MACGRAY13D

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AWsacHnxERcssUS7IBv4i80YYc0kFXXk0KPY1Fte4MjtXQ3/vHx0aSnCnozZD8Mu puDvKZT0BZG3tx5ltEHSWw== 0000935836-08-000209.txt : 20080411 0000935836-08-000209.hdr.sgml : 20080411 20080411151932 ACCESSION NUMBER: 0000935836-08-000209 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20080411 DATE AS OF CHANGE: 20080411 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: MAC-GRAY CORP CENTRAL INDEX KEY: 0001038280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 043361982 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-53449 FILM NUMBER: 08752203 BUSINESS ADDRESS: STREET 1: 404 WYMAN STREET STREET 2: SUITE 400 CITY: WALTHAM STATE: MA ZIP: 02451 BUSINESS PHONE: 781-487-7600 MAIL ADDRESS: STREET 1: 404 WYMAN STREET STREET 2: SUITE 400 CITY: WALTHAM STATE: MA ZIP: 02451 FORMER COMPANY: FORMER CONFORMED NAME: MAC GRAY INC DATE OF NAME CHANGE: 19970424 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: FAIRVIEW CAPITAL INVESTMENT MANAGEMENT CENTRAL INDEX KEY: 0001056549 IRS NUMBER: 943294876 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 300 DRAKE'S LANDING ROAD STREET 2: SUITE 250 CITY: GREENBRAE STATE: CA ZIP: 94904 BUSINESS PHONE: 4154644640 MAIL ADDRESS: STREET 1: 300 DRAKE'S LANDING ROAD STREET 2: SUITE 250 CITY: GREENBRAE STATE: CA ZIP: 94904 SC 13D/A 1 macgray13d.htm SCHEDULE 13D AMENDMENT NO. 2 MACGRAY13D

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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SCHEDULE 13D

Under the Securities Exchange Act of 1934
(Amendment No. 2)

Mac-Gray Corporation

(Name of Issuer)

Common Stock

(Title of Class of Securities)

554153106

(CUSIP Number)

Ellyn Roberts
Shartsis Friese LLP
One Maritime Plaza, 18th Floor
San Francisco, CA 94111 (415) 421-6500

(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)

April 10, 2008

(Date of Event Which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of sections 240.13d-1(e), 240.13d-1(f) or 140.13d-1(g), check the following box. [ ]

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See section 240.13d-7 for other parties to whom copies are to be sent.

* The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter the disclosures provided in a prior cover page.

The information required in the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Fairview Capital Investment Management, LLC

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a)
(b) X

3. SEC Use Only

4. Source of Funds (See Instructions) AF

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization California

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 0
	8. Shared Voting Power 744,146
	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 744,146

11. Aggregate Amount Beneficially Owned by Each Reporting Person 744,146

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 5.6%

14. Type of Reporting Person (See Instructions) IA, OO

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Fairview Capital

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a)
(b) X

3. SEC Use Only

4. Source of Funds (See Instructions) AF

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization California

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 0
	8. Shared Voting Power 744,146
	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 744,146

11. Aggregate Amount Beneficially Owned by Each Reporting Person 744,146

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 5.6%

14. Type of Reporting Person (See Instructions) HC, CO

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Andrew F. Mathieson

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a)
(b) X

3. SEC Use Only

4. Source of Funds (See Instructions) AF

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization U.S.A.

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 7,200
	8. Shared Voting Power 744,146
	9. Sole Dispositive Power 7,200
	10. Shared Dispositive Power 744,146

11. Aggregate Amount Beneficially Owned by Each Reporting Person 751,346

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 5.6%

14. Type of Reporting Person (See Instructions) HC, IN

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Scott W. Clark

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a)
(b) X

3. SEC Use Only

4. Source of Funds (See Instructions) AF

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization U.S.A.

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 0
	8. Shared Voting Power 744,146
	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 744,146

11. Aggregate Amount Beneficially Owned by Each Reporting Person 744,146

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 5.6%

14. Type of Reporting Person (See Instructions) HC, IN

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Darlington Partners, L.P.

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a)
(b) X

3. SEC Use Only

4. Source of Funds (See Instructions) AF

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization Delaware

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 0
	8. Shared Voting Power 741,146
	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 741,146

11. Aggregate Amount Beneficially Owned by Each Reporting Person 741,146

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 5.6%

14. Type of Reporting Person (See Instructions) PN

Item 1. Security and Issuer

This statement relates to shares of Common Stock (the "Stock") of Mac-Gray Corporation (the "Issuer"). The principal executive office of the Issuer is located at 404 Wyman Street, Suite 400, Waltham, MA 02451-1212.

Item 2. Identity and Background

The persons filing this statement and the persons enumerated in Instruction C of Schedule 13D and, where applicable, their respective places of organization, general partners, directors, executive officers and controlling persons, and the information regarding them, are as follows:

(a) Fairview Capital Investment Management, LLC ("FCIM LLC")
Fairview Capital
Andrew F. Mathieson
Scott W. Clark
Darlington Partners, L.P. ("Darlington")
(collectively, the "Filers").

(b) The business address of the Filers is
300 Drakes Landing Road, Suite 250, Greenbrae, CA 94904

(c) Present principal occupation or employment of the Filers and the name, principal business and address of any corporation or other organization in which such employment is conducted:
FCIM LLC is the investment adviser and general partner of Darlington and is the investment adviser to other accounts. Fairview Capital is the manager of FCIM LLC. Mr. Mathieson is the controlling shareholder and President of Fairview Capital and is a member of FCIM LLC. Mr. Clark is a member and portfolio manager of FCIM LLC and the portfolio manager of Darlington.

(d) During the last five years, none of the Filers has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).

(e) During the last five years, none of the Filers was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

(f) For citizenship of the Filers, see Item 4 of the cover sheet for each Filer.

Item 3. Source and Amount of Funds or Other Consideration

The source and amount of funds used in purchasing the Stock were as follows:

Purchaser	Source of Funds	Amount
FCIM LLC	AF⁽¹⁾	$7,215,383

(1) Purchases were made by an investment limited partnership to which FCIM LLC is the general partner and investment adviser and other accounts of which it is the investment adviser.

Item 4. Purpose of Transaction

The Filers acquired the Shares for investment purposes in the ordinary course of business. In pursuing such investment purposes, the Filers may further purchase, hold, vote, trade, dispose or otherwise deal in the Shares at times, and in such manner, as they deem advisable to benefit from changes in the Shares' market price, changes in the Issuer's operations, business strategy or prospects, or from sale or merger of the Issuer. To evaluate such alternatives, the Filers routinely will monitor the Issuer's operations, prospects, business development, management, competitive and strategic matters, capital structure, and prevailing market conditions, as well as alternative investment opportunities, the filers' liquidity requirements and other investment considerations. Consistent with their investment research methods and evaluation criteria, the Filers may discuss such matters with the Issuer's management or directors, other shareholders, industry analysts, existing or potential strategi c partners or competitors, investment and financing professionals, sources of credit and other investors. Such factors and discussions may materially affect, and result in, the Filers' modifying their ownership of the Shares, exchanging information with the Issuer pursuant to confidentiality or similar agreements, proposing changes in the Issuer's operations, governance or capitalization, or in proposing one or more of the other actions described in sections (a) through (j) of Item 4 of Schedule 13D. The Filers may formulate other plans and/or make other proposals, and take such actions with respect to the Shares, including any or all of the actions described in sections (a) through (j) of Item 4 of Schedule 13D. Without limiting the generality of the foregoing, certain of the Filers sent a letter (a) on April 10, 2008, to the Issuer's board of directors (the "Board") expressing, among other things, their disappointment that the Issuer still has not addressed their concerns expressed in earlier letters, a nd in particular, their disappointment that the Issuer acquired Automatic Laundry Company at a price that the Filers believe was too high, (b) on December 5, 2007, to the Board urging it to consider a high dividend payment model or selling the Issuer, (c) on October 9, 2007, to the independent members of the Board asking them to consider certain questions in connection with maximizing the value of the Issuer for all shareholders and (d) on July 9, 2007, to the Board recommending that the Issuer, among other things, make changes to its capital allocation strategy. Copies of those letters are incorporated by reference as Exhibits B, C, D and E.

Item 5. Interest in Securities of the Issuer

The beneficial ownership of the Stock by each Filer at the date hereof is reflected on that Filer's cover page.

FCIM LLC purchased the Stock described below on behalf of Darlington in an open market transaction, and such purchases are the Filers' only transactions in the Stock in the last sixty days:

Name	Purchase or Sale	Date	Number of Shares	Price per Share
FCIM LLC	Purchase	03/07/2008	12,396	$11.09
FCIM LLC	Purchase	03/10/2008	100	$11.35
FCIM LLC	Purchase	03/17/2008	7,700	$11.11
FCIM LLC	Purchase	03/18/2008	400	$11.35
FCIM LLC	Purchase	03/19/2008	3,300	$11.40
FCIM LLC	Purchase	03/20/2008	2,100	$11.55
FCIM LLC	Purchase	03/31/2008	11,500	$11.35

Item 6. Contracts, Arrangement, Understandings or Relationships with Respect to Securities of the Issuer

FCIM LLC is the general partner of Darlington pursuant to an agreement of limited partnership and is the investment adviser to other accounts pursuant to investment advisory contracts providing to FCIM LLC the authority, among other things, to invest Darlington's and those accounts' funds in the Stock, to vote and dispose of the Stock and to file this statement on behalf of Darlington and the other accounts. Pursuant to such agreement of limited partnership, FCIM LLC is entitled to allocations based on assets under management and realized and unrealized gains.

Item 7. Material to Be Filed as Exhibits

Exhibit A - Agreement Regarding Joint Filing of Statement on Schedule 13D or 13G.

Exhibit B - Letter to the Board dated April 10, 2008.

Exhibit C - Letter to the Board dated December 5, 2007, incorporated by reference to Schedule 13D filed December 7, 2007.

Exhibit D - Letter to the independent members of the Board dated October 9, 2007, incorporated by reference to Schedule 13D filed December 7, 2007.

Exhibit E - Letter to the Board dated July 9, 2007, incorporated by reference to Schedule 13D filed December 7, 2007.

SIGNATURES

After reasonable inquiry and to the best of my knowledge, I certify that the information set forth in this statement is true, complete and correct.

Dated: April 11, 2008

FAIRVIEW CAPITAL INVESTMENT MANAGEMENT, LLC

By: Fairview Capital, Manager

By: Andrew F. Mathieson, President

FAIRVIEW CAPITAL

By: Andrew F. Mathieson, President

Andrew F. Mathieson

Scott W. Clark

DARLINGTON PARTNERS, L.P.

By: Fairview Capital Investment Management, LLC, General Partner

By: Fairview Capital, Manager

By: Andrew F. Mathieson, President

EXHIBIT A

AGREEMENT REGARDING JOINT FILING

OF STATEMENT ON SCHEDULE 13D OR 13G

The undersigned agree to file jointly with the Securities and Exchange Commission (the "SEC") any and all statements on Schedule 13D or Schedule 13G (and any amendments or supplements thereto) required under section 13(d) of the Securities Exchange Act of 1934, as amended, in connection with purchases and sales by the undersigned of securities of any issuer, until such time as the undersigned file with the SEC a statement terminating this Agreement Regarding Joint Filing of Statement on Schedule 13D or 13G. For that purpose, the undersigned hereby constitute and appoint Fairview Capital Investment Management, LLC, a California limited liability company, as their true and lawful agent and attorney-in-fact, with full power and authority for and on behalf of the undersigned to prepare or cause to be prepared, sign, file with the SEC and furnish to any other person all certificates, instruments, agreements and documents necessary to comply with section 13(d) and section 16(a) of the Securities Exchange Act of 1934, as amended, in connection with said purchases and sales, and to do and perform every act necessary and proper to be done incident to the exercise of the foregoing power, as fully as the undersigned might or could do if personally present, until such time as the undersigned file with the SEC a statement terminating this Agreement Regarding Joint Filing of Statement on Schedule 13D or 13G.

Dated: December 27, 2007

FAIRVIEW CAPITAL INVESTMENT MANAGEMENT, LLC

By: Fairview Capital, Manager

By: Andrew F. Mathieson, President

FAIRVIEW CAPITAL

By: Andrew F. Mathieson, President

Andrew F. Mathieson

Scott W. Clark

DARLINGTON PARTNERS, L.P.

By: Fairview Capital Investment Management, LLC, General Partner

By: Fairview Capital, Manager

By: Andrew F. Mathieson, President

4281\004\EROBERTS\1504374.1

EX-1 2 ltissuer.htm EXHIBIT B LTISSUER

April 10, 2008

The Board of Directors

Mac-Gray Corporation

c/o Linda A. Serafini, Secretary

404 Wyman Street, Suite 400

Waltham, MA 02451

Dear Members of the Board:

It is our sense that there is a rising tide of shareholder discontent over Mac-Gray's poor financial performance, its ineffective acquisition strategy, and a perceived lack of accountability from the Management and Board. We, and separately, other shareholders, have expressed legitimate concerns and requested change, yet the Board has failed to respond.

We were disappointed that Mac-Gray chose not to address our concerns in its fourth-quarter earnings press release and conference call on March 6, 2008. Instead, the company reported yet another period of mediocre financial performance and indicated plans to continue with its questionable strategy.

Our disappointment turned extreme when we learned of the purchase of Automatic Laundry Company ("ALC") for $116 million on April 1, 2008. Once again, Mac-Gray has grossly overpaid for an acquisition. Unless changes are made immediately, we fear the ALC transaction may set the stage for several more years of substandard financial performance. Based on the 10% decline in Mac-Gray's share price since the announcement of the deal, it is clear the market agrees with our assessment.

Rising Tide of Shareholder Discontent

During the past year, in numerous meetings and conversations with Management and in three letters to the Board, we have outlined serious concerns regarding Mac-Gray's growth and capital allocation strategies. Our opinions are informed by the research we have conducted during the four years we have been Mac-Gray shareholders.

Since filing our Schedule 13D in December, we have received calls from other large shareholders who have told us they agree with our point of view and want change at Mac-Gray (we also have received calls from former shareholders who sold their shares in frustration).

Another significant shareholder, River Road Asset Management, which holds 14.2% of Mac-Gray's common stock according to its most recently filed Schedule 13D, expressed concern in that Schedule 13D over Mac-Gray's failure to address its depressed stock market valuation and urged the Board to hire an independent advisor to explore strategic options, including a sale of the company.

As of the date of this letter, accounts managed by Fairview Capital hold 5.6% of Mac-Gray's common shares. Based on the ownership disclosed by River Road Asset Management in its Schedule 13D, shareholders controlling 19.8% of Mac-Gray, acting separately, have questioned publicly the company's performance and asked for change. We believe other shareholders have expressed similar views to Mac-Gray's Management in private. Yet the company has ignored these concerns, and in doing so has demonstrated a lack of accountability and a sense of disregard for its shareholders.

2007 Financial Results

We are perplexed by the disconnect between Management's interpretation of the company's financial results and the actual results themselves. In his opening comments on the fourth-quarter conference call, Stewart MacDonald called 2007 "an excellent year for the company." In the fourth-quarter earnings press release, Mr. MacDonald says: "Our results in 2007 reflect the effectiveness of our disciplined corporate strategy, which combines select acquisitions with organic growth."

To the contrary, we believe the 2007 results demonstrate the ineffectiveness of Mac-Gray's strategy. Let us review the 2007 financial performance:

Return on invested capital ("ROIC") = 6.0%

Return on equity ("ROE") = 3.8%

Adjusted earnings per diluted share ("EPS") of $0.26 was the second-lowest result in six years

Growth in total debt (+18%) greatly exceeded growth in adjusted EBITDA (+8%)

Share price appreciation in 2007 = -5.5%

Annualized share price appreciation since the 1997 IPO through 12/31/07 = +0.2%

In our previous letters, we have presented compelling analyses showing that the company's poor financial results are a direct result of its flawed "growth" strategy, which encourages poor investments to drive increases in revenue and EBITDA.

This was again the case in 2007. Mac-Gray spent approximately $78 million (nearly $6 per common share) on capital expenditures and acquisitions, but failed to improve the metrics that drive shareholder value (including ROIC, ROE and EPS). To make matters worse for shareholders, Mac-Gray's short-term and long-term incentive compensation plans (which place emphasis on growth in revenue and EBITDA, as outlined in Mac-Gray's 2007 proxy statement and its Form 8-K filed on January 17, 2008) will likely provide Management with large bonuses despite the lack of value creation. While Management may be gratified (and enriched) by its 2007 performance, shareholders are no better off.

Acquisition Strategy

The ALC acquisition marks Mac-Gray's fourth major acquisition in recent years. In each case, Mac-Gray acquired a good business, but grossly overpaid. We believe this is because Mac-Gray focuses almost exclusively on the strategic benefits of these deals and ignores the financial imperative to create shareholder value.

Mac-Gray's poor consolidated financial performance is a direct result of its acquisition strategy, in which financial discipline seems to be an afterthought. For example, we estimate the $116 million purchase price for ALC was approximately $26 million too high. A simplistic analysis demonstrates this point.

ALC generates $16 million of annual EBITDA, and Mac-Gray eventually expects to achieve an additional $4 million of annual EBITDA from cost-saving synergies. The $116 million purchase price represents a multiple of 7.3x ALC's stand-alone EBITDA, and a multiple of 5.8x the pro forma EBITDA number. Note that Mac-Gray's own EBITDA valuation multiple was approximately 5.5x prior to the announcement of the deal (based on Mac-Gray's $11.50 closing share price on 3/31/08).

We would argue that a smaller regional company should merit a lower valuation multiple than a national provider such as Mac-Gray. We would also argue that the buyer should retain the majority of the value of the synergies because the synergies are not possible without the buyer, and because the buyer is at risk for achieving the synergies.

Based on this logic, we believe Mac-Gray should have paid no more than 5.0x EBITDA, and it should have retained the majority of the value of the synergies for its shareholders. If we generously attribute one-half of the estimated synergies to the seller, then Mac-Gray should have paid for $18 million of EBITDA. Using a multiple of 5.0x would suggest a fair price of $90 million.

By "fair," we of course mean fair to Mac-Gray shareholders. If the seller was not willing to sell at this price, Mac-Gray should have walked away. Instead, Mac-Gray paid a higher multiple than its own and gave the seller 100% of the value of the synergies. If only Mac-Gray were so generous with its own shareholders! This lack of discipline is especially shocking given that Management believes it was the only bidder trying to buy ALC.

Stewart MacDonald's discussion of the ALC deal on the April 1, 2008, conference call further demonstrates Mac-Gray's overemphasis on "strategy" and its lack of focus on shareholder value. On that call, Mr. MacDonald devoted the bulk of his prepared remarks to the strategic benefits of the deal, and made barely any mention at all of the financial rationale.

The only indication volunteered by Management regarding the deal's financial impact (besides some brief comments during the Q&A period) was that it would be accretive in the first twelve months. Unfortunately, for a fully debt-financed acquisition to be merely accretive is a trivial accomplishment and one that creates little shareholder value. We would note that the three previous large acquisitions were also advertised as accretive, yet Mac-Gray's 2007 adjusted EPS was the second lowest result in the past six years. This begs the question whether any of those deals in fact have been accretive.

As with the previous major acquisitions, it seems that "strategic" considerations trumped financial ones. While the strategic benefits are laudable, they are worthless to Mac-Gray shareholders if they cannot be attained at attractive prices.

Looking Forward

Mac-Gray's poor financial performance in recent years demonstrates that the acquisitions of WEB East, WEB West, and Hof have not created adequate value for shareholders. The ALC acquisition appears to be a similar story. For all of their strategic benefits, these deals cannot be justified on a financial basis.

Though the ALC acquisition cannot be undone, it is not too late to make important changes. The Board must determine a new course that will maximize shareholder value moving forward. Failure to take action will most likely result in further shareholder discontent and activism.

We suggest the Board do the following:

1. Talk with your shareholders. Given Mac-Gray's woeful share price performance, the growing discontent among shareholders, and the thoughtful concerns that we and other shareholders have raised, there is no reason the independent members of the Board should not grant an audience to concerned shareholders.

2. Conduct a thorough study of the two WEB acquisitions to determine why they failed to create shareholder value. These two deals are far enough in the past that an effective "post mortem" can be completed. Management promised these deals would be accretive and earn double-digit annualized returns on investment, yet there is no evidence of this in Mac-Gray's consolidated financial results. We speculate the main reason is that Mac-Gray paid too much for these businesses (though there may be other reasons as well).

3. Provide shareholders with a three-year business plan or "road map" to demonstrate how the status quo strategy will lead to improved financial performance and a higher share price. Rather than just hoping for validation from Wall Street and a higher valuation multiple, Mac-Gray should convince its shareholders that it has a plan to generate the per-share profitability required to drive the share price higher. Let us remind you that Mac-Gray's share price is now below the 1997 IPO price of $11.

4. Hold Management accountable. The three-year business plan should include a set of financial goals that are linked directly to shareholder value (revenue and EBITDA growth should not be on the list). Base Management's compensation on these metrics. Management should be well compensated if it hits the objectives, and it should earn little or no compensation if it misses them. Extended periods of underperformance should cause the Board to consider termination.

5. Form an independent committee and hire a Wall Street investment bank to review Mac-Gray's strategic alternatives, including a comparison of the status quo strategy versus our suggestions: a high dividend payout model or a sale of the company. Given that Management seems so confident in its strategy, it should welcome the opportunity for an independent advisor to compare that strategy to alternatives.

We respectfully ask for a response from an independent member of the Board or a communication to all shareholders no later than the time of Mac-Gray's announcement of first-quarter results. If no response is provided, we plan to seek answers in person at the annual meeting of stockholders.

Very sincerely,

Scott W. Clark Andrew F. Mathieson

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