
 
  •  the nature, quality and pricing of services Alon Energy has agreed to provide us.
 
We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.
 
The agreements we will enter into with Alon Energy may be amended upon agreement between the parties. While we are controlled by Alon Energy, we may not have the leverage to negotiate amendments to these agreements if required on terms as favorable to us as those we would negotiate with an unaffiliated third party.
 
Some of our directors and executive officers own common stock of Alon Energy and Alon Israel and, in some cases, their other subsidiaries, and options or other instruments, the value of which is related to the value of stock of Alon Energy or Alon Israel, as applicable, and, in some cases, their other subsidiaries, and hold management positions with Alon Energy and Alon Israel, which could cause conflicts of interests that result in our not acting on opportunities we otherwise may have.
 
Some of our directors and executive officers own Alon Energy and Alon Israel common stock and options or other instruments the value of which is related to the value of common stock of Alon Energy or Alon Israel, as applicable, and, in some cases, their other subsidiaries. In addition, some of our directors are executive officers and directors of Alon Energy and Alon Israel. The direct and indirect interests of our directors and officers in common stock of Alon Energy and Alon Israel and their other subsidiaries and the presence of executive officers or directors of Alon Energy and Alon Israel on our board of directors could create, or appear to create, conflicts of interest with respect to matters involving both us and Alon Energy or Alon Israel that could have different implications for Alon Energy or Alon Israel than they do for us. We cannot assure you that the agreements we enter into with Alon Energy and Alon Israel will adequately address potential conflicts of interest or that potential conflicts of interest will be resolved in our favor or that we will be able to take advantage of corporate opportunities presented to individuals who are officers or directors of both us and Alon Energy or Alon Israel. As a result, we may be precluded from pursuing certain growth opportunities.
 
We will be a “controlled company” within the meaning of the NYSE rules, and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.
 
After the completion of this offering, Alon USA, LP, a wholly-owned subsidiary of Alon Energy, will own more than 50% of the total voting power of our common shares and we will be a “controlled company” under the NYSE corporate governance standards. As a controlled company, we will not be required to comply with certain NYSE corporate governance requirements, including the requirements:
 
  •  that a majority of our board of directors consists of independent directors;
 
  •  that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
 
  •  that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
 
  •  for an annual performance evaluation of the nominating and governance committee and compensation committee.
 
As a result, you will not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.


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Risks Related to This Offering
 
There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity.
 
Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering.
 
If our stock price decreases after this offering, you could lose a significant part or all of your investment. The market price of our common stock may be influenced by many factors, some of which are beyond our control, including those decisions described under “— Risks Relating to Our Business” and the following:
 
  •  general economic and stock market conditions;
 
  •  risks relating to our business and our industry, including those discussed above;
 
  •  strategic actions by us or our competitors;
 
  •  announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;
 
  •  the failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts;
 
  •  variations in our quarterly results of operations;
 
  •  future sales of our common stock or other securities; and
 
  •  investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives.
 
As a result of these factors, investors in our common stock may not be able to resell their shares at or above the initial offering price. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated to, and disproportionate to, the operating performance of the wholesale marketing and retail segments. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.
 
We will face new challenges, increased costs and administrative responsibilities as an independent public company.
 
As a public company with listed equity securities, we will need to comply with additional laws, regulations and requirements, certain provisions of the Sarbanes-Oxley Act of 2002, related regulations of the Securities and Exchange Commission and the Public Company Accounting Oversight Board and NYSE requirements. Complying with these laws, regulations and requirements will occupy a significant amount of the time of our board of directors and management and will increase our costs and expenses.
 
We will need to:
 
  •  institute a more comprehensive compliance function;
 
  •  design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
 
  •  prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;


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  •  establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;
 
  •  involve and retain to a greater degree outside counsel and accountants in the above activities; and
 
  •  enhance our investor relations function.
 
If we do not implement such measures in a timely manner or with adequate compliance, we might fail to comply with these additional rules and regulations, which in turn could subject us to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission or the NYSE. Any such action could harm our reputation and investor confidence in the accuracy and completeness of our financial reports, which could materially adversely affect our stock price.
 
In addition, we also expect that being a public company subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit and compensation committees, and qualified executive officers.
 
We will be required to report the effectiveness of the internal controls over financial reporting of our business in our annual report on Form 10-K for the year ended December 31, 2009.
 
Section 404 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission promulgated thereunder require our annual reports to contain a report of management’s assessment of the effectiveness of internal controls over financial reporting and an attestation report of our independent registered public accounting firm, including its opinion on the effectiveness of our internal control over financial reporting. These reports will be required to be included in our annual reports on Form 10-K commencing with our annual report on Form 10-K for the year ended December 31, 2009. The evaluation of our systems and the documentation of such systems that we will need to comply with Section 404 will be both costly and time-consuming. We cannot estimate at this time how long this process will take nor how much additional expense we will incur in completing the process necessary to comply with Section 404. We will need to improve our internal controls in connection with this offering in order to timely meet our reporting requirements as a public company. As we prepare for the completion of this offering, we are in the process of addressing these issues by hiring additional personnel with the necessary expertise. However, these and other remediation efforts may not enable us to avoid significant deficiencies or material weaknesses in our internal controls over financial reporting in the future. If we are unable to conclude that our internal control over financial reporting is effective as of the end of 2009 (or if our auditors are unable to opine that our internal control over financial reporting is effective), we could lose investor confidence in the accuracy and completeness of our financial reports, which could, in turn, have an adverse effect on our stock price.
 
You will incur immediate and substantial dilution as a result of this offering.
 
The initial public offering price per share of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock immediately after the offering. As a result, you will pay a price per share that substantially exceeds the tangible book value of our assets after subtracting our liabilities. Based on the issuance and sale of          million shares of common stock by us at an assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover of this prospectus), you will incur immediate dilution of approximately $      in the net tangible book value per share if you purchase shares in this offering. See “Dilution.”
 
Shares eligible for future sale could materially adversely affect our common stock price.
 
Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. Under our certificate of incorporation, we are authorized to issue up to           shares of common stock, of which           shares of common stock will


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be outstanding following this offering. Of these shares, the shares of common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act by persons other than “affiliates,” as that term is defined in Rule 144 under the Securities Act.
 
We, our officers and directors and Alon Energy have agreed, subject to certain exceptions, not to sell or transfer, directly or indirectly, any shares of our common stock for a minimum period of 180 days from the date of this prospectus, subject to certain extensions, without the prior consent of Credit Suisse. However, after the lock-up period expires, Alon Energy will be able to register the common stock it owns and shares issuable upon conversion of the shares of series A convertible preferred stock under the Securities Act pursuant to a registration rights agreement with us. Furthermore, although there is no present intention to do so, Credit Suisse may, in its sole discretion and without notice, release all or any portion of the shares subject to these lock-up agreements. See “Underwriting.”
 
Following completion of this offering, we intend to register an aggregate of shares of our common stock that are reserved for issuance upon the exercise of options granted or reserved for grant under our equity incentive plan. Stockholders will be able to sell these shares in the public market upon issuance, subject to restrictions under the securities laws, any applicable lock-up agreements, any stock option vesting requirements and the lapsing of restrictions on restricted stock.
 
Also, in the future we may issue securities in connection with investments and acquisitions. The amount of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding common stock.
 
We cannot predict the size of future issuances of our common stock or the effect, if any, that future sales and issuances of shares of our common stock would have on the market price of our common stock. See “Shares Eligible for Future Sale.”
 
Provisions of our amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law may impede or discourage a takeover, which could materially adversely affect the value of our common stock.
 
Provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of discouraging a change of control of our company or deterring tender offers for our common stock. The anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. Additionally, provisions of our amended and restated certificate of incorporation and amended and restated bylaws will impose various procedural and other requirements, which could make it more difficult for stockholders to effect some corporate actions. For example, our amended and restated certificate of incorporation will authorize our board to determine the rights, preferences and privileges and restrictions of unissued shares of preferred stock without any vote or action by our stockholders. Thus, our board will be able to authorize and issue shares of preferred stock with voting or conversion rights that could materially adversely affect the voting or other rights of holders of our common stock. Moreover, stockholders will not be permitted to call a special meeting or to require the board of directors to call a special meeting or to take action by written consent. These rights and provisions may have the effect of delaying or deterring a change of control of our company and may limit the price that investors might be willing to pay in the future for shares of our common stock. See “Description of Capital Stock.”
 
There is no assurance that we will declare dividends or have the available cash to make dividend payments.
 
Although we will have a policy of paying dividends on our common stock, there can be no assurance that funds will be available for this purpose in the future. The declaration and payment of dividends will be subject to the sole discretion of our board of directors, will not be cumulative and will depend upon our profitability, financial condition, capital needs, future prospects and other factors deemed relevant by our board of directors at the time. No dividends will be payable in respect of our common stock unless we have first paid the stated dividends on our series A convertible preferred stock.


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If we are, or become, a U.S. real property holding corporation, special tax rules may apply to a sale, exchange or other disposition of common stock by non-U.S. holders, and those holders may be less inclined to invest in our stock as they may be subject to U.S. federal income tax in certain situations.
 
A non-U.S. holder will be subject to U.S. federal income tax with respect to gains recognized on the sale, exchange or other disposition of our common stock if we are, or were, a “U.S. real property holding corporation,” or a USRPHC, at any time during the shorter of the five-year period ending on the date of the sale or other disposition and the period such non-U.S. holder held our common stock (such applicable shorter period, the “lookback period”). In general, we would be a USRPHC if the fair market value of our “U.S. real property interests,” as such term is defined for U.S. federal income tax purposes, equals or exceeds 50% of the sum of the fair market value of our worldwide real property interests and our other assets used or held for use in our trade or business. Based on our best estimate, we believe there is a significant risk that we may currently be, or may become, a USRPHC. However, because the determination of whether we are a USRPHC is fact-specific and depends on the composition of our assets and other factors, some of which may be beyond our control (including, for example, fluctuations in the value of our assets), it is difficult to determine or predict whether we are or will become a USRPHC. If we are or become a USRPHC, so long as our common stock is regularly traded on an established securities market (such as the NYSE), only a non-U.S. holder who, actually or constructively, holds or held during the lookback period more than 5% of our common stock will be subject to U.S. federal income tax on the disposition of our common stock.


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FORWARD-LOOKING STATEMENTS
 
This prospectus includes forward-looking statements in addition to historical information. These forward-looking statements are included throughout this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Corporate Reorganization Transactions” and relate to matters such as our industries, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements in this prospectus.
 
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
 
Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:
 
  •  volatility in crude oil and wholesale petroleum costs;
 
  •  volatility in retail fuel prices;
 
  •  loss of our 7-Eleven and FINA licenses;
 
  •  loss or adverse effect on our supplier relationships for motor fuel and merchandise;
 
  •  competition in the retail and wholesale marketing industries;
 
  •  our ability to attract and retain qualified employees;
 
  •  changes in economic conditions, generally, and in the markets we serve, consumer behavior and travel trends;
 
  •  seasonal trends in the industries in which we operate;
 
  •  inability to identify, acquire and integrate new stores or grow our wholesale marketing operations;
 
  •  the effects of and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations;
 
  •  dangers inherent in storing and transporting motor fuel;
 
  •  our ability to insure our motor fuel operations;
 
  •  litigation or adverse publicity concerning food quality, food safety or other health concerns related to our convenience stores;
 
  •  operating hazards, natural and man-made disasters, casualty losses and other matters beyond our control; and
 
  •  the other factors discussed in more detail under “Risk Factors.”
 
Many of these factors are described in greater detail under “Risk Factors.” Potential investors are urged to consider these factors and the other factors described under “Risk Factors” carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included herein are made only as of the date of this prospectus, and we undertake no obligation to update any information contained in this prospectus or to publicly release the results of any revisions to any forward-looking statements that may be made to reflect events or circumstances that occur, or that we become aware of, after the date of this prospectus, except as may be required by any applicable securities laws.


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USE OF PROCEEDS
 
Based on an assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover of this prospectus), we estimate that the proceeds we will receive from the sale of common stock in this offering will be approximately $      million, after deducting underwriting discounts and commissions and estimated offering expenses.
 
We intend to use the net proceeds:
 
  •  to return $      million of parent investment to Alon USA, LP; and
 
  •  for general corporate purposes, including growth capital.
 
The parent company investment that will be repaid with a portion of the proceeds of this offering consists of the current balance of net intercompany contributions that we have received from Alon USA, LP, our direct parent company.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) the net proceeds to us from this offering by $      , assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
 
DIVIDEND POLICY
 
We intend to pay quarterly cash dividends on our common stock at an initial annual rate of $      per share, commencing in the           quarter of 2009. However, the declaration and payment of future dividends to holders of our common stock is at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal requirements, prior payments of preferred stock dividends and other factors our board of directors deems relevant.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2008 on an actual basis, on an as adjusted basis to give effect to the corporate reorganization transactions and on an as further adjusted basis to give effect to the sale by us of          shares of our common stock in this offering at an assumed initial offering price of $      per share (the midpoint of the range set forth on the cover of this prospectus) and the application of the net proceeds thereof as described in “Use of Proceeds.” You should read this table in conjunction with “Use of Proceeds,” “Selected Historical Combined Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Corporate Reorganization Transactions” and our audited and unaudited combined financial statements and related notes included elsewhere in this prospectus.
 
                         
    As of June 30, 2008  
          As
    As Further
 
    Historical     Adjusted(1)     Adjusted(2)  
    (Dollars, in millions, except per share amounts)  
 
Cash and cash equivalents
  $ 5.6     $           $        
                         
Notes payable:
                       
Amended Wachovia Credit Facility and other indebtedness(3)
  $ 90.5     $       $    
Member’s interest and equity/stockholders’ equity:
                       
Net parent investment
    111.3                  
Preferred stock, $0.01 par value;   shares authorized;   shares issued and outstanding, as adjusted and as further adjusted
                     
Common stock, $0.01 par value;   shares authorized;   shares issued and outstanding, as adjusted;   shares issued and outstanding, as further adjusted
                     
Additional paid-in capital
                     
Accumulated other comprehensive loss
    (0.7 )                
Retained earnings
    3.0                  
                         
Total member’s interest and equity/stockholders’ equity
    113.6                  
                         
Total capitalization
  $ 204.1     $       $  
                         
 
 
(1) Reflects the conversion of $   million of net parent investment from Alon Energy to $   million of our series A convertible preferred stock and $   million of common stock.
 
(2) Reflects the offering and use of proceeds therefrom as described in this prospectus. See “Use of Proceeds.”
 
(3) As of June 30, 2008, (a) $89.7 million were outstanding under the Amended Wachovia Credit Facility and there were no further amounts available for borrowing and (b) $0.8 million were outstanding under mortgage loans and our capital lease obligation.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) each of cash and cash equivalents, additional paid-in capital and total member’s interests and equity/stockholders’ equity by $      and would increase (decrease) total capitalization by $      , assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.


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DILUTION
 
Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in this offering will exceed the net tangible book value per share of common stock after this offering. If you invest in our common stock, your investment will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. We calculate net tangible book value per share by calculating our total assets less intangible assets and total liabilities, and dividing it by the number of outstanding shares of common stock.
 
As of June 30, 2008, our net tangible book value was approximately $      million, or approximately $      per share of common stock, after giving pro forma effect to the corporate reorganization transactions. After giving effect to the sale of           shares of common stock in this offering at an assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover of this prospectus) and after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value as of June 30, 2008, which we refer to as our pro forma net tangible book value, would have been approximately $      million, or $      per share. This represents an immediate increase in net tangible book value of $      per share to our existing stockholders and an immediate dilution of $      per share to purchasers of common stock in this offering. The following table illustrates this dilution on a per share basis:
 
                 
Assumed initial public offering price per share
            $        
Net tangible book value per share as of June 30, 2008 after giving pro forma effect to the corporate reorganization transactions
  $            
Increase in net tangible book value per share attributable to new investors
               
                 
Pro forma net tangible book value per share after the offering
               
                 
Dilution per share to new investors
          $    
                 
 
Each $1.00 increase (decrease) in the assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) our net tangible book value after this offering by $      per share and the dilution in net tangible book value to new investors in this offering by $      per share.
 
The following table summarizes as of June 30, 2008, as adjusted to give effect to the corporate reorganization transactions, this offering and use of proceeds thereof, the differences between the number of shares of common stock purchased from us, the aggregate cash consideration paid to us (after giving effect to the return of parent investment in connection with this offering) and the average price per share paid by existing stockholders and new investors purchasing shares of common stock in this offering. The following table does not reflect the ownership by our parent of the series A convertible preferred stock. The calculation below is based on an offering price of $      per share (the midpoint of the range set forth on the cover of this prospectus) before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us (after giving effect to the return of parent investment in connection with this offering):
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     Percent     Amount     Percent     per Share  
 
Existing stockholders(1)
              %   $             %   $        
New investors(1)
                                  $    
                                         
Total
            100 %   $         100 %        
                                         
 
 
(1) If the underwriters’ over-allotment option is exercised in full, the percentage of shares of common stock held by existing stockholders after this offering would be reduced to          , or     % of the total number of our shares of common stock outstanding after this offering, and the number of shares of common stock held by new investors would increase to           , or     % of the total number of our shares of common stock outstanding after this offering.


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A $1.00 increase (decrease) in the assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) total consideration paid by new investors in this offering and by all investors by $      million, and would increase (decrease) the average price per share paid by new investors by $      , assuming the number of shares of common stock offered by us, as set forth on the cover of this prospectus, remains the same.


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SELECTED HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
 
The following table sets forth our selected historical combined financial and operating data as of and for the periods indicated below. The selected historical combined financial data for the years ended December 31, 2005, 2006 and 2007, and the selected historical combined balance sheet data as of December 31, 2006 and 2007, have been derived from our audited combined financial statements, which are included elsewhere in this prospectus. The selected historical combined balance sheet data as of December 31, 2005 have been derived from our audited combined balance sheet as of December 31, 2005, which is not included in this prospectus.
 
The selected historical combined financial data for the years ended December 31, 2003 and 2004, and the selected historical combined balance sheet data as of December 31, 2003 and 2004, have been derived from our unaudited combined financial statements, which are not included in this prospectus.
 
The selected historical combined financial data for the six months ended June 30, 2007 and 2008, and as of June 30, 2008 are derived from our unaudited combined financial statements, which are included elsewhere in this prospectus. We have prepared our unaudited combined financial statements on the same basis as our audited combined financial statements and have included all adjustments, consisting of normal and recurring adjustments, which we consider necessary for a fair presentation of our financial position and operating results for the unaudited periods. The selected historical combined financial and operating data for the six months ended June 30, 2007 and 2008 and as of June 30, 2008, are not necessarily indicative of the results that may be obtained for a full year.
 
During the periods covered by our historical financial data, most of our business was accounted for as an operating segment of Alon Energy. Our combined financial statements include allocations of certain corporate functions provided to us by Alon Energy, including general corporate expenses, where allocations are based on estimates of effort or resources incurred on our behalf. Certain other costs incurred by Alon Energy for our direct benefit, such as rent, salaries and benefits, also have been included in our financial statements. However, our financial statements do not purport to represent and may not necessarily reflect what our financial position, cash flows and results of operations actually would have been if we had operated as a stand-alone company during the periods presented. Accordingly, our historical financial data also do not purport to represent and may not be indicative of our cash flows and results of operations for any future period or financial position at any future date.


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The following selected historical combined financial and operating data should be read in conjunction with “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited combined financial statements and related notes included elsewhere in this prospectus.
 
                                                         
                                  Six Months Ended
 
    Year Ended December 31,     June 30,  
    2003     2004     2005     2006     2007     2007     2008  
    unaudited                       unaudited  
    (Dollars in thousands, except as noted)  
 
Statement of Operations Data:
                                                       
Revenues:
                                                       
Motor fuel — retail
  $ 147,777     $ 171,383     $ 193,232     $ 194,025     $ 259,287     $ 101,555     $ 169,184  
Merchandise — retail
    126,072       125,054       128,466       150,899       213,433       86,206       124,807  
Other, net — retail(1)
    4,340       5,054       4,879       6,255       7,374       3,084       2,931  
                                                         
Total retail
    278,189       301,491       326,577       351,179       480,094       190,845       296,922  
Motor fuel — wholesale
    605,827       703,903       831,004       910,959       792,273       411,112       392,597  
Other, net — wholesale(2)
    1,796       4,945       2,431       2,455       2,149       919       1,390  
                                                         
Total wholesale
    607,623       708,848       833,436       913,414       794,422       412,031       393,987  
                                                         
Total revenues
    885,812       1,010,339       1,160,013       1,264,593       1,274,516       602,876       690,909  
Gross profit:
                                                       
Motor fuel — retail
    11,918       12,598       14,985       14,555       19,478       8,910       10,077  
Merchandise — retail
    38,644       38,548       37,954       42,500       61,113       23,605       36,028  
Other, net
    4,340       5,054       4,879       6,254       7,375       3,084       2,931  
                                                         
Total retail
    54,902       56,200       57,818       63,309       87,966       35,599       49,036  
                                                         
Motor fuel — wholesale
    10,721       2,134       (7,096 )     13,897       26,141       12,152       (110 )
Other, net — wholesale
    1,796       4,945       2,431       2,456       2,149       919       1,390  
                                                         
Total wholesale
    12,517       7,079       (4,665 )     16,353       28,290       13,071       1,280  
                                                         
Total gross profit
    67,419       63,279       53,153       79,662       116,256       48,670       50,316  
Operating and selling expenses:
                                                       
Operating, selling and administrative
    58,068       57,857       58,668       64,256       81,933       34,607       46,261  
Depreciation, amortization and accretion
    5,315       4,962       5,026       6,205       10,245       3,580       6,898  
                                                         
Total operating and selling expenses
    63,383       62,819       63,694       70,461       92,178       38,187       53,159  
Operating income (loss)
    4,036       460       (10,541 )     9,201       24,078       10,483       (2,843 )
Interest expense
    3,325       3,555       3,848       5,864       5,202       1,842       2,683  
Rental, interest and other income
    367       476       168       229       484       124       274  
Gain (loss) on sale of assets
    (23 )     (115 )     (55 )     (30 )     68       49       (21 )
                                                         
Income (loss) before income tax expense (benefit)
    1,055       (2,734 )     (14,276 )     3,536       19,428       8,814       (5,273 )
Income tax expense (benefit)
    54       72       (5,040 )     1,336       7,543       3,364       (1,570 )
                                                         
Net income (loss)
  $ 1,001     $ (2,806 )   $ (9,236 )   $ 2,200     $ 11,885     $ 5,450     $ (3,703 )
                                                         


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                                  Six Months Ended
 
    Year Ended December 31,     June 30,  
    2003     2004     2005     2006     2007     2007     2008  
    unaudited                       unaudited  
    (Dollars in thousands, except as noted)  
 
Other Financial Data:
                                                       
EBITDA (unaudited)(3)
  $ 9,695     $ 5,783     $ (5,420 )   $ 15,575     $ 34,810     $ 14,224     $ 4,292  
Net cash provided by (used in):
                                                       
Operating activities
    7,011       6,432       (16,915 )     14,860       10,143       (5,588 )     (17,102 )
Investing activities
    (7,193 )     (3,648 )     (6,216 )     (38,280 )     (85,841 )     (79,237 )     (1,469 )
Financing activities
    (158 )     (2,958 )     24,560       23,547       81,429       94,099       13,795  
Capital expenditures(4)
    7,467       3,952       6,216       10,902       11,027       2,051       1,469  
                                                         
Operating Data (unaudited):
                                                       
Number of retail stores (end of period)(5)
    168       167       167       207       307       206       306  
Retail fuel gallons sold
    100,389       97,541       87,714       75,969       91,945       38,026       49,285  
Average gasoline retail price (dollars per gallon sold)
  $ 1.47     $ 1.76     $ 2.20     $ 2.55     $ 2.82     $ 2.67     $ 3.43  
Average per retail store(6):
                                                       
Retail merchandise sales
    736       746       769       806       831       418       407  
Retail fuel gallons sold
    598       592       535       414       364       188       164  
Comparable merchandise store sales growth(7):
            1.4 %     3.1 %     4.8 %     3.1 %     3.5 %     (2.7 )%
Retail merchandise gross margin(8)
    33.6 %     34.0 %     33.3 %     32.3 %     32.1 %     31.0 %     31.2 %
Retail fuel margin (cents per gallon)(9)
    11.2 ¢     11.9 ¢     17.1 ¢     19.2 ¢     21.2 ¢     23.4 ¢     20.4¢  
Number of stores supplied through wholesale distributor network (end of period)(10)
    1,345       1,302       1,079       983       776       925       765  
Wholesale fuel gallons sold(11)
    673,806       594,768       598,965       543,788       458,581       239,811       184,540  
Wholesale fuel margin (cents per gallon)
    1.9 ¢     0.9 ¢     (0.8     3.0 ¢     6.2 ¢     5.5 ¢     0.7 ¢
                                                         
Balance Sheet Data (end of period):
                                                       
Cash and cash equivalents
  $ 3,265     $ 3,091     $ 4,520     $ 4,647     $ 10,378             $ 5,602  
Working capital(12)
    26,534       20,776       20,744       22,906       28,410               48,429  
Total assets
    108,903       105,413       113,866       141,465       237,015               240,661  
Total liabilities
    71,297       72,976       108,000       90,970       136,335               127,049  
Total member’s interest and equity
    37,606       32,437       5,866       50,495       100,680               113,612  
 
 
(1) Includes revenues from lottery, money orders, money wire and ATM commissions, and other commissions earned on gift cards and ancillary services.
 
(2) Includes payment card processing fees, broadband and equipment rents, and other marketing and trade agreement fees.
 
(3) We define EBITDA as net income (loss) before net interest expense, income tax expense (benefit) and depreciation, amortization and accretion. We believe that EBITDA is useful to investors in evaluating our operating performance because:
 
  •  securities analysts and investors often use such calculations as a measure of financial performance and debt service capabilities;
 
  •  it facilitates management’s ability to measure operating performance of our business on a consistent basis since it removes the impact of items not directly resulting from our retail and wholesale marketing operations; and

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  •  it is used by our management for internal planning purposes, including aspects of our operating budget, capital expenditures, as well as for segment and individual site operating targets.
 
EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for an analysis of our results as reported under GAAP. Some of these limitations include:
 
  •  it does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
 
  •  it does not reflect changes in, or cash requirements for, working capital;
 
  •  it does not reflect significant interest expense, or the cash requirements necessary to service interest or principal payments on our credit facilities;
 
  •  it does not reflect payments made or future requirements for income taxes;
 
  •  although depreciation, amortization and accretion are non-cash charges, the assets being depreciated and amortized may be replaced in the future, and EBITDA does not reflect cash requirements for such replacements; and
 
  •  because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies.
 
The following table presents a reconciliation of net income (loss) to EBITDA:
 
                                                         
          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2003     2004     2005     2006     2007     2007     2008  
 
Net income (loss)
  $ 1,001     $ (2,806 )   $ (9,236 )   $ 2,200     $ 11,885     $ 5,450     $ (3,703 )
Depreciation, amortization and accretion
    5,315       4,962       5,026       6,205       10,245       3,580       6,898  
Interest expense, net
    3,325       3,555       3,830       5,834       5,137       1,830       2,667  
Income tax expense (benefit)
    54       72       (5,040 )     1,336       7,543       3,364       (1,570 )
                                                         
EBITDA
  $ 9,695     $ 5,783     $ (5,420 )   $ 15,575     $ 34,810     $ 14,224     $ 4,292  
                                                         
 
(4) Excludes capital assets acquired in business acquisitions.
 
(5) Store count at June 30, 2007 excludes 102 stores acquired on June 29, 2007 because no results of operation are included in the six months ended June 30, 2007.
 
(6) Average retail merchandise sales and motor fuel gallons sold are based on total merchandise sales or motor fuel gallons sold divided by total store months
 
(7) Includes only stores operated in both periods.
 
(8) Retail merchandise gross margin represents the difference between (i) merchandise sales revenues and other retail sales and services revenues and (ii) the delivered cost of merchandise purchases, net of rebates and commissions, expressed as a percentage of merchandise sales revenues. Retail merchandise gross margins, also referred to as in-store margins, are commonly used in the retail industry to measure in-store, or non-fuel, operating results.
 
(9) Retail fuel margin represents the difference between motor fuel revenues and net cost of purchased fuel, including transportation costs and associated motor fuel taxes, expressed on a cents per gallon basis. Motor fuel margins are frequently used in the retail industry to measure operating results related to motor fuel sales.
 
(10) Excludes convenience stores we own and operate.
 
(11) Includes motor fuel gallons sold to our retail convenience stores.
 
(12) Working capital is defined as total current assets, excluding cash and cash equivalents, less total current liabilities.


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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
 
The following unaudited pro forma condensed combined financial data for the year ended December 31, 2007 and as of and for the six months ended June 30, 2008, are based upon our historical combined financial statements included elsewhere in this prospectus, adjusted to give pro forma effect to certain transactions. The unaudited pro forma condensed combined statement of operations data for the year ended December 31, 2007 give effect to the Skinny’s transaction, the corporate reorganization transactions, this offering and the application of net proceeds thereof as if they had each occurred as of January 1, 2007. The unaudited pro forma condensed combined statement of operations data for the six months ended June 30, 2008 give effect to the corporate reorganization transactions, this offering and the application of net proceeds thereof as if they had each occurred as of January 1, 2008. The unaudited pro forma condensed combined balance sheet data as of June 30, 2008 give effect to the corporate reorganization transactions, this offering and the application of net proceeds thereof as if they had each occurred as of June 30, 2008.
 
The pro forma adjustments in the column labeled Corporate Reorganization Transactions Adjustments give effect to the corporate reorganization transactions we expect to consummate with Alon Energy immediately prior to the consummation of this offering. Following completion of these transactions, the retail and wholesale marketing segments will both be conducted by subsidiaries of Alon Brands. See “Corporate Reorganization Transactions.”
 
The pro forma adjustments in the column labeled Skinny’s Transaction Adjustments give effect to our acquisition on June 29, 2007 of Skinny’s. The aggregate purchase price for Skinny’s was approximately $75.3 million after adjustments for working capital, debt and certain other post-closing adjustments. The operations of Skinny’s have been included in our combined statement of operations since the acquisition date.
 
The unaudited pro forma condensed combined financial data is included for informational purposes only and does not purport to represent what our financial position or results of operations would actually have been had the transactions referenced above occurred on the dates indicated. In addition, the pro forma adjustments described herein are based on available information and upon assumptions that our management believes are reasonable. The unaudited pro forma financial data also do not purport to represent and may not be indicative of our results of operations for any future period or financial position at any future date.
 
The following unaudited pro forma condensed combined statements of operations should be read in conjunction with “Use of Proceeds,” “Capitalization,” “Selected Historical Combined Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited combined financial statements and related notes included elsewhere in this prospectus.


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ALON BRANDS, INC.
 
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2008
 
                                         
          Corporate
    Pro Forma for
             
          Reorganization
    Corporate
             
          Transactions
    Reorganization
    Offering
    Pro
 
    Actual     Adjustments     Transactions     Adjustments     Forma  
    (Dollars in thousands)  
 
ASSETS
Current Assets
                                       
Cash and cash equivalents
  $ 5,602     $     $ 5,602     $                $             
Accounts and short-term notes receivable, net of allowance for doubtful accounts
    46,675             46,675                  
Inventories
    27,900             27,900                  
Deferred income tax assets
    2,986             2,986                  
Prepaid expenses and other current assets
    2,058             2,058                  
                                         
Total Current Assets
    85,221             85,221                  
                                         
Property and Equipment, net
    94,181             94,181                  
                                         
Other Non-Current Assets
                                       
Goodwill
    50,450             50,450                  
Intangible assets, net
    9,257             9,257                  
Other assets
    1,552             1,552                  
                                         
Net Other Non-Current Assets
    61,259             61,259                  
                                         
Total Assets
  $ 240,661     $     $ 240,661     $       $    
                                         
LIABILITIES AND MEMBER’S INTEREST AND EQUITY
Current Liabilities
                                       
Current portion of notes payable and capital lease obligation
  $ 6,635     $     $ 6,635     $       $    
Accounts payable
    11,281             11,281                  
Accounts payable, affiliates
    1,451             1,451                  
Income taxes payable
    295             295                  
Accrued liabilities and expenses
    11,528             11,528                  
                                         
Total Current Liabilities
    31,190             31,190                  
                                         
Long-Term Liabilities
                                       
Notes payable
    83,795             83,795                  
Capital lease obligation
    114             114                  
Deferred income tax liability
    7,838             7,838                  
Other non-current liabilities
    4,112             4,112                  
                                         
Total Liabilities
    127,049             127,049                  
                                         
Commitments and Contingencies
                                       
Member’s Interest and Equity
                                       
Net parent investment
    111,322                                  
Preferred Stock
                                     
Common Stock
                                     
Additional paid-in capital
                                     
Accumulated other comprehensive loss, net of tax
    (728 )                                
Retained earnings
    3,018                                  
                                         
Total Members Interest and Equity/Stockholders’ Equity
    113,612                                  
                                         
Total Liabilities, Member’s Interest and Equity/Stockholders’ Equity
  $ 240,661     $     $ 240,661     $       $    
                                         
(a) Reflects the conversion of $      of net parent investment to common stock and the conversion of $      of such investment to our series A convertible preferred stock.
 
(b) Reflects gross offering proceeds of $      less estimated offering-related expenses of $      that are capitalized and $      retirement of net parent investment.
 
(c) Reflects the return of $      of net parent investment to Alon USA, LP with the proceeds of the offering.


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ALON BRANDS, INC.
 
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
 
                                                 
    Historical                          
    Alon Brands
    Skinny’s
          Pro Forma
             
    for the Year
    for the Six
          for
             
    Ended
    Months Ended
    Skinny’s
    Skinny’s
             
    December 31,
    June 29,
    Transaction
    Transaction
    Offering
    Pro
 
    2007(1)     2007     Adjustments     Adjustments     Adjustments     Forma  
    (Dollars in thousands, except per share amounts)  
 
Revenues
                                               
Motor fuel
  $ 1,051,560       50,266     $ (38,418 )(a)   $ 1,063,408     $           $        
Merchandise
    213,433       36,007               249,440                  
Other, net
    9,523       832       (101 )(b)     10,254                  
                                                 
Total Revenues
    1,274,516       87,105       (38,519 )     1,323,102                  
                                                 
Cost of Sales
                                               
Motor fuel
    1,005,941       47,699       (38,418 )(a)     1,015,221                  
Merchandise, net
    152,319       25,064               177,384                  
                                                 
Total Cost of Sales
    1,158,260       72,763       (38,418 )     1,192,605                  
                                                 
Gross Profit
    116,256       14,342       (101 )     130,497                  
                                                 
Operating and Selling Expenses
                                               
Personnel costs, taxes, and benefits
    39,884       7,437               47,321                  
Leases and utilities
    14,117       1,687               15,804                  
Royalties
    2,901       77               2,978                  
Other operating, selling, and administrative
    25,031       3,205       (101 )(b)     28,135                  
Depreciation, amortization and accretion
    10,245       1,116       523 (c)     11,884                  
                                                 
Operating and Selling Expenses
    92,178       13,522       422       106,122                  
                                                 
Operating Income (Loss)
    24,078       820       (523 )     24,375                  
                                                 
Other Income (Expense)
                                               
Interest expense
    (5,202 )     (1,323 )     169 (d)     (6,356 )                
Interest income
    65       43               108                  
Rental, interest and other income
    419       194               613                  
Gain on sale of assets
    68       5               73                  
                                                 
Other Income (Expense)
    (4,650 )     (1,081 )     169       (5,562 )                
                                                 
Income (Loss) Before Income Tax Expense (Benefit)
    19,428       (261 )     (354 )     18,813                  
                                                 
Income Tax Expense (Benefit)
    7,543       3,541       (3,986 )(e)     7,098                  
                                                 
Net Income (Loss)
  $ 11,885       (3,802 )   $ 3,632     $ 11,715     $       $  
                                                 
Earnings Per Share
          $    
Weighted Average Shares Outstanding
               
 
 
(1) Amounts included in actual column include Alon Marketing and SCS for the twelve months ended December 31, 2008 and Skinny’s from the date of acquisition, June 29, 2007.
 
Related to the Skinny’s acquisition:
 
(a) Elimination of motor fuel products purchased from Alon Marketing totaling $38,418;
 
(b) Elimination of credit card revenue of $101.
 
(c) Increase to depreciation, amortization and accretion expense on an acquired asset totaling $523;
 
(d) Increase to interest expense based on increase of borrowings under the Amended Wachovia Credit Facility to $46,167 as of January 1, 2007 at 5% (LIBOR plus 1.5%) totaled $395; elimination of $564 of prepayment penalties associated with early extinguishment of Skinny’s debt; and
 
(e) Decrease in income tax expense based on election to be treated as a “C” corporation and the Skinny’s operating loss for the six months ended June 29, 2007.


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ALON BRANDS, INC.
 
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
 
                         
          Offering
       
    Actual     Adjustments     Pro Forma  
    (Dollars in thousands, except per share amounts)  
 
Revenues
                       
Motor fuel
  $ 561,780     $           $        
Merchandise
    124,807                  
Other, net
    4,322                  
                         
Total Revenues
    690,909                  
                         
Cost of Sales
                       
Motor fuel
    551,814                  
Merchandise, net
    88,779                  
                         
Total Cost of Sales
    640,593                  
                         
Gross Profit
    50,316                  
                         
Operating and Selling Expenses
                       
Personnel costs, taxes, and benefits
    22,512                  
Leases and utilities
    8,060                  
Royalties
    1,523                  
Other operating, selling, and administrative
    14,166                  
Depreciation, amortization and accretion
    6,898                  
                         
Total Operating and Selling Expenses
    53,159                  
                         
Operating Income (Loss)
    (2,843 )                
                         
Other Income (Expense)
                       
Interest expense
    (2,683 )                
Interest income
    16                  
Rental and other income
    258                  
Gain (loss) on sale of assets
    (21 )                
                         
Total Other Income (Expense)
    (2,430 )                
                         
Income (Loss) Before Income Taxes
    (5,273 )                
                         
Income Tax Expense (Benefit)
    (1,570 )                
                         
Net Income (Loss)
  $ (3,703 )   $       $    
                         
Earnings Per Share(a):
                       
Basic
  $    
Diluted
  $    
Weighted Average Shares Outstanding(b):
                       
Basic
  $    
Diluted
  $  
 
 
(a) Pro forma earnings per share data for the six months ended June 30, 2008 reflect the conversion of Alon USA Interests, LLC to a “C” corporation in November 2008, the issuance of common stock and series A convertible preferred stock in the corporate reorganization transactions and the issuance of shares in this offering. Pro forma earnings per share is calculated by dividing the net income by the basic and diluted shares outstanding.
 
(b) Pro forma basic and diluted shares outstanding reflect the conversion of Alon USA Interests, LLC to a “C” corporation in November 2008 and issuance of common stock and series A convertible preferred stock in the corporate reorganization transactions and the issuance of shares of common stock in this offering.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion together with our audited and unaudited combined financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. See “Forward-Looking Statements.” The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and elsewhere in this prospectus. EBITDA is a non-GAAP financial measure of performance that has limitations and should not be considered as a substitute for net income. See “Prospectus Summary — Summary Historical Combined and Unaudited Pro Forma Condensed Combined Financial and Operating Data” and “Selected Historical Combined Financial and Operating Data” for a discussion of our use of EBITDA in this prospectus and a reconciliation of EBITDA to net income for the periods presented.
 
Overview
 
We are the largest 7-Eleven licensee in the United States, and we are the sole licensee of the FINA brand for motor fuels in the South Central and Southwestern United States. Our business consists of two operating segments: retail and wholesale marketing. As of June 30, 2008, our retail segment operated 306 convenience stores in Central and West Texas and New Mexico, substantially all of which are operated under the 7-Eleven and FINA brands. Through our 7-Eleven licensing agreement, we have the exclusive right to operate 7-Eleven convenience stores in substantially all of our existing retail markets and many surrounding areas. Our wholesale marketing segment markets and supplies motor fuels under the FINA brand and provides brand support and payment card processing services to distributors supplying over 1,000 retail locations, including all company-owned stores that sell motor fuel. In certain markets, we also sub-license the FINA brand and provide the same brand support and payment card processing services to distributors outside of our supply network representing approximately 100 additional retail locations.
 
Historically, most of our business was accounted for as an operating segment of Alon USA Energy, Inc., an independent refining company listed on the NYSE under the symbol “ALJ.” Alon Energy owns and operates four crude oil refineries located in Big Spring, Texas; Paramount and Long Beach, California and Krotz Springs, Louisiana.
 
On June 29, 2007, we completed the acquisition of Skinny’s, Inc., or Skinny’s, a privately-held company that operated 102 stores in Central and West Texas. The aggregate purchase price for Skinny’s was approximately $75.3 million after adjustments for working capital, debt and certain other post-closing adjustments. The operations of Skinny’s have been included in our combined statements of operations since the acquisition date.
 
On July 3, 2006, we completed the purchase of 40 retail stores from Good Time Stores, Inc., or Good Times, in El Paso, Texas. The aggregate purchase price for the 40 acquired stores was $27.4 million after adjustments for inventories, post-closing transaction costs and assumption of certain lease obligations.
 
Corporate Reorganization Transactions
 
In November 2008, Alon Brands was converted from a Texas limited liability company to a Delaware corporation. Alon Brands historically operated as a holding company for the retail business of Alon Energy. Prior to the consummation of this offering, Alon Energy and Alon Brands will undertake a series of corporate reorganization transactions which will result in the assets and liabilities of the wholesale marketing segment being contributed to Alon Brands from Alon USA, LP. See “Corporate Reorganization Transactions.”
 
Our audited and unaudited combined financial statements included elsewhere in this prospectus, which are discussed below, reflect the historical financial position, cash flows and results of operations of the business that will be transferred to us from Alon USA, LP pursuant to a series of corporate reorganization


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transactions. However, our financial statements do not purport to represent, and may not necessarily reflect, what our financial position, cash flows and results of operations actually would have been if we had operated as a stand-alone company during the periods presented. Accordingly, our historical financial data also do not purport to represent and may not be indicative of our financial position, cash flows or results of operations for any future period or financial position at any future date.
 
Basis of Presentation
 
Prior to the effectiveness of the registration statement of which this prospectus forms a part, Alon Energy intends to “carve out” and cause the assets and liabilities associated with its FINA-branded wholesale marketing segment, operated by Alon USA, LP, to be contributed to Alon Marketing, LLC, or Alon Marketing, a newly-formed Delaware limited liability company. Alon USA, LP is the direct parent of Alon Brands, and the equity interests in Alon Marketing will then be contributed to Alon Brands. The historical financial statements contained in this prospectus reflect the combined financial position and results of operations of the wholesale marketing and retail segments that will be owned and operated by Alon Brands at the time of this offering.
 
We conduct our business in two primary business segments, retail and wholesale marketing. The retail segment operates 306 convenience store sites located in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and FINA brand names. Substantially all of the motor fuels sold through the retail segment are purchased from our wholesale marketing segment.
 
The wholesale marketing segment markets motor fuels through a network of over 1,000 locations under the FINA brand name, including our retail convenience stores that sell motor fuel. A majority of the fuel marketed is purchased through Alon Energy’s physically integrated system refined in Big Spring, Texas. This segment also provides its network of FINA-branded customers with brand support and payment card processing services.
 
Sales of motor fuels to our retail segment from our wholesale marketing segment, payment card processing fees and other fees charged or sales to our retail segment by our wholesale marketing segment are eliminated through consolidation of our financial statements.
 
Material Industry Trends
 
Our retail segment operates within the highly fragmented U.S. convenience store industry, with the 10 largest convenience store retailers accounting for less than 9% of total convenience stores in 2007. Furthermore, operators with 50 or fewer stores accounted for approximately 75% of all convenience stores operated by retailers in 2007. In recent years, the convenience store industry has experienced many important consumer trends, including changing consumer demographics and eating patterns that have resulted in more food consumed away from home, and a shift of consumer food and general merchandise purchases away from traditional supermarkets to convenience stores and other alternative formats, including big box retailers. Additionally, the increasing size and complexity of the big box retail format has driven many consumers to smaller retailers, such as convenience stores, to meet their demand for speed and convenience in daily shopping needs. We also believe that the highly fragmented nature of the convenience store industry provides larger chain operators significant scale advantages and opportunities to grow through acquisitions. The continued divestiture of retail operations by major oil companies may transfer advantages to medium to large retail convenience store chain operators, as we believe that the presence of major refiner operators in the industry may have depressed retail gasoline margins and this trend may reverse as major oil companies exit direct retail operations.
 
In recent years the market for wholesale distribution of motor fuel products has also experienced a number of changes, including the consolidation among major petroleum product producers over the last 25 years, which has resulted in fewer recognizable brands available to consumers, and a 37% reduction in the number of operating crude oil refineries, which has resulted in less access to product and increased the importance of obtaining a secure fuel supply source. In addition, an increased scrutiny by oil companies and


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refiners in selecting distributors, with a preference for larger distributors capable of handling higher volumes, has limited smaller distributors’ access to product.
 
Description of Revenues and Expenses
 
Retail
 
Revenues.  Revenues in our retail segment consist primarily of sales of merchandise and motor fuels. Retail revenues consist of gross merchandise sales less rebates, commissions and discounts, and gross fuel sales, including motor fuel taxes. Retail merchandise sales are driven by convenience, branding and competitive pricing. Our convenience store volumes are seasonal and peak in the second and third quarters of the year.
 
Cost of Sales.  Cost of sales for our retail segment include cost of sales for motor fuels and merchandise. Motor fuel cost of sales represents the net cost of purchased fuel, including transportation costs and associated motor fuel taxes. Merchandise cost of sales includes the delivered cost of merchandise purchases, net of merchandise rebates and commissions.
 
Gross Profit.  Retail merchandise gross profit is equal to retail merchandise sales less the delivered cost of the retail merchandise, net of vendor discounts and rebates, measured as a percentage of total retail merchandise sales. Our goal is to enhance overall store profitability through new fuel pricing strategies designed to increase fuel sales volumes which are expected to generate higher customer traffic that will increase sales of higher margin retail merchandise.
 
Operating, Selling and Administrative Expenses.  Operating, selling and administrative expenses in our retail segment consist primarily of costs relating to the operations of our convenience stores, including payment card fees, labor, utilities, maintenance and retail corporate overhead expense.
 
Wholesale Marketing
 
Revenues.  Wholesale marketing revenues consist primarily of motor fuel sales, net of early payment discounts, payment card processing fees and net of payment card processing expenses. Revenues for our wholesale marketing segment include sales of motor fuels to our retail segment, which are eliminated through consolidation of our financial statements.
 
Cost of Sales.  Wholesale marketing segment cost of sales consists of the cost of motor fuel purchased for resale.
 
Gross Profit.  Motor fuel gross profit is equal to motor fuel sales less the delivered cost of fuel and motor fuel taxes, measured on a cents per gallon, or cpg, basis. Our motor fuel margins are driven by local supply, demand and competitor pricing.
 
Operating, Selling and Administrative Expenses.  Operating, selling and administrative expenses in our wholesale marketing segment consist primarily of overhead and marketing expenses.
 
Our earnings and cash flows from our wholesale marketing segment are primarily affected by the motor fuel sales volumes and margins recognized on the sale of motor fuels to our distributors, payment card processing fee revenue and licensing fees. The margins recognized on sales of motor fuel are the price at which fuel is sold to our FINA-branded distributors less our delivered cost, net of any early payment discounts. Payment card processing fee revenue is the fees assessed on our wholesale customers and licensees, net of the costs we incur in providing such payment card processing services.
 
Influences on Results of Operations
 
During 2008, Alon Energy, our primary supplier, suffered a major fire at its refinery located in Big Spring, Texas. As a result, a number of our wholesale marketing segment’s distributors were supplied through terminals that were inconvenient to them and our fuel sales volumes decreased. Fuel margins were also negatively affected because we purchased fuel for resale in order to honor contractual commitments to these


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distributors. Additionally, we are in the process of reducing our exposure in markets not integrated with Alon Energy’s Big Spring refinery by allowing our fuel supply agreements to expire by their terms, which has resulted in declining fuel sales volumes over the past several years.
 
Over the past several years, wholesale motor fuel costs have continued to be extremely volatile and prices have increased and decreased substantially. The periods of higher motor fuel costs resulted in increases in our retail segment’s payment card expenses, since these fees are calculated as a percentage of the sales amount rather than gallons sold. We are able to partially mitigate these higher costs for our retail segment due to the payment card processing services offered by our wholesale segment, such that we are able to recoup a portion of those increased costs on a combined basis, as well as benefit from the increased fees received from third-party purchasers.
 
Alon Energy currently provides us with significant corporate and shared services functions. Our historical financial statements in this prospectus reflect an allocation of these costs within operating, selling and administrative expenses. These allocations include costs related to treasury, payroll and other financial related services, human resources and employee benefits, legal, information systems, investment services, corporate services and procurement and sourcing support. Following our corporate reorganization transactions, we expect Alon Energy to continue to provide many of the services related to these functions on a transitional basis for a fee. These services will be provided under the Corporate Services Agreement described in “Certain Relationships and Related Party Transactions.” In addition to the cost of these services, we may incur other corporate and operational costs which may be greater than historically allocated levels. For example, as a public company, we will incur costs relating to our public reporting and compliance obligations. Also, we will incur certain non-recurring expenses in connection with the corporate reorganization transactions.
 
Results of Operations
 
The following table sets forth summary financial data from our financial statements as a percentage of total revenues for the periods indicated:
 
                                         
    Year Ended December 31,     Six Months Ended June 30,  
    2005     2006     2007     2007     2008  
 
Revenues:
                                       
Motor fuel
    88.3 %     87.4 %     82.5 %     85.0 %     81.3 %
Merchandise
    11.1       11.9       16.7       14.3       18.1  
Other, net
    0.6       0.7       0.8       0.7       0.6  
                                         
Total revenues
    100.0       100.0       100.0       100.0       100.0  
                                         
Gross profit:
                                       
Motor fuel
    0.7       2.2       3.6       3.5       1.4  
Merchandise
    3.3       3.4       4.8       3.9       5.2  
Other, net
    0.6       0.7       0.8       0.7       0.6  
                                         
Total gross profit
    4.6       6.3       9.2       8.1       7.2  
Operating, selling and administrative expenses
    5.1       5.1       6.4       5.7       6.7  
Depreciation, amortization and accretion
    0.4       0.5       0.8       0.6       1.0  
Other expense
    0.3       0.4       0.4       0.3       0.4  
                                         
Net income (loss) before income tax expense (benefit)
    (1.2 )     0.3       1.6       1.5       (0.9 )
Income tax expense (benefit)
    (0.4 )     0.1       0.6       0.6       (0.2 )
                                         
Net income (loss)
    (0.8 )%     0.2 %     1.0 %     0.9 %     (0.7 )%
                                         


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The following tables provide summary financial and operating data for us and our two operating segments.
 
Alon Brands, Inc. Combined
 
                                         
          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2005     2006     2007     2007     2008  
    (Dollars in thousands)  
                      (unaudited)  
 
Statement of Operations Data:(1)
                                       
Revenues
  $ 1,160,013     $ 1,264,593     $ 1,274,516     $ 602,876     $ 690,909  
Cost of sales
    1,106,860       1,184,931       1,158,260       554,206       640,593  
Gross profit
    53,153       79,662       116,256       48,670       50,316  
Operating and selling expenses:
                                       
Operating, selling and administrative
    58,668       64,256       81,933       34,607       46,261  
Depreciation, amortization and accretion
    5,026       6,205       10,245       3,580       6,898  
                                         
Total operating and selling expenses
    63,694       70,461       92,178       38,187       53,159  
Operating income (loss)
    (10,541 )     9,201       24,078       10,483       (2,843 )
Interest expense
    3,848       5,864       5,202       1,842       2,683  
Rental, interest and other income
    168       229       484       124       274  
Gain (loss) on sale of assets
    (55 )     (30 )     68       49       (21 )
Income tax expense (benefit)
    (5,040 )     1,336       7,543       3,364       (1,570 )
                                         
Net income (loss)
  $ (9,236 )   $ 2,200     $ 11,885     $ 5,450     $ (3,703 )
                                         
Other Financial Data:
                                       
EBITDA (unaudited)(2)
  $ (5,420 )   $ 15,575     $ 34,810     $ 14,224     $ 4,292  
Net cash provided by (used in):
                                       
Operating activities
    (16,915 )     14,860       10,143       (5,588 )     (17,102 )
Investing activities
    (6,216 )     (38,280 )     (85,841 )     (79,237 )     (1,469 )
Financing activities
    24,560       23,547       81,429       94,099       13,795  
Capital expenditures(3)
    6,216       10,902       11,027       2,051       1,469  
 
 
(1) Excludes inter-company sales and expenses that are eliminated in the combined financial statements.
 
(2) We define EBITDA as net income (loss) before net interest expense, income tax expense (benefit) and depreciation, amortization and accretion. We believe that EBITDA is useful to investors in evaluating our operating performance because:
 
• securities analysts and investors often use such calculations as a measure of financial performance and debt service capabilities;
 
• it facilitates management’s ability to measure operating performance of our business on a consistent basis since it removes the impact of items not directly resulting from our retail and wholesale marketing operations; and
 
• it is used by our management for internal planning purposes, including aspects of our operating budget, capital expenditures, as well as for segment and individual site operating targets.
 
EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance. EBITDA has limitations as an analytical tool, and you should not


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consider it in isolation or as a substitute for an analysis of our results as reported under GAAP. Some of these limitations include:
 
• it does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
 
• it does not reflect changes in, or cash requirements for, working capital;
 
• it does not reflect significant interest expense, or the cash requirements necessary to service interest or principal payments on our credit facilities;
 
• it does not reflect payments made or future requirements for income taxes;
 
• although depreciation, amortization and accretion are non-cash charges, the assets being depreciated and amortized may be replaced in the future, and EBITDA does not reflect cash requirements for such replacements; and
 
• because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies.
 
The following table presents a reconciliation of net income (loss) to EBITDA:
 
                                         
    Year Ended December 31,     Six Months Ended June 30,  
    2005     2006     2007     2007     2008  
    (Dollars in thousands)  
 
Net income (loss)
  $ (9,236 )   $ 2,200     $ 11,885     $ 5,450     $ (3,703 )
Depreciation, amortization and accretion
    5,026       6,205       10,245       3,580       6,898  
Interest expense, net
    3,830       5,834       5,137       1,830       2,667  
Income tax expense (benefit)
    (5,040 )     1,336       7,543       3,364       (1,570 )
                                         
EBITDA
  $ (5,420 )   $ 15,575     $ 34,810     $ 14,224     $ 4,292  
                                         
 
(3) Excludes capital assets acquired in business acquisitions.
 
Retail Segment
 
                                         
    Year Ended December 31,     Six Months Ended June 30,  
    2005     2006     2007     2007     2008  
    (Dollars in thousands, except as noted)  
 
Statement of Operations Data:
                                       
Revenues(1)
  $ 326,577     $ 351,179     $ 480,094     $ 190,845     $ 296,922  
Cost of sales
    268,759       287,870       392,128       155,246       247,887  
                                         
Gross profit
    57,818       63,309       87,966       35,599       49,035  
                                         
Operating and selling expenses:
                                       
Operating, selling and administrative
    50,167       56,559       76,257       31,717       44,088  
Depreciation, amortization and accretion
    4,136       5,040       8,794       2,863       6,125  
                                         
Total operating and selling expenses
    54,303       61,559       85,051       34,580       50,213  
                                         
Operating income (loss)
  $ 3,515     $ 1,710     $ 2,915     $ 1,019     $ (1,178 )
                                         
Operating Data (unaudited):
                                       
Number of stores (end of period)(2)
    167       207       307       206       306  
Fuel sales (thousands of gallons)
    87,714       75,969       91,945       38,026       49,285  
Fuel sales (thousands of gallons per site per month)(3)
    44.6       34.4       30.3       31.4       27.2  
Fuel margin (cents per gallon)(4)
    17.1 ¢     19.2 ¢     21.2 ¢     23.4 ¢     20.2 ¢
Merchandise sales
  $ 128,466     $ 150,899     $ 213,433     $ 86,206     $ 124,807  
Merchandise sales (per site per month)(5)
    64.1       67.2       69.3       69.7       67.8  
Merchandise margin
    33.3 %     32.3 %     32.1 %     31.0 %     31.2 %
Comparable merchandise store sales growth(6)
    3.1 %     4.8 %     3.1 %     3.5 %     (2.7 )%


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(1) Includes motor fuel sales, including federal and state excise tax, merchandise sales, and other commissions earned.
 
(2) Includes all stores selling merchandise, including nine stores that do not sell motor fuels. Store count at June 30, 2007 excludes 102 stores acquired on June 29, 2007 because no results of operation are included in the six months ended June 30, 2007.
 
(3) Motor fuel gallons sold on a per site, per month basis is calculated by the total gallons sold divided by total store months.
 
(4) Retail fuel margin represents the difference between motor fuel revenues and net cost of purchased fuel, including transportation costs and associated motor fuel taxes, expressed on a cents per gallon basis. Motor fuel margins are frequently used in the retail industry to measure operating results related to motor fuel sales.
 
(5) Merchandise sales per site, per month is calculated by merchandise sales divided by total store months.
 
(6) Includes stores operated for the current and prior period.
 
Wholesale Marketing Segment
 
                                         
    Year Ended December 31,     Six Months Ended June 30,  
    2005     2006     2007     2007     2008  
    (Dollars in thousands, except as noted)  
                      (unaudited)  
 
Statement of Operations Data:
                                       
Revenues(1)
  $ 833,436     $ 913,414     $ 794,422     $ 412,031     $ 393,987  
Cost of sales
    838,101       897,061       766,132       398,960       392,706  
                                         
Gross profit (loss)
    (4,665 )     16,353       28,290       13,071       1,281  
                                         
Operating and selling expenses:
                                       
Operating, selling, and administrative
    8,501       7,697       5,676       2,890       2,173  
Depreciation, amortization and accretion
    890       1,165       1,451       717       773  
                                         
Total operating and selling expenses
    9,391       8,862       7,127       3,607       2,946  
                                         
Operating income (loss)
  $ (14,056 )   $ 7,491     $ 21,163     $ 9,464     $ (1,665 )
                                         
Operating Data (unaudited):
                                       
Fuel volume
    598,965       543,788       458,581       239,811       184,540  
Fuel margin (cents per gallon)
    (0.8     3.0¢       6.2¢       5.5¢       0.7¢  
Distributor count (end of period)(2)
    97       90       81       86       81  
Retail outlet count (end of period)(3)
    1,243       1,191       1,082       1,131       1,071  
Average wholesale rack fuel price(4)
  $ 1.67     $ 1.99     $ 2.21     $ 2.08     $ 2.92  
 
 
(1) Includes motor fuel sales, payment card processing fees and other marketing and trade agreement program revenues and has eliminated inter-company sales and volume.
 
(2) Includes all active FINA-branded distributors with retail outlets, whether or not supplied by us with motor fuels, excluding our retail subsidiaries.
 
(3) Includes all active FINA-branded retail outlets operating under a distributor sales agreement or a distributor license agreement, including the convenience stores operated by our retail segment.
 
(4) Average wholesale rack fuel price is calculated as the branded gasoline and diesel rack sales price per gallon, prior to any discounts given to FINA-branded distributors.


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Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007
 
Revenues
 
Combined.  Revenues for the six months ended June 30, 2008 were $690.9 million, compared to $602.9 million for the six months ended June 30, 2007, an increase of $88.0 million or 14.6%. This increase was primarily attributable to higher retail motor fuel and merchandise sales from 102 convenience stores acquired in June 2007 and higher retail motor fuel prices over the comparable period in 2007. This increase was partially offset by lower retail and wholesale fuel sales in the six months ended June 30, 2008, compared to the six months ended June 30, 2007.
 
Retail Segment.  Revenues for our retail segment were $296.9 million for the six months ended June 30, 2008, compared to $190.8 million for the six months ended June 30, 2007, an increase of $106.1 million or 55.6%. Of this increase, $90.7 million was attributable to motor fuel, merchandise and other in-store sales from 102 convenience stores acquired in June 2007. Revenues at our remaining convenience stores increased by $15.4 million, which was attributable to higher motor fuel prices, partially offset by reduced fuel sales due to lower volume. Despite lower fuel sales at these convenience stores, merchandise revenues were flat over the comparable period in 2007.
 
Wholesale Marketing Segment.  Revenues for our wholesale marketing segment were $394.0 million for the six months ended June 30, 2008, compared to $412.0 million for the six months ended June 30, 2007, a decrease of $18.0 million or 4.4%. This decrease was primarily attributable to reduced fuel sales due to lower volume that resulted from supply sourcing disruptions and a net decline of 60 retail outlets that we supplied with motor fuel. This net decline in retail outlets supplied by us was a result of our efforts to reduce our exposure in markets not integrated with Alon Energy’s Big Spring refinery.
 
Cost of Sales
 
Combined.  Cost of sales was $640.6 million for the six months ended June 30, 2008, compared to $554.2 million for the six months ended June 30, 2007, an increase of $86.4 million or 15.6%. This increase was primarily attributable to higher retail fuel and merchandise costs from 102 convenience stores acquired in June 2007 and higher retail and wholesale motor fuel costs. This increase was partially offset by reduced wholesale fuel sales due to lower volume.
 
Retail Segment.  Cost of sales for our retail segment was $247.9 million for the six months ended June 30, 2008, compared to $155.2 million for the six months ended June 30, 2007, an increase of $92.6 million or 59.7%. Of this increase, $75.4 million was attributable to increased fuel and merchandise costs from 102 convenience stores acquired in June 2007, $16.3 million was attributable to higher motor fuel costs and approximately $1.0 million was attributable to in-store merchandise purchases.
 
Wholesale Marketing Segment.  Cost of sales for our wholesale marketing segment was $392.7 million for the six months ended June 30, 2008, compared to $399.0 million for the six months ended June 30, 2007, a decrease of $6.3 million or 1.6%. This decrease was primarily attributable to reduced fuel sales due to lower volume that resulted from a net decline of 60 retail outlets that we supplied with motor fuel. This decrease in cost of sales was partially offset by higher motor fuel prices.
 
Operating and Selling Expenses, Excluding Depreciation, Amortization and Accretion
 
Combined.  Operating and selling expenses, excluding depreciation, amortization and accretion for the six months ended June 30, 2008 were $46.3 million, compared to $34.6 million for the six months ended June 30, 2007, an increase of $11.7 million or 33.8%. This increase was primarily attributable to higher retail operating and selling expenses from 102 convenience stores acquired in June 2007. This increase was partially offset by reduced wholesale fuel sales due to lower volume.
 
Retail Segment.  Operating and selling expenses, excluding depreciation, amortization and accretion for our retail segment for the six months ended June 30, 2008 were $44.1 million, compared to $31.7 million for the six months ended June 30, 2007, an increase of $12.4 million or 39.1%. Of this increase, $11.6 million


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was attributable to higher operating and selling expenses from 102 convenience stores acquired in June 2007 and approximately $0.8 million was attributable to higher payment card expenses resulting from higher motor fuel prices, increased repairs and maintenance costs and cash and inventory shortages.
 
Wholesale Marketing Segment.  Operating and selling expenses, excluding depreciation, amortization and accretion for our wholesale marketing segment for the six months ended June 30, 2008 were $2.2 million, compared to $2.9 million for the six months ended June 30, 2007, a decrease of $0.7 million or 24.1%. This decrease was primarily attributable to reduced fuel sales due to lower volume that resulted from a net decline of 60 retail outlets that we supplied with motor fuel.
 
Depreciation, Amortization and Accretion
 
Depreciation, amortization and accretion for the six months ended June 30, 2008 was $6.9 million, compared to $3.6 million for the six months ended June 30, 2007, an increase of $3.3 million or 91.7%. This increase was primarily attributable to 102 convenience stores acquired in June 2007.
 
Operating Income (Loss)
 
Combined.  Operating loss was $2.8 million for the six months ended June 30, 2008, compared to operating income of $10.5 million for the six months ended June 30, 2007, a decrease of $13.3 million. This decrease was primarily attributable to reduced retail and wholesale fuel sales due to lower volume and lower wholesale motor fuel margins.
 
Retail Segment.  Operating loss for our retail segment was $1.2 million for the six months ended June 30, 2008, compared to operating income of $1.0 million for the six months ended June 30, 2007, a decrease of $2.2 million. This decrease was primarily attributable to reduced fuel sales due to lower volume, an increase in workers’ compensation and general liability claims, higher repair and maintenance cost and an increase in payment card fees resulting from higher motor fuel prices.
 
Wholesale Marketing Segment.  Operating loss for our wholesale marketing segment was $1.7 million for the six months ended June 30, 2008, compared to operating income of $9.5 million for the six months ended June 30, 2007, a decrease of $11.2 million or 117.9%. This decrease was primarily attributable to reduced fuel sales due to lower volume and lower motor fuel margins. Fuel sales volume was lower due to supply sourcing disruptions and a net decline of 60 retail outlets that we supplied with motor fuel. Motor fuel margins were lower due to our purchasing of fuels for resale to honor our supply commitments to FINA-branded distributors and the introduction by some of our competitors of lower-cost ethanol into motor fuel for certain markets.
 
Interest Expense
 
Interest expense was $2.7 million for the six months ended June 30, 2008, compared to $1.8 million for the six months ended June 30, 2007, an increase of $0.9 million or 50.0%. This increase was primarily attributable to debt incurred in connection with 102 convenience stores acquired in June 2007.
 
Income Tax Expense (Benefit)
 
Income tax benefit was $1.6 million for the six months ended June 30, 2008, compared to income tax expense of $3.4 million for the six months ended June 30, 2007, a decrease of $5.0 million. This decrease resulted from our net loss in the six months ended June 30, 2008, compared to net income in the six months ended June 30, 2007. Our effective tax rate was 29.8% for the six months ended June 30, 2008, compared to an effective tax rate of 38.2% for the six months ended June 30, 2007.
 
Net Income (Loss)
 
As a result of the foregoing, net loss was $3.7 million for the six months ended June 30, 2008, compared to net income of $5.5 million for the six months ended June 30, 2007, a decrease of $9.2 million.


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Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 
Revenues
 
Combined.  Revenues for 2007 were $1,274.5 million, compared to $1,264.6 million for 2006, an increase of $9.9 million or 0.8%. This increase was primarily attributable to six months of retail motor fuel and merchandise sales from 102 convenience stores acquired in June 2007, twelve months of retail motor fuel and merchandise sales from 40 convenience stores purchased in July 2006 compared to six months of such sales reflected an additional in 2006 and higher retail motor fuel prices over the comparable period in 2006. These increases were partially offset by reduced wholesale fuel sales due to lower volume in the year ended December 31, 2007, compared to the year ended December 31, 2006.
 
Retail Segment.  Revenues for our retail segment were $480.1 million for 2007, compared to $351.2 million for 2006, an increase of $128.9 million or 36.7%. Of this increase, $89.1 million was attributable to six months of motor fuel and merchandise sales from 102 convenience stores acquired in June 2007, $24.9 million was attributable to twelve months of motor fuel and merchandise sales from 40 convenience stores purchased in July 2006, compared to six months of sales reflected in 2006 and $14.9 million was attributable to higher motor fuel prices.
 
Wholesale Marketing Segment.  Revenues for our wholesale marketing segment were $794.4 million for 2007, compared to $913.4 million for 2006, a decrease of $119.0 million or 13.0%. This decrease was primarily attributable to lower fuel sales volume that resulted from a net decline of 109 retail outlets that we supplied with motor fuel. This net decline in retail outlets supplied by us was a result of our efforts to reduce our exposure in markets not integrated with Alon Energy’s Big Spring refinery.
 
Cost of Sales
 
Combined.  Cost of sales was $1,158.3 million for 2007, compared to $1,184.9 million for 2006, a decrease of $26.6 million or 2.2%. This decrease was primarily attributable to reduced wholesale fuel sales due to lower volume. This decrease was partially offset by increased retail motor fuel and merchandise costs from 102 convenience stores acquired in June 2007 and our remaining convenience stores.
 
Retail Segment.  Cost of sales for our retail segment was $392.1 million for 2007, compared to $287.9 million for 2006, an increase of $104.2 million or 36.2%. Of this increase, $73.8 million was attributable to higher motor fuel and merchandise costs from 102 convenience stores acquired in June 2007 and $30.4 million were attributable to higher motor fuel and merchandise costs at our remaining convenience stores.
 
Wholesale Marketing Segment.  Cost of sales for our wholesale marketing segment was $766.1 million for 2007, compared to $897.1 million for 2006, a decrease of $131.0 million or 14.6%. This decrease was primarily attributable to reduced fuel sales due to lower volume that resulted from a net decline of 109 retail outlets that we supplied with motor fuel.
 
Operating and Selling Expenses, Excluding Depreciation, Amortization and Accretion
 
Combined.  Operating and selling expenses, excluding depreciation, amortization and accretion for 2007 were $81.9 million, compared to $64.3 million for 2006, an increase of $17.6 million or 27.5%. This increase was primarily attributable to higher operating and selling expenses from convenience stores acquired in June 2007 and 40 convenience stores purchased in July 2006. This increase was partially offset by reduced wholesale fuel sales on lower volume.
 
Retail Segment.  Operating and selling expenses, excluding depreciation, amortization and accretion for our retail segment for 2007 were $76.3 million, compared to $56.6 million for 2006, an increase of $19.7 million or 34.8%. Of this increase, $11.9 million was attributable to higher operating and selling expenses from 102 convenience stores acquired in June 2007 and $7.8 million was attributable to additional operating and selling expenses related to 40 convenience stores purchased in July 2006.


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Wholesale Marketing Segment.  Operating and selling expenses, excluding depreciation, amortization and accretion for our wholesale marketing segment for 2007 were $5.7 million, compared to $7.7 million for 2006, a decrease of $2.0 million or 26.0%. This decrease was primarily attributable to reduced fuel sales on lower volume that resulted from a net decline of 109 retail outlets that we supplied with motor fuel.
 
Depreciation, Amortization and Accretion
 
Depreciation, amortization and accretion for 2007 was $10.2 million, compared to $6.2 million for 2006, an increase of $4.0 million or 64.5%. This increase was primarily attributable to 102 convenience stores acquired in June 2007.
 
Operating Income (Loss)
 
Combined.  Operating income was $24.1 million for 2007, compared to operating income of $9.2 million for 2006, an increase of $14.9 million or 162.0%. This increase was primarily attributable to a significant supply source disruption in our marketing areas and higher retail fuel sales margins.
 
Retail Segment.  Operating income for our retail segment was $2.9 million for 2007, compared to operating income of $1.7 million for 2006, an increase of $1.2 million or 70.6%. This increase was primarily attributable to higher fuel sales margins, improved in-store merchandise margins and lower operating expenses on same store sales.
 
Wholesale Marketing Segment.  Operating income for our wholesale marketing segment was $21.2 million for 2007, compared to $7.5 million for 2006, an increase of $13.7 million or 182.7%. This increase was primarily attributable to a significant supply source disruption in our marketing areas caused by an area refinery going offline. This disruption resulted in a favorable spread between the price most often used in many of the geographic areas in which we supply motor fuel, and the Gulf Coast market, which is more representative of our motor fuel costs.
 
Interest Expense
 
Interest expense was $5.2 million for 2007, compared to $5.9 million for 2006, a decrease of $0.7 million or 11.9%. This decrease is due to the refinancing of certain of our debt.
 
Income Tax Expense (Benefit)
 
Income tax expense was $7.5 million for 2007, compared to $1.3 million for 2006, an increase of $6.2 million. This increase resulted from greater operating income from the previous year. Our effective tax rate was 38.8% for 2007, compared to an effective tax rate of 37.8% for 2006.
 
Net Income (Loss)
 
As a result of the foregoing, net income was $11.9 million for 2007, compared to net income of $2.2 million for 2006, an increase of $9.7 million.
 
Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 
Revenues
 
Combined.  Revenues for 2006 were $1,264.6 million, compared to $1,160.0 million for 2005, an increase of $104.6 million or 9.0%. Of this increase, $80.0 million was attributable to higher wholesale motor fuel revenues and $24.6 million was primarily attributable to higher retail motor fuel and merchandise sales from 40 convenience stores acquired in July 2006 over the comparable period in 2005. This increase was partially offset by reduced retail fuel sales due to lower volume at our remaining convenience stores in the year ended December 31, 2006, compared to the year ended December 31, 2005.
 
Retail Segment.  Revenues for our retail segment were $351.2 million for 2006, compared to $326.6 million for 2005, an increase of $24.6 million or 7.5%. This increase was primarily attributable to motor fuel,


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merchandise and other in-store revenues from 40 convenience stores acquired in July 2006. This increase was partially offset by reduced fuel sales due to lower volume at our remaining convenience stores.
 
Wholesale Marketing Segment.  Revenues for our wholesale marketing segment were $913.4 million for 2006, compared to $833.4 million for 2005, an increase of $80.0 million or 9.6%. This increase was primarily attributable to higher motor fuel prices. This increase was partially offset by decreased fuel sales due to lower volume that resulted from a net decline of 52 retail outlets that we supply with motor fuel.
 
Cost of Sales
 
Combined.  Cost of sales was $1,184.9 million for 2006, compared to $1,106.9 million for 2005, an increase of $78.0 million or 7.0%. This increase was primarily attributable to higher retail and wholesale motor fuel costs and additional retail motor fuel and merchandise costs related to 40 convenience stores purchased in July 2006. This increase was partially offset by decreased fuel sales due to lower volume.
 
Retail Segment.  Cost of sales for our retail segment was $287.9 million for 2006, compared to $268.8 million for 2005, an increase of $19.1 million or 7.1%. This increase was primarily attributable to higher motor fuel costs and additional motor fuel and merchandise costs related to 40 convenience stores acquired in July 2006. This increase was partially offset by decreased fuel sales due to lower volume.
 
Wholesale Marketing Segment.  Cost of sales for our wholesale marketing segment was $897.1 million for 2006, compared to $838.1 million for 2005, an increase of $59.0 million or 7.0%. This increase was primarily attributable to higher motor fuel costs, partially offset by lower fuel sales volume.
 
Operating and Selling Expense, Excluding Depreciation, Amortization and Accretion
 
Combined.  Operating and selling expenses, excluding depreciation, amortization and accretion for 2006 were $64.3 million, compared to $58.7 million for 2005, an increase of $5.6 million or 9.5%. This increase was primarily attributable to higher lease expense related to 40 convenience stores purchased in July 2006. This increase was partially offset by decreased fuel sales due to lower volume.
 
Retail Segment.  Operating and selling expenses, excluding depreciation, amortization and accretion for our retail segment for 2006 were $56.6 million, compared to $50.2 million for 2005, an increase of $6.4 million or 12.7%. This increase was primarily attributable to higher lease expense related to 40 convenience stores acquired in July 2006.
 
Wholesale Marketing Segment.  Operating and selling expenses, excluding depreciation, amortization and accretion for our wholesale marketing segment for 2006 were $7.7 million, compared to $8.5 million for 2005, a decrease of $0.8 million or 9.4%. This decrease was primarily attributable to decreased fuel sales on lower volume that resulted from a net decline of 52 retail outlets that we supplied with motor fuel.
 
Depreciation, Amortization and Accretion
 
Depreciation, amortization and accretion for 2006 was $6.2 million, compared to $5.0 million for 2005, an increase of $1.2 million or 24.0%. This increase was primarily attributable to 40 convenience stores purchased in July 2006.
 
Operating Income (Loss)
 
Combined.  Operating income was $9.2 million for 2006, compared to operating loss of $10.5 million for 2005, an increase of $19.7 million. This increase was primarily attributable to improved wholesale gross margins, which were negatively affected in 2005 by hurricanes Katrina and Rita and higher retail operating and selling expenses related to 40 convenience stores purchased in July 2006.
 
Retail Segment.  Operating income for our retail segment was $1.7 million for 2006, compared to $3.5 million for 2005, a decrease of $1.8 million or 51.4%. This decrease was primarily attributable to higher operating and selling expenses related to 40 convenience stores purchased in July 2006.


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Wholesale Marketing Segment.  Operating income for our wholesale marketing segment was $7.5 million for 2006, compared to an operating loss of $14.1 million for 2005, an increase of $21.6 million or 153.2%. This increase was primarily attributable to greater gross margins, improved product allocation controls at terminals and the implementation of new pricing software, which were negatively affected in 2005 by hurricanes Katrina and Rita.
 
Interest Expense, Net
 
Net interest expense was $5.8 million for 2006, compared to $3.8 million for 2005, an increase of $2.0 million or 52.6%. This increase was primarily attributable to the refinancing of existing credit facilities and debt incurred in connection with the 40 convenience stores acquired in July 2006.
 
Income Tax Expense (Benefit)
 
Income tax expense was a $1.3 million for 2006, compared to a $5.0 million benefit for 2005, an increase of $6.3 million. This increase resulted from our net loss in 2005 compared to net income in 2006. Our effective tax rate was 37.8% for 2006, compared to an effective tax rate of 35.3% for 2005.
 
Net Income (Loss)
 
As a result of the foregoing, net income was $2.2 million for 2006, compared to net loss of $9.2 million for 2005, an increase of $11.4 million.
 
Liquidity and Capital Resources
 
Our primary sources of liquidity have historically included cash on hand, cash generated from operating activities, credit facilities, parent company investments and trade credit for fuel purchases provided by our parent company. After giving effect to the corporate reorganization transactions and this offering, our future sources of liquidity will primarily consist of cash on hand and cash generated from operating activities, which we believe will be sufficient to satisfy our anticipated cash requirements associated with operating our business during the next 12 months. Following the offering, we do not expect any further investments from our parent company. We believe that cash generated from operating activities and the proceeds of this offering will be sufficient to satisfy our liquidity needs for the foreseeable future.
 
Our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. In addition, our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business.
 
Depending upon conditions in the capital markets and other factors, we may consider the issuance of debt or equity securities, or other possible capital markets transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes. Pursuant to our growth strategy, we will also consider from time to time acquisitions of, and investments in, assets or businesses that complement our existing assets and businesses. Such transactions, if any, are expected to be financed through cash on hand and from operations, bank borrowings, the issuance of debt or equity securities or a combination of two or more of those sources.


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Cash Flows
 
The following table sets forth our combined cash flows for the years ended December 31, 2005, 2006 and 2007 and for the six months ended June 30, 2007 and 2008:
 
                                         
          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2005     2006     2007     2007     2008  
    (Dollars in thousands)  
                      (unaudited)  
 
Cash provided by (used in):
                                       
Operating activities
  $ (16,915 )   $ 14,860     $ 10,143     $ (5,588 )   $ (17,102 )
Investing activities
    (6,216 )     (38,280 )     (85,841 )     (79,237 )     (1,469 )
Financing activities
    24,560       23,547       81,429       94,099       13,795  
                                         
Net increase (decrease) in cash and cash equivalents
  $ 1,429     $ 127     $ 5,731     $ 9,274     $ (4,776 )
                                         
 
Cash Flows Provided By (Used In) Operating Activities.  Net cash used in operating activities for the six months ended June 30, 2008 was $17.1 million compared to $5.6 million for the six months ended June 30, 2007. Approximately 50% of the use of funds from operating activities during the six months ended June 30, 2008 funded $8.2 million in accounts and short-term notes receivables. The increase was primarily attributed to rising fuel cost. Other significant uses of operating funds during this period included $1.0 million in retail inventories and $7.9 million reduction in accrued liabilities and expenses.
 
Net cash provided by operating activities in 2007 was $10.1 million compared to $14.9 million in 2006. Operating cash flows in 2007 were primarily attributable to net income of $11.9 million. Adjustments to reconcile net income to cash generated from operating activities included $10.2 million of depreciation, amortization and accretion expense and $4.7 million in deferred income taxes. The operating funds generated were primarily used to fund an increase of $6.0 million in retail inventories related to the acquisition of 102 stores in June 2007, a reduction of $7.4 million in accounts payable, affiliates, net and a reduction of $6.2 million in trade payables.
 
Net cash generated from operating activities in 2006 was $14.9 million, including $2.2 million attributable to net income and $9.6 million attributable to adjustments from reconciling net income to cash provided to operating activities, including depreciation, amortization and accretion adjustments of $6.2 million. Working capital, net of cash, increased to $22.9 million from $20.7 million, or $2.2 million, and other non-current assets and liabilities generated $0.2 million.
 
Net cash used in operating activities in 2005 was $16.9 million on a net loss of $9.2 million. Other uses of operating funds in 2005 included an increase of $8.7 million in receivables from customers and $3.1 million in the payment of trade payables and other accrued liabilities.
 
Cash Flows Provided By (Used In) Investing Activities.  Net cash used in investing activities was $1.5 million for the six months ended June 30, 2008 compared to $79.2 million in the six months ended June 30, 2007. The investing activities during the six months ended June 30, 2008 included $1.4 million of property and equipment additions, and $0.1 million of costs associated with brand image enhancement account. Net cash used in investing activities during the six months ended June 30, 2007 included $77.2 million used in the acquisition of 102 convenience stores.
 
Net cash used in investing activities in 2007 was $85.8 million compared to $38.3 million for 2006. In 2007, $75.3 million was used in the acquisition of 102 convenience stores in June 2007 and $10.3 million was used for equipment cost and building improvements in 7-Eleven minimum standard conversion costs.
 
Net cash used in investing activities was $38.3 million for 2006 compared to $6.2 million used in 2005. In 2006, $27.4 million was used in the acquisition of 40 convenience stores in July 2006 and approximately $10.0 million was used for equipment cost and building improvements in 7-Eleven minimum standard conversion costs.


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Cash Flows Provided By (Used In) Financing Activities.  Net cash provided from financing activities was $13.8 million for the six months ended June 30, 2008 compared to $94.1 million during the six months ended June 30, 2007. During the six months ended June 30, 2008, parent investment recognized from the net change in assets contributed from Alon Energy totaled $16.6 million and $2.8 million of cash was used to repay long-term debt and capital lease obligations. During the six months ended June 30, 2007, the cash flows provided by financing activities included a $46.2 million loan from Wachovia under the Amended Wachovia Credit Facility, and a $0.6 million payment of notes payable. Net change in parent investment of assets contributed from Alon Energy was $48.6 million as of June 30, 2007.
 
Net cash provided from financing activities was $81.4 million in 2007 compared to $23.5 million in 2006. Financing funds provided in 2007 included $46.2 million in loans under the Amended Wachovia Credit Facility. Net change in parent investment of assets contributed from Alon Energy was $39.0 million for 2007.
 
Net cash provided from financing activities was $23.5 million in 2006 compared to $24.6 million in 2005. Net cash provided by financing activities in 2006 included $48.6 million in loans under the Original Wachovia Credit Facility and the repayment of $29.9 million of existing credit facilities and long-term debt. Net change in parent investment was $26.8 million for 2005.
 
Summary of Indebtedness
 
The following table sets forth summary information related to our Amended Wachovia Credit Facility and other material indebtedness as of June 30, 2008:
 
                         
    As of June 30, 2008  
    Amount
    Total
    Total
 
    Outstanding     Facility     Availability  
    (Dollars in thousands)  
 
Note payable, including current portion:
                       
Amended Wachovia Credit Facility
  $ 89,721     $ 89,721     $  
Other mortgage indebtedness
    680       680        
                         
Total
  $ 90,401     $ 90,401     $  
                         
 
Wachovia Credit Facility.  On June 29, 2007, Southwest Convenience Stores, LLC (“SCS”), our subsidiary, entered into an amended and restated credit agreement with Wachovia Bank, N.A. (“Wachovia”), as administrative agent. The Amended Wachovia Credit Facility amends and restates the credit agreement dated June 6, 2006, among SCS, Wachovia and the other lenders a party thereto (the “Original Wachovia Credit Facility”).
 
Borrowings under the Amended Wachovia Credit Facility bear interest at a Eurodollar rate plus 1.5% per annum. Principal payments under the Amended Wachovia Credit Facility began August 1, 2007 with monthly installments based on a 15-year amortization term. As of June 30, 2008 and December 31, 2007, $89.7 million and $92.4 million, respectively, were outstanding under the Amended Wachovia Credit Facility and there were no further amounts available for borrowing.
 
Prior to the amendment, $48.8 million was outstanding under the Original Wachovia Credit Facility, consisting of a $28.8 million term loan and a $20.0 million revolving credit loan. In connection with the Skinny’s acquisition, SCS converted the existing revolving credit loan of $20.0 million to a term loan and borrowed an additional $46.2 million under the Amended Wachovia Credit Facility on June 29, 2007. All outstanding amounts were combined into a $95.0 million term loan.
 
The obligations under the Amended Wachovia Credit Facility are secured by a pledge of substantially all of the assets of SCS and Skinny’s, LLC and each of their subsidiaries, including cash, accounts receivable and inventory and is guaranteed by us and Alon Energy.
 
The Amended Wachovia Credit Facility contains customary restrictive covenants on activities, such as restrictions on liens, mergers, consolidations, sales of assets, additional indebtedness, investments, certain lease obligations and certain restricted payments.


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Other Indebtedness.  In 2003, we obtained $1.5 million in mortgage loans to finance the acquisition of new retail locations. The interest rates on these loans ranged between 5.5% and 9.7%, with 5- to 15-year payment terms. The outstanding balance was $0.9 million at June 30, 2008.
 
Outstanding Letters of Credit.  Alon Energy has a letter of credit expiring September 9, 2009 for $2.5 million issued to Ace American Insurance Company for the purpose of our prior workers’ compensation claims. There are no specific claims related to Alon Brands. Alon Energy has an additional letter of credit expiring July 31, 2009 for $0.5 million issued to Kemper Indemnity Insurance Company for environmental claims related to SCS. In the event that these letters of credit are drawn in respect of their claims, we will have an indemnification obligation to Alon Energy for such amount.
 
Capital Spending
 
Our expected capital expenditures for 2008 is $2.0 million. As of June 30, 2008, $1.5 million of this amount had been spent.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
Contractual Obligations and Commitments
 
Information regarding our known contractual obligations of the types described below as of December 31, 2007 is set forth in the following table:
 
                                         
    Payments Due by Period  
    Less Than
                More Than
       
Contractual Obligations
  1 Year     1-3 Years     3-5 Years     5 Years     Total  
    (Dollars in thousands)  
 
Note payable obligations
  $ 6,625     $ 13,129     $ 12,742     $ 61,111     $ 93,607  
Capital lease obligation
    29       62       66             157  
Operating lease obligations
    5,507       9,459       7,577       41,187       63,730  
                                         
Total obligations
  $ 12,161     $ 22,650     $ 20,385     $ 102,298     $ 157,494  
                                         
 
Quantitative and Qualitative Disclosures About Market Risk
 
Changes in motor fuel prices and interest rates are our primary sources of market risk. Our board of directors oversees all activities associated with the identification, assessment and management of our market risk exposure.
 
Motor Fuel Price Risk
 
We are exposed to market risks related to the volatility of motor fuel prices in our retail segment. Our financial results can be affected significantly by fluctuations in these prices, which depend on many factors, including demand for crude oil, gasoline, diesel and other refined products, changes in the economy, worldwide production levels, worldwide inventory levels and governmental regulatory initiatives.
 
Our retail segment maintains inventories of motor fuels, the values of which are subject to wide fluctuations in market prices driven by world economic conditions, regional and global inventory levels and seasonal conditions. As of June 30, 2008, we held approximately 2.2 million gallons of motor fuel at our retail convenience stores. The inventory cost of our motor fuel inventories is determined under the first-in, first-out (FIFO) method.
 
Interest Rate Risks
 
As of June 30, 2008, $89.7 million of our outstanding debt was at floating interest rates. Outstanding borrowings under the Amended Wachovia Credit Facility bear interest at the Eurodollar rate plus 1.5% per


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annum. As of June 30, 2008, we had interest rate swap agreements with a notional amount of $50.0 million and a fixed interest rate of 4.75%. An increase of 1.0% in the Eurodollar rate would result in an increase in our interest expense of approximately $0.4 million per year.
 
Critical Accounting Policies
 
We prepare our combined financial statements in conformity with GAAP. In order to apply these principles, we must make judgments, assumptions and estimates based on the best available information at the time that affect the reported amount of revenues and expenses during the reporting period and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ based on the accuracy of the information utilized and subsequent events, some of which we may have little or no control over. Our critical accounting policies, which are discussed below, could materially adversely affect the amounts recorded in our combined financial statements.
 
Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and results of operations, and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. Our accounting policies are described in the notes to our audited combined financial statements included elsewhere in this prospectus. We believe the following policies to be the most critical in understanding the judgments that are involved in preparing our combined financial statements.
 
Inventory.  Our inventories are stated at the lower of cost or market. Materials and supplies are stated at average cost. Cost for our motor fuels inventory is determined under the first-in, first-out (FIFO) method. Our convenience store merchandise inventory is determined under the retail inventory method.
 
Environmental and Other Loss Contingencies.  We record liabilities for loss contingencies, including environmental remediation costs, when such losses are probable and can be reasonably estimated. Our environmental liabilities represent the estimated cost to investigate and remediate contamination at our properties. Our estimates are based upon internal and third-party assessments of contamination, available remediation technology and environmental regulations. Accruals for estimated liabilities from projected environmental remediation obligations are recognized no later than the completion of the remedial feasibility study. These accruals are adjusted as further information develops or circumstances change. We do not discount environmental liabilities to their present value unless payments are fixed and determinable, and we record them without considering potential recoveries from third parties. Recoveries of environmental remediation costs from third parties are recorded as assets when receipt is deemed probable. We update our estimates to reflect changes in factual information, available technology and applicable laws and regulations.
 
Goodwill and Intangible Assets.  Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired less liabilities assumed. Intangible assets are assets that lack physical substance (excluding financial assets). Intangible assets with finite useful lives are amortized on a straight-line basis over one to 40 years. Goodwill acquired in a business combination and intangible assets with indefinite useful lives are not amortized. Goodwill and intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. We use December 31 of each year as our valuation date for annual impairment testing purposes.
 
Impairment of Long-Lived Assets.  We account for impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In evaluating our assets, long- lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to future net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its expected future cash flows, an impairment loss is recognized based on the excess of the carrying value of the impaired asset over its fair value. These future cash flows and fair values are estimates based on our judgment


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and assumptions. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs of disposition.
 
Recent Accounting Pronouncements
 
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”). SFAS 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. This statement is effective for all accounting changes and any error corrections occurring after January 1, 2006. The adoption of SFAS 154 did not have a material effect on the Company’s financial position or results of operations.
 
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). This interpretation prescribes a “more-likely-than-not” recognition threshold and measurement attribute (the largest amount of benefit that is greater than 50.0% likely of being realized upon ultimate settlement with tax authorities) for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provided guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Alon Energy performed a review of its tax positions and adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material effect on the Company’s results of operations or financial position.
 
In June 2006, the FASB ratified the consensus on EITF Issue No. 06-3; How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (“EITF 06-3”) (that is, gross versus net presentation). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is imposed concurrent with or subsequent to a revenue-producing transaction between a seller and a customer. For taxes within the scope of this issue that are significant in amount, the consensus requires the following disclosures: (i) the accounting policy elected for these taxes and (ii) the amount of the taxes reflected gross in the income statement on an interim and annual basis for all periods presented. The disclosure of those taxes can be provided on an aggregate basis. We adopted the consensus on January 1, 2007, and it had no material effect on our results of operations or financial position. Excise taxes on motor fuel sales by the retail segment is presented on a gross basis with supplemental information regarding the amount of such taxes included in revenues provided in Note 2 (s) to our audited combined financial statements. All other excise taxes are presented on a net basis in the Combined Statements of Operations.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measures. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with early adoption encouraged, provided the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement No. 157 , to provide a one-year deferral of the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed in financial statements at fair value on a recurring basis (that is, at least annually). For nonfinancial assets and nonfinancial liabilities subject to the deferral, the effective date of SFAS 157 is postponed to fiscal years beginning after November 15, 2008 and to interim periods within those fiscal years. The provisions of SFAS 157 are to be applied on a prospective basis, with the exception of certain financial instruments for which retrospective application is required. Except for nonfinancial assets and nonfinancial liabilities subject to the deferral, we adopted SFAS 157 on January 1, 2008, with no impact on our combined financial statements.
 
SEC Staff Guidance — Quantifying Financial Statement Misstatements.  During September 2006, the SEC Staff issued Staff Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current year Financial Statements, which discusses the process of quantifying financial


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statement misstatements. During the fourth quarter of 2006, we adopted this guidance, and it had no material effect on our combined financial statements.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not materially effect our financial position or results of operations since we did not elect to record any of our financial assets or financial liabilities at fair value.
 
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”), which requires that the purchase method of accounting be used for all business combinations. SFAS 141(R) requires most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination be recorded at fair value. SFAS 141(R) applies to all business combinations, including combinations by contract alone. SFAS No. 141(R) is effective for periods beginning on or after December 15, 2008 and earlier application is prohibited. SFAS 141(R) will be applied to business combinations occurring after the effective date.
 
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Combined Financial Statements, an Amendment of ARB 51 (“SFAS 160”), which requires non-controlling interests (previously referred to as minority interests) to be treated as a separate component of equity. SFAS 160 is effective for periods beginning on or after December 15, 2008. Earlier application is prohibited. SFAS 160 will be applied prospectively to all non-controlling interests. Comparative period information must be recast to classify non-controlling interests in equity, attribute net income and other comprehensive income to non-controlling interests and provide other disclosures required by SFAS 160. We will adopt SFAS 160 on January 1, 2009 and do not expect it to materially affect our financial position or results of operations.
 
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). This standard is intended to improve financial reporting by requiring transparency about the location and amounts of derivative instruments in an entity’s financial statements, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The provisions of SFAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not believe the adoption of SFAS 161 will have a significant effect on our combined financial position, results of operations or cash flows. We will adopt SFAS 161 on January 1, 2009.


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BUSINESS
 
Our Company
 
We are the largest 7-Eleven licensee in the United States, and we are the sole licensee of the FINA brand for motor fuels in the South Central and Southwestern United States. Our business consists of two operating segments: retail and wholesale marketing. As of June 30, 2008, our retail segment operated 306 convenience stores in Central and West Texas and New Mexico, substantially all of which are operated under the 7-Eleven and FINA brands. Through our 7-Eleven licensing agreement, we have the exclusive right to operate 7-Eleven convenience stores in substantially all of our existing retail markets and many surrounding areas. Our wholesale marketing segment markets and supplies motor fuels under the FINA brand and provides brand support and payment services to distributors supplying over 1,000 locations, including all 297 company-owned stores that sell motor fuel. In markets where we choose not to supply fuel products we also sub-license the FINA brand and provide the same brand support and payment services to distributors supplying approximately 100 additional locations in these regions. We believe our leading brand offerings, advantageous fuel supply agreement, leading market position and complementary business model provide us with competitive advantages and position us well for continued growth.
 
Historically, most of our business was accounted for as an operating segment of Alon Energy, an independent refining company listed on the New York Stock Exchange, or NYSE, under the symbol “ALJ.” Alon Energy owns and operates four crude oil refineries located in Big Spring, Texas; Paramount and Long Beach, California; and Krotz Springs, Louisiana. After completion of this offering, Alon USA, LP, a wholly owned subsidiary of Alon Energy, will continue to own approximately     % of our common stock and all of our convertible preferred stock. Alon Energy is majority-owned by Alon Israel Oil Company, Ltd., or Alon Israel, an Israeli limited liability company and one of the largest operators of retail gasoline and convenience stores in Israel. Our ongoing relationships with Alon Energy and Alon Israel provide us with secure fuel supply and retail operating expertise, which we believe provide us with a competitive advantage.
 
Our History
 
In November 2008 Alon Brands, Inc., a Delaware corporation, was formed as a result of the conversion of Alon USA Interests, LLC, which was formed as a Texas limited liability company in September 2002. Prior to this offering, we have operated our businesses as a segment of Alon Energy. In June 2007, we completed the acquisition of Skinny’s, a privately held company that owned and operated 102 convenience stores in Central and West Texas and in July 2006, we completed the purchase of 40 retail convenience stores from Good Time Stores, Inc. in El Paso, Texas. Prior to the corporate reorganization transactions to be completed immediately prior to this offering, we have not operated independently of Alon Energy.
 
Our Industry
 
Convenience Stores.  Our retail segment operates within the large and growing U.S. convenience store industry. According to NACS, sales in the industry have grown from $337.0 billion in 2003 to $577.4 billion in 2007, which represents a CAGR of 14.4%. This industry is highly fragmented, with the 10 largest convenience store operators controlling less than 9% of the total convenience stores in 2007. Furthermore, convenience store operators with 50 or fewer stores accounted for approximately 75% of all convenience stores in 2007. We believe we will continue to benefit from several key industry trends and characteristics, including:
 
  •  Continuing shift of consumer food and general merchandise purchases away from traditional supermarkets to convenience stores and other alternative formats;
 
  •  Increasing size and complexity of the big box retail format, driving consumers to small box retailers, such as convenience stores, to meet their demand for speed and convenience in daily shopping needs;
 
  •  Changing consumer demographics and eating patterns resulting in more food consumed away from home;


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  •  Increasing significance of the advantages of scale given the highly fragmented nature of the industry; and
 
  •  Continuing opportunities to grow through acquisitions given industry fragmentation and continued divestitures of retail convenience stores by major oil companies.
 
Motor Fuel Marketing and Supply.  In recent years, the market for wholesale distribution of motor fuel products has experienced a number of changes which we believe provide opportunities to grow our wholesale marketing segment, including:
 
  •  Consolidation among major petroleum product producers over the last 20 years, which has resulted in fewer recognizable brands available to consumers;
 
  •  A 37% reduction in the number of operating crude oil refineries over the last 25 years, which has resulted in less access to product and increased the importance of obtaining a secure fuel supply source; and
 
  •  Increased scrutiny by oil companies and refiners in selecting distributors, with a preference for larger distributors capable of handling higher volumes, limiting smaller distributors’ access to product.
 
Our Competitive Strengths
 
We believe the following competitive strengths differentiate us from our competitors:
 
Leading 7-Eleven Convenience Store Brand.  7-Eleven is the most recognized brand for convenience stores in the United States and around the world. We are the largest 7-Eleven licensee in the United States and we have an exclusive license to use the 7-Eleven brand in substantially all of our retail markets and many surrounding areas. Our licensing arrangement allows us to offer well-known proprietary products, including Slurpee® frozen carbonated beverages, Big Gulp® beverages and Big Bite® hot dogs, which contribute to our merchandise margin, which is in excess of the industry average. Additionally, we benefit from access to 7-Eleven’s successful and innovative new product development, marketing techniques, national advertising campaigns and proprietary retail information.
 
Exclusive FINA Brand Offering.  With approximately 1,100 branded locations and a history reaching back to 1963, the FINA name is well-known in the South Central and Southwestern United States. We believe FINA-branded products are an important market differentiator for both our retail operations and for those of our distributors. We have an exclusive license to market motor fuels under the FINA brand in Texas, Oklahoma, New Mexico, Arizona, Arkansas, Louisiana, Colorado and Utah.
 
Attractive Wholesale Marketing Segment.  Our wholesale marketing segment supplies distributors with motor fuel under the FINA brand and provides payment card processing, branding and construction incentives, and signage and marketing incentives. We provide these services only to distributors, as opposed to individual dealers or retailers, which lowers our credit risk by concentrating our customer base to a smaller number of more creditworthy accounts. Furthermore, the relatively low operating costs and capital requirements of our wholesale marketing segment have historically generated excess free cash flow. We believe this segment will continue to generate free cash flow in the future which we plan to utilize to fund our growth strategy.
 
Advantageous Long-Term Fuel Supply Agreement.  Immediately prior to the consummation of this offering, we will enter into a long-term fuel supply agreement with Alon Energy to secure substantially all of our motor fuel requirements. This new agreement will provide cost-advantaged pricing and a secure fuel supply. This agreement will also provide us a platform for growth in existing and new markets, such as Louisiana and Southern California, where Alon Energy owns and operates refineries.
 
Leading Market Position in Attractive Markets.  We believe we are the largest convenience store operator by number of stores in the cities of Abilene, Big Spring, El Paso, Lubbock, Midland, Odessa and Wichita Falls, Texas. We also have a significant presence in Albuquerque, New Mexico. Approximately 92% of our stores are located in Central and West Texas, which include population and employment


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growth areas exceeding national averages based on U.S. Census data. We believe we will continue to benefit from the regional economy’s focus on energy and agriculture and the stability provided by military bases in the region.
 
Complementary Business Model.  We believe our wholesale marketing operations and related brand sub-licensing provide us with a diverse source of revenues to compliment our retail operations. In addition to increasing our overall scale and providing us with additional sales and income opportunities over other convenience store operators, our complementary wholesale operations also minimize some of the risks that convenience store-only operators face, such as higher payment card expenses and volatility in retail motor fuel margins. For example, revenues generated from our wholesale marketing segment’s payment card processing services partially offset our retail segment’s payment card expenses. Furthermore, we believe our complementary operations also enhance our flexibility to grow in existing and new markets and enhance the overall stability of our business.
 
Experienced Management with Significant Operating Expertise.  Our senior management team averages 19 years of relevant experience in the retail and fuel marketing industries. We believe our management team’s experience and accomplishments position us well for continued growth. We also benefit from the management and transactional expertise provided through our relationships with Alon Energy and Alon Israel, which has grown since its formation in 1989 to become one of the largest operators of retail gasoline and convenience stores in Israel.
 
Our Strategy
 
We believe there are significant opportunities to continue to expand our businesses and increase our sales and profitability through the implementation of the following strategies:
 
Improve Our Retail Operations.  Following our separation from Alon Energy and this offering, we believe we will be better able to invest our capital to improve our retail operations. Specifically, we plan to drive increased volumes and overall profitability by:
 
  •  Introducing new products and services;
 
  •  Realizing the benefits of our recent fuel equipment upgrades;
 
  •  Optimizing our fuel pricing to improve overall retail profits and drive in-store traffic;
 
  •  Completing selective retail store remodels and equipment upgrades;
 
  •  Improving product positioning of higher margin, high volume product categories; and
 
  •  Better utilizing our point-of-sale technologies.
 
Increase Sales of Higher Margin Foodservice Products.  The industry average in-store sales contribution from prepared on-site food programs was 6.6% for the year ended December 31, 2007. Our prepared on-site food contribution was 1.3% for the same period. We believe there is a significant opportunity to increase our sales from higher margin prepared food offerings, which in turn will drive ancillary revenues from other higher margin foodservice products, such as fountain and hot-dispensed beverages. Through our 7-Eleven license agreement, we have access to 7-Eleven’s entire program of proprietary foodservice products. In addition, our 7-Eleven license agreement allows us to offer third-party foodservice products. We plan to increase our foodservice sales by better leveraging 7-Eleven’s foodservice program, implementing an independent hot food program and significantly improving our beverage offerings, all of which carry higher margins than other retail products.
 
Grow Our Retail Store Base.  Over the last three years, we have increased our retail store count from 167 to 306 by completing and integrating two acquisitions. In doing so, we have improved our profitability at these stores acquired, through rebranding to the 7-Eleven brand, and realizing the benefits of increased scale. We believe our acquisition experience and our scalable infrastructure form a strong platform for future growth and that acquisitions of additional stores provides us the opportunity to


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increase our overall profitability. We expect to continue to grow our retail store base through acquisitions in markets where we are the exclusive licensee of the 7-Eleven brand.
 
Improve Our Wholesale Marketing Operations.  We have implemented and continue to implement changes to our wholesale marketing programs to increase the ratability, or consistency, of our distributors’ purchases of motor fuel products, which further enhances our profitability. We plan to continue to grow our distributor network in our current markets through our offering of the FINA brand, reliable fuel supply and brand support and payment card processing services. In addition, we intend to expand our branded fuel supply offering into new markets, including markets in which Alon Energy now operates, or in the future may, acquire refineries.
 
Retail
 
As of June 30, 2008, we operated 306 retail convenience stores located in Central and West Texas and New Mexico. Our convenience stores, substantially all of which operate under the 7-Eleven and FINA brands, typically offer motor fuel, food products, tobacco products, non-alcoholic and alcoholic beverages and general merchandise to our customers. We believe we are the largest independent operator of retail convenience stores in each of the cities of Abilene, Big Spring, El Paso, Lubbock, Midland, Odessa and Wichita Falls, Texas. We also have a significant presence in Waco, Texas and Albuquerque, New Mexico. Our markets are characterized by high population and employment growth, particularly in West and Central Texas, and many of our geographic regions have remained economically robust given the regional economies’ focus on energy and agriculture and the presence of military bases. Substantially all of our motor fuel sold at our retail convenience stores is supplied by our wholesale marketing segment. We are the largest independent licensee of the 7-Eleven brand in the United States, and we have an exclusive license to use the well-known FINA brand in Texas, Oklahoma, New Mexico, Arizona, Arkansas, Louisiana, Colorado and Utah. In addition, we operate 24 stores near Waco, Texas that are outside of our 7-Eleven license area and are operated under the Skinny’s brand.
 
For the year ended December 31, 2007, our retail segment generated revenues of $480.1 million and gross profit of $88.0 million. For the six months ended June 30, 2008, our retail segment generated revenues of $296.9 million and gross profit of $49.0 million. The retail segment had total assets of $187.7 million as of June 30, 2008. The following table sets forth revenues and gross profits from our retail segment for those periods:
 
                                                                 
    Year Ended December 31, 2007     Six Months Ended June 30, 2008  
    Revenues     Gross Profit     Revenues     Gross Profit  
    (Dollars in thousands)  
 
Motor fuel
  $ 259,287       54.0 %   $ 19,478       22.1 %   $ 169,184       57.0 %   $ 10,077       20.5 %
Merchandise
    213,433       44.5       61,113       69.5       124,807       42.0       36,028       73.5  
Other, net
    7,374       1.5       7,375       8.4       2,931       1.0       2,931       6.0  
                                                                 
                                                                 
Total
  $ 480,094       100.0 %   $ 87,966       100.0 %   $ 296,922       100.0 %   $ 49,036       100.0 %
                                                                 
 
Store Locations
 
As of June 30, 2008, 283 of our 306 retail convenience stores were located in Central and West Texas and 23 were located in or near Albuquerque, New Mexico. Two hundred eighty-one of our stores are operated under the 7-Eleven and FINA brands, while the remaining stores operate under the Skinny’s and FINA brands. Our stores are generally open 24 hours, 365 days a year, and substantially all of our stores sell motor fuel. Our typical store sizes range from 2,000 to 2,500 square feet.
 
Merchandise and Foodservice Sales
 
Our retail convenience stores typically offer a variety of food products, tobacco products, carbonated and non-carbonated and non-alcoholic and alcoholic beverages, snacks, groceries and non-food merchandise. Our stores generally stock merchandise that are tailored to local market preferences. Our 7-Eleven branded stores carry products such as Slurpee® frozen carbonated beverages, Big Gulp® beverages and Big Bite® hot dogs,


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which are unique to the 7-Eleven brand. In addition, we operate ATM and money order programs in each of our stores and also provide other products and services such as lottery, prepaid telephone cards and gift cards.
 
Our position as a 7-Eleven licensee allows Alon Brands full access to 7-Eleven’s foodservice programs and consulting and we are utilizing this benefit in the evaluation of 7-Eleven’s proprietary foodservice offerings. 7-Eleven has prepared on-site and commissary distributed food programs that could be introduced in many of our markets. We are also exploring third-party foodservice offerings that may have more appeal in some regional markets. In 2009, we intend to tailor our foodservice offerings to the local demographics in selected markets that we serve.
 
The following table sets forth the percentage by category of our retail merchandise revenues based on available category sales data for substantially all of our retail stores at the end of period:
 
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