MAC-GRAY CORP, 424B4, 1997-10-17

MAC-GRAY CORP
424B4, 1997-10-17
PERSONAL SERVICES

Previous: MADE2MANAGE SYSTEMS INC, S-1, 1997-10-17

Next: EDUCATION LOANS INC /DE, S-1/A, 1997-10-17

<PAGE>

FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-33669

PROSPECTUS

4,000,000 SHARES
LOGO

MAC-GRAY CORPORATION

COMMON STOCK
($.01 PAR VALUE)

All of the 4,000,000 shares of Common Stock, $.01 par value (the "Common
Stock"), being offered hereby (the "Shares") are being issued and sold by Mac-
Gray Corporation (the "Company").

Prior to this offering, there has been no public market for the Common Stock.
See "Underwriting" for information relating to the factors considered in
determining the initial public offering price. The Common Stock has been
approved for listing, subject to official notice of issuance, on the New York
Stock Exchange under the trading symbol "TUC."

SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY (1)
<S> <C> <C> <C>
Per Share.................................. $11.00 $0.77 $10.23
Total(2)................................... $44,000,000 $3,080,000 $40,920,000
- --------------------------------------------------------------------------------
</TABLE>
(1) Before deducting offering expenses, payable by the Company, estimated at
$875,000. The Company, which has been treated for federal income tax
purposes as an S corporation prior to the consummation of this offering,
will distribute approximately $9.0 million of the net proceeds from this
offering to the Company's stockholders of record immediately prior to the
consummation of this offering. This distribution represents a significant
portion of the historical earnings that have previously been taxed
directly to the stockholders of the Company and certain of its
predecessors and which were available for distribution to them. See "Risk
Factors--Termination of S Corporation Status and Distribution to Current
Stockholders," "Termination of S Corporation Status," "Use of Proceeds,"
"Principal Stockholders," "Certain Relationships and Related Transactions"
and Note 15 of the Notes to the Mac-Gray Co., Inc. and Mac-Gray L.P.
Combined Financial Statements for December 31, 1996.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 600,000 additional shares of Common Stock at the Price to Public, less
Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $50,600,000,
$3,542,000, and $47,058,000, respectively. See "Underwriting."

The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or
in part and to withdraw, cancel or modify the offer without notice. It is
expected that delivery of the Shares will be made at the office of Salomon
Brothers Inc, Seven World Trade Center, New York, New York, or through the
facilities of The Depository Trust Company, on or about October 22, 1997.

SALOMON BROTHERS INC

SMITH BARNEY INC.

FIRST ALBANY CORPORATION

The date of this Prospectus is October 16, 1997.
<PAGE>

DESCRIPTION OF GRAPHICS:

[INSIDE FRONT COVER: MAP OF UNITED STATES FROM THE EAST COAST TO THE ROCKY
MOUNTAINS DISPLAYING STATES IN WHICH THE COMPANY CONDUCTS OPERATIONS (MARKED
IN BLUE), AS WELL AS DISPLAYING THE COMPANY'S CORPORATE HEADQUARTERS, REGIONAL
OFFICES AND RECENT ACQUISITIONS.]

[INSIDE FRONT GATEFOLD: GRAPHICAL DEPICTION OF THE COMPANY'S TARGET CUSTOMER
BASE AS WELL AS ITS CURRENT USE OF SMART CARD TECHNOLOGY IN VARIOUS
APPLICATIONS, INCLUDING LAUNDRY EQUIPMENT AND DOOR ACCESS UNITS FOR VARIOUS
CUSTOMER GROUPS.]

[INSIDE BACK COVER: COMPANY LOGO.]

----------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The information contained in this Prospectus gives effect to:
(i) the reorganization (the "Mac-Gray Combination") of Mac-Gray Services, Inc.,
a Delaware corporation that was formerly known as Mac-Gray Co., Inc. ("Mac-Gray
Co."), and Mac-Gray, L.P., a Delaware limited partnership (the "Limited
Partnership"); and (ii) the acquisition (the "Sun Services Acquisition") of Sun
Services of America, Inc., a Florida corporation ("SSA"), and R. Bodden Coin-
Op-Laundry, Inc., a Florida corporation ("RBCO" and, together with SSA, "Sun
Services"), both of which occurred on April 17, 1997. Unless the context
requires otherwise, all references to the Company shall mean Mac-Gray
Corporation and its subsidiaries and predecessors, including Mac-Gray Co. and
the Limited Partnership, and businesses that it has acquired from their
respective dates of acquisition, including Sun Services. See "The Company."
Unless otherwise indicated, information in this Prospectus: (i) assumes no
exercise of the Underwriters' over-allotment option, and (ii) does not include
shares issuable upon exercise of outstanding options or reserved for issuance
pursuant to the Company's stock option and incentive plan. See "Underwriting"
and "Management--1997 Stock Option and Incentive Plan."

THE COMPANY

The Company, founded in 1927, is among North America's largest suppliers of
card and coin-operated laundry services in multiple housing facilities such as
apartment buildings, colleges and universities and public housing complexes,
and, based upon the Company's survey of colleges and universities, is North
America's largest supplier of such services to the college and university
market. The Company owns and operates approximately 113,000 card and coin-
operated washers and dryers in more than 17,000 multiple housing laundry rooms
located in 22 states in the Northeast, Midwest and Southeast regions of the
United States. In addition, the Company believes that it is the largest
operator of commercial laundry equipment manufactured by The Maytag Corporation
("Maytag"). The Company's revenue, EBITDA and net income, on a pro forma basis,
for the twelve months ended June 30, 1997, were approximately $79.2 million,
$17.9 million and $4.8 million, respectively.

Approximately 90% of the Company's revenue is derived from the operation of
washers and dryers in laundry rooms under long-term leases with property owners
("Laundry Route Revenue"). Under these long-term leases, which have an average
remaining life of more than seven years, the Company typically receives the
exclusive right to operate laundry rooms within a multiple housing property in
exchange for a percentage of the revenue collected. The Company's revenue base
is well diversified, as no lessor currently represents more than 1% of the
Company's machine base. The Company has been able to retain 99% of its existing
machine base, while also adding an average of 5.2% to its machine base, during
each of the past four years. The Company believes that its superior sales and
service efforts position it to continue to grow its customer base in its
existing markets, as well as to pursue opportunities in other geographic
markets and related industries.

The card and coin-operated laundry services industry, which the Company
estimates to have aggregate annual revenue of over $2.0 billion, is highly
fragmented and has recently begun to experience significant consolidation
primarily as a result of two factors: the consolidation of the real estate
ownership and management industries, most noticeably through the proliferation
of real estate investment trusts ("REITs") and large national property
management companies; and the increasing financial and technological demands
being placed upon smaller, family-owned service providers. The consolidation in
the real estate industry has resulted in a smaller number of decision-makers
overseeing a larger and more geographically diverse portfolio of properties.
These decision-makers,

3
<PAGE>

who are increasingly seeking outsourcing opportunities to allow them to focus
on their core real estate business, prefer financially stable and
geographically diverse service providers, including laundry service providers.
Many of these larger property owners and managers are demanding that their
service providers deliver both enhanced and integrated services in order to
retain residents, the critical factor in a property's profitability. In
addition, the Company believes that a significant number of the smaller,
independent owner-operators of laundry service businesses, many of whom are
confronting generational ownership changes, have elected not to expend the
financial and managerial resources necessary to meet expanding customer demands
and instead are choosing to sell their businesses. The Company, with a solid
customer reputation, a strong capital base and a proven record of acquiring and
integrating compatible businesses, believes that it is well positioned to take
advantage of these changes in the industry.

The Company has accelerated its acquisition efforts during the past 16 months
by adding to its senior management team and substantially increasing the funds
available under its credit facility. The Company's recent efforts are intended
to build upon the Company's successful acquisition record. Since May 1996, the
Company has acquired seven laundry route ("Laundry Route") businesses,
representing approximately 35,000 machines. These acquisitions include the
acquisition of Sun Services, which added a substantial number of machines to
the Company's existing machine base in Florida, the state with the third
largest multiple housing market in the country.

The Company, through its relationship with Schlumberger Technologies, Inc.,
an international leader in cashless payment technologies ("Schlumberger"), has
introduced and intends to expand its use of newly available smart card payment
systems to improve its existing operations and to offer enhanced products and
services to customers. Smart cards are the same size as credit or debit cards,
but contain a small chip which is capable of computational operations, as well
as storing data and value for use in cashless transactions. The stored value
feature of smart cards is used with the Company's laundry equipment to provide
laundry users the convenience and security of cashless transactions. Smart card
based payment systems are less expensive to install and operate than other
cashless payment systems, such as debit cards, and as a result have a greater
potential for use in the multi-housing market.

The Company, which has experienced increased usage at existing facilities
which have been equipped with smart card readers, believes that these smart
card based payment technologies may also be used to increase revenue by
facilitating modest price increases and variable time pricing. Since 1991, the
Company has installed more than 11,000 debit card operated laundry machines in
response to customer demand in the college and university market and, since
April 1, 1997, the Company has installed smart card readers in more than 2,200
laundry machines primarily in the multi-housing market. The Company believes
that its seven-year experience with cashless payment systems provides it with a
competitive advantage as it further pursues the roll-out of smart card operated
laundry equipment.

The Company's strategic objectives are to (i) grow its revenue and customer
base and increase profitability and cash flow by refining and expanding its
present operations and (ii) capitalize on the consolidation opportunities that
exist in its existing and related industries. In order to achieve these
objectives, the Company intends to:

4
<PAGE>

substantially on referrals from existing customers and intends to continue
its historical, proactive attention to customer service and satisfaction.
This focus has resulted in a 99% machine retention rate over the past four
years.

IMPLEMENT NEWLY AVAILABLE TECHNOLOGY--The Company intends to accelerate
the use of cost-effective smart card based payment and door access systems
to increase revenue at existing facilities and to attract additional
customers through a broader product offering. As card based technologies
become more prevalent, their use may also permit the Company to offer other
smart card based services to its customers, including perimeter access,
photocopying, vending machines, telephones, rent collection and other
ancillary services.

PURSUE STRATEGIC ACQUISITION OPPORTUNITIES--The Company intends to
continue to acquire and integrate businesses that both increase penetration
in existing markets and also strategically expand the Company's geographic
presence. The Company believes that in-market acquisitions will allow it to
capitalize on operating efficiencies and increase market penetration. In
addition, the Company intends to acquire laundry room operations in new
markets in order to increase its geographic diversity and broaden its
potential customer base. The Company will continue its disciplined approach
to evaluating expansion opportunities, including an analysis of each
acquisition candidate's projected cash flow as compared to the Company's
desired internal rate of return.

INCREASE LEADING POSITION IN COLLEGE AND UNIVERSITY MARKET--The Company
intends to strengthen its leading position in the college and university
market and to use it as a foundation for growth in both existing and new
geographic markets. The Company will continue to utilize a sales force
which focuses exclusively on this specialized market which is often the
first to demand new products and services. In addition, the Company intends
to broaden, potentially through acquisitions, the services offered to its
existing college and university customers, including ancillary services
typically used by college students, such as off-site laundry and vended
services, which may be outside the Company's current core business.

RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Com- 4,000,000 shares
pany............................
Common Stock to be outstanding
after the offering.............. 10,979,826 shares(1)
Use of proceeds.................. For repayment of certain indebtedness, pay-
ment of a distribution to the Company's ex-
isting stockholders and other general corpo-
rate purposes.
New York Stock Exchange symbol... TUC
</TABLE>
- --------
(1) Excludes (i) 638,340 shares of Common Stock issuable upon exercise of
outstanding stock options granted pursuant to the Company's 1997 Stock
Option and Incentive Plan (the "1997 Stock Plan") at a weighted average
exercise price of $8.86 per share and (ii) 111,660 shares of Common Stock
available for future grants under the 1997 Stock Plan, subject to increase
upon consummation of this offering. See "Management--1997 Stock Option and
Incentive Plan."

5
<PAGE>

SUMMARY COMBINED FINANCIAL DATA

Set forth below are summary historical combined and pro forma combined
financial data of the Company. The summary historical combined financial data
for the three years in the period ended December 31, 1996 were derived from the
historical combined financial statements of the Company presented elsewhere in
this Prospectus. The summary historical combined data for the six months ended
June 30, 1996 and 1997 have not been audited. Results for interim periods
include all adjustments, consisting only of normal recurring adjustments, which
management considers necessary for the fair presentation of the results of such
periods; however, they are not necessarily indicative of results for the full
year. The unaudited pro forma combined financial data set forth below do not
purport to represent the Company's combined results of operations or financial
position for any future period. The summary combined financial data set forth
below should be read in conjunction with, and are qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited combined financial statements and accompanying
notes thereto included elsewhere in this Prospectus.
<TABLE>

<CAPTION>
HISTORICAL PRO FORMA
------------------------------------------- -------------------------------
TWELVE SIX MONTHS
SIX MONTHS MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED JUNE 30, ENDED JUNE 30,
------------------------- ---------------- DECEMBER 31, ------------------
1994 1995 1996 1996 1997 1996(1) 1996(1) 1997(1)
------- ------- ------- ------- ------- ------------ ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Revenue................. $48,031 $50,710 $64,427 $29,025 $38,288 $ 71,091 $32,256 $ 40,320
Cost of revenue:
Commissions............ 19,168 20,471 25,760 11,622 14,639 28,478 13,037 15,436
Laundry route
expenditures.......... 7,889 8,251 10,955 4,600 6,231 11,775 5,003 6,414
Depreciation and
amortization.......... 4,756 4,899 6,216 2,715 3,776 7,455 3,159 4,131
Cost of equipment
sales................. 2,673 2,938 5,189 2,280 3,831 5,466 2,315 3,995
------- ------- ------- ------- ------- --------- ------- ---------
Total cost of revenue.. 34,486 36,559 48,120 21,217 28,477 53,174 23,514 29,976
Operating expenses:
General and
administration........ 3,085 3,901 3,952 1,874 2,076 4,897 2,324 2,246
Sales and marketing.... 2,501 2,531 3,803 1,541 2,697 3,963 1,614 2,744
Depreciation........... 442 455 517 242 382 542 253 388
------- ------- ------- ------- ------- --------- ------- ---------
Total operating
expenses.............. 6,028 6,887 8,272 3,657 5,155 9,402 4,191 5,378
------- ------- ------- ------- ------- --------- ------- ---------
Income from operations.. 7,517 7,264 8,035 4,151 4,656 8,515 4,551 4,966
Interest expense....... (1,217) (1,175) (1,956) (751) (1,431) (852) (483) (425)
Other income (expense),
net................... 70 55 (87) 1 39 (147) (2) 39
------- ------- ------- ------- ------- --------- ------- ---------
Income before provision
for income taxes...... 6,370 6,144 5,992 3,401 3,264 7,516 4,066 4,580
Provision for income
taxes................. (388) (374) (465) (255) (232) (3,028) (1,626) (1,832)
------- ------- ------- ------- ------- --------- ------- ---------
Net income.............. $ 5,982 $ 5,770 $ 5,527 $ 3,146 $ 3,032 $ 4,488 $ 2,440 $ 2,748
======= ======= ======= ======= ======= ========= ======= =========
Pro forma net income
per common share(2)... $ 0.49 $ 0.28
========= =========
Pro forma weighted
average common shares
outstanding(2)........ 7,468,383 7,468,383
========= =========
OTHER FINANCIAL DATA:
EBITDA(3).............. $12,785 $12,673 $14,681 $ 7,109 $ 8,853 $ 16,365 $ 7,961 $ 9,524
Depreciation and
amortization.......... 5,198 5,354 6,733 2,957 4,158 7,997 3,412 4,519
Capital expenditures... 5,679 4,421 7,635 2,986 2,998 8,079 3,175 3,013
Cash flows from
operating activities.. 10,650 10,417 13,650 5,682 3,546 14,553 5,927 3,935
Cash flows used in
investing activities.. (5,613) (5,105) (22,070) (15,803) (7,956) (24,234) (17,991) (8,236)
Cash flows provided by
(used in) financing
activities............ (6,128) (3,549) 7,382 8,696 4,226 8,643 10,532 4,117
</TABLE>
- --------
See footnotes on page 7.

6
<PAGE>

<TABLE>
<CAPTION>
HISTORICAL AT PRO FORMA AT
JUNE 30, 1997 JUNE 30, 1997(4)
------------- ----------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets..................................... $68,971 $73,734
Long-term debt, net of current portion........... 32,902 6,620
Redeemable common stock(5)....................... 7,797 7,797
Stockholders' equity............................. 14,542 41,287
</TABLE>
- --------
(1) Reflects (i) the Sun Services Acquisition for the year ended December 31,
1996 and the six months ended June 30, 1996 as if it occurred on January 1,
1996. For the six months ended June 30, 1997, the historical results of Sun
Services for the period from April 1, 1997 to April 16, 1997 have not been
included and are not material to the Company, (ii) certain adjustments
directly attributable to the Sun Services Acquisition for the
aforementioned periods, (iii) the Company's change in income tax status
from an S corporation for income tax purposes to a C corporation and the
application of an estimated income tax rate of 40%, and (iv) this offering
and the application of the net proceeds therefrom as described under "Use
of Proceeds." See "Unaudited Pro Forma Financial Data."
(2) Pro forma net income per common share and pro forma weighted average number
of common shares outstanding include all Common Stock equivalents and are
reflective of: (i) the Mac-Gray Combination and (ii) the number of shares
of Common Stock required to be issued in this offering in order to pay the
estimated $9.0 million distribution expected to be declared immediately
prior to the consummation of this offering and paid from the proceeds
thereof. Pro forma net income per share was computed using the treasury
stock method and all Common Stock and Common Stock equivalents issued
within twelve months of this offering have been included in computing
Common Stock and Common Stock equivalents. The pro forma net income per
common share, after giving effect to the number of shares required to be
issued in order to repay the debt and the accompanying reduction in related
interest expense (tax-effected) would have been $0.46 and $0.28 for the
year ended December 31, 1996 and for the six months ended June 30, 1997,
respectively.
(3) "EBITDA" is defined herein as income before provision for income taxes,
plus depreciation and amortization expense and interest expense. EBITDA
should not be considered as an alternative to net income as a measure of
operating results or as an alternative to cash flows as a measure of
liquidity and it is not a measure of performance or financial condition
under generally accepted accounting principles. EBITDA is presented because
the Company's management believes that certain investors may find it to be
a useful tool for measuring the Company's ability to meet its future debt
service, capital expenditure and working capital requirements.
(4) Reflects (i) the planned distribution following the consummation of this
offering of approximately $9.0 million to the Company's stockholders of
record as of a date immediately prior to the consummation of this offering,
(ii) the increase in the Company's net deferred tax liabilities of
approximately $4.3 million pursuant to the Company's change in tax status
from an S corporation to a C corporation and (iii) this offering and the
application of the net proceeds therefrom as described under "Use of
Proceeds."
(5) Redeemable Common Stock was issued in connection with the Sun Services
Acquisition.

----------------

7
<PAGE>

RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to other information contained in this Prospectus, in
evaluating an investment in the shares of Common Stock offered hereby.

IMPLEMENTATION OF ACQUISITION STRATEGY; INTEGRATION OF ACQUIRED BUSINESSES

The Company's growth strategy depends, in part, on its ability to acquire
and successfully integrate and operate additional businesses. In order to
pursue this strategy, the Company continually evaluates potential acquisition
candidates that provide services to the multi-housing market, including
Laundry Route businesses as well as businesses that could provide ancillary
services, such as photocopying, vending machines and telephones, to the
Company's customer base and target market. The success of any completed
acquisition will depend in large measure on the Company's ability to integrate
the assets, maintain and improve the results of operations and increase the
revenue of the acquired business. The process of integrating acquired
businesses, and in particular, geographically diverse operations or operations
outside the Company's core business, with the Company's business may involve
unforeseen difficulties and may require a disproportionate amount of the
Company's financial and other resources, including management time. While the
Company generally believes that its management team and business structure
enable it to operate a significantly larger and more diverse operation, there
is no assurance that the Company will be able to successfully integrate
acquired businesses into its existing operations and to implement effective
cost savings programs.

The Company has experienced increased competition in its acquisition
activities. Growing competition may increase purchase prices for future
acquisitions to levels that make the acquisitions less attractive or
uneconomic. In addition, future acquisitions accounted for under the purchase
method of accounting may result in the recording of goodwill, the amortization
of which may reduce the Company's net income. If further acquisitions are
made, the Company expects to continue to use cash and securities, including
shares of Common Stock, as consideration for such acquisitions. Use of the
Company's Common Stock as acquisition consideration may result in dilution to
the Company's stockholders. In the event that the Common Stock does not
maintain a sufficient valuation or if potential acquisition candidates are
unwilling to accept shares of Common Stock as consideration, the Company will
be required to use more cash resources or other consideration to continue its
acquisition program. In addition, if the Company is unable to generate
sufficient cash for further acquisitions from existing operations, the
Company's acquisition program could be adversely affected unless the Company
is able to obtain additional capital through external financings or can borrow
sufficient amounts. Any such debt financing will result in additional leverage
and any further equity financing may result in dilution to the Company's
stockholders. In addition, the Company is currently restricted through
September 2000 in its ability to acquire or operate laundry rooms in multi-
housing facilities in the District of Columbia, Maryland, Tennessee, Virginia
and West Virginia pursuant to a non-competition agreement entered into in
connection with a transaction consummated in 1990. This restriction on the
Company's activities, which will remain in effect after consummation of this
offering and will limit the Company's access to a geographic segment of the
market, would terminate before September 2000 upon certain changes in the
Company's ownership. There can be no assurance that suitable additional
acquisitions can be identified, financed, consummated on acceptable terms and
integrated into the Company's operations or that future acquisitions will be
financially and operationally successful. Failure to identify, finance and
consummate acquisitions on acceptable terms, or to integrate acquired
operations into the Company's operations could have a material adverse effect
on the Company's business, results of operations, financial condition and
prospects. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Business--
Company Strategy."

COMPETITION

The card and coin-operated laundry services industry is highly competitive.
In most of the Company's markets, laundry services may be available through
property owners and managers that

8
<PAGE>

operate their own laundry rooms ("Self-Owners"), private, family-owned
businesses or large regional and national laundry services companies. In the
competition to supply services to property owners, local private businesses
tend to have long-standing relationships with customers in their specific
geographic market, and the larger companies participating in the industry
consolidation, two of which have significantly larger installed machine bases
than the Company's, tend to have significant operational and managerial
resources to devote to expansion and to capture additional market share.
Accordingly, there can be no assurance that the Company will be able to
compete effectively in any specific geographic location in the business of
supplying laundry equipment services to property owners and managers or in the
acquisition of other businesses. See "Business--Competition."

DEPENDENCE UPON SENIOR EXECUTIVES

The Company is currently dependent to a significant degree upon the ability
and experience of four senior executives: Stewart Gray MacDonald, Jr., John S.
Olbrych, Neil F. MacLellan, III and Patrick A. Flanagan. The Company has
elected not to enter into employment agreements with any of these executives.
The Company's preference to not utilize employment agreements for its senior
executives may affect the Company's ability to attract and retain senior
executives in the future. The loss of any of the Company's senior executives
could adversely affect the Company's ability to maintain its current operating
performance or to achieve growth through acquisitions. See "Management."

SIGNIFICANT CAPITAL EXPENDITURES; ADDITIONAL FINANCINGS

The industry in which the Company operates is capital intensive.
Accordingly, the Company must continue to make capital expenditures in order
to periodically replace its existing equipment. In addition, the Company's
plan to utilize newly available smart card based technologies with its
equipment will also result in significant capital expenditures. While the
Company anticipates that its existing capital resources, including the net
proceeds from this offering and its line of credit, as well as cash from
operations, will be adequate to finance anticipated capital expenditures,
there can be no assurance that such resources or cash flows will be sufficient
or that the incremental revenue and cost efficiencies associated with
technological enhancements, such as the smart card, will justify the
significant capital expenditures. To the extent that its available resources
are insufficient to fund capital requirements, the Company may need to raise
additional funds through public or private financings that may or may not be
on terms favorable to the Company and, in the case of equity financings, could
result in dilution to the Company's stockholders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Business--Card and Coin-Operated Laundry Route
Business" and "--Technology."

UNCERTAINTY OF MARKET ACCEPTANCE OF NEW PRODUCTS AND SERVICES

The Company is currently introducing, and intends to introduce in the
future, new products and services utilizing smart card based technologies.
While the Company believes that cashless transactions will be attractive to
its customers and will provide the Company with certain benefits, there can be
no assurance that there will be widespread acceptance of these products by
property owners, managers, colleges and universities and residents, or that
technical or operational problems will not arise from their implementation. A
lack of market acceptance of these new products and services could have a
material adverse effect on the Company's business, results of operations,
financial condition and prospects. See "Business--Technology."

DEPENDENCE UPON LEASE RENEWALS

The Company's business is highly dependent upon the renewal of its leases
with property owners, colleges and universities and public housing
authorities. The Company has traditionally relied upon exclusive, long-term
leases with its customers, as well as frequent customer interaction and an

9
<PAGE>

historical emphasis on customer service, to assure continuity of financial and
operating results. There can be no assurance that the Company will be able to
continue to secure long-term exclusive leases with its customers or that it
will continue to successfully renew expiring leases. Any failure by the
Company to continue to obtain long-term exclusive leases with a substantial
number of its customers, or to successfully renew its existing leases as they
expire, could have a material adverse effect on the Company's business,
results of operations, financial condition and prospects. In addition, the
Company has occasionally experienced loss of business when property owners or
management companies choose to vacate properties as a result of economic
downturns that impact occupancy levels. There can be no assurance that future
economic downturns will not result in similar losses of business. See
"Business--Card and Coin-Operated Laundry Route Business--Facility Leasing."

DEPENDENCE UPON CERTAIN SUPPLIERS

The Company currently purchases more than 90% of the equipment that it
utilizes in its Laundry Route business from Maytag. In addition, the Company
derives a significant amount of its non-Laundry Route revenue, as well as
certain competitive advantages, from its position as a distributor of Maytag
commercial laundry products. Although the purchase and distribution agreements
between the Company and Maytag are terminable by either party upon written
notice, the Company has never had such an agreement terminated by Maytag. The
Company also currently purchases substantially all of its smart card based
equipment from Schlumberger, a manufacturer of card based electronic
transaction systems. The Company may choose to continue to rely substantially
in the future on the Schlumberger technology and its relationship with
Schlumberger in general. A termination of, or substantial revision of the
terms of, the contractual arrangements or business relationships with Maytag
or Schlumberger could have a material adverse effect on the Company's
business, results of operations, financial condition and prospects. See
"Business--Technology" and "--Laundry Equipment Sales, Leasing and Service."

RESTRICTIONS IMPOSED BY THE COMPANY'S INDEBTEDNESS

The Company has a credit agreement with State Street Bank and Trust Company
and CoreStates Bank, which provides the Company with a $50.0 million revolving
credit facility (the "Credit Facility"). The Company intends to use the
proceeds of this offering to pay off approximately $31.0 million of the amount
outstanding under the Credit Facility; however, the Company will continue to
have access to funds under the Credit Facility should the need for financing
arise provided the Company is not in default under the terms of the Credit
Facility. In the event the Company borrows significant amounts under the
Credit Facility, such level of indebtedness could have important consequences
to the Company and its stockholders, including the following: (i) a
substantial portion of the Company's cash flow from operations would need to
be dedicated to the payment of the principal of and interest on such
indebtedness and would not be available for other purposes; (ii) the ability
of the Company to obtain financing in the future for working capital needs,
capital expenditures, acquisitions, investments, general corporate purposes or
other purposes could be materially limited or impaired; and (iii) the
Company's level of indebtedness could reduce the Company's flexibility to
respond to changing business and economic conditions. The Credit Facility
contains various covenants limiting the discretion of the Company's management
with respect to certain business matters, including financial and other
operating covenants. Failure to comply with any such covenants would permit
the lender to accelerate the maturity of the loan, which could have a material
adverse effect on the Company's business, results of operations, financial
condition and prospects. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

VOTING CONTROL BY PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS

After giving effect to the sale of the shares of Common Stock offered
hereby, the principal stockholders, directors and executive officers of the
Company and their affiliates will beneficially own

10
<PAGE>

in the aggregate approximately 64% of the outstanding Common Stock. This
percentage ownership does not give effect to the exercise of options to
purchase 425,315 shares of Common Stock held by certain of these individuals,
which, if exercised in whole or in part, will further concentrate ownership of
the Common Stock. As a result, the above-referenced stockholders will retain
the voting power required to elect all of the Company's directors and to
approve all other matters requiring approval by a majority of the stockholders
of the Company including, in many cases, significant corporate transactions,
such as mergers and sales of all or substantially all of the Company's assets.
Such concentration of ownership, together, in some cases, with certain
provisions of the Company's Amended and Restated Certificate of Incorporation
and By-laws and certain sections of the Delaware General Corporation Law, may
have the effect of delaying or preventing a change in control of the Company.
See "--Anti-takeover Effect of Certificate of Incorporation and By-law
Provisions and Delaware Law," "Management--Directors and Executive Officers"
and "Principal Stockholders."

TERMINATION OF S CORPORATION STATUS AND DISTRIBUTION TO CURRENT STOCKHOLDERS

The Company and certain of its predecessors have been treated for federal
income tax purposes as S corporations under the Internal Revenue Code of 1986,
as amended (the "Code"). Upon consummation of this offering (the "Termination
Date"), the Company's status as an S corporation under the Code will
automatically terminate and the Company will thereafter be subject to federal
and state income taxes. As an S corporation, the Company's and certain of its
predecessors' earnings have been taxed, for federal and state income tax
purposes, directly to the stockholders. The Company has historically retained
a significant portion of its earnings, which would otherwise have been
available for distribution to its stockholders, in order to capitalize the
Company. Following consummation of this offering, the Company intends to use a
portion of the proceeds of this offering to fund a distribution to the
Company's stockholders of record as of a date immediately prior to
consummation of this offering in the amount of approximately $9.0 million.
This distribution represents a significant portion of the historical earnings
that have previously been taxed directly to the stockholders of the Company
and certain of its predecessors and which were available for distribution to
them. Purchasers of Common Stock in this offering will not receive any portion
of the distribution. In addition, in connection with the automatic termination
of its S corporation status, the Company will recognize a non-recurring charge
of approximately $4.3 million in the quarter during which the Termination Date
occurs as well as an addition of approximately $4.3 million in net deferred
tax liabilities in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." See "Termination of S Corporation
Status," "Use of Proceeds," "Principal Stockholders," "Certain Relationships
and Related Transactions" and Note 15 of the Notes to the Mac-Gray Co., Inc.
and Mac-Gray L.P. Combined Financial Statements for December 31, 1996.

COMMON STOCK CONTINGENT REPURCHASE OBLIGATION

The Company is obligated to repurchase up to 612,026 shares of Common Stock
issued in connection with the Sun Services Acquisition at a purchase price of
$12.74 per share in the event the holder or holders of such shares elects to
require the Company to repurchase such shares (the "Put Right"). This Put
Right terminates on the third anniversary of the closing of this offering.
There can be no assurance that the holder or holders of such shares will not
exercise the Put Right, nor can there be any assurance that, once exercised,
the Company will be able to obtain financing to satisfy such Put Right on
terms satisfactory to the Company, if at all. In the event the Company was
required to repurchase such shares, it may be required to incur additional
indebtedness under its Credit Facility to fund such repurchase. In the event
the Company was unable to borrow such funds under its Credit Facility, the
Company would need to pursue alternative financing sources which, if
available, may be at higher interest rates than presently available under the
Company's existing Credit Facility. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions."

11
<PAGE>

ANTI-TAKEOVER EFFECT OF CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS AND
DELAWARE LAW

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and By-laws, certain sections of the Delaware General
Corporation Law and the ability of the Company's Board of Directors (the
"Board of Directors") to issue shares of preferred stock and to establish the
voting rights, preferences and other terms thereof, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved
by the Board of Directors, including takeovers which certain stockholders may
deem to be in their best interests. These provisions and the ability of the
Board of Directors to issue preferred stock without further action by
stockholders could delay or frustrate the removal of incumbent directors or
the assumption of control by stockholders, even if such removal or assumption
of control would be beneficial to stockholders. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest,
even if such events would be beneficial, in the short term, to the interests
of stockholders. Such anti-takeover provisions include, among other things, a
classified Board of Directors serving staggered three-year terms, the
elimination of stockholder voting by written consent, the absence of
cumulative voting for directors, the removal of directors only for cause, the
vesting of exclusive authority in the Board of Directors to determine the size
of the Board of Directors and (subject to certain limited exceptions) to fill
vacancies thereon, the vesting of exclusive authority in the Board of
Directors (except as otherwise required by law) to call special meetings of
stockholders, and certain advance notice requirements for stockholder
proposals and nominations for election to the Board of Directors. The Company
is subject to Section 203 of the Delaware General Corporation Law which, in
general, imposes restrictions upon certain acquirors (including their
affiliates and associates) of 15% or more of the Company's Common Stock. See
"Description of Capital Stock--Certain Provisions of Certificate and By-laws"
and "--Statutory Business Combination Provision."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of the Common Stock in the public market after
this offering could adversely affect the market price of the Common Stock. In
addition to the 4,000,000 shares of Common Stock offered hereby, 6,979,826
shares of Common Stock (including 612,026 shares of redeemable Common Stock)
owned by current stockholders of the Company will be eligible for sale in the
public market beginning April 17, 1998. The holders of all of such shares have
agreed not to publicly offer, sell or otherwise dispose of any shares of
Common Stock owned by them for 180 days from the date of this Prospectus
without the consent of Salomon Brothers Inc. Upon the later of the expiration
of such agreement or such date, pursuant to Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"), such stockholders may sell such
shares without registration, subject to certain limitations, including
limitations on volume of sales. If such stockholders should sell or otherwise
dispose of a substantial amount of Common Stock in the public market, the
prevailing market price for the Common Stock could be adversely affected. The
holders of 6,979,826 shares of Common Stock have the right in certain
circumstances to require the Company to register their shares under the
Securities Act for resale to the public and to include some or all of their
shares of Common Stock in a registration statement filed by the Company. The
Company also intends to register, soon after the consummation of this
offering, at least 750,000 shares of Common Stock issuable pursuant to the
1997 Stock Plan. See "Management--1997 Stock Option and Incentive Plan,"
"Certain Relationships and Related Transactions" and "Shares Eligible for
Future Sale."

POTENTIAL VOLATILITY OF STOCK PRICE

The trading price of the Common Stock may be subject to fluctuations in
response to quarter-to-quarter variations in operating results, changes in
earnings estimates by investment analysts or changes in business or regulatory
conditions affecting the Company, its customers or its competitors. The stock
market historically has experienced volatility which sometimes has been
unrelated to the operating performance of such companies. These market
fluctuations may adversely affect the price of the Common Stock.

12
<PAGE>

ABSENCE OF DIVIDENDS

Following the consummation of this offering, the Company intends to retain
earnings to finance the growth and development of its business and does not
anticipate paying cash dividends in the foreseeable future. Declaration of
dividends will in the future depend upon, among other things, the Company's
results of operations, financial condition, acquisitions, capital requirements
and general business condition. The Credit Facility also restricts dividend
payments in certain limited circumstances. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

ABSENCE OF PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE

Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop
after this offering, or, if developed, that it will be sustained. The initial
public offering price has been determined by negotiation between the Company
and representatives of the Underwriters and may not be indicative of prices
that will prevail in the trading market. See "Underwriting" for a description
of the factors considered in determining the initial public offering price.

MATERIAL BENEFITS TO CERTAIN INSIDERS

The Company is obligated to make certain payments to a current director of
the Company as a result of an agreement entered into in connection with the
Company's acquisition of Sun Services, which was owned by such director. In
addition, the Company is obligated to make certain payments to the wife of the
Company's co-founder and former Chief Executive Officer for the remainder of
her life. See "Certain Relationships and Related Transactions."

IMMEDIATE AND SUBSTANTIAL DILUTION TO PURCHASERS IN OFFERING

The initial public offering price is substantially higher than the book
value per share of Common Stock. Accordingly, purchasers in this offering will
suffer immediate and substantial dilution of $8.56. Additional dilution will
occur upon the exercise of outstanding options to purchase shares of Common
Stock granted by the Company to independent members of its Board of Directors
and certain of the Company's employees, including certain members of the
Company's management, pursuant to the 1997 Stock Plan. See "Dilution" and
"Management--1997 Stock Option and Incentive Plan."

13
<PAGE>

THE COMPANY

Certain predecessors to the Company have engaged in the Company's principal
business since 1927. Mac-Gray Co., the Company's largest operating subsidiary,
was incorporated in 1952 and was reincorporated in Delaware in 1992. The
Limited Partnership, of which Mac-Gray Co. was the sole general partner, was
organized in Delaware in 1995 to hold a significant portion of the Company's
operations in the Midwest. On April 17, 1997, Mac-Gray Co. and the Limited
Partnership were reorganized to create the Company and to operate as wholly
owned subsidiaries of the Company. The Limited Partnership was thereafter
immediately merged with and into Mac-Gray Co. Concurrently with the Mac-Gray
Combination, the Company acquired Sun Services for cash, the assumption of
certain liabilities and the issuance of shares of Common Stock.

Mac-Gray Corporation, incorporated in Delaware in 1997 in connection with
the Mac-Gray Combination and the Sun Services Acquisition, operates as a
holding company for its wholly owned subsidiaries including Mac-Gray Co., RBCO
and a corporate successor to SSA. The Company, along with these principal
subsidiaries, operates Laundry Routes and distributes commercial laundry
products. Unless the context otherwise requires, all references to the Company
shall mean Mac-Gray Corporation and its subsidiaries and predecessors,
including Mac-Gray Co. and the Limited Partnership, and businesses that it has
acquired from their respective dates of acquisition, including Sun Services.

The Company's executive offices are located at 22 Water Street, Cambridge,
Massachusetts 02141, and its telephone number is (617) 492-4040.

TERMINATION OF S CORPORATION STATUS

The Company and certain of its predecessors elected Subchapter S status
under the Code and comparable provisions of certain state income tax laws. An
S corporation, generally, is not subject to income tax at the corporate level
(with certain exceptions under certain state income tax laws). Instead, the S
corporation's income, generally, passes through to its stockholders and is
taxed personally to them. As a result, the Company's and certain of its
predecessors' earnings have been taxed for federal and state income tax
purposes, with certain exceptions, directly to the stockholders of the
Company. The Company and certain of its predecessors have historically
retained a significant portion of their respective earnings, which would
otherwise have been available for distribution to their stockholders, in order
to capitalize such companies.

Upon the Termination Date, the Company's status as an S corporation under
the Code will automatically terminate. Prior to the Termination Date, the
Company intends to declare a distribution of approximately $9.0 million of
previously taxed but undistributed earnings payable to stockholders of record
as of such date. This distribution, which will be paid immediately following
consummation of this offering from the proceeds thereof, represents a
significant portion of the Company's and certain of its predecessors'
undistributed historical earnings through June 30, 1997 which have previously
been taxed for federal and state income tax purposes directly to the
stockholders of such companies. See "Risk Factors--Termination of S
Corporation Status and Distribution to Current Stockholders," "Use of
Proceeds," "Principal Stockholders," "Certain Relationships and Related
Transactions" and Note 15 of the Mac-Gray Co., Inc. and Mac-Gray L.P. Notes to
Combined Financial Statements for December 31, 1996.

In connection with the automatic termination of its S corporation status,
the Company will recognize a non-recurring charge of approximately $4.3
million in the quarter during which the Termination Date occurs, as well as an
addition of approximately $4.3 million in net deferred tax liabilities in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Further, the Company, which has not previously
been subject to federal and state taxes on its corporate earnings, will
thereafter be subject to such taxes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

14
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company hereby (after deducting the underwriting
discounts and estimated offering expenses payable by the Company) will be
approximately $40.0 million ($46.2 million if the Underwriters' over-allotment
option is exercised in full). The uses of such net proceeds will be as
follows: (i) approximately $31.0 million will be used to repay senior secured
indebtedness incurred under the Credit Facility which was incurred to finance
the consideration paid in connection with the acquisitions consummated during
the past twelve months, to finance the purchase of capital equipment and to
fund working capital and (ii) approximately $9.0 million will be used to pay
the distribution following the consummation of this offering of previously
taxed but undistributed earnings to the Company's stockholders of record as of
a date immediately prior to the consummation of this offering. In the event
the Underwriters' over-allotment option is exercised in full, the additional
proceeds therefrom will be used to repay the remaining debt currently
outstanding under the Credit Facility and any remaining proceeds from such
over-allotment option exercise will be used for general corporate purposes,
which may include future acquisitions. Although the Company frequently
evaluates acquisition candidates as part of its normal operating strategy, the
Company currently has no agreements or understandings with respect to any
material future acquisitions. The indebtedness under the Credit Facility (i)
bears interest, prior to the consummation of this offering, at the Company's
option, at a variable rate of the prime rate plus 0.5% or LIBOR plus 2.5% and,
following the consummation of this offering, at the Company's option, at the
prime rate minus 0.5% or LIBOR plus 2.0% and (ii) is payable on April 14,
1999. As of September 15, 1997, the interest rate on the first $22 million of
indebtedness under the Credit Facility was approximately 8.22% and the
interest rate on the remaining balance under the Credit Facility was
approximately 9.0%. Funds will be available under the Credit Facility,
including the amounts repaid with the proceeds of this offering, to the
Company following the consummation of this offering. Until used, the proceeds
of this offering will be invested in short-term, investment grade, interest-
bearing obligations.

DIVIDEND POLICY

Following the consummation of this offering, the Company currently intends
to retain earnings to finance the growth and development of its business and
does not anticipate paying cash dividends in the foreseeable future. Any
payment of cash dividends in the future will be at the discretion of the Board
of Directors and will depend upon the financial condition, capital
requirements and earnings of the Company and such other factors as the Board
of Directors may deem relevant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

Immediately following the consummation of this offering, the Company intends
to distribute approximately $9.0 million of previously taxed but undistributed
earnings to its existing stockholders. Purchasers of Common Stock in this
offering will not receive any portion of this distribution. See "Termination
of S Corporation Status" and "Use of Proceeds." The Company, as an S
corporation, distributed an aggregate of approximately $3.4 million and $4.5
million to its stockholders during 1996 and 1995, respectively, the majority
of which funded the stockholders' tax liabilities incurred as a result of the
Company's and certain of its predecessors' earnings being taxed directly to
the stockholders.

15
<PAGE>

CAPITALIZATION

The following table sets forth the actual capitalization of the Company at
June 30, 1997; and the pro forma as adjusted capitalization which gives effect
to: (i) the planned distribution following the consummation of this offering
of approximately $9.0 million of previously taxed but undistributed earnings
to the Company's stockholders of record as of a date immediately prior to the
consummation of this offering, (ii) the increase in the Company's net deferred
tax liabilities of approximately $4.3 million pursuant to the Company's change
in tax status from an S corporation to a C corporation and (iii) this offering
and the application of the net proceeds therefrom as described under "Use of
Proceeds."

<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------
PRO FORMA
ACTUAL (1)(2) AS ADJUSTED (1)
------------- ---------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Short-term debt:
Credit Facility (3)............................ $ -- $ --
Other debt..................................... 2,370 2,370
Long-term debt:
Credit Facility (3)............................ 26,282 --(5)
Other debt..................................... 6,620 6,620
Redeemable Common Stock, 612,026 shares (4)...... 7,797 7,797
Stockholders' equity:
Common Stock of Mac-Gray Corporation ($.01 par
value; 30,000,000 shares authorized, 6,367,800
actual shares and 10,367,800 pro forma as
adjusted shares issued and outstanding,
respectively)................................. 64 104
Additional paid-in capital..................... -- 40,925
Retained earnings.............................. 14,220 --
Net unrealized gain on available-for-sale
security, net of tax.......................... 258 258
------- -------
Total stockholders' equity................... 14,542 41,287
------- -------
Total capitalization......................... $57,611 $58,074
======= =======
</TABLE>
- --------
(1) Excludes (i) 638,340 shares of Common Stock issuable upon exercise of
outstanding stock options granted pursuant to the 1997 Stock Plan at a
weighted average exercise price of $8.86 per share and (ii) 111,660 shares
of Common Stock available for future grants under the 1997 Stock Plan,
subject to increase upon consummation of this offering. See "Management--
1997 Stock Option and Incentive Plan."
(2) See unaudited June 30, 1997 balance sheet included in the Company's 1996
audited financial statements.
(3) Following the consummation of this offering, the Company will have
approximately $50.0 million available under the Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
(4) Redeemable Common Stock was issued in connection with the Sun Services
Acquisition.
(5) In addition, net proceeds of this offering will also be used to repay
additional borrowings under the Credit Facility incurred subsequent to
June 30, 1997.

16
<PAGE>

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1997,
was $(13.3) million or $(1.90) per share of Common Stock. "Net tangible book
value" represents the amount of the Company's total tangible assets reduced by
the amount of its total liabilities on a pro forma basis, including the effect
of the Company's change in income tax status from an S corporation to a
C corporation and also including the distribution that is planned to be
declared immediately prior to the consummation of this offering, and divided
by the pro forma number of shares of Common Stock outstanding. Without taking
into account any other changes in such pro forma net tangible book value after
June 30, 1997, other than to give effect to the receipt by the Company of the
net proceeds from the sale of the 4,000,000 shares of Common Stock offered
hereby after deducting the underwriting discounts and estimated offering
expenses, the net pro forma tangible book value of the Company as of June 30,
1997 would have been $26.8 million, or $2.44 per share. This represents an
immediate increase in net tangible book value of $4.34 per share to existing
stockholders and an immediate dilution in net tangible book value of $8.56 per
share to new investors purchasing Common Stock in this offering. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Price to public............................................ $11.00
Pro forma net tangible book value per share before this
offering................................................ $(1.90)
Increase per share attributable to new investors......... 4.34
------
Pro forma net tangible book value per share after this
offering.................................................. 2.44
------
Dilution per share to new investors........................ $ 8.56
======
</TABLE>

The following table summarizes, as of June 30, 1997, the number of shares of
Common Stock purchased from the Company, the estimated total consideration
paid to the Company and the average price paid per share by the existing
stockholders and by the investors purchasing shares of Common Stock offered
hereby:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 6,979,826 64% $10,364,000 19% $ 1.48
New investors.................. 4,000,000 36% $44,000,000 81% $11.00
---------- --- ----------- ---
Total........................ 10,979,826 100% $54,364,000 100%
========== === =========== ===
</TABLE>

The foregoing table and computations assume no exercise of any outstanding
stock options or the Underwriters' over-allotment option. As of September 15,
1997, there were 638,340 shares of Common Stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $8.86 per
share, none of which are exercisable as of the date of this Prospectus. In
addition, there are 111,660 shares of Common Stock reserved for future
issuance under the Company's 1997 Stock Plan, subject to increase upon
consummation of this offering. In the event that any shares available for
issuance upon exercise of outstanding options are issued, there will be
further dilution to new investors. See "Capitalization," "Management--
Executive Compensation," "--1997 Stock Option and Incentive Plan," "Certain
Relationships and Related Transactions" and "Description of Capital Stock."

17
<PAGE>

SELECTED HISTORICAL COMBINED FINANCIAL DATA

Set forth below are selected historical financial data of the Company as of
the dates and for the periods indicated. The selected historical combined
financial data of the Company for the three years in the period ended December
31, 1996 were derived from the historical combined financial statements of the
Company that were audited by Price Waterhouse LLP, whose report appears
elsewhere in this Prospectus. The selected historical combined financial data
of the Company for the two years in the period ended December 31, 1993 and the
six months ended June 30, 1996 and 1997 have not been audited. Results for
interim periods include all adjustments, consisting only of normal recurring
adjustments, which management considers necessary for the fair presentation of
the results for such periods; however, they are not necessarily indicative of
results for the full year. The selected combined financial data set forth
below should be read in conjunction with, and are qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited combined financial statements and accompanying
notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997(1)
------- ------- ------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Revenue................. $40,030 $44,942 $48,031 $50,710 $ 64,427 $29,025 $ 38,288
Cost of revenue:
Commissions............ 15,182 17,762 19,168 20,471 25,760 11,622 14,639
Laundry route expendi-
tures................. 6,381 7,458 7,889 8,251 10,955 4,600 6,231
Depreciation and amor-
tization.............. 3,921 4,377 4,756 4,899 6,216 2,715 3,776
Cost of equipment
sales................. 1,911 1,700 2,673 2,938 5,189 2,280 3,831
------- ------- ------- ------- --------- ------- ---------
Total cost of revenue.. 27,395 31,297 34,486 36,559 48,120 21,217 28,477
Operating expenses:
General and administra-
tion (2).............. 6,270 3,383 3,085 3,901 3,952 1,874 2,076
Sales and marketing.... 2,202 2,445 2,501 2,531 3,803 1,541 2,697
Depreciation........... 369 421 442 455 517 242 382
------- ------- ------- ------- --------- ------- ---------
Total operating ex-
penses................ 8,841 6,249 6,028 6,887 8,272 3,657 5,155
------- ------- ------- ------- --------- ------- ---------
Income from operations.. 3,794 7,396 7,517 7,264 8,035 4,151 4,656
Interest expense....... (496) (1,437) (1,217) (1,175) (1,956) (751) (1,431)
Other income (expense),
net................... 73 71 70 55 (87) 1 39
------- ------- ------- ------- --------- ------- ---------
Income before provision
for income taxes....... 3,371 6,030 6,370 6,144 5,992 3,401 3,264
Provision for income
taxes................. (207) (330) (388) (374) (465) (255) (232)
------- ------- ------- ------- --------- ------- ---------
Net income.............. $ 3,164 $ 5,700 $ 5,982 $ 5,770 $ 5,527 $ 3,146 $ 3,032
======= ======= ======= ======= ========= ======= =========
Pro Forma as adjusted
net income (3)......... $ 3,595 $ 1,958
========= =========
Pro Forma as adjusted
net income per common
share (4).............. $ 0.48 $ 0.26
========= =========
Pro Forma as adjusted
weighted average common
shares outstanding
(4).................... 7,468,383 7,468,383
========= =========
OTHER FINANCIAL DATA:
EBITDA (5)............. $ 8,157 $12,265 $12,785 $12,673 $ 14,681 $ 7,109 $ 8,853
Depreciation and amor-
tization.............. 4,290 4,798 5,198 5,354 6,733 2,957 4,158
Capital expenditures... 5,119 5,407 5,679 4,421 7,635 2,986 2,998
Cash flows from operat-
ing activities........ 9,924 9,405 10,650 10,417 13,650 5,682 3,546
Cash flows used in
investing activities.. (6,622) (5,689) (5,613) (5,105) (22,070) (15,803) (7,956)
Cash flows provided by
(used in) financing
activities............ (2,103) (3,744) (6,128) (3,549) 7,382 8,696 4,226
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $(3,160) $(3,437) $(4,181) $(2,237) $ (6,069) $(3,643) $ (2,223)
Total assets........... 29,462 32,713 33,292 36,754 54,108 50,208 68,971
Long-term debt, net of
current portion....... 17,539 15,718 13,544 11,843 23,325 24,109 32,902
Redeemable common stock
(6)................... -- -- -- -- -- -- 7,797
Stockholders' equity... 3,713 6,783 9,439 12,850 14,683 13,507 14,542
</TABLE>
- --------
See footnotes on page 19.

18
<PAGE>

(1) The financial data for the six months ended June 30, 1997 includes the
results of the Sun Services Acquisition subsequent to the acquisition date
of April 17, 1997.
(2) In 1992, the Company recorded a severance charge of $2.8 million as a
result of the retirement of a long-time employee.
(3) Pro forma as adjusted net income has been adjusted to give effect to the
Company's operations as if the Company were subject to federal and state
income taxes on a corporate level (at an estimated income tax of 40%)
during the periods presented.
(4) Pro forma as adjusted net income per common share and pro forma as
adjusted weighted average number of common shares outstanding include all
Common Stock equivalents and are reflective of: (i) the Mac-Gray
Combination and (ii) the number of shares of Common Stock required to be
issued in this offering in order to pay the estimated $9.0 million
distribution expected to be declared immediately prior to the consummation
of this offering and paid from the proceeds thereof. Pro forma as adjusted
net income per share was computed using the treasury stock method and all
Common Stock and Common Stock equivalents issued within twelve months of
this offering have been included in computing Common Stock and Common
Stock equivalents. The pro forma net income per common share, after giving
effect to the number of shares required to be issued in order to repay the
debt and the accompanying reduction in related interest expense (tax-
effected) would have been $0.46, and $0.27 for the year ended December 31,
1996 and for the six months ended June 30, 1997, respectively.
(5) "EBITDA" is defined herein as income before provision for income taxes,
plus depreciation and amortization expense and interest expense. EBITDA
should not be considered as an alternative to net income as a measure of
operating results or as an alternative to cash flows as a measure of
liquidity and it is not a measure of performance or financial condition
under generally accepted accounting principles. EBITDA is presented
because the Company's management believes that certain investors may find
it to be a useful tool for measuring the Company's ability to meet its
future debt services, capital expenditure and working capital
requirements.
(6) Redeemable Common Stock was issued in connection with the Sun Services
Acquisition.

19
<PAGE>

UNAUDITED PRO FORMA FINANCIAL DATA

The following unaudited pro forma combined statements of income for the year
ended December 31, 1996 and the six months ended June 30, 1996 and 1997 have
been adjusted to reflect the following:

(i) the Sun Services Acquisition for the year ended December 31, 1996 and
the six months ended June 30, 1996 as if it occurred on January 1, 1996.
For the six months ended June 30, 1997, the historical results of Sun
Services for the period from April 1, 1997 through April 16, 1997 have not
been included and are not material to the Company;

(ii) the Company's change in income tax status from an S corporation for
income tax purposes to a C corporation and the application of an estimated
effective income tax rate of 40%; and

(iii) this offering and the application of the net proceeds therefrom as
described under "Use of Proceeds."

The unaudited pro forma combined statements of income do not reflect the
non-recurring charge of approximately $4.3 million that will be required to be
recorded by the Company on the effective date of this offering to provide for
net deferred tax liabilities resulting from the change in income tax status
from an S corporation to a C corporation, in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."

The unaudited pro forma combined statement of income for the year ended
December 31, 1996 does not reflect the results of operations of The Laundry
Company, a business acquired in May 1996, for the period January 1, 1996
through April 30, 1996 as it was not considered practicable to obtain the
preacquisition results. Alternatively, the Company has included audited
combined statements of income of Mac-Gray Co., Inc. and Mac-Gray, L.P. which
include ten months of post acquisition results of The Laundry Company in this
prospectus.

The unaudited pro forma adjusted combined balance sheet as of June 30, 1997
presented on page F-3 of the Mac-Gray Co., Inc. and Mac-Gray L.P. combined
financial statements includes the financial position of Sun Services as of
that date.

The unaudited pro forma combined financial data are provided for
informational purposes only and are not necessarily indicative of the results
of operations of the Company had the transactions assumed therein occurred, as
described above, nor are they necessarily indicative of the results of
operations which may be expected to occur in the future. The unaudited pro
forma combined financial data are based upon assumptions that the Company
believes are reasonable and should be read in conjunction with the combined
financial statements and the accompanying notes thereto included elsewhere in
this Prospectus.

20
<PAGE>

MAC-GRAY CORPORATION

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
COMPANY PRO FORMA
YEAR ENDED OFFERING AND YEAR ENDED
DECEMBER 31, SUN SERVICES PRO FORMA ACQUISITION OTHER DECEMBER 31,
1996 ACQUISITION (1) COMBINED ADJUSTMENTS ADJUSTMENTS 1996
------------ --------------- --------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $64,427 $6,664 $71,091 $ $ $ 71,091
Cost of revenue:
Commissions............ 25,760 2,718 28,478 28,478
Laundry route expendi-
tures................. 10,955 820 11,775 11,775
Depreciation and amor-
tization.............. 6,216 655 6,871 584 (3) 7,455
Cost of equipment
sales................. 5,189 277 5,466 5,466
------- ------ ------- ----- ------- ---------
Total cost of revenue.. 48,120 4,470 52,590 584 53,174
Operating expenses:
General and administra-
tion.................. 3,952 1,220 5,172 (275)(4) 4,897
Sales and marketing.... 3,803 160 3,963 3,963
Depreciation........... 517 25 542 542
------- ------ ------- ----- ------- ---------
Total operating ex-
penses................ 8,272 1,405 9,677 (275) 9,402
------- ------ ------- ----- ---------
Income from operations.. 8,035 789 8,824 (309) 8,515
Interest expense....... (1,956) (267) (2,223) 1,371 (5) (852)
Other expense, net..... (87) (60) (147) (147)
------- ------ ------- ----- ------- ---------
Income before provision
for income taxes....... 5,992 462 6,454 (309) 1,371 7,516
Provision for income
taxes................. (465) -- (465) (2,563)(6) (3,028)
------- ------ ------- ----- ------- ---------
Net income.............. $ 5,527 $ 462 $ 5,989 $(309) $(1,192) $ 4,488
======= ====== ======= ===== ======= =========
Pro forma net income per
common share (7)....... $ 0.49
=========
Pro forma weighted
average common shares
outstanding (7)........ 7,468,383
=========
</TABLE>
- --------
See footnotes on page 23.

21
<PAGE>

MAC-GRAY CORPORATION

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

SIX MONTHS ENDED JUNE 30, 1997

<TABLE>
<CAPTION>
COMPANY PRO FORMA
SIX MONTHS SIX MONTHS
ENDED OFFERING AND ENDED
JUNE 30, SUN SERVICES PRO FORMA ACQUISITION OTHER JUNE 30,
1997 ACQUISITION (2) COMBINED ADJUSTMENTS ADJUSTMENTS 1997
---------- --------------- --------- ----------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $38,288 $2,032 $40,320 $ $ $ 40,320
Cost of revenue:
Commissions............ 14,639 797 15,436 15,436
Laundry route expendi-
tures................. 6,231 183 6,414 6,414
Depreciation and amor-
tization.............. 3,776 209 3,985 146 (3) 4,131
Cost of equipment
sales................. 3,831 164 3,995 3,995
------- ------ ------- ---- ------- ---------
Total cost of revenue.. 28,477 1,353 29,830 146 29,976
Operating expenses:
General and administra-
tion.................. 2,076 307 2,383 (137)(4) 2,246
Sales and marketing.... 2,697 47 2,744 2,744
Depreciation........... 382 6 388 388
------- ------ ------- ---- ------- ---------
Total operating ex-
penses................ 5,155 360 5,515 (137) 5,378
------- ------ ------- ---- ---------
Income from operations.. 4,656 319 4,975 (9) 4,966
Interest expense....... (1,431) (89) (1,520) 1,095 (5) (425)
Other income (expense),
net................... 39 -- 39 39
------- ------ ------- ---- ------- ---------
Income before provision
for income taxes....... 3,264 230 3,494 (9) 1,095 4,580
Provision for income
taxes................. (232) -- (232) (1,600)(6) (1,832)
------- ------ ------- ---- ------- ---------
Net income.............. $ 3,032 $ 230 $ 3,262 $ (9) $ (505) $ 2,748
======= ====== ======= ==== ======= =========
Pro forma net income per
common share (7)....... $ 0.28
=========
Pro forma weighted aver-
age common shares out-
standing (7)........... 7,468,383
=========
</TABLE>
- --------
See footnotes on page 23.

22
<PAGE>

MAC-GRAY CORPORATION

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

SIX MONTHS ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
COMPANY PRO FORMA
SIX MONTHS SIX MONTHS
ENDED OFFERING AND ENDED
JUNE 30, SUN SERVICES PRO FORMA ACQUISITION OTHER JUNE 30,
1996 ACQUISITION (1) COMBINED ADJUSTMENTS ADJUSTMENTS 1996
---------- --------------- --------- ----------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $29,025 $3,231 $32,256 $ $ $ 32,256
Cost of revenue:
Commissions............ 11,622 1,415 13,037 13,037
Laundry route expendi-
tures................. 4,600 403 5,003 5,003
Depreciation and amor-
tization.............. 2,715 298 3,013 146 (3) 3,159
Cost of equipment
sales................. 2,280 35 2,315 2,315
------- ------ ------- ----- ------- ---------
Total cost of revenue.. 21,217 2,151 23,368 146 23,514
Operating expenses:
General and administra-
tion.................. 1,874 587 2,461 (137)(4) 2,324
Sales and marketing.... 1,541 73 1,614 1,614
Depreciation........... 242 11 253 253
------- ------ ------- ----- ------- ---------
Total operating ex-
penses................ 3,657 671 4,328 (137) 4,191
------- ------ ------- ----- ------- ---------
Income from operations.. 4,151 409 4,560 (9) 4,551
Interest expense....... (751) (97) (848) 365 (5) (483)
Other income (expense),
net................... 1 (3) (2) (2)
------- ------ ------- ----- ------- ---------
Income before provision
for income taxes....... 3,401 309 3,710 (9) 365 4,066
Provision for income
taxes................. (255) -- (255) (1,371)(6) (1,626)
------- ------ ------- ----- ------- ---------
Net income.............. $ 3,146 $ 309 $ 3,455 $ (9) $(1,006) $ 2,440
======= ====== ======= ===== ======= =========
Pro forma net income per
common share (7)....... $ 0.30
=========
Pro forma weighted aver-
age common shares out-
standing (7)........... 7,468,383
=========
</TABLE>
- --------
(1) Represents historical results of Sun Services for the year ended December
31, 1996 and the six months ended June 30, 1996, as applicable.
(2) For the six months ended June 30, 1997, the historical results of Sun
Services for the period from April 1, 1997 to April 16, 1997 have not been
included and are not material to the Company.
(3) Reflects increased amortization, due to the Company's application of
purchase accounting in the Sun Services Acquisition, in which the excess
of the purchase price over the fair value of the net assets acquired was
allocated to goodwill and is being amortized over twenty years.
(4) Reflects the decrease in general and administration expenses due to the
reduction of Sun Services executive compensation costs as a result of
certain agreements entered into in connection with the Sun Services
Acquisition.
(5) Reflects the reduction in interest expense due to the use of a portion of
the proceeds of this offering (see "Use of Proceeds") to pay down the
entire outstanding bank debt under the Credit Facility and the outstanding
indebtedness assumed in the Sun Services Acquisition.
(6) Reflects the income tax provision adjustment required to result in a pro
forma income tax provision based upon (i) the Company's termination of its
S corporation status, resulting in corporate income taxes as a C
corporation for all pro forma periods presented and (ii) the direct tax
effects of the pro forma adjustments described herein. All income tax
adjustments were computed using an estimated effective income tax rate of
40%.
(7) Pro forma net income per common share and pro forma weighted average
number of common shares outstanding include all Common Stock equivalents
and are reflective of: (i) the Mac-Gray Combination and (ii) the number of
shares of Common Stock required to be issued in this offering in order to
pay the estimated $9.0 million dividend expected to be declared
immediately prior to the consummation of this offering and paid from the
proceeds thereof. Pro forma net income per share was computed using the
treasury stock method. All Common Stock and Common Stock equivalents
issued within twelve months of this offering have been included in
computing Common Stock and Common Stock equivalents. The pro forma net
income per common share, after giving effect to the number of shares
required to be issued in order to repay the debt and the accompanying
reduction in related interest expense (tax-effected) would have been
$0.46, $0.28, and $0.25 for the year ended December 31,1996 and for the
six months ended June 30, 1997 and 1996, respectively.

23
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ significantly from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors" as well as those discussed elsewhere
in this Prospectus. The historical financial information presented herein
represents (i) consolidated results of the Company, (ii) the combined results
of Mac-Gray Co. and the Limited Partnership and (iii) the combined results of
SSA and RBCO. The following discussion and analysis should be read in
conjunction with the combined financial statements and related notes thereto
presented elsewhere in this Prospectus.

OVERVIEW

The Company derives its revenue principally through the operation and
maintenance of card and coin-operated laundry rooms in multiple housing
facilities, such as apartment buildings, colleges and universities and public
housing complexes. The Company operates its laundry rooms under long-term
leases with property owners, colleges and universities and governmental
agencies. The leases typically grant the Company the exclusive right to
operate laundry rooms on the lessor's premises for a fixed term, which is
generally seven to ten years, in exchange for a percentage of the revenue
collected. The Company's Laundry Route business consists of approximately
113,000 laundry machines, operated in over 17,000 multiple housing laundry
rooms located in 22 states in the Northeast, Southeast and Midwest regions of
the United States.

The Company also derives revenue as a distributor and servicer of commercial
laundry equipment manufactured by Maytag. The Company has Maytag distributor
agreements for Connecticut, Illinois, Maine, Massachusetts, New Hampshire, New
York (except metropolitan New York City), western Pennsylvania, Rhode Island,
South Carolina, Vermont and portions of Arkansas, Indiana, Iowa, Mississippi
and Missouri. The Company also sells laundry equipment manufactured by
American Dryer, Dexter and Whirlpool to provide several alternatives in
machine type, cost and capacity. Additionally, the Company sells or rents
laundry equipment to restaurants, hotels, health clubs and similar
institutional users that operate their own on-premise laundry facilities.

RESULTS OF OPERATIONS

Six months ended June 30, 1997 compared to six months ended June 30, 1996.

Revenue. Revenue increased by $9,263,000, or 32%, to $38,288,000 in 1997
from $29,025,000 in 1996. This increase was primarily attributable to growth
in existing Laundry Route Revenue and the impact of two full quarter's
operation of the businesses acquired in 1996. Laundry Route Revenue increased
$7,082,000, of which $3,382,000 was attributable to the expansion of existing
operations and $3,700,000 was attributable to an increase in the number of
machines operated as a result of the seven acquisitions of Laundry Route
businesses subsequent to March 31, 1996. Sales of equipment increased by
$2,181,000, of which $814,000 was attributable to growth of revenue from
existing distributorships and $1,367,000 was attributable to revenue from two
newly acquired distributorships. The Company believes that a substantial
portion of the growth of revenue from existing Laundry Routes and from
existing distributorships was attributable to the Company's increased
expenditures on sales and marketing efforts, which are described below.

Commissions. Commissions, which are generally paid based upon a percentage
of revenue earned in the Company's laundry rooms, increased by $3,017,000, or
26%, to $14,639,000 in 1997 from $11,622,000 in 1996. This increase was
primarily attributable to an increase in Laundry Route Revenue which results
in an increase in variable expenses related thereto.

24
<PAGE>

Laundry Route Expenditures. Laundry Route expenditures, which are primarily
variable expenses which change with increases and decreases in revenue and
include costs associated with installing and servicing machines, as well as
the costs of collecting, counting and depositing the revenue, increased by
$1,631,000, or 35%, to $6,231,000 in 1997 from $4,600,000 in 1996. This
increase was due to the general increase in revenue, which resulted in
increased servicing, collecting, counting and depositing activity, as well as
increased levels of expenses associated with improving service in some of the
acquired businesses.

Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization included as a component of cost of revenue, as
well as depreciation which is included as an operating expense. Aggregate
depreciation and amortization increased by $1,201,000, or 41%, to $4,158,000
in 1997 from $2,957,000 in 1996. This increase was primarily attributable to
the acquisition of seven Laundry Route businesses, which resulted in
additional machines to depreciate, as well as an increase in intangible assets
to amortize, and the placement of 8,227 new machines on the Company's existing
Laundry Routes.

Cost of Equipment Sales. Cost of equipment sales increased by $1,551,000, or
68%, to $3,831,000 in 1997 from $2,280,000 in 1996. This increase was
attributable to increased equipment sales.

General and Administration. General and administration expenses increased by
$202,000, or 11%, to $2,076,000 in 1997 from $1,874,000 in 1996. This increase
was attributable to the hiring of additional clerical and administrative staff
to support the increase in the Company's business.

Sales and Marketing. Sales and marketing expense increased by $1,156,000, or
75%, to $2,697,000 in 1997 from $1,541,000 in 1996. This increase was
attributable to the expansion of the marketing department, led by the hiring
of an experienced national marketing executive in the third quarter of 1996,
and an increase in the number of field sales representatives.

Interest Expense. Interest expense increased $680,000, or 91%, to $1,431,000
in 1997 from $751,000 in 1996. This increase was primarily attributable to the
increased borrowings incurred to finance the acquisitions made during 1996 and
1997.

Income Tax Expense. Income tax expense decreased by $23,000, or 9%, to
$232,000 in 1997 from $255,000 in 1996. The effective income tax rate for 1996
was 7.5% compared to 7.1% for 1997. As the historical income tax provision was
established only to provide for income taxes in states that do not recognize
Subchapter S corporations, the statutory income tax rate for 1996 and 1997 was
6%. The effective rate differed from the statutory rate in 1996 and 1997 due
to expenses recorded for book purposes that are not deductible for income tax
purposes.

The statutory income tax rate utilized by the Company during 1995 and 1996
is not indicative of the statutory income tax rate that will be utilized upon
termination of the Company's S corporation status concurrent with the
consummation of this offering. Subsequent to the consummation of this
offering, the Company's statutory income tax rate will be approximately 40%.

Fiscal year ended December 31, 1996 compared to fiscal year ended December
31, 1995

Revenue. Revenue increased by $13,717,000, or 27%, to $64,427,000 in 1996
from $50,710,000 in 1995. This increase was primarily attributable to the
acquisition of six Laundry Route businesses, two of which also maintained
Maytag distributorships, as well as internal growth of both card and coin
Laundry Route Revenue and revenue from sales of equipment under various
distribution arrangements. Laundry Route Revenue increased $9,506,000, of
which $3,596,000 was attributable to the expansion of existing operations and
$5,910,000 was attributable to an increase in the number

25
<PAGE>

of machines operated as a result of the six acquisitions of Laundry Route
businesses. Sales of equipment increased by $4,211,000, of which $3,111,000
was attributable to growth of revenue from existing distributorships and
$1,100,000 was attributable to revenue from two newly acquired
distributorships. The Company believes that a substantial portion of the
growth of revenue from existing Laundry Routes and from existing
distributorships was attributable to the Company's increased expenditures on
sales and marketing efforts, which are described below.

Commissions. Commissions increased by $5,289,000, or 26%, to $25,760,000 in
1996 from $20,471,000 in 1995. This increase was primarily attributable to an
increase in Laundry Route revenue, which resulted in an increase in variable
expenses, including commissions, related thereto, as well as slightly higher
commission rates applicable to the new leases that the Company acquired or
entered into during 1995 and 1996.

Laundry Route Expenditures. Laundry Route expenditures, which include costs
associated with installing and servicing machines, as well as the costs of
collecting, counting and depositing the revenue, increased by $2,704,000, or
33%, to $10,955,000 in 1996 from $8,251,000 in 1995. This increase was
primarily attributable to the increase in Laundry Route business, which
resulted in increased servicing and collecting activity.

Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization which is included as a component of cost of
revenue, as well as depreciation which is included as an operating expense.
Aggregate depreciation and amortization increased by $1,379,000, or 26%, to
$6,733,000 in 1996 from $5,354,000 in 1995. The increase was primarily
attributable to the acquisition of six Laundry Route businesses, which
resulted in additional machines to depreciate, as well as an increase in
intangible assets to amortize, and the placement of 5,143 new machines on the
Company's existing Laundry Routes.

Cost of Equipment Sales. Cost of equipment sales increased by $2,251,000, or
77%, to $5,189,000 in 1996 from $2,938,000 in 1995. This increase was
attributable to increased equipment sales.

General and Administration. General and administration expenses increased by
$51,000, or 1%, to $3,952,000 in 1996 from $3,901,000 in 1995. This increase
was attributable to the hiring of additional clerical and administrative staff
to help support the increase in the Laundry Route business, as well as the
increase in the distributorship business. General and administration expenses
for 1995 were unusually high as a result of certain expenses related to the
hiring, relocation and subsequent termination of a senior executive.

Sales and Marketing. Sales and marketing expense increased by $1,272,000, or
50%, to $3,803,000 in 1996 from $2,531,000 in 1995. This increase was
attributable to the hiring of a significant number of additional field sales
representatives, the expansion of the marketing department and the hiring of
an experienced national marketing executive in the third quarter of 1996.

Interest Expense. Interest expense increased $781,000, or 66%, to $1,956,000
in 1996 from $1,175,000 in 1995. This increase was primarily attributable to
increased borrowings incurred to finance the six acquisitions completed during
1996.

Income Tax Expense. Income tax expense increased by $91,000, or 24%, to
$465,000 in 1996 from $374,000 in 1995. The effective income tax rate for 1995
was approximately 6.1% compared to 7.8% for 1996. As the historical income tax
provision was established only to provide for income taxes in states that do
not recognize Subchapter S corporations, the statutory income tax rate for
1995 and 1996 was 6%. The effective income tax rate differed from the
statutory rate in 1995 and 1996 due to expenses recorded for book purposes
that are not deductible for income tax purposes.

The statutory income tax rate utilized by the Company during 1995 and 1996
is not indicative of the statutory income tax rate that will be utilized upon
termination of the Company's S corporation

26
<PAGE>

status concurrent with the consummation of this offering. Subsequent to the
consummation of this offering, the Company's statutory income tax rate will be
approximately 40%.

Fiscal year ended December 31, 1995 compared to fiscal year ended December
31, 1994.

Revenue. Revenue increased by $2,679,000, or 6%, to $50,710,000 in 1995 from
$48,031,000 in 1994. This increase was primarily attributable to internal
growth of both Laundry Route Revenue and revenue from sales of equipment under
various distribution arrangements. Laundry Route Revenue increased $2,579,000,
which is primarily attributable to the expansion of existing operations,
including an increase in the number of machines operated by the Company. Sales
of equipment increased by $100,000 which is attributable to growth of revenue
from existing distributorships.

Commissions. Commissions increased by $1,303,000, or 7%, to $20,471,000 in
1995 from $19,168,000 in 1994. This increase was primarily attributable to an
increase in Laundry Route Revenue and the resulting increase in variable
expenses, including commissions, related thereto.

Laundry Route Expenditures. Laundry Route expenditures increased by
$362,000, or 5%, to $8,251,000 in 1995 from $7,889,000 in 1994. This increase
was primarily attributable to the increased costs of servicing, collecting,
counting and depositing the increased revenue which was generated by the
increase in the Laundry Route business.

Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization included as a component of cost of revenue as
well as depreciation which is included as an operating expense. Aggregate
depreciation and amortization increased by $156,000, or 3%, to $5,354,000 in
1995 from $5,198,000 in 1994. The increase was primarily attributable to the
placement of 5,280 new machines on the Company's existing Laundry Routes.

Cost of Equipment Sales. Cost of equipment sales increased by $265,000, or
10%, to $2,938,000 in 1995 from $2,673,000 in 1994. This increase was
attributable to increased equipment sales.

General and Administration. General and administration expenses increased by
$816,000, or 26%, to $3,901,000 in 1995 from $3,085,000 in 1994. This increase
was primarily attributable to the hiring, relocation and subsequent
termination of a senior executive, as well as to a general increase in wages
for the Company's clerical personnel.

Sales and Marketing. Sales and Marketing expense increased by $30,000, or
1%, to $2,531,000 in 1995 from $2,501,000 in 1994. This increase was
attributable to the Company's increased sales efforts.

Interest Expense. Interest expense decreased $42,000, or 3%, to $1,175,000
in 1995 from $1,217,000 in 1994. This decrease was primarily attributable to
lower interest rates, the benefit of which was somewhat offset by increased
borrowings incurred to finance an acquisition made with cash consideration
during 1995.

Income Tax Expense. Income tax expense decreased by $14,000, or 4%, to
$374,000 for 1995 from $388,000 in 1994. The effective income tax rate for
1994 and 1995 was approximately 6.1%. As the historical income tax provision
was established to provide for taxes in states that do not recognize
Subchapter S corporations, the statutory income tax rate for 1994 and 1995 was
6%. The effective income tax rate differs from the statutory rate in 1994 and
1995 due to expenses recorded for book purposes that are not deductible for
income tax purposes.

The statutory income tax rate utilized by the Company during 1994 and 1995
is not indicative of the statutory income tax rate that will be utilized upon
termination of the Company's S corporation status concurrent with the
consummation of this offering. Subsequent to the consummation of this
offering, the Company's statutory income tax rate will be approximately 40%.

27
<PAGE>

SEASONALITY

The Company experiences moderate seasonality as a result of its significant
operations in the college and university market. Revenues derived from the
college and university market represent approximately thirty percent (30%) of
the Company's total revenue. These revenues are derived substantially during
the school year which includes the first, second and fourth quarters.
Conversely, the Company increases its operating expenditures during the third
quarter when colleges and universities are not in session as a result of the
Company's increased machine installation activities.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of cash have been operating activities and
bank borrowings. The Company's primary uses of cash have been the seven
acquisitions consummated since May 1996 and for capital expenses including the
purchase of new laundry machines and smart card based payment systems. The
Company anticipates that it will continue to use cash flow from its operating
activities to finance working capital needs, including interest payments on
its outstanding indebtedness, as well as capital expenditures. The Company
does, however, anticipate that it will also use funds available to it under
the Credit Facility to finance possible acquisitions, larger capital
expenditures and, as needed, working capital.

Cash flow from operations was $13,650,000, $10,417,000 and $10,650,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. Cash flow from
operations consists primarily of Laundry Route Revenue, distributorship and
laundry equipment service revenue, commissions, Laundry Route expenditures,
cost of equipment sales, general and administration expenses and sales and
marketing expenses.

Cash used in investing activities was $22,070,000, $5,105,000 and $5,613,000
for the years ended December 31, 1996, 1995 and 1994, respectively. The
Company invested $14,487,000 and $821,000 for the fiscal years ended December
31, 1996 and 1995 in connection with the seven acquisitions consummated during
such periods. The Company also utilized $125,000 as a portion of the
consideration paid in connection with the redemption of 2,275 shares of its
Common Stock as of January 1, 1996.

Capital expenditures were $7,635,000, $4,421,000 and $5,679,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.

Net cash flows (uses) from financing activities, consisting primarily of
proceeds from and repayments of bank borrowings and payments of dividends,
were $7,382,000, $(3,549,000) and $(6,128,000) for the years ended December
31, 1996, 1995 and 1994, respectively.

The Company maintains a $50 million revolving line of credit under its
Credit Facility with State Street Bank and Trust Company and CoreStates Bank.
Outstanding indebtedness under the Credit Facility currently bears interest,
at the Company's option, at a rate equal to the prime rate plus 0.5% or LIBOR
plus 2.5%. Borrowings under the Credit Facility totalled $26.3 million as of
June 30, 1997. Upon consummation of this offering, indebtedness under the
Credit Facility will bear interest, at the Company's option, at a rate equal
to the prime rate minus 0.5% or LIBOR plus 2.0%. The Credit Facility imposes
certain financial covenants on the Company, including (i) a limit on the
Company's senior liabilities of 3.5 times and 2.5 times EBITDA for the prior
four quarters ending as of the end of each quarter of 1997 and for the prior
four quarters ending as of the end of each quarter ending after 1997,
respectively; (ii) a requirement to maintain minimum shareholders equity (as
specifically defined in the Credit Facility), as measured at the end of each
quarter, of $23,000,000 as of December 31, 1996, increasing by $4,000,000 per
year thereafter; (iii) a limit on aggregate capital expenditures of
$7,000,000, $8,000,000 and $9,000,000 for the years ending December 31, 1996,
1997 and 1998 thereafter, respectively; (iv) minimum EBITDA, measured on a
quarterly basis for the immediately preceding four quarters, of $4,000,000;
(v) a minimum fixed charge coverage ratio (EBITDA to

28
<PAGE>

scheduled principal and interest payments) of 1.3:1, 1.1:1 and 1.3:1 for the
quarters during 1996, 1997 and 1998 and thereafter, respectively; and (vi) a
requirement that the Company have minimum annual net income of $4,000,000. The
Company was in material compliance with all such covenants, or received a
written waiver with respect to any non-compliance therewith, as of the quarter
ended June 30, 1997. The Credit Facility, under certain limited circumstances,
also restricts the payment of dividends and other distributions as well as
certain acquisitions and investments. The Credit Facility is secured by a
blanket lien on the assets of the Company and each of its subsidiaries, as
well as a pledge by the Company of all of the capital stock of its
subsidiaries.

In connection with the Sun Services Acquisition, the Company issued 612,026
shares of Common Stock to the owner of Sun Services. As a privately owned
Company issuing shares of its redeemable Common Stock which, at that point,
were substantially illiquid, the Company provided the Sun Services owner with
rights (the "Put Rights") to require the Company to repurchase the shares of
Common Stock issued by the Company as consideration in the acquisition. The
Company also received certain rights (the "Call Rights") to repurchase such
shares of Common Stock. Upon consummation of this offering, the Call Rights
and certain of the Put Rights terminate. Following consummation of this
offering, the Company remains obligated to repurchase shares of Common Stock
at a price of $12.74 per share in the event the holder or holders of such
shares elect to exercise the Put Rights. Such remaining Put Rights expire on
the third anniversary of the closing of this offering. The Put Rights, if
exercised, would require the Company to purchase up to 612,026 shares of
Common Stock, at a purchase price of $12.74 per share, representing an
aggregate purchase price of up to approximately $7.8 million. In the event
such Put Rights are exercised, the Company would likely fund the purchase
price for such shares of Common Stock by incurring additional indebtedness
under its Credit Facility. See "Certain Relationships and Related
Transactions."

The net proceeds from this offering will enable the Company to repay $31.0
million of its existing outstanding indebtedness under the Credit Facility.
The Company believes that the proceeds of this offering, together with the
amount available under the Credit Facility and cash flow generated by
operations will be sufficient to fund the Company's normal working capital
needs and capital expenditures for the foreseeable future. In addition, to the
extent that the Company were to borrow all amounts then available to it under
the Credit Facility in connection with one or more acquisitions or in
connection with significant capital expenditures, either in the short-term or
in the long-term, management believes that cash generated from operating
activities will be sufficient to fund the Company's operating expenses and
debt service needs for the foreseeable future. Additional financing, under the
Credit Facility or otherwise, may, however, be required after this offering in
connection with an acquisition or acquisitions which the Company may
consummate in the future. To the extent that any such additional financing was
needed, and could not be obtained on terms favorable to the Company, if at
all, the Company's ongoing capital improvement efforts and acquisition
activity would likely be reduced or delayed as cash generated from operating
activities is used for operating expenses and debt service. See "Risk
Factors--Risks Associated with Acquisitions; Integration of Acquired
Businesses."

INFLATION

The Company does not believe that its financial performance has been
materially affected by inflation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). The adoption of SFAS 123 during the Company's fiscal
year ended December 31, 1996 did not materially impact the financial position
or results of operations of the Company.

29
<PAGE>

The FASB issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), which is required to be adopted by the
Company in its fiscal 1997 financial statements. SFAS 128 requires the Company
to disclose a basic and a diluted earnings per share calculation. The basic
earnings per share calculation excludes Common Stock equivalents from the
earnings per share calculation, while diluted earnings per share is calculated
consistent with traditional primary earnings per share calculations. To the
extent that the Company has net income and has options or other Common Stock
equivalents outstanding, computing basic earnings per share would result in
higher earnings per share than would have been reported prior to the adoption
of SFAS 128.

The FASB issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131) which are required to be adopted by the
Company in its fiscal 1998 financial statements. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. SFAS 131 establishes standards for reporting
information on operating segments in financial statements. The Company is
currently reviewing the impact of SFAS 130 and SFAS 131 on its financial
statements.

30
<PAGE>

BUSINESS

The Company, founded in 1927, believes that it is among North America's
largest suppliers of card and coin-operated laundry services in multiple
housing facilities such as apartment buildings, colleges and universities and
public housing complexes, and, based upon the Company's survey of colleges and
universities, is North America's largest supplier of such services to the
college and university market. The Company owns and operates approximately
113,000 card and coin-operated washers and dryers in more than 17,000 multiple
housing laundry rooms located in 22 states in the Northeast, Midwest and
Southeast regions of the United States. In addition, the Company believes that
it is the largest operator of commercial laundry products manufactured by
Maytag. The Company's revenue, EBITDA and net income, on a pro forma basis,
for the twelve months ended June 30, 1997, were approximately $79.2 million,
$17.9 million and $4.8 million, respectively.

Approximately 90% of the Company's revenue is derived from the operation of
washers and dryers in laundry rooms under long-term leases with property
owners. Under the Company's long-term leases, which have an average remaining
life of more than seven years, the Company typically receives the exclusive
right to operate laundry rooms within a multiple housing property in exchange
for a percentage of the revenue collected. The Company has been able to retain
99% of its existing machine base, while also adding an average of 5.2% to its
machine base, during each of the past four years. The Company believes that
its ability to retain its existing machine base in the past, while growing its
machine base through acquisitions, is indicative of its service of, and
attention to, property owners and managers. The property owner or manager is
usually responsible for maintaining and cleaning the premises and for payment
of the utilities. The Company leases space within a property, in some
instances improves the leased space with new flooring, ceilings and other
improvements, and then installs and services the laundry equipment and
collects the revenue. The Company sets and adjusts the pricing for its
machines based upon local market conditions.

The Company is also a significant distributor for several major equipment
manufacturers, including Maytag. As an equipment distributor, the Company
sells commercial laundry equipment to public laundromats, as well as to the
real estate industry. The Company is also certified by the manufacturers to
service the commercial laundry equipment that it sells. The Company also sells
commercial laundry equipment directly to institutional purchasers, including
hospitals, restaurants and hotels, for use in their own on-premise laundry
facilities.

The Company recently completed the acquisition of Sun Services, an
established laundry services provider, which provides the Company with a
foundation from which it can further penetrate the Florida multiple housing
market, the third largest such market in the country. The Sun Services
Acquisition added a significant number of machines to the Company's existing
base in Florida. In connection with the acquisition, Jeffrey C. Huenink, the
owner of Sun Services and the President of the Multi-Housing Laundry
Association through June 1997, became a significant stockholder in the
Company. See "--Company Strategy."

The Company manages its Laundry Route business and its distribution and
servicing business from its corporate headquarters in Cambridge,
Massachusetts, where it has centralized its administrative, billing,
marketing, purchasing and refurbishing operations. The Company also operates
sales and/or service centers in Connecticut, Florida (three locations),
Georgia, Illinois, Maine, Missouri, New York (two locations), North Carolina
and Pennsylvania.

FINANCIAL CHARACTERISTICS OF THE COMPANY'S BUSINESS

The Company's business has the following financial and operational
characteristics:

RECURRING REVENUE--The Company operates laundry equipment located in
multiple housing facilities under long-term leases with property owners. In
addition, the Company's efforts are designed to maintain customer
relationships over the long-term, thus optimizing customer retention.

31
<PAGE>

HISTORICALLY NON-CYCLICAL BUSINESS--The Company has not experienced a
reduction of its business as a result of past general economic downturns,
including the recession that occurred in the early 1990s, although there
can be no assurance that this would be the case in the future. The Company
believes that many larger property owners and managers may be even more
inclined to outsource non-core operations, such as laundry services, during
economic downturns as they seek to control capital expenditures while
maximizing resident retention through the availability of quality services
and amenities.

DIVERSIFIED AND STABLE CUSTOMER BASE--The Company provides laundry
services to more than 17,000 laundry rooms located in 22 states in the
Northeast, Midwest and Southeast regions of the United States. Currently,
no lessor represents more than 1% of the Company's machine base. The
Company serves customers in a number of markets including apartment
buildings, colleges and universities and public housing complexes.

INDUSTRY OVERVIEW

The card and coin-operated laundry services industry serves multiple housing
markets such as apartment buildings, colleges and universities and public
housing complexes. The Company estimates, based upon its analysis of 1990 U.S.
Department of Census data on multi-family housing units and colleges and
universities, as well as its analysis of related U.S. Department of Census
research surveys conducted during 1996, that these markets contain more than
3.5 million machines nationally, generating more than $2.0 billion in annual
revenues, and approximately 1.7 million machines in the Company's current
geographic markets. Trends in the real estate market generally, and in the
multiple housing industry specifically, are having a significant impact on the
laundry services industry and have resulted in increasing consolidation.

The consolidation taking place in the real estate ownership and management
industries, including consolidation caused by the growth of REITs and large
national property management companies, has begun to have an impact on the
multiple housing environment, most noticeably through ownership and operation
of apartment complexes by larger organizations and more geographically diverse
property managers. Many of these larger, more geographically diverse property
management and ownership entities are beginning to outsource on-premise
services to enable the property owner or manager to focus on their core
business. By outsourcing services, property owners and managers are able to
respond more quickly and efficiently to the residents' needs, thereby
increasing retention, the critical factor in these larger entities'
profitability. These same property owners and managers are also increasingly
looking for service providers that can service multiple locations with a
broader product mix.

The laundry services industry has historically been serviced by small,
independent owner-operators. Many of these independent business owners
commenced operations during the 1940s and 1950s and are facing generational
transfer issues as they reach retirement age. While many of these
entrepreneurs enjoy excellent reputations, they are confronted with
significant capital expenditures necessary to upgrade existing equipment and
implement newly available payment technologies. Faced with these factors, many
are choosing to sell their businesses.

Recent developments in cashless payment technology have also begun to change
the way in which the laundry services industry conducts business. Cashless
payment technology, the costs of which have historically outweighed the
benefits, has recently become more affordable which, the Company believes,
will lead to more cashless, card based laundry rooms. The benefits of cashless
payment technology include the potential for modest incremental price
increases, variable time pricing, reduced administrative burden, improved cash
controls and enhanced user convenience. Cashless payment technology will also
provide property owners with the ability to integrate laundry room

32
<PAGE>

services with previously unrelated amenities, such as door and perimeter
access, photocopying, telephone, rent collection, vending machines and other
ancillary services.

The card and coin-operated laundry service industry is also influenced by
societal trends in multi-family housing, whether it be in the retirement,
assisted-living or low income rental markets or in the development of larger
and more full-service apartment and condominium communities. As the retirement
age population grows, retirement and full-service assisted living facilities
are being increasingly utilized by those who desire a communal, secure living
arrangement with access to a full range of on-premise services. The Company
believes that the trend towards multi-family housing will lead to increased
demand for on-premise, modern laundry rooms as well as other amenities.

The Company believes that the factors discussed above have created an
opportunity for those companies with strong financial and management resources
to grow their customer base and increase revenue and cash flow.

COMPANY STRATEGY

The Company's strategic objectives are to (i) grow its revenue and customer
base and increase profitability and cash flow by refining and expanding its
present operations and (ii) capitalize on the consolidation opportunities that
exist in the highly fragmented laundry services industry. In order to achieve
these objectives, the Company intends to:

EXPAND CUSTOMER BASE IN EXISTING MARKETS--The Company intends to use its
sales and marketing resources, which have significantly increased during
the past 16 months, to secure additional customers in its existing markets.
The Company's sales force is organized to focus on specific markets
including larger property owners, such as REITs and public housing
authorities, geographically diversified property managers and colleges and
universities. The Company relies substantially on referrals from existing
customers and intends to continue its historic, proactive attention to
customer service and satisfaction. This focus has resulted in a 99% machine
retention rate over the past four years.

IMPLEMENT NEWLY AVAILABLE TECHNOLOGY--The Company has installed smart
card readers in more than 2,200 laundry machines since April 1, 1997 and
intends to accelerate the use of cost-effective smart card based payment
and access systems. Smart card based payment technology permits the Company
to make modest, periodic price increases, as well as to establish variable
time pricing, which will add incremental revenue. The installation of smart
card readers has increased revenue at existing facilities and has also
attracted additional customers as a result of the Company providing a
broader product offering.

The Company particularly believes that smart card based payment systems
are making its laundry equipment more convenient by eliminating the need to
gather coins to use the equipment. The Company has experienced increased
usage in some of its laundry facilities following the recent installation
of smart card readers. In addition, as card based technologies become more
prevalent, their use may also permit the Company to offer other smart card
based services to its customers, including door and perimeter access,
photocopying, vending machines, telephones, rent collection and other
ancillary services.

33
<PAGE>

INCREASE LEADING POSITION IN COLLEGE AND UNIVERSITY MARKET--The Company
intends to strengthen its leading position in the college and university
market and to use it as a foundation for growth in both existing and new
geographic markets. The Company will continue to utilize a sales force
which focuses exclusively on this specialized market, which is often the
first to demand new products and services. In addition, the Company intends
to broaden, potentially through acquisitions, the services offered to its
existing college and university customers, including ancillary services
typically used by college students, such as off-site laundry and vended
services, which may be outside the Company's current core business.

INTERNAL GROWTH

The Company's internal growth strategy is based upon its philosophy that to
experience real, sustainable long-term growth it must retain and build upon
its existing customer base. The Company has significantly increased its sales
and marketing resources during the past 16 months in order to take advantage
of opportunities which have arisen as a result of the consolidation in the
real estate industry. Nearly all of the Company's employees are eligible for
incentive bonuses based upon the net growth of the Company's customer base.
The Company's efforts have helped it to retain 99% of its existing machine
base, while also adding an average of 5.2% to its machine base, during each of
the past four years. The Company's internal growth strategy, which is intended
to expand the Company's customer base and to grow revenue, focuses on three
distinct efforts: (i) use cashless payment technology to generate increased
incremental revenue, (ii) convert owner-operated laundry rooms to Company-
operated laundry rooms and (iii) secure new locations that were previously
served by another independent operator.

USE OF EMERGING PAYMENT TECHNOLOGY--The Company intends to use smart card
based cashless payment systems to generate incremental revenue at existing
locations. For example, the Company's smart card based payment systems,
including those available through the Company's arrangements with
Schlumberger, permit the Company or the property owner to implement modest
periodic price increases and to use variable time pricing to increase the
Company's revenue and to maximize machine usage. Prior to the availability
of smart card based cashless payment systems, modest incremental price
increases could not be implemented because of the use of twenty-five cent
coins to operate the laundry machines and the risk of imposing larger price
increases than a particular user-base would accept without experiencing a
reduction in usage. The Company intends to accelerate its use of smart card
based payment technology at existing locations by converting coin-operated
equipment in response to customer demand. The Company further intends to
continue to install smart card readers in machines at new locations as
property owners and managers request this new technology in their efforts
to retain tenants.

CONVERT SELF-OWNERS--The Company actively markets to property owners and
managers who own and operate on-premise laundry rooms ("Self-Owners"). By
outsourcing their laundry service operations to the Company, these Self-
Owners can achieve economic benefits through decreased capital expenditures
and increased cash flow. In addition, this outsourcing permits property
owners and managers to focus on their core business with the knowledge that
a quality service provider is delivering services that help to retain
residents. The Company further believes that its reputation for integrity
in collection, a local sales force and prompt, efficient service, provide
the Company with a competitive advantage in successfully converting Self-
Owners to Company customers. For example, the Company recently acquired The
Laundry Works, a division of Boston Financial Group, L.P., a large property
management company headquartered in Boston, Massachusetts ("BFG"), which
resulted in the conversion of more than 500 machines at 18 locations in
seven states from self-owned and operated laundry rooms to Company-operated
laundry rooms. The Company believes that BFG will realize a reduction in
capital and administrative expenditures related to self-ownership, which
should increase BFG's cash flows.

34
<PAGE>

SECURE NEW LOCATIONS PREVIOUSLY SERVED BY COMPETITORS--The Company's
sales and marketing efforts focus significantly on properties where leases
with competitors are nearing expiration. The Company's marketing department
maintains an extensive database of prospective customers, including
competitors' customers, which includes detailed information that assists
the Company in its efforts to secure new customers. The Company has also
historically achieved significant growth in this area through referrals
from existing customers.

STRATEGIC ACQUISITIONS

The Company intends to continue to take advantage of the opportunities
created by the changes in the card and coin-operated laundry services industry
through strategic acquisitions of local and regional Laundry Route businesses.
The Company has accelerated its acquisition efforts by adding to its senior
management team, increasing its sales and marketing departments and
substantially increasing the funds available under its Credit Facility. The
Company's recent efforts are intended to accelerate and build upon the
Company's successful acquisition record. Since May 1996, the Company has
acquired seven Laundry Route businesses, representing approximately 35,000
machines, contributing to the growth in its machine base. The following table
summarizes the locations of the Company's acquisitions consummated since May
1996:

<TABLE>
<CAPTION>
DATE LOCATION
---- --------
<S> <C>
May 1996...................................... Syracuse, New York
June 1996..................................... Buffalo, New York
August 1996................................... St. Louis, Missouri
September 1996................................ Georgia and South Carolina
December 1996................................. Madison, Wisconsin
December 1996................................. Boston, Massachusetts
April 1997.................................... Tampa, Florida
</TABLE>

The acquisitions include the Sun Services Acquisition, which added a
significant number of machines to the Company's existing machine base in
Florida, the state with the third largest multiple housing market in the
country. The Company believes that its access to capital and its proven
ability to acquire and integrate smaller independent Laundry Route operators
with its operations provides it with a competitive advantage when pursuing
some of the numerous, private, family-owned businesses that, in many cases,
are experiencing generational ownership changes. Many of these independent
owner-operators have decided to sell their businesses because they either have
elected not to expend the financial resources necessary, or lack access to the
additional capital necessary to upgrade existing equipment and to implement
new technology in order to compete with larger operators, such as the Company.

The Company's acquisition strategy has historically included both in-market
acquisitions, which increase the Company's presence in its existing geographic
markets, as well as add-on acquisitions, which establish the Company in a
geographic market in which it does not have a significant presence. The
Company's acquisition efforts have historically focused on both small, local,
as well as regional, Laundry Route operators. The Company believes this focus
on smaller to mid-sized acquisitions has enabled it to experience significant,
long-term growth because it permits the Company to successfully integrate
these acquired businesses into existing operations without adversely affecting
its overall customer service.

Local Laundry Route Operators. The purchase of small, local Laundry Route
operators and the integration of their assets into the Company's operations
results in a lower overall cost structure for the acquired business. The
Company expects to continue to evaluate additional opportunities to acquire
Laundry Route businesses from independent owner-operators to further
increase operating leverage within its markets. In many regions, the
Company may be able to acquire Laundry Routes contiguous with its existing
areas of operation without incurring significant incremental administrative
costs.

35
<PAGE>

Regional Laundry Route Operators. A regional Laundry Route acquisition is
typically larger in size and provides the Company with the opportunity to
improve its cash flow by significantly increasing total revenue, by
eliminating duplicative corporate and administrative functions and by
reducing capital expenditures through improved purchasing power. The
acquisition of a regional Laundry Route also provides a geographic
footprint from which the Company's sales staff can operate to increase
market penetration.

In order to offer its customers a comprehensive set of products and services
to meet their residents' increasing demands, the Company may also choose to
pursue acquisitions of businesses that can provide additional services to the
Company's customer base and target markets. The Company believes that,
although certain of these ancillary services, such as off-site laundry and
vended services, may be outside the Company's current core business, certain
operating characteristics, such as the similarity of sales distribution
networks, customer decision makers and payment and collection procedures, may
present the Company with attractive growth opportunities.

CARD AND COIN-OPERATED LAUNDRY ROUTE BUSINESS

The Company currently owns and operates more than 113,000 machines in over
17,000 laundry rooms located in multiple housing facilities, with no lessor
representing more than 1% of the Company's total machine base. The principal
aspects of the Company's Laundry Route operations include sales and marketing,
facility leasing, service, collections and security and equipment
refurbishment.

Sales and Marketing. The Company markets its products and services through a
sales and marketing staff of 43 people. The Company's sales staff is dispersed
geographically throughout the Company's principal markets in order to support
the Company's customer and prospective customer base. As discussed below, the
Company primarily focuses its sales efforts on two markets: real estate
(apartments and public housing complexes) and colleges and universities. The
Company's sales force is charged with two primary functions: maintaining
existing customer relationships and soliciting new relationships. The
Company's marketing staff is located at its corporate headquarters in
Cambridge, Massachusetts. The Company has added 17 sales and marketing
personnel during the past 16 months.

Real Estate. The Company's regional real estate sales team works with
multi-housing accounts, such as apartments and public housing complexes,
and is focused on the needs of existing customers, as well as the needs of
potential customers. Each sales team relies heavily on referrals from
existing accounts, as well as the internal expansion of existing accounts.

In response to the consolidation of the multi-housing industry by the
largest REITs and property management companies, the Company has assigned
primary responsibility for the geographically dispersed property owners and
managers to one of its senior sales managers. This position is focused
principally on developing relationships at the executive level with many
national REITs and property management companies.

Colleges and Universities. The Company's college and university sales
team is focused on enhancing relationships with existing accounts, as well
as soliciting additional colleges and universities. The sales team relies
heavily on national and regional trade show participation in order to reach
the various decision makers of existing accounts and new prospects. The
Company believes that having a sales team focused solely on the college and
university market has helped it to achieve its status as North America's
largest supplier of card and coin-operated laundry services to the college
and university market.

Facility Leasing. The Company typically sets up a complete laundry room
facility in the leased space, including washers, dryers and debit or smart
card readers, tables for organizing and folding laundry and seating areas. In
addition, the Company will frequently refurbish the premises by painting

36
<PAGE>

the room and/or installing ventilation, lighting, plumbing and drainage. These
improvements are designed to create a laundry room which is clean and
convenient, thus encouraging maximum usage of the equipment by the residents
of the property. The Company generally enters into long-term leases with
property owners which provide, in most cases, for sharing of machine revenue
on a percentage basis. Under the terms of a standard long-term lease, the
Company leases a room or dedicated area within a multi-housing facility from
the property owner, public housing agency or college or university. The
Company's installed machine base is diversified across the various types of
properties that it serves as follows:

<TABLE>
<S> <C>
Apartments, condominiums and co-operatives........................... 64%
Colleges, universities and schools................................... 25%
Public housing....................................................... 5%
Military bases....................................................... 1%
Elderly housing...................................................... 1%
Other................................................................ 4%
</TABLE>

Based upon the Company's survey of colleges and universities, the Company is
the largest operator of card and coin-operated laundry rooms in the North
American college and university market with a customer base consisting of
approximately 315 of the more than 1,600 public and private residential
institutions. The Company's strategy has been to pursue additional college and
university accounts both through acquisitions and through entering into new
geographic markets.

Approximately 90% of the Company's revenue is derived from the operations of
washers and dryers in laundry rooms pursuant to long-term leases with property
owners. The leases, which have an average remaining life of over seven years
and provide the Company with the exclusive right to operate the laundry room
on the premises, typically require the Company to pay a percentage of the
revenue collected to the lessor as a commission (or rent) and, in some cases,
require advance rental payments. The property owner or manager is usually
responsible for maintaining and cleaning the premises and for payment of the
utilities. Because of the Company's significant initial capital investment,
the Company's leases may only be terminated by the customer prior to their
stated expiration date for non-performance by the Company. The Company is
unaware of any laundry room lease that has ever been terminated by a customer
due to non-performance by the Company.

Service. The Company delivers, installs, services and collects revenue from
the laundry equipment used in the Company-operated laundry rooms. The
Company's maintenance program is intended to limit unnecessary capital
expenditures and extend the useful life of the Company's laundry equipment,
thus realizing optimal lifetime revenue per machine. The Company utilizes a
three facet program, coupled with a restoration and redeployment program, to
ensure that down time for its equipment is kept to a minimum, thus maximizing
average revenue per machine.

Install High Quality Equipment. The Company primarily installs equipment
manufactured by Maytag. The Company believes that the installation of high
quality equipment at the outset, coupled with a proper maintenance program,
results in equipment that operates more efficiently, is used more often and
maximizes revenue per machine. The Company believes that its role as a
significant purchaser and user, as well as distributor, of Maytag equipment
affords it a competitive advantage both in terms of pricing and in terms of
its staff of highly qualified service technicians. The Company also
purchases equipment from other leading manufacturers, including Whirlpool
and General Electric, and believes that such manufacturers are willing to
increase their sales to the Company. See "Risk Factors--Dependence Upon
Certain Suppliers."

Periodic Preventive Maintenance. The Company performs scheduled,
periodic, preventive maintenance on the Company's equipment at its various
leased laundry rooms.

37
<PAGE>

On-Call Service. The Company employs approximately 90 service technicians
to both maintain and repair its equipment. These service technicians have
an average of over seven years experience repairing and maintaining laundry
equipment. The Company's Director of Service Training is responsible for
evaluating and training the service force. The Company is the only Maytag
distributor to have ever won the prestigious Maytag Red Carpet Service
Award twice, both times within the past ten years.

Collections and Security. Revenues from the Company's laundry rooms are
collected on a periodic basis (typically one to three times per month) based
upon the historical use at each property. The collection routes are altered
frequently and the Company utilizes a computerized coin counting system and
various preventive and internal control measures, including armored car
services, to reduce the risks associated with its business.

Equipment Refurbishment. The Company refurbishes some of its laundry
equipment at its Cambridge, Massachusetts headquarters. The refurbishment
process involves removing some machines from active service and restoring or
replacing some of the machine parts. The refurbished machines result in cost
savings which, when coupled with the installation of high quality machines and
a proper maintenance and service program, can result in reduced capital
expenditures and increased profitability for the property owner. Refurbished
machines are either used in locations where the lessor has requested them or
to replace older laundry equipment.

TECHNOLOGY

The Company maintains a significant information technology system to
facilitate its lease monitoring, commission paying and product purchasing
activities. The Company has recently implemented and/or expanded its use of
technologies that the Company believes will broaden its existing product and
service offerings, enhance its customer service, improve its financial and
operational monitoring of its lease locations, and facilitate its analysis of
the operations of potential acquisition candidates.

Cashless Transactions. The Company operates both smart card and debit card
based payment systems. Since 1991, the Company has installed more than 11,000
debit card operated laundry machines in response to customer demand in the
college and university market. The installation of these debit card based
machines often provided the Company with access to colleges and universities
that demanded card based payment systems as part of their procurement process.

The Company has installed smart card readers in more than 2,200 laundry
machines since April 1, 1997 and intends to accelerate the use of cost-
effective smart card based payment and access systems. Smart cards are the
same size as credit or debit cards, but contain a small microprocessor chip
which is capable of computational operations, as well as storing data and
value for use in cashless transactions. The stored value feature of smart
cards is used with the Company's laundry equipment to provide laundry users
the convenience and security of cashless transactions. The Company, which has
experienced increased usage at existing facilities which have been equipped
with smart card readers, believes that these smart card based payment
technologies may also be used to increase revenue by facilitating modest price
increases and the implementation of variable time pricing while also enhancing
the ability to expand its existing services and product offerings. The
additional benefits associated with smart card based transactions include
reduced administrative burdens and expenditures, reduced vandalism, improved
security and more efficient revenue collections. The Company believes that the
availability of these technologies will also increase laundry room usage and
decrease the property owner's risk of loss of resident business to off-
premises operators which, the Company believes, will further enhance the
attractiveness of smart card based payment systems to property owners and
managers.

38
<PAGE>

Newly Available Technology. The introduction of a new, single unit smart
card reader for use with laundry equipment has made it cost-effective and
operationally feasible to convert existing coin-operated machines and to
install new smart card operated machines. Prior to the availability of this
technology, each piece of laundry equipment had to be hard-wired to an on-
line processing system in order to function as a cashless unit. The newly
available single unit smart card reader makes conversions and new
installations more cost-effective.

On April 1, 1997, the Company commenced a roll-out of smart card based
payment systems. The Company has equipped more than 2,200 laundry machines
with smart card readers since the commencement of this roll-out. The
Company is also installing smart card operated machines at many of its new
customer accounts. The Company believes that its seven year experience with
cashless payment systems provides it with a competitive advantage as it
further pursues the roll-out of card-operated laundry equipment.

Pricing Flexibility. By equipping its machines with cashless payment
technology, the Company believes that it can go beyond providing a safer
environment and more efficient laundry facility. The use of smart card
technology will enable the Company to make modest incremental price
adjustments over time rather than in twenty-five cent increments. The
Company believes that such modest price increases will lead to more revenue
per machine without reducing the usage of its machines significantly. In
addition, cashless technology will enable the Company to establish variable
time pricing schedules. For instance, the machines may be programmed to
have one set of prices during peak hours, one set during normal hours, and
another set of prices during "off" hours of operation to encourage maximum
usage, which the Company believes will lead to increased incremental
revenue.

Information Services. The Company is employing an integrated approach to the
underlying technology required to support its sales and administrative
functions. The Company provides its sales personnel with laptop computers for
use in communicating with the Company, accessing Company pricing and related
information and preparing customer presentations and analyses. The Company
also operates a data warehousing software system to assist the Company in its
operational and financial data management. For example, the data warehousing
software system aids the Company's senior management in analyzing geographic
and product line trends, as well as individual property and regional
performance. The Company can also use this data warehousing system to
seamlessly import operational information of a laundry service provider that
the Company may be interested in acquiring.

Machine Technology. In January 1997, Maytag introduced new laundry machine
models which can only be activated by using a smart card. These new machines,
which are comparably priced to existing equipment, along with the Company's
access to the newly developed smart card readers, will permit the Company to
more economically install smart card based equipment.

Additionally, in March 1997, Maytag introduced its new high-efficiency
Maytag Neptune(TM) line of laundry products. The Company believes that this
new line, which is more efficient in its use of water and utilities than
existing Maytag machines, will enhance customer relations.

COMPETITION

The card and coin-operated laundry services industry is highly competitive,
capital intensive and requires reliable and prompt service. The Company
believes that customers consider different factors in selecting a laundry
service provider including customer service, reputation, commission rates
(including advance commissions) and range of products and services. The
Company believes that different types of customers assign varied weight to
each of these factors and that no one factor materially influences a
customer's selection of a laundry service provider. Within any given
geographic area, the Company may compete with local independent-operators,
regional operators and multi-regional operators. Although the industry is
highly fragmented, the Company and several other independent-operators have
chosen to

39
<PAGE>

grow by acquisitions, as well as through new machine placement. The Company
believes that it is the fourth largest card and coin-operated laundry services
provider in North America. The Company believes that only Coinmach Laundry
Corporation ("Coinmach"), Web Service Company, Inc. ("Web"), and Macke Laundry
Services, L.P. maintain a larger machine base than the Company. The Company
further believes that both Coinmach and Web maintain significantly larger
machine bases than the Company's machine base.

LAUNDRY EQUIPMENT SALES, LEASING AND SERVICE

The Company sells commercial laundry products to the retail coin laundromat
market and has been a Maytag distributor since 1927. The Company has, through
acquisitions of businesses and the cooperation of Maytag, grown its Maytag
distribution and service business to encompass Connecticut, Illinois, Maine,
Massachusetts, New Hampshire, New York (except metropolitan New York City),
western Pennsylvania, Rhode Island, South Carolina, Vermont and portions of
Arkansas, Indiana, Iowa, Mississippi and Missouri. The Company is currently
the sole distributor of Maytag commercial laundry equipment in each of its
areas. As a distributor, the Company sells laundry equipment to laundromat
owners, apartment and condominium owners and institutions such as hospitals,
restaurants and elder care facilities. The Company's retail coin laundromat
sales team is focused on selling replacement equipment to existing coin
laundromat owners, as well as soliciting new customers for its distribution
business. The sales efforts are supported by regional service training
seminars held for the benefit of existing and potential laundromat owners. The
Company also sells equipment manufactured by American Dryer, Dexter and
Whirlpool when such equipment better suits a customer's needs. The Company
believes that its role as a distributor, and not just a buyer, of commercial
laundry equipment provides it with a competitive advantage in that it has
access to numerous Self-Owners who may either choose to buy equipment from the
Company or choose to outsource this function by becoming a lessor to the
Company.

The Company has also established a leasing program for commercial laundry
customers who choose neither to purchase equipment nor to become a Laundry
Route customer. This program involves the leasing of commercial laundry
equipment to customers who maintain their own coin-operated laundry rooms, as
well as to customers (such as hotels) who operate their own on-premise laundry
equipment. Although this operation currently provides a small amount of
revenue to the Company, the Company anticipates that this market presents the
Company with growth opportunities as additional Self-Owners see these services
as a way to free up available capital for other business needs.

The Company also offers potential owner-operators of independent laundromats
complete design, construction, installation and set-up of turn-key
laundromats. The Company derives its revenue by selling the equipment to the
owner-operator and through ongoing service contracts with the owner-operator.

EMPLOYEES

The Company has approximately 274 employees. None of the Company's employees
is covered by a collective bargaining agreement. The Company believes its
relations with its employees are good.

40
<PAGE>

PROPERTIES

The Company owns its 40,000 square foot corporate headquarters in Cambridge,
Massachusetts which houses the Company's administrative and central services,
including a 20,000 square foot warehouse for equipment and parts. The Company
also leases the following regional facilities, which are largely operated as
sales and service facilities, though limited administrative functions are also
performed at many of them:

<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE
-------- --------------
<S> <C>
Buffalo, New York......................................... 9,500
Charlotte, North Carolina................................. 7,600
Fort Lauderdale, Florida.................................. 6,000
Gainesville, Florida...................................... 750
Gurnee, Illinois.......................................... 12,000
East Hartford, Connecticut................................ 14,900
Pittsburgh, Pennsylvania.................................. 1,100
St. Louis, Missouri....................................... 2,400
Standish, Maine........................................... 7,500
Syracuse, New York........................................ 7,800
Tampa, Florida............................................ 6,200
</TABLE>

The Company believes that its properties are generally well maintained and
in good condition. The Company believes that its properties are adequate for
present needs and that suitable additional or replacement space will be
available as required.

LEGAL PROCEEDINGS

The Company is from time to time a party to litigation arising in the
ordinary course of business. There can be no assurance that the Company's
insurance coverage will be adequate to cover all liabilities occurring out of
such claims. In the opinion of management, any liability that the Company
might incur upon the resolution of this litigation will not, in the aggregate,
have a material adverse effect on the financial condition or results of
operations of the Company.

41
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company, their positions with
the Company and their ages as of September 1, 1997 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Gray MacDonald, Jr. ......... 47 Chairman, Chief Executive Officer and
Director
Neil F. MacLellan, III............... 38 Executive Vice President, Sales and
Marketing
John S. Olbrych...................... 42 Chief Financial Officer and Treasurer
Patrick A. Flanagan.................. 44 Executive Vice President, Mergers and
Acquisitions, Secretary and Director
Jeffrey C. Huenink................... 41 Director
John P. Leydon....................... 64 Director
Jerry A. Schiller.................... 64 Director
Eugene B. Doggett.................... 61 Director (immediately following
consummation of this offering)
</TABLE>

STEWART GRAY MACDONALD, JR. serves as Chairman of the Board and Chief
Executive Officer and has served as a Director of the Company since 1983. Mr.
MacDonald served the Company in various executive capacities from 1989 until
his election as Chairman of the Board in 1992. Mr. MacDonald, the son of the
Company's co-founder and first President, is the fourth member of the
Company's founding families to lead the organization. Mr. MacDonald, a three
time member of the U.S. Olympic Rowing Team and a former coach with the U.S.
National Rowing Team, received his B.A. from the University of Wisconsin.

NEIL F. MACLELLAN, III has been with the Company since 1985 and has served
as Executive Vice President, Sales and Marketing since December 1995. From
January 1991 through December 1995, Mr. MacLellan served as the Company's
Director of Finance and Administration and from March 1985 through January
1991, Mr. MacLellan served as Controller of the Company. Mr. MacLellan
received his B.S. in Accounting from Bentley College.

JOHN S. OLBRYCH has served as Chief Financial Officer of the Company since
April 1996 and served as a Director of the Company from November 1993 until
May 1997. From 1991 through 1996, Mr. Olbrych was an independent business
consultant. In this role he served as interim Chief Financial Officer of
AirTran Corporation, Airways Corporation, Carus Corporation, Carus Publishing
Company and Daisytek International. From 1986 through 1991, Mr. Olbrych served
as a Vice President of State Street Bank and Trust Company. Mr. Olbrych
received his B.A. from Dartmouth College and his M.B.A. from The Amos Tuck
School at Dartmouth College.

PATRICK A. FLANAGAN has served as a Director of the Company since 1992 and
has served as Executive Vice President, Mergers and Acquisitions of the
Company since April 1996. From January 1993 through April 1996, Mr. Flanagan
was a partner with American Capital Strategies, an investment bank
specializing in mergers and acquisitions. From 1990 to January 1993, Mr.
Flanagan was a partner in Fidelis Group, an investment bank. From 1983 to
1990, Mr. Flanagan was an investment banker in the Corporate Finance
Department at Drexel Burnham Lambert where he was a First Vice President. Mr.
Flanagan holds a B.S. from Purdue University and received his M.B.A. from
Harvard Business School.

42
<PAGE>

JEFFREY C. HUENINK has been a Director of the Company since April 1997. From
1986 until the Sun Services Acquisition in April 1997, the President and owner
of Sun Services. Mr. Huenink was, until June 1997, the President of the Multi-
Housing Laundry Association, an industry trade group, and was a member of the
Florida House of Representatives from 1988 until 1992. Mr. Huenink received
his B.S. in Business Administration from the University of South Florida. The
existing stockholders of the Company have agreed to vote their shares in favor
of Mr. Huenink's election to the Board of Directors, provided that certain
conditions contained in the First Stockholders' Agreement (as defined below)
are met, through April 1999. See "Certain Relationships and Related
Transactions."

JOHN P. LEYDON has been a Director of the Company since April 1997. Mr.
Leydon has been the Chief Financial Officer of Pacific Packaging Products,
Inc. since December 1996. From 1983 to 1996, Mr. Leydon was a partner at
Leydon & Gallagher, a certified public accounting firm. Mr. Leydon received
his B.S. in Business Administration from Boston College, his M.B.A. from
Babson College and his M.S. in Taxation from Bentley College.

JERRY A. SCHILLER has been a Director of the Company since April 1997. Mr.
Schiller has been a private investor and consultant since 1993. In October
1993, Mr. Schiller retired after 31 years of service with The Maytag
Corporation. From 1985 until his retirement, Mr. Schiller served as the
Executive Vice President and Chief Financial Officer, as well as a Director,
of The Maytag Corporation. From 1962 until 1985, Mr. Schiller held various
executive positions with The Maytag Corporation. Mr. Schiller received his
B.S. in Business Administration and Accounting from Augustana College.

EUGENE B. DOGGETT will become a Director of the Company following the
consummation of this offering. Mr. Doggett is an Executive Vice President and
Director of Iron Mountain Incorporated, a publicly traded records management
company. From 1987 until June 1997, Mr. Doggett was also Chief Financial
Officer of Iron Mountain. Prior to joining Iron Mountain, Mr. Doggett had
extensive experience in commercial and investment banking, as well as
financial and general management experience at senior levels. He holds a B.A.
from Yale University and an M.B.A. from Harvard Business School.

Executive officers are elected annually by the Board of Directors and serve
at its discretion. There are no family relationships among any of the
directors and executive officers of the Company except that Eugene B. Doggett,
who will become a director of the Company upon consummation of this offering,
is the uncle of Cynthia V. Doggett, Stewart Gray MacDonald, Jr.'s wife.

BOARD OF DIRECTORS

The business of the Company is managed under the direction of the Board of
Directors. As of the date of this Prospectus, the number of directors of the
Company is currently fixed at five and will expand to six upon consummation of
this offering. The Company's Amended and Restated Certificate of Incorporation
provides that the Board of Directors shall be divided into three classes. The
members of each class of directors serve for staggered three-year terms. The
Board of Directors is composed of two Class I Directors (Messrs. Flanagan and
Leydon), two Class II Directors (Messrs. Huenink and Schiller) and two Class
III Directors (Mr. MacDonald and, upon consummation of this offering, Mr.
Doggett), whose initial terms will expire upon the election and qualification
of directors at the annual meetings of stockholders held following the fiscal
years ending December 31, 1997, 1998 and 1999, respectively. At each annual
meeting of stockholders, directors will be re-elected or elected for a full
term of three years to succeed those directors whose terms are expiring.

The Board of Directors has established an Audit Committee (the "Audit
Committee") and a Compensation Committee (the "Compensation Committee"). The
Audit Committee recommends to the Board of Directors the firm to be appointed
as independent accountants to audit financial statements and to perform
services related to the audit, reviews the scope and results of the audit with
the independent accountants, reviews with management and the independent
accountants the Company's

43
<PAGE>

year-end operating results, considers the adequacy of the internal accounting
procedures and considers the effect of such procedures on the accountants'
independence. The Audit Committee consists of Messrs. Leydon and Schiller. The
Compensation Committee, which consists of Messrs. MacDonald, Leydon and
Schiller, reviews and recommends to the Board of Directors the compensation
arrangements for all directors and officers other than Mr. MacDonald, whose
compensation arrangements are reviewed and recommended by Messrs. Leydon and
Schiller, approves such arrangements for other senior level employees and
administers and takes such other action as may be required in connection with
certain compensation and incentive plans of the Company. The Compensation
Committee also determines the number of options to be granted or shares of
common stock to be issued to eligible persons under the Company's 1997 Stock
Plan and prescribes the terms and provisions of each grant made under the 1997
Stock Plan other than with respect to the eligibility of Mr. MacDonald, as to
whom the full Board of Directors makes such determinations. In addition, the
Compensation Committee construes and interprets the 1997 Stock Plan and
issuances thereunder, and establishes, amends and revokes rules and
regulations for administration of the 1997 Stock Plan.

Members of the Board of Directors who are also employees of the Company do
not receive compensation for their services on the Board of Directors or any
committee thereof. Each director who is not an employee of the Company (an
"Independent Director") receives an annual fee of $12,000 and an additional
fee of $500 per meeting of the Board of Directors. In addition, upon
consummation of this offering, each current Independent Director will be
granted an option to purchase 1,000 shares of Common Stock at an exercise
price equal to the initial public offering price per share of Common Stock.
Under the 1997 Stock Plan, each new Independent Director is also entitled to
receive an initial grant of an option to purchase 1,000 shares of Common Stock
upon his or her election to the Board of Directors, and each Independent
Director who is serving as a director of the Company on the fifth business day
after each annual meeting of stockholders, beginning with the 1998 annual
meeting, will automatically be granted an option to purchase 1,000 shares of
Common Stock. All options granted to Independent Directors under the 1997
Stock Plan shall be exercisable immediately and shall terminate upon the tenth
anniversary of the date of grant. See "--1997 Stock Option and Incentive
Plan--Stock Options Granted to Independent Directors."

All members of the Board of Directors are reimbursed for travel expenses
incurred in attending meetings of the Board of Directors and its committees.

44
<PAGE>

EXECUTIVE COMPENSATION

Summary Compensation. The following summary compensation table sets forth
information concerning compensation for services rendered in all capacities
awarded to, earned by or paid to the Company's Chief Executive Officer and the
other named executive officers during the fiscal year ended December 31, 1996.
No other executive officer of the Company who held office as of December 31,
1996 met the definition of "highly compensated" within the meaning of the
Securities and Exchange Commission's executive compensation disclosure rules
for this period.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) OPTIONS(#) COMPENSATION($)(2)
- --------------------------- --------- ----------- ------------ ------------------
<S> <C> <C> <C> <C>
Stewart Gray MacDonald, $131,976 $ 98,380 148,700 $2,245
Jr.....................
Chairman and Chief Ex-
ecutive Officer
Neil F. MacLellan, III.. 85,000 115,188 81,800 8,624
Executive Vice
President, Sales and
Marketing
John S. Olbrych......... 88,411(3) 70,000 81,800 --
Chief Financial Officer
and Treasurer
Patrick A. Flanagan..... 97,500(4) 89,133 74,350 --
Executive Vice Presi-
dent, Mergers and Ac-
quisitions and Secre-
tary
</TABLE>
- --------
(1) The Company's executive officers are eligible for annual cash bonuses.
Such bonuses are based upon achievement of individual or corporate
performance objectives determined by the Board of Directors.
(2) Includes contributions made on the executive's behalf to the Company's
profit sharing plan and, in the case of Mr. MacLellan, premiums paid by
the Company for life insurance benefitting such executive's spouse.
(3) Mr. Olbrych was appointed the Company's Chief Financial Officer in April
1996.
(4) Mr. Flanagan was appointed Executive Vice President, Mergers and
Acquisitions in April 1996.

45
<PAGE>

Option Grants. The following table sets forth certain information concerning
the individual grant of options to purchase Common Stock of the Company to the
Chief Executive Officer and the other named executive officers of the Company
who received such a grant during the fiscal year ended December 31, 1996.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------
POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF PERCENT ANNUAL RATES OF
SECURITIES OF TOTAL STOCK PRICE
UNDERLYING OPTIONS EXERCISE APPRECIATION FOR
OPTIONS GRANTED TO OR BASE OPTION TERM(3)
GRANTED EMPLOYEES IN PRICE EXPIRATION -------------------
(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
---------- ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stewart Gray MacDonald,
Jr. ................... 148,700 26.7% $ 8.80 12/30/06 $822,946 $2,085,508
Neil F. MacLellan, III.. 81,800 14.7 8.80 12/30/06 452,704 1,147,239
John S. Olbrych......... 81,800 14.7 8.80 12/30/06 452,704 1,147,239
Patrick A. Flanagan..... 74,350 13.4 8.80 12/30/06 411,473 1,042,754
</TABLE>
- --------
(1) On December 30, 1996, the Company granted to Messrs. MacDonald, MacLellan,
Olbrych and Flanagan, as well as certain other employees of the Company,
options to purchase 148,700, 81,800, 81,800 and 74,350 shares,
respectively, of Common Stock (the "1996 Options"). The 1996 Options,
which have an exercise price of $8.80 per share, are not currently
exercisable, but will become 100% vested at the end of the sixth
anniversary of the grant date. Upon consummation of this offering, the
vesting schedule of the 1996 Options will be accelerated in accordance
with the vesting schedule contained in each agreement evidencing such
option such that twenty percent (20%) of such options will become
exercisable on each of December 30, 1997, 1998, 1999, 2000 and 2001. The
exercise price of $8.80 per share was determined by the Board of Directors
to be the fair market value of the shares underlying such options on the
date of grant. See "--1997 Stock Option and Incentive Plan."
(2) All options were granted at fair market value as determined by the Board
of Directors on the date of grant. See "--1997 Stock Option and Incentive
Plan--Stock Options."
(3) This column shows the hypothetical gain or option spreads of the options
granted based on assumed annual compound stock appreciation rates of 5%
and 10% over the full 10-year term of the options. The gains shown are net
of the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise. The 5% and 10% assumed rates
of appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future Common Stock prices. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
optionholders' continued employment through the option period and the date
on which the options are exercised.

46
<PAGE>

Option Exercises and Holdings. The following table sets forth information
concerning the number and value of unexercised options to purchase shares of
Common Stock of the Company held by the Chief Executive Officer and the other
named executive officers of the Company who held such options at December 31,
1996. None of the Chief Executive Officer or the other named executive
officers of the Company exercised any stock options during fiscal 1996.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
--------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Stewart Gray MacDonald,
Jr..................... 0 148,700 $ 0 $327,140
Neil F. MacLellan, III.. 0 81,800 0 179,960
John S. Olbrych......... 0 81,800 0 179,960
Patrick A. Flanagan..... 0 74,350 0 163,570
</TABLE>
- --------
(1) There was no public trading market for the Common Stock as of October 16,
1997. Accordingly, these values have been calculated based upon the
initial public offering price of $11.00 less the applicable exercise
price.

1997 STOCK OPTION AND INCENTIVE PLAN

In December 1996, the Board of Directors of Mac-Gray Co. adopted, and the
stockholders approved, the Mac-Gray Co., Inc. 1996 Stock Option and Incentive
Plan (the "Predecessor Plan"). On April 7, 1997, the Board of Directors
adopted and the Company's stockholders approved the 1997 Stock Option and
Incentive Plan for the Company (the "1997 Stock Plan"). The 1997 Stock Plan is
designed and intended as a performance incentive for officers, employees,
consultants and Independent Directors to promote the financial success and
progress of the Company. The Company anticipates that providing such persons
with a direct stake in the Company's welfare will assure a closer
identification of their interests with those of the Company, thereby
stimulating their efforts on the Company's behalf and strengthening their
desire to remain with the Company. All officers, employees and Independent
Directors are eligible to participate in the 1997 Stock Plan.

The 1997 Stock Plan provides for the issuance of up to the greater of (i)
750,000 shares of Common Stock or (ii) ten percent of the then outstanding
shares of Common Stock. The Company currently has reserved 750,000 shares of
Common Stock for issuance under the 1997 Stock Plan, of which 638,340 shares
are subject to outstanding options and 111,660 remain available for issuance,
subject to increase upon consummation of this offering. Upon consummation of
this offering, the number of shares reserved for issuance under the 1997 Stock
Plan will be 750,000. On and after the date the 1997 Stock Plan becomes
subject to Section 162(m) of the Code, options with respect to no more than
150,000 shares of Common Stock may be granted to any one individual in any
calendar year.

On December 30, 1996, Mac-Gray Co. granted to Messrs. MacDonald, MacLellan,
Olbrych and Flanagan, as well as certain other employees of the Company,
options to purchase 148,700, 81,800, 81,800 and 74,350 shares, respectively,
of its Common Stock (the "1996 Options") pursuant to the Predecessor Plan. The
1996 Options were subsequently assumed by the Company under the 1997 Stock
Plan, and the Predecessor Plan was terminated. On August 14, 1997, the Company
granted to Messrs. MacDonald, MacLellan, Olbrych and Flanagan, as well as
certain other employees of the Company, options to purchase 14,870, 8,180,
8,180 and 7,435 shares, respectively, of its Common Stock (the "August
Options") pursuant to the 1997 Stock Plan. The 1996 Options and the August

47
<PAGE>

Options, which have an exercise price of $8.80 and $9.25 per share,
respectively, are not currently exercisable, but will become 100% vested at
the end of the sixth anniversary of the grant date. Upon consummation of this
offering, the vesting schedule of the 1996 Options and the August Options will
be accelerated such that twenty percent (20%) of such options will become
exercisable on each of the first through fifth anniversaries of the date of
grant of such options. The exercise prices of $8.80 and $9.25 per share were
determined by the Board of Directors to be the fair market value of the shares
underlying such options on the respective dates of grant.

The following summary description does not purport to be complete and is
qualified in its entirety by the 1997 Stock Plan, a copy of which is filed as
an exhibit to the Registration Statement of which this Prospectus is a part.

Plan Administration; Eligibility. The 1997 Stock Plan is administered by the
Board of Directors or the Compensation Committee thereof (the "Committee").
All members of the Committee must be "disinterested persons" as that term is
defined under the rules promulgated by the Securities and Exchange Commission
and "outside directors" as defined in Section 162(m) of the Internal Revenue
Code (the "Code") and the regulations promulgated thereunder.

The Committee has full power to select, from among the employees and other
persons eligible for awards, the individuals to whom awards will be granted,
to make any combination of awards to participants, and to determine the
specific terms and conditions of each award, subject to the provisions of the
1997 Stock Plan. The Committee may permit Common Stock, and other amounts
payable pursuant to an award, to be deferred. In such instances, the Committee
may permit dividend or deemed dividends to be credited to the amount of
deferrals.

Persons eligible to participate in the 1997 Stock Plan will be those
officers, employees and other key persons, such as consultants, of the Company
and its subsidiaries who are responsible for or contribute to the management,
growth or profitability of the Company and its subsidiaries, as selected from
time to time by the Committee. Independent Directors will also be eligible for
certain awards under the 1997 Stock Plan.

Stock Options. The 1997 Stock Plan permits the granting of (i) options to
purchase Common Stock intended to qualify as incentive stock options under
Section 422 of the Code ("Incentive Options") and (ii) options that do not so
qualify ("Non-Qualified Options"). Only employees of the Company and its
subsidiaries may be granted Incentive Options. The option exercise price of
each option will be determined by the Committee but may not be less than 100%
of the fair market value of the Common Stock on the date of grant in the case
of Incentive Options, and may not be less than 85% of the fair market value of
the Common Stock on the date of grant in the case of Non-Qualified Options.
Employees participating in the 1997 Stock Plan may, however, elect, with the
consent of the Committee, to receive discounted Non-Qualified Options in lieu
of cash bonuses. In the case of such grants, the option exercise price must be
at least 50% of the fair market value of the Common Stock on the date of
grant.

The term of each option will be fixed by the Committee and may not exceed
ten years from the date of grant in the case of an Incentive Option. The
Committee will determine at what time or times each option may be exercised
and, subject to the provisions of the 1997 Stock Plan, the period of time, if
any, after retirement, death, disability or termination of employment during
which options may be exercised. Options may be made exercisable in
installments, and the exercisability of options may be accelerated by the
Committee.

Upon exercise of options, the option exercise price must be paid in full
either in cash or by certified or bank check or other instrument acceptable to
the Committee or, if the Committee so permits, by delivery of shares of Common
Stock already owned by the optionee. The exercise price may also be delivered
to the Company by a broker pursuant to irrevocable instructions to the broker
from the optionee.

48
<PAGE>

At the discretion of the Committee, stock options granted under the 1997
Stock Plan may include a "re-load" feature pursuant to which an optionee
exercising an option by the delivery of shares of Common Stock would
automatically be granted an additional stock option (with an exercise price
equal to the fair market value of the Common Stock on the date the additional
stock option is granted) to purchase that number of shares of Common Stock
equal to the number delivered to exercise the original stock option. One of
the purposes of this feature is to enable participants to maintain an equity
interest in the Company without dilution.

To qualify as Incentive Options, options must meet additional Federal tax
requirements, including limits on the value of shares subject to Incentive
Options which first become exercisable in any one calendar year, and a shorter
term and higher minimum exercise price in the case of certain large
stockholders.

Stock Options Granted to Independent Directors. The 1997 Stock Plan provides
for the automatic grant to each Independent Director of a Non-Qualified Option
to purchase 1,000 shares of Common Stock in connection with the consummation
of this offering. The 1997 Stock Plan also provides for the automatic grant to
each Independent Director of a Non-Qualified Option to purchase 1,000 shares
of Common Stock upon his or her initial election to the Board of Directors. In
addition, each Independent Director who is serving as a director of the
Company on the fifth business day after each annual meeting of stockholders,
beginning with the 1998 annual meeting, will automatically be granted on such
day a Non-Qualified Option to acquire 1,000 shares of Common Stock. The
exercise price of each such Non-Qualified Option is the fair market value of
the Common Stock on the date of grant. All of such Non-Qualified Options
granted to Independent Directors shall be exercisable immediately and shall
terminate on the tenth anniversary of the date of grant.

Stock Appreciation Right. The Committee may award a stock appreciation right
("SAR") either as a freestanding award or in tandem with a stock option. Upon
exercise of the SAR, the holder will be entitled to receive an amount equal to
the excess of the fair market value on the date of exercise of one share of
Common Stock over the exercise price per share specified in the related stock
option (or, in the case of freestanding SAR, the price per share specified in
such right, which price may not be less than 85% of the fair market value of
the Common Stock on the date of grant) times the number of shares of Common
Stock with respect to which the SAR is exercised. This amount may be paid in
cash, Common Stock, or a combination thereof, as determined by the Committee.
If the SAR is granted in tandem with a stock option, exercise of the SAR
cancels the related option to the extent of such exercise.

Restricted Stock. The Committee may also award shares of Common Stock to
officers, other employees and key persons of the Company subject to such
conditions and restrictions as the Committee may determine ("Restricted
Stock"). These conditions and restrictions may include the achievement of
certain performance goals and/or continued employment with the Company through
a specified restricted period. The purchase price of shares of Restricted
Stock will be determined by the Committee. If the performance goals and other
restrictions are not attained, the employees will forfeit their awards of
Restricted Stock.

Unrestricted Stock. The Committee may also grant shares (at no cost or for a
purchase price determined by the Committee) which are free from any
restrictions under the 1997 Stock Plan ("Unrestricted Stock"). Unrestricted
Stock may be issued to employees and key persons in recognition of past
services or other valid consideration, and may be issued in lieu of cash
bonuses to be paid to such employees and key persons.

Subject to the consent of the Committee, an employee or key person of the
Company may make an irrevocable election to receive a portion of his
compensation in Unrestricted Stock (valued at fair market value on the date
the cash compensation would otherwise be paid).

49
<PAGE>

An Independent Director may, pursuant to an irrevocable written election at
least six months before directors' fees would otherwise be paid, receive all
or a portion of such fees in Unrestricted Stock, valued at fair market value
on the date the directors' fees would otherwise be paid. In certain instances,
an Independent Director may also elect to defer a portion of his director fees
payable in the form of Unrestricted Stock, in accordance with such rules and
procedures as may from time to time be established by the Company. During the
period of deferral, the deferred Unrestricted Stock would receive dividend
equivalent rights.

Performance Share Awards. The Committee may also grant performance share
awards to employees or other key persons of the Company entitling the
recipient to receive shares of Common Stock upon the achievement of individual
or Company performance goals and such other conditions as the Committee shall
determine ("Performance Share Award").

Dividend Equivalent Rights. The Committee may grant dividend equivalent
rights, which give the recipient the right to receive credits for dividends
that would be paid if the grantee had held specified shares of Common Stock.
Dividend equivalent rights may be granted as a component of another award or
as a freestanding award. Dividend equivalents credited under the 1997 Stock
Plan may be paid currently or be deemed to be reinvested in additional shares
of Common Stock, which may thereafter accrue additional dividend equivalents
at fair market value at the time of deemed reinvestment or on the terms then
governing the reinvestment of dividends under the Company's dividend
reinvestment plan, if any. Dividend equivalent rights may be settled in cash,
shares, or a combination thereof, in a single installment or installments, as
specified in the award. Awards payable in cash on a deferred basis may provide
for crediting and payment of interest equivalents.

Adjustments for Stock Dividends, Mergers, Etc. The Committee will make
appropriate adjustments in outstanding awards to reflect stock dividends,
stock splits and similar events. In the event of a merger, liquidation, sale
of the Company or similar event, the Committee, in its discretion, may provide
for substitution or adjustments of outstanding options and SARs, or may
terminate all unexercised options and SARs with or without payment of cash
consideration.

Amendments and Termination. The Board of Directors may at any time amend or
discontinue the 1997 Stock Plan and the Committee may at any time amend or
cancel outstanding awards for the purpose of satisfying changes in the law or
for any other lawful purpose. No such action may be taken, however, which
adversely affects any rights under outstanding awards without the holder's
consent. Further, amendments to the 1997 Stock Plan shall be subject to
approval by the Company's stockholders if and to the extent required by the
Securities Exchange Act of 1934, as amended (the "1934 Act"), to ensure that
awards granted under the 1997 Stock Plan are exempt under Rule 16b-3
promulgated under the 1934 Act, or required by the Code to preserve the
qualified status of Incentive Options.

Change in Control Provisions. The 1997 Stock Plan provides that in the event
of a sale of all or substantially all of the assets or Common Stock of the
Company, a merger or consolidation which results in a change in control of the
Company or the liquidation or dissolution of the Company (a "Change in
Control"), all stock options and stock appreciation rights shall automatically
become fully exercisable. In addition, at any time prior to or after a Change
in Control, the Committee may accelerate awards and waive conditions and
restrictions on any awards to the extent it may determine appropriate.

STOCK APPRECIATION RIGHTS

Prior to this offering, the Company terminated the Mac-Gray Co., Inc. 1992
Stock Appreciation Rights Plan (the "1992 SAR Plan"). There are no outstanding
stock appreciation rights under the 1992 SAR Plan.

50
<PAGE>

EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS

The Company is not a party to any employment agreements with any of its
executive officers.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

All executive officer compensation decisions will be made by the Committee.
The Committee will review and make recommendations regarding the compensation
for management and key employees of the Company, including salaries and
bonuses. The members of the Committee upon consummation of this offering will
be Messrs. MacDonald, Leydon and Schiller. Prior to May 2, 1997, and prior to
the creation of the Committee, each of Messrs. MacDonald, Olbrych and Flanagan
participated in deliberations of the Company's Board of Directors concerning
executive compensation.

51
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In April 1997, the Company consummated the Sun Services Acquisition whereby
it acquired Sun Services via mergers in which it issued an aggregate
consideration of $1,945,000 cash and 612,026 shares of Common Stock to Jeffrey
C. Huenink, who is currently a member of the Board of Directors and a
stockholder of the Company. In connection with the Sun Services Acquisition,
the Company entered into a Noncompetition Agreement (the "Noncompetition
Agreement") and a Consulting Agreement (the "Consulting Agreement") with Mr.
Huenink, the former owner of Sun Services. The Noncompetition Agreement
prohibits Mr. Huenink from conducting business in the Company's principal
industry for a period of three years from the later of the date of termination
of the Consulting Agreement and the date that Mr. Huenink ceases to be a
director of the Company. Pursuant to the terms of the Consulting Agreement,
Mr. Huenink is to advise the Company through April 16, 2002 with respect to
its acquisition strategy and assist the Company in seeking out acquisition
candidates that complement this strategy. The Company has provided Mr. Huenink
with incentives to identify acquisition candidates that may be successfully
integrated into the Company including a combined fixed rate/bonus compensation
package. The fixed rate portion of the compensation package provides Mr.
Huenink with an annual consulting payment of $50,000 during each of the first
and second years of the Consulting Agreement and $100,000 for each of the
third through fifth years. In addition, the bonus portion of the compensation
package is computed based upon a percentage (1% during the first and second
years and .75% during each of the third through fifth years) of revenues of
certain acquired businesses and is guaranteed to be at least $225,000 during
each of the first and second years of the Consulting Agreement.

In connection with the Sun Services Acquisition, the Company entered into a
Stockholders' Agreement (the "First Stockholders' Agreement") with Mr. Huenink
and the other stockholders of the Company pursuant to which (i) Mr. Huenink
received demand and "piggy-back" registration rights, (ii) each stockholder
agreed to vote their respective shares in favor of Mr. Huenink's election to
the Board of Directors until the earlier to occur of (a) April 17, 1999, and
(b) such time as Mr. Huenink ceases to hold five percent of the outstanding
shares of Common Stock, (iii) Mr. Huenink received the right to require the
Company to repurchase up to 612,026 shares of Common Stock issued in
connection with the Sun Services Acquisition at a purchase price of $12.74 per
share (the "Put Right"), and (iv) the Company received certain call rights
with respect to such shares. The Put Right expires on the third anniversary of
the consummation of the offering. Upon the consummation of this offering, the
call rights and certain of the put rights terminate. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Liquidity and Capital Resources."

In connection with the Mac-Gray Combination, the Company (i) acquired all of
the shares of common stock, $.01 par value per share, of Mac-Gray Co. from
each of Mr. Stewart Gray MacDonald, Jr. ("Mr. S. MacDonald, Jr."), Ms. Sandra
E. MacDonald ("Ms. S. MacDonald"), Mr. Daniel W. MacDonald ("Mr. D.
MacDonald," and collectively, the "MacDonalds") and certain trusts under which
such individuals are beneficiaries in exchange for an aggregate of 5,000,000
shares of Common Stock and (ii) acquired all of the limited partner interests
in the Limited Partnership from each of the MacDonalds in exchange for an
aggregate of 1,367,800 shares of Common Stock. Immediately after the Mac-Gray
Combination, the Company effected the merger of the Limited Partnership with
and into Mac-Gray Co., the Limited Partnership's sole general partner. The
Company and Mac-Gray Co. have assumed the existing liabilities and
indebtedness of the Limited Partnership. Mr. S. MacDonald, Jr. is Chief
Executive Officer and Chairman of the Board of Directors, and each of Mr. S.
MacDonald, Jr., Ms. S. MacDonald and Mr. D. MacDonald own of record and
beneficially greater than five percent of the outstanding shares of Common
Stock.

Pursuant to a Stockholders' Agreement by and among the Company and certain
of its stockholders (the "Second Stockholders' Agreement," and together with
the First Stockholders' Agreement, the "Stockholders' Agreements"), (i) each
of Mr. S. MacDonald, Jr., Ms. S. MacDonald

52
<PAGE>

and Mr. D. MacDonald (and any assignees or trusts created by them or under
which they are beneficiaries) received "piggy-back" and demand registration
rights, (ii) each of the MacDonalds granted to and received from the others
rights of first offer to participate on a pro-rata basis in certain sales by
them of shares of Common Stock and (iii) the MacDonalds granted to the Company
rights of second offer to participate in certain sales by them of shares of
Common Stock.

In 1977, Mac-Gray Co. entered into an arrangement with the Company's co-
founder and then Chief Executive Officer that provided his wife, Ms. Evelyn C.
MacDonald ("Ms. E. MacDonald"), with an annual payment following his death.
The Company, through its subsidiary, Mac-Gray Co., pays Ms. E. MacDonald, the
mother of Stewart Gray MacDonald, Jr., the Company's Chairman and Chief
Executive Officer, a fixed amount of $104,000 per year pursuant to this
arrangement, which is not evidenced by a comprehensive written agreement, and
will continue to make such payments for the remainder of Ms. E. MacDonald's
life. See Note 7 of the Notes to Combined Financial Statements of Mac-Gray
Co., Inc. and Mac-Gray, L.P.

Immediately following the consummation of this offering, the Company will
distribute approximately $9.0 million from the proceeds thereof to its
stockholders of record as of a date immediately prior to the consummation of
this offering. This distribution represents a significant portion of the
Company's and certain of its predecessor's historical, undistributed earnings
through June 30, 1997 which have been previously taxed for federal and state
income tax purposes directly to the existing stockholders of the Company. See
"Termination of S Corporation Status" and "Use of Proceeds."

53
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 1, 1997,
and as adjusted to reflect the sale of the shares of Common Stock offered
hereby, by (i) each person known by the Company to own beneficially five
percent or more of the outstanding shares of the Common Stock, (ii) each
director, the Chief Executive Officer and each of the named executive officers
of the Company, and (iii) all directors and executive officers of the Company
as a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect
to such shares, subject to community property laws where applicable.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
SHARES BENEFICIALLY OWNED
BENEFICIALLY ------------------------------
NAME OF BENEFICIAL OWNERS(1) OWNED(2)(3) BEFORE OFFERING AFTER OFFERING
---------------------------- ------------ --------------- --------------
<S> <C> <C> <C>
Evelyn C. MacDonald(3)(4)......... 1,700,000 24.4% 15.5%
Stewart Gray MacDonald,
Jr.(3)(4)(5)..................... 1,914,600 27.4% 17.4%
Sandra E. MacDonald(3)(4)(6)...... 3,209,250 46.0% 29.2%
Daniel W. MacDonald(3)(4)(7)...... 2,122,600 30.4% 19.3%
Patrick A. Flanagan(3)(4)(8)...... 1,700,000 24.4% 15.5%
Peter C. Bennett(3)(4)(9)......... 1,700,000 24.4% 15.5%
R. Robert Woodburn,
Jr.(3)(4)(10).................... 1,700,000 24.4% 15.5%
Cynthia V. Doggett(3)(11)......... 1,435,000 20.6% 13.1%
Richard G. MacDonald(3)(12)....... 459,750 6.6% 4.2%
Gilbert M. Roddy, Jr.(3)(13)...... 580,000 8.3% 5.3%
Jeffrey C. Huenink................ 612,026 8.8% 5.6%
Jerry A. Schiller................. -- -- *
John P. Leydon.................... -- -- *
Neil F. MacLellan, III(14)........ -- -- *
John S. Olbrych(14)............... -- -- *
All executive officers and
directors as a group (7
persons)......................... 3,659,959 52.4% 33.3%
</TABLE>
- --------
* less than 1%
(1) Unless otherwise indicated, the mailing address for each stockholder and
director is c/o Mac-Gray Corporation, 22 Water Street, Cambridge, MA
02141.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares of
Common Stock beneficially owned by a person, shares of Common Stock
subject to options and warrants held by that person that are currently
exercisable or exercisable within 60 days of this Prospectus are deemed
outstanding. As of September 1, 1997, a total of 6,979,826 shares of
Common Stock were issued and outstanding.
(3) The Company and the stockholders of the Company, including The Evelyn C.
MacDonald Family Trust for the benefit of Stewart G. MacDonald, Jr., The
Evelyn C. MacDonald Family Trust for the benefit of Sandra E. MacDonald,
The Evelyn C. MacDonald Family Trust for the benefit of Daniel W.
MacDonald (each of these sub-trusts under The Evelyn C. MacDonald Family
Trusts is referred to herein as a "Sub-Trust" and collectively as "Sub-
Trusts"), Mr. S. MacDonald, Jr., Ms. S. MacDonald, Mr. D. MacDonald, The
Stewart G. MacDonald, Jr. 1984 Trust (the "SGM Trust"), The Daniel W.
MacDonald Trust 1988 (the "DWM Trust"), the New Century Trust, The
Whitney E. MacDonald GST Trust-1997, The Jonathan S. MacDonald GST Trust-
1997, The Robert C. MacDonald GST Trust-1997, The Whitney E. MacDonald
Gift Trust, The Jonathan S. MacDonald Gift Trust, The Robert C. MacDonald
Gift Trust and Jeffrey C. Huenink are parties to the Stockholders'
Agreement. The First Stockholders' Agreement provides, among other
things, that the parties thereto must vote their respective shares,
subject to certain conditions contained therein, in favor of Mr.
Huenink's election as a director of the Company. See "Certain

54
<PAGE>

Relationships and Related Transactions." In addition, the First
Stockholders' Agreement provides Mr. Huenink with certain rights to put
his shares of Common Stock to the Company. As a result of the First
Stockholders' Agreement, each stockholder may be deemed to beneficially
own all of the issued and outstanding shares of Common Stock, although
such is not reflected in the table of shares beneficially owned. The
Company and each of the Sub Trusts, Mr. S. MacDonald, Jr., Ms. S.
MacDonald, Mr. D. MacDonald, the SGM Trust, the DWM Trust, the New Century
Trust, The Whitney E. MacDonald GST Trust-1997, The Jonathan S. MacDonald
GST Trust-1997, The Robert C. MacDonald GST Trust-1997, The Whitney E.
MacDonald Gift Trust, The Jonathan S. MacDonald Gift Trust, The Robert C.
MacDonald Gift Trust, and Cynthia V. Doggett are parties to a
Stockholders' Agreement dated as of June 26, 1997 (the "Second
Stockholders' Agreement"). The Second Stockholders' Agreement gives the
parties thereto rights of first offer to purchase shares offered for sale
by another stockholder who is a party thereto, as well as providing the
Company with rights of second offer to purchase such shares. As a result
of the Second Stockholders' Agreement, each of the parties thereto may be
deemed to beneficially own all of the issued and outstanding shares of
Common Stock owned by the other parties thereto, although such is not
reflected in the table of shares beneficially owned.
(4) Includes 1,700,000 shares of Common Stock held in trust pursuant to The
Evelyn C. MacDonald Family Trusts (the "ECM Trust"), the grantor of which
is Ms. Evelyn C. MacDonald ("Ms. E. MacDonald"). The independent trustees
(the "Independent Trustees") of the ECM Trust are Peter C. Bennett ("Mr.
Bennett"), R. Robert Woodburn, Jr. ("Mr. Woodburn") and Patrick A.
Flanagan ("Mr. Flanagan"). In addition, each of Mr. S. MacDonald, Jr.,
Ms. S. MacDonald and Mr. D. MacDonald are trustees of the individual Sub-
Trust under the ECM Trust of which such individual is a beneficiary.
566,667 shares of Common Stock held by the ECM Trust are held in a Sub-
Trust for the benefit of Mr. S. MacDonald, 566,667 shares of Common Stock
held by the ECM Trust are held in a Sub-Trust for the benefit of Ms. S.
MacDonald, and 566,667 shares of Common Stock held by the ECM Trust are
held in a Sub-Trust for the benefit of Mr. D. MacDonald. The Independent
Trustees have voting power over the shares held by the ECM Trust and the
Sub-Trusts, and may be deemed to have beneficial ownership of such shares
of Common Stock. Under the ECM Trust, Ms. E. MacDonald has the right to
replace the property held by the ECM Trust, including the shares of
Common Stock, at any time by contributing property of equivalent value to
the ECM Trust. As a result, Ms. E. MacDonald may be deemed to have
beneficial ownership of the shares of Common Stock held by the ECM Trust.
The four trustees of each Sub-Trust (including each of Mr. S. MacDonald,
Jr., Ms. S. MacDonald and Mr. D. MacDonald as to their own respective
Sub-Trust) generally have the shared power to dispose of the shares of
Common Stock attributed to such Sub-Trust and, therefore, may be deemed
to have beneficial ownership of the shares of Common Stock held by such
Sub-Trust.
(5) Includes (i) 655,000 shares of Common Stock held by the SGM Trust, of
which Mr. S. MacDonald, Jr. serves as co-trustee and is sole beneficiary,
(ii) 580,000 shares of Common Stock held by the New Century Trust, of
which Mr. S. MacDonald, Jr. is the grantor, and (iii) 566,667 shares of
Common Stock held by the ECM Trust for the benefit of Mr. S. MacDonald,
Jr., of which Mr. S. MacDonald, Jr. serves as co-trustee and is the
beneficiary. Mr. S. MacDonald, Jr., may replace the shares of Common
Stock held by the New Century Trust at any time with property of
equivalent value and therefore may be deemed to beneficially own all such
shares of Common Stock. Mr. S. MacDonald, Jr. disclaims beneficial
ownership of such shares of Common Stock. The Company has granted Mr. S.
MacDonald, Jr. options to purchase up to 163,570 shares of Common Stock,
none of which are exercisable within 60 days and none of which are
included in shares beneficially owned.
(6) Includes (i) 148,800 shares of Common Stock held by The Whitney E.
MacDonald GST Trust-1997, (ii) 148,800 shares of Common Stock held by The
Jonathan S. MacDonald GST Trust-1997, (iii) 148,800 shares of Common
Stock held by The Robert C. MacDonald GST Trust-1997, (iv) 566,667 shares
held by the ECM Trust for the benefit of Ms. S. MacDonald, of which Ms.
S. MacDonald serves as co-trustee and is the beneficiary, and (v)
1,100,000 shares of Common Stock held by the DWM Trust, of which Ms. S.
MacDonald serves as co-trustee. Richard G. MacDonald ("Mr. R. MacDonald")
is the sole trustee of each of the aforementioned trusts (other

55
<PAGE>

than the ECM Trust and DWM Trust) and may be deemed to beneficially own
all of such shares of Common Stock. The shares held by each of The Whitney
E. MacDonald GST Trust-1997, The Jonathan S. MacDonald GST Trust-1997 and
The Robert C. MacDonald GST Trust-1997 (collectively, the "GST Trusts")
may be replaced at any time by Ms. S. MacDonald, the grantor of such
trusts, with property of equivalent value and, therefore, Ms. S. MacDonald
may be deemed to beneficially own all such shares of Common Stock. Ms. S.
MacDonald disclaims beneficial ownership of the shares of Common Stock
held by the GST Trusts and the 1,100,000 shares of Common Stock held by
the DWM Trust.
(7) Includes (i) 1,100,000 shares of Common Stock held by the DWM Trust, of
which Mr. D. MacDonald is co-trustee and sole beneficiary, and (ii)
566,667 shares of Common Stock held by the ECM Trust for the benefit of
Daniel W. MacDonald, of which Mr. D. MacDonald serves as co-trustee and
is the beneficiary.
(8) Includes 1,700,000 shares of Common Stock in the aggregate held by the
ECM Trust for which Mr. Flanagan serves as co-trustee and shares voting
and dispositive power over the shares of Common Stock. Mr. Flanagan
disclaims beneficial ownership of the shares of Common Stock held by the
ECM Trust. The Company has granted Mr. Flanagan options to purchase up to
81,785 shares of Common Stock, none of which are exercisable within 60
days and none of which are included in shares of Common Stock
beneficially owned.
(9) Includes 1,700,000 shares of Common Stock held by the ECM Trust for which
Mr. Bennett serves as co-trustee and shares voting and dispositive power
over the shares of Common Stock. Mr. Bennett disclaims beneficial
ownership of the shares of Common Stock held by the ECM Trust. Mr.
Bennett's mailing address is c/o State Street Research & Management
Company, One Financial Center, 31st Floor, Boston, MA 02110.
(10) Includes 1,700,000 shares of Common Stock held by the ECM Trust for which
Mr. Woodburn serves as co-trustee and shares voting and dispositive power
over the shares of Common Stock. Mr. Woodburn disclaims beneficial
ownership of the shares of Common Stock held by the ECM Trust. Mr.
Woodburn's mailing address is c/o Palmer & Dodge, One Beacon Street,
Boston, Massachusetts 02108.
(11) Includes (i) 655,000 shares of Common Stock held by the SGM Trust, of
which Ms. Doggett serves as co-trustee, and (ii) 580,000 shares of Common
Stock held by the New Century Trust, of which Ms. Doggett serves as co-
trustee. The shares of Common Stock held in the New Century Trust may be
replaced at any time by the grantor, Mr. S. MacDonald, Jr., with property
of equivalent value. The SGM Trust is revocable by the grantor, Mr. S.
MacDonald, Jr. Ms. Doggett disclaims beneficial ownership of all of
shares of Common Stock held by such trusts.
(12) Includes (i) 148,800 shares of Common Stock held by The Whitney E.
MacDonald GST Trust-1997, (ii) 148,800 shares of Common Stock held by The
Jonathan S. MacDonald GST Trust-1997, (iii) 148,800 of Common Stock
shares held by The Robert C. MacDonald GST Trust-1997, (iv) 4,450 shares
of Common Stock held by The Whitney E. MacDonald Gift Trust, (v) 4,450
shares of Common Stock held by The Jonathan S. MacDonald Gift Trust, and
(vi) 4,450 shares of Common Stock held by The Robert C. MacDonald Gift
Trust. Mr. R. MacDonald is the sole trustee of each of the aforementioned
trusts and may be deemed to beneficially own all such shares of Common
Stock. The 459,700 shares of Common Stock held by the GST Trusts may be
replaced at any time by Ms. S. MacDonald, the grantor, with property of
equivalent value, all 459,700 shares of Common Stock of which Mr. R.
MacDonald disclaims beneficial ownership.
(13) Includes 580,000 shares of Common Stock held by the New Century Trust, of
which Mr. Roddy serves as co-trustee. The shares of Common Stock held by
the New Century Trust may be replaced at any time by Mr. S. MacDonald,
Jr., the grantor, with property of equivalent value, of which all 580,000
shares of Common Stock Mr. Roddy disclaims beneficial ownership. Mr.
Roddy's mailing address is c/o Loring, Wolcott & Coolidge, 230 Congress
Street, Boston, Massachusetts 02110.
(14) The Company has granted to each of Messrs. MacLellan and Olbrych options
to purchase up to 89,980 shares of Common Stock, none of which are
exercisable within 60 days and none of which are included in shares of
Common Stock beneficially owned.

56
<PAGE>

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED AND OUTSTANDING CAPITAL STOCK

The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $.01 par value per share, and 5,000,000 shares of undesignated
preferred stock issuable in series by the Board of Directors ("Preferred
Stock"). As of September 1, 1997, there were 6,979,826 shares of Common Stock
(including 612,026 shares of redeemable Common Stock) outstanding that were
held of record by 17 stockholders. There will be 10,979,826 shares of Common
Stock outstanding after giving effect to the 4,000,000 shares of Common Stock
offered to the public hereby (assuming no exercise of the Underwriters' over-
allotment option and no exercise of outstanding options). The following
summary description of the capital stock of the Company does not purport to be
complete and is qualified in its entirety by reference to the Company's
Amended and Restated Certificate of Incorporation (the "Certificate") and By-
laws (the "By-laws"), copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part. The Certificate and
By-laws have been adopted by the stockholders of the Company and the Board of
Directors.

Common Stock. The holders of Common Stock are entitled to one vote per share
on all matters to be voted on by stockholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. See "Dividend Policy." The
possible issuance of Preferred Stock with a preference over Common Stock as to
dividends could impact the dividend rights of holders of Common Stock. Holders
of Common Stock are not entitled to cumulative voting rights. Therefore, the
holders of a majority of the shares voted in the election of directors can
elect all of the directors then standing for election, subject to the rights
of the holders of any then outstanding Preferred Stock, if and when issued.
The holders of Common Stock have no preemptive or other subscription rights,
and there are no conversion rights or redemption or sinking fund provisions
with respect to the Common Stock. Upon the voluntary or involuntary
liquidation, dissolution or winding up of the Company, the net assets of the
Company shall be distributed pro rata to the holders of the Common Stock in
accordance with their respective rights and interests, subject to the rights
and interests of the holders of Preferred Stock, if and when issued. All
outstanding shares of Common Stock, including the shares offered hereby, are,
or will be upon consummation of this offering, fully paid and non-assessable.

The Certificate and By-laws provide, subject to the rights of the holders of
any Preferred Stock then outstanding, that the number of directors shall be
fixed by the Board of Directors. The directors, other than those who may be
elected by the holders of any Preferred Stock, are divided into three classes,
as nearly equal in number as possible, with each class serving for a three-
year term. Subject to any rights of the holders of Preferred Stock to elect
directors and to remove any director whom the holders of any such stock had
the right to elect, any director of the Company may be removed from office
only with cause and by the affirmative vote of at least two-thirds of the
total votes which would be eligible to be cast by stockholders in the election
of such director.

Undesignated Preferred Stock. The Board of Directors is authorized, without
further action of the stockholders of the Company, to issue up to 5,000,000
shares of Preferred Stock in classes or series and to fix the designations,
powers, preferences and the relative, participating, optional or other special
rights of the shares of each series and any qualifications, limitations and
restrictions thereon as set forth in the Certificate. Any such Preferred Stock
issued by the Company may rank prior to the Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting rights
and may be convertible into shares of Common Stock.

The purpose of authorizing the Board of Directors to issue Preferred Stock
is, in part, to eliminate delays associated with a stockholder vote on
specific issuances. The issuance of Preferred Stock

57
<PAGE>

could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring or seeking to
acquire, a significant portion of the outstanding Common Stock.

CERTAIN PROVISIONS OF CERTIFICATE AND BY-LAWS

General. A number of provisions of the Company's Certificate and By-laws
concern matters of corporate governance and the rights of stockholders.
Certain of these provisions, as well as the ability of the Board of Directors
to issue shares of Preferred Stock and to set the voting rights, preferences
and other terms thereof, may be deemed to have an anti-takeover effect and may
discourage takeover attempts not first approved by the Board of Directors,
including takeovers which certain stockholders may deem to be in their best
interests. To the extent takeover attempts are discouraged, temporary
fluctuations in the market price of the Company's Common Stock, which may
result from actual or rumored takeover attempts, may be inhibited. These
provisions, together with the classified Board of Directors and the ability of
the Board of Directors to issue Preferred Stock without further stockholder
action, also could delay or frustrate the removal of incumbent directors or
the assumption of control by stockholders, even if such removal or assumption
would be beneficial to stockholders of the Company. These provisions also
could discourage or make more difficult a merger, tender offer or proxy
contest, even if a transaction or contest could be favorable to the interests
of stockholders, and could potentially depress the market price of the Common
Stock. The Board of Directors believes that these provisions are appropriate
to protect the interests of the Company and all of its stockholders. The Board
of Directors has no present plans to adopt any other measures or devices which
may be deemed to have an "anti-takeover effect."

Meetings of Stockholders. The Company's By-laws provide that a special
meeting of stockholders may be called only by the Board of Directors unless
otherwise required by law. The Company's By-laws provide that only those
matters set forth in the notice of the special meeting may be considered or
acted upon at that special meeting, unless otherwise provided by law. In
addition, the Company's By-laws set forth certain other requirements, such as
advance notice and informational requirements and time limitations on any
director nomination or any new business which a stockholder wishes to propose
for consideration at an annual meeting of stockholders.

No Stockholder Action by Written Consent. The Certificate provides that for
so long as the Company has a class of stock registered pursuant to the
provisions of the Securities Exchange Act of 1934, as amended, any action
required or permitted to be taken by the stockholders of the Company at an
annual or special meeting of stockholders must be effected at a duly called
meeting and may not be taken or effected by a written consent of stockholders
in lieu thereof.

Indemnification and Limitation of Liability. The By-laws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company, and further permits
the advancing of expenses incurred in defense of claims. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contractual right and shall not be exclusive of any other right now possessed
or hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. The Certificate contains a provision permitted by Delaware law that
generally eliminates the personal liability of directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence
or gross negligence in business combinations, unless the director has breached
his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation
Law or obtained an improper personal benefit. This provision does not alter a
director's liability under the

58
<PAGE>

federal securities laws. In addition, this provision does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty.

Amendment of the Certificate. The Certificate provides that an amendment
thereof must first be approved by a majority of the Board of Directors and
(with certain exceptions) thereafter approved by the holders of a majority of
the outstanding shares entitled to vote on such amendment, and the affirmative
vote of a majority of the outstanding shares of each class entitled to vote
thereon as a class; provided, however, that the affirmative vote of not less
than 80% of the outstanding shares entitled to vote on such amendment, and the
affirmative vote of not less than 80% of the outstanding shares of each class
entitled to vote thereon as a class, is required to amend provisions of the
Certificate relating to the prohibition of stockholder action by written
consent, the establishment, composition and powers of the Board of Directors,
the limitation of director liability and amendments to the Certificate.

Amendment of By-laws. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority
of the directors then in office. Such action by the stockholders requires the
affirmative vote of the holders of at least three-fourths of the total votes
present and eligible to be cast by holders of voting stock voting as a single
class with respect to such amendment or repeal at an annual meeting of
stockholders or a special meeting called for such purpose, unless the Board of
Directors recommends that the stockholders approve such amendment or repeal at
such meeting, in which case such amendment or repeal shall only require the
affirmative vote of a majority of the total votes present and eligible to be
cast by holders of voting stock voting as a single class with respect to such
amendment or repeal.

Ability to Adopt Stockholder Rights Plan. The Board of Directors may in the
future resolve to issue shares of Preferred Stock or rights to acquire such
shares, to implement a stockholder rights plan which creates voting or other
impediments or under which shares are distributed to a third-party investor, a
group of investors or stockholders or issued to an employee stock ownership
plan to discourage persons seeking to gain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, if such change in control
is not in the best interests of the Company and its stockholders. The Board of
Directors has no present intention of adopting a stockholder rights plan and
is not aware of any attempt to obtain control of the Company.

STATUTORY BUSINESS COMBINATION PROVISION

Upon completion of this offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations
with a person, or an affiliate or associate of such person, who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting
in a person becoming an interested stockholder, or the business combination,
is approved by the board of directors of the corporation before the person
becomes an interested stockholder; (ii) the interested stockholder acquired
85% or more of the outstanding voting stock of the corporation in the same
transaction that makes it an interested stockholder (excluding shares owned by
persons who are both officers and directors of the corporation, and shares
held by certain employee stock ownership plans); or (iii) on or after the date
the person becomes an interested stockholder, the business combination is
approved by the corporation's board of directors and by the holders of at
least 66 2/3% of the corporation's outstanding voting stock at an annual or
special meeting, excluding shares owned by the interested stockholder. Under
Section 203, an "interested stockholder" is defined (with certain limited
exceptions) as any person that is (i) the owner of 15% or more of the
outstanding voting stock of the corporation or (ii) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately

59
<PAGE>

prior to the date on which it is sought to be determined whether such person
is an interested stockholder.

A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage; provided, however, that
such by-law or charter amendment shall not become effective until 12 months
after the date the stockholders adopt such exclusion. Neither the Certificate
nor the By-laws contains any such exclusion.

TRANSFER AGENT AND REGISTRAR

State Street Bank and Trust Company is the transfer agent and registrar for
the Company's Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 10,979,826 shares of
Common Stock outstanding (assuming the Underwriters' over-allotment option is
not exercised), excluding (i) 638,340 shares issuable upon exercise of options
to purchase shares of Common Stock outstanding at August 1, 1997 under the
1997 Stock Plan, and (ii) 111,660 shares of Common Stock reserved for issuance
upon grant or exercise of future awards under the 1997 Stock Plan, subject to
increase upon consummation of this offering. Of the total shares outstanding,
only the 4,000,000 shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act, except
for any shares purchased by affiliates of the Company, which will be subject
to the limitations of Rule 144 under the Securities Act ("Rule 144"). All of
the remaining 6,979,826 shares outstanding (the "Restricted Shares") may be
sold only pursuant to an effective Registration Statement filed by the Company
or an applicable exemption, including sales meeting the applicable
requirements of Rule 144 under the Securities Act.

None of the 6,979,826 shares of Common Stock owned by current stockholders
of the Company will be eligible for sale in accordance with Rule 144 prior to
April 17, 1998, at which such time all 6,979,826 shares of Common Stock will
be eligible for sale in the public market.

In general, Rule 144 as currently in effect provides that any person (or
persons whose shares are aggregated), including a person who may be deemed an
"affiliate" of the Company (as defined under the Securities Act), whose
Restricted Shares have been fully paid for and held for at least one year from
the later of the date of issuance by the Company or acquisition from an
affiliate of the Company, is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of (i) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding
the date on which notice of such sale is filed on Form 144 with the Securities
and Exchange Commission (the "Commission") and (ii) 1% of the shares of Common
Stock then outstanding (approximately 109,798 shares upon consummation of this
offering). In addition, sales under Rule 144 are subject to certain other
restrictions regarding the manner of sale, required notice and availability of
public information concerning the Company. Persons who are not affiliates at
the time of sale and who have not been affiliates of the Company for at least
90 days prior to a sale, and who have beneficially owned the shares proposed
to be sold for at least two years (including the holding period of any prior
owner other than an affiliate), are entitled to sell such shares under Rule
144(k) without the limitations referenced above. Affiliates, including members
of the Board of Directors and senior management, continue to be subject to the
limitations under Rule 144, including volume of sale limitations for all
shares held by them, regardless of the time period held. Shares of Common
Stock sold by the Company to, among others, its employees, officers and
directors upon exercise of options granted pursuant to written compensation
plans or contracts (including certain options granted under the 1997 Stock
Plan), and in reliance on Rule 701 under the Securities Act, may be resold,
beginning 90 days

60
<PAGE>

after the effective date of this Prospectus, in reliance on Rule 144 by such
persons who are not affiliates subject only to the provisions of Rule 144
regarding manner of sale, and by such persons who are affiliates subject to
all provisions of Rule 144 except its one-year minimum holding period
requirement.

Under the 1997 Stock Plan, the Company is authorized to issue options for up
to the greater of 750,000 shares of Common Stock or ten percent of the then
outstanding shares of Common Stock, of which 638,340 shares were issuable upon
the exercise of outstanding stock options. Upon consummation of this offering,
1,097,982 shares of Common Stock will be reserved for issuance under the 1997
Stock Plan (1,157,982 shares of Common Stock will be reserved for issuance
under the 1997 Stock Plan if the Underwriters' over-allotment option is
exercised in full). See "Management--1997 Stock Option and Incentive Plan" and
"--Executive Compensation--Option Grants." The Company intends to file a
Registration Statement under the Securities Act to register the shares of
Common Stock reserved for issuance under the 1997 Stock Plan. Such
Registration Statement is expected to be filed as soon as practicable after
the date of this Prospectus and will become automatically effective upon
filing. Shares of Common Stock issued upon the exercise of options under the
1997 Stock Plan after the effective date of such Registration Statement
generally will be available for sale in the open market, subject to Rule 144
limitations with respect to affiliates, and subject to the lock-up agreements
described below.

LOCK-UP AGREEMENTS

All stockholders of the Company, including the directors and officers,
holding in the aggregate 6,979,826 of the shares of Common Stock (after giving
effect to this offering), have agreed that they will not, without the prior
written consent of the Representatives of the Underwriters, agree to sell,
contract to sell or otherwise dispose of any shares of Common Stock of the
Company for a period of 180 days after the date of this Prospectus. In
addition, the Company has agreed that, without the prior written consent of
Salomon Brothers Inc, the Company will not, directly or indirectly, sell,
offer, contract to sell or otherwise dispose of any shares of Common Stock for
a period of 180 days after the date of this Prospectus, except that the
Company may grant stock options under the 1997 Stock Plan or issue shares upon
the exercise of options granted under the 1997 Stock Plan.

REGISTRATION RIGHTS

The holders of 6,979,826 shares of Common Stock, representing all of the
shares of Common Stock outstanding prior to this offering, have the right, in
certain circumstances, to require the Company to register their shares under
the Securities Act for resale to the public and to include their shares in a
registration statement filed by the Company, all under the terms of the
Stockholders' Agreements. See "Certain Relationships and Related
Transactions."

EFFECT OF FUTURE SALES

Prior to this offering, there has been no trading market for shares of
Common Stock, and the effect, if any, that future market sales of shares or
the availability of shares for sale will have on the prevailing market prices
for the Common Stock cannot be predicted. Nevertheless, sales of a substantial
number of shares in the public market, or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock
and could impair the Company's future ability to raise capital through an
offering of its equity securities. See "Risk Factors--Shares Eligible for
Future Sale."

61
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in an Underwriting Agreement
by and among the Company and the Underwriters, the Company has agreed to sell
to each of the entities named below (the "Underwriters") and each of the
Underwriters, for whom Salomon Brothers Inc, Smith Barney Inc. and First
Albany Corporation are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company the number of shares of Common
Stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Salomon Brothers Inc............................................... 1,420,000
Smith Barney Inc. ................................................ 1,420,000
First Albany Corporation........................................... 510,000
Lazard Freres & Co. LLC............................................ 150,000
Lehman Brothers Inc. .............................................. 150,000
PaineWebber Incorporated........................................... 150,000
Raymond James & Associates, Inc. .................................. 100,000
Tucker Anthony Incorporated........................................ 100,000
---------
Total............................................................ 4,000,000
=========
</TABLE>

In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares
of Common Stock offered hereby (other than those covered by the Underwriters'
over-allotment option described below) if any shares of Common Stock are
purchased. In the event of a default by any Underwriter, the Underwriting
Agreement provides that, in certain circumstances, purchase commitments of the
non-defaulting Underwriters may be increased or the Underwriting Agreement may
be terminated.

The Company has been advised by the Representatives that the several
Underwriters propose initially to offer the shares of Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $0.46 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per share to other dealers. After
the initial offering, the public offering price and such concessions may be
changed.

The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to 600,000 additional
shares of Common Stock, at the same price per share as the initial shares of
Common Stock to be purchased by the Underwriters. The Underwriters may
exercise the option only to cover over-allotments, if any, in the sale of the
shares of Common Stock that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each Underwriter will have
a firm commitment, subject to certain conditions, to purchase a number of
option shares proportionate to such Underwriter's initial commitment.

The Company, its officers and directors, and certain beneficial owners of
the Common Stock have agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any security convertible into or
exchangeable for Common Stock for a period of 180 days from the date of this
Prospectus, without the prior written consent of Salomon Brothers Inc;
provided, however, that the Company may issue and sell Common Stock pursuant
to any employee stock option or stock option or purchase plan in effect at the
date of this Prospectus and the Company may issue Common Stock issuable upon
the conversion of securities outstanding on the date of this Prospectus.
Salomon Brothers Inc, in its sole discretion, may release any of the shares
subject to the foregoing agreement at any time without notice.

62
<PAGE>

The Underwriting Agreement provides that the Company and its three operating
subsidiaries will indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act or contribute to
payments the Underwriters may be required to make in respect thereof.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase shares of Common
Stock. As an exception to these rules, the Representatives are permitted to
engage in certain transactions that stabilize the price of the Common Stock.
Such transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.

In addition, if the Representatives over-allot (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this
Prospectus), and thereby create a short position in the Common Stock in
connection with this offering, the Representatives may reduce that short
position by purchasing Common Stock in the open market. The Representatives
also may elect to reduce any short position by exercising all or part of the
over-allotment option described herein.

The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering.

In general, purchases of a security for the purpose of stabilization to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this offering.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

Prior to this offering there has been no public market for the Common Stock.
The price to the public for the shares of Common Stock has been determined
through negotiations between the Company and the Representatives and is based
on, among other things, the Company's financial and operating history and
condition, the prospects of the Company and its industry in general, the
management of the Company and the market prices of securities of companies
engaged in businesses similar to those of the Company. There can, however, be
no assurance that the prices at which the shares of Common Stock will sell in
the public market after this offering will not be lower than the price at
which it is sold by the Underwriters.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Certain legal
matters will be passed upon for the Underwriters by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.

63
<PAGE>

EXPERTS

The combined financial statements of the Company as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
the combined financial statements of the Company for the two-month period
ended February 28, 1997 and the combined financial statements of Sun Services
of America, Inc. and R. Bodden Coin-Op-Laundry, Inc. as of and for the year
ended December 31, 1996 included in this Prospectus have been so included in
reliance of the report of Price Watherhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-1 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended, with respect to the Common Stock being
offered by this Prospectus. This Prospectus, does not contain all of the
information set forth in the Registration Statement certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information about the Company and the securities offered by this
Prospectus, reference is made to the Registration Statement. Statements
contained in this Prospectus about the contents of any contract or any other
documents are not necessarily complete, and in each instance reference is made
to the copy of the contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected by
anyone without charge and may be obtained at prescribed rates at the
Commission at the Public Reference Section of the Commission, maintained by
the Commission at its principal office located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, the New York Regional Office located at Seven World
Trade Center, New York, New York 10048, and the Chicago Regional Office
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and are also publicly available through the Commission's web
site (http://www.sec.gov).

Upon completion of this offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. The Company intends to furnish its
stockholders with annual reports containing audited financial statements
certified by its independent auditors and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.

64
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
MAC-GRAY CO., INC. AND MAC-GRAY L.P.
Report of Independent Accountants........................................ F-2
Combined Balance Sheet as of December 31, 1995 and 1996 and June 30, 1997
(unaudited)............................................................. F-3
Combined Statement of Income for the Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended June 30, 1996 and 1997 (unaudited).... F-4
Combined Statement of Stockholders' Equity for the Years Ended December
31, 1994, 1995 and 1996 and for the Six Months Ended June 30, 1997
(unaudited)............................................................. F-5
Combined Statement of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996 and for the Six Months Ended June 30, 1996 and 1997
(unaudited)............................................................. F-6
Notes to Combined Financial Statements................................... F-7

Report of Independent Accountants........................................ F-19
Combined Statement of Income for the Two Months Ended February 28, 1997.. F-20
Notes to Combined Financial Statements................................... F-21

SUN SERVICES OF AMERICA, INC. AND R. BODDEN COIN-OP-LAUNDRY, INC.
Report of Independent Accountants........................................ F-27
Combined Balance Sheet as of December 31, 1996 and March 31, 1997
(unaudited)............................................................. F-28
Combined Statement of Income for the Year Ended December 31, 1996 and for
the Three Months Ended March 31, 1996 and 1997 (unaudited).............. F-29
Combined Statement of Stockholder's Equity for the Year Ended December
31, 1996 and the Three Months Ended March 31, 1997 (unaudited).......... F-30
Combined Statement of Cash Flows for the Year Ended December 31, 1996 and
for the Three Months Ended March 31, 1996 and 1997 (unaudited).......... F-31
Notes to Combined Financial Statements................................... F-32
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Mac-Gray Co., Inc.
and the Partners of Mac-Gray, L.P.

In our opinion, the accompanying combined balance sheet and the related
combined statements of income, of changes in stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of Mac-
Gray Co., Inc. and Mac-Gray, L.P. (the "Companies"), at December 31, 1996 and
1995, and the combined results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Companies' management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Boston, Massachusetts
February 28, 1997

F-2
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
DECEMBER 31, JUNE 30,
---------------- JUNE 30, 1997
1995 1996 1997 (NOTE 15)
------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 3,882 $ 2,844 $ 2,660 $ 2,660
Trade receivables, net of allowance
for doubtful accounts................ 1,063 1,640 1,741 1,741
Available-for-sale security........... 377 343 343 343
Inventory............................. 1,187 1,509 1,649 1,649
Prepaid expenses and other current
assets............................... 1,287 1,699 2,256 2,256
------- ------- ------- -------
Total current assets................ 7,796 8,035 8,649 8,649
Property, plant and equipment, net.... 25,804 31,912 34,036 34,036
Intangible assets, net................ 904 11,491 22,297 22,297
Prepaid commissions and other assets.. 2,250 2,670 3,989 3,989
------- ------- ------- -------
Total assets........................ $36,754 $54,108 $68,971 $68,971
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt..... $ 3,027 $ 4,042 $ 2,370 $ 2,370
Current portion of capital lease
obligations.......................... 238 251 344 344
Accounts payable...................... 1,893 3,876 2,048 2,048
Accrued commissions................... 3,994 4,940 4,656 4,656
Accrued expenses...................... 881 995 1,454 1,454
Dividends payable..................... -- -- -- 9,000
------- ------- ------- -------
Total current liabilities........... 10,033 14,104 10,872 19,872
Long-term debt.......................... 11,843 23,325 32,902 32,902
Long-term capital lease obligations..... 179 193 414 414
Deferred income tax liabilities......... 589 647 740 5,040
Deferred retirement obligation.......... 1,260 1,156 1,104 1,104
Other liabilities....................... -- -- 600 600
Commitments and contingencies (Note
11).................................... -- -- -- --
Redeemable common stock, 612,026
shares................................. -- -- 7,797 7,797
Stockholders' equity:
Common stock of Mac-Gray Co., Inc. ($1
par value; 200,000 shares authorized,
154,275 shares issued and 102,275 and
100,000 outstanding, respectively)... 154 154 -- --
Additional capital.................... 1,009 2,413 -- 920
Common stock of Mac-Gray Corporation
($.01 par value; 30,000,000 shares
authorized, 6,367,800 shares issued
and outstanding)..................... -- -- 64 64
Retained earnings..................... 19,781 20,788 14,220 --
Net unrealized gain on available-for-
sale security, net of tax............ 290 258 258 258
------- ------- ------- -------
Less: 52,000 and 54,275 shares held in
treasury, respectively, at cost...... (8,384) (8,930) -- --
------- ------- ------- -------
Total stockholders' equity.......... 12,850 14,683 14,542 1,242
------- ------- ------- -------
Total liabilities and stockholders'
equity................................. $36,754 $54,108 $68,971 $68,971
======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements

F-3
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY L.P.

COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ---------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................... $48,031 $50,710 $ 64,427 $29,025 $ 38,288
Cost of revenue:
Commissions............. 19,168 20,471 25,760 11,622 14,639
Laundry route expendi-
tures.................. 7,889 8,251 10,955 4,600 6,231
Depreciation and amorti-
zation................. 4,756 4,899 6,216 2,715 3,776
Cost of equipment
sales.................. 2,673 2,938 5,189 2,280 3,831
------- ------- ---------- ------- ----------
Total cost of reve-
nue.................. 34,486 36,559 48,120 21,217 28,477
------- ------- ---------- ------- ----------
Operating expenses:
General and administra-
tion................... 3,085 3,901 3,952 1,874 2,076
Sales and marketing..... 2,501 2,531 3,803 1,541 2,697
Depreciation............ 442 455 517 242 382
------- ------- ---------- ------- ----------
Total operating ex-
penses............... 6,028 6,887 8,272 3,657 5,155
------- ------- ---------- ------- ----------
Income from operations.... 7,517 7,264 8,035 4,151 4,656
Interest expense........ (1,217) (1,175) (1,956) (751) (1,431)
Other income (expense),
net.................... 70 55 (87) 1 39
------- ------- ---------- ------- ----------
Income before provision
for income taxes....... 6,370 6,144 5,992 3,401 3,264
Provision for income
taxes.................. (388) (374) (465) (255) (232)
------- ------- ---------- ------- ----------
Net income................ $ 5,982 $ 5,770 $ 5,527 $ 3,146 $ 3,032
======= ======= ========== ======= ==========
UNAUDITED PRO FORMA AS ADJUSTED
DATA (NOTE 15):
Income before provision
for income taxes....... $ 6,370 $ 6,144 $ 5,992 $ 3,401 $ 3,264
Provision for income
taxes.................. (2,548) (2,458) (2,397) (1,360) (1,306)
------- ------- ---------- ------- ----------
Pro forma as adjusted
net income............. $ 3,822 $ 3,686 $ 3,595 $ 2,041 $ 1,958
======= ======= ========== ======= ==========
Pro forma as adjusted
net income per
common share........... $ 0.55 $ 0.30
========== ==========
Pro forma as adjusted
weighted average
common shares outstand-
ing.................... 6,588,618 6,588,618
========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements

F-4
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK NET UNREALIZED TREASURY STOCK
---------------- GAINS (LOSSES) -----------------
NUMBER OF PARTNERS' RETAINED ON SECURITY, NUMBER OF
SHARES VALUE CAPITAL EARNINGS NET OF TAX SHARES VALUE TOTAL
--------- ----- --------- -------- -------------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 154,275 $ 154 $ -- $14,629 $ 383 52,000 $(8,384) $6,782
Net income............. -- -- -- 5,982 -- -- -- 5,982
Net change in
unrealized gains
(losses) on available-
for-sale security, net
of tax................ -- -- -- -- (121) -- -- (121)
Dividends.............. -- -- -- (3,205) -- -- -- (3,205)
--------- ----- ------- ------- ----- ------- ------- -------
Balance, December 31,
1994................... 154,275 154 -- 17,406 262 52,000 (8,384) 9,438
Net income............. -- -- -- 5,770 -- -- -- 5,770
Net change in
unrealized gains
(losses) on available-
for-sale security, net
of tax................ -- -- -- -- 28 -- -- 28
Dividends.............. -- -- -- (3,395) -- -- -- (3,395)
Contribution of
capital............... -- -- 1,009 -- -- -- -- 1,009
--------- ----- ------- ------- ----- ------- ------- -------
Balance, December 31,
1995................... 154,275 154 1,009 19,781 290 52,000 (8,384) 12,850
Net income............. -- -- -- 5,527 -- -- -- 5,527
Net change in
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ -- -- -- -- (32) -- -- (32)
Dividends.............. -- -- -- (4,520) -- -- -- (4,520)
Common stock
redemption............ -- -- -- -- -- 2,275 (546) (546)
Contribution of
capital............... -- -- 1,404 -- -- -- -- 1,404
--------- ----- ------- ------- ----- ------- ------- -------
Balance, December 31,
1996................... 154,275 154 2,413 20,788 258 54,275 (8,930) 14,683
Net income
(unaudited)........... -- -- -- 3,032 -- -- -- 3,032
Elimination of capital
structure (Note 13)
(unaudited)........... (154,275) (154) (2,413) (6,363) -- (54,275) 8,930 --
Reorganization of the
Company (Note 13)
(unaudited)........... 6,367,800 64 -- (64) -- -- -- --
Net change in
unrealized gains
(losses) on available-
for-sale securities,
net of tax
(unaudited)........... -- -- -- -- -- -- -- --
Dividends (unaudited).. -- -- -- (3,173) -- -- -- (3,173)
--------- ----- ------- ------- ----- ------- ------- -------
Balance, June 30, 1997
(unaudited)............ 6,367,800 $ 64 $ -- $14,220 $258 -- $ -- $14,542
========= ===== ======= ======= ===== ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements

F-5
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING AC-
TIVITIES:
Net income................... $ 5,982 $ 5,770 $ 5,527 $ 3,146 $ 3,032
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization.............. 5,198 5,354 6,733 2,957 4,158
(Gain) loss on sale of
assets.................... 14 (11) 43 42 --
Deferred income taxes...... 72 71 60 -- 93
(Increase) decrease in
accounts receivable......... (545) 69 (577) (185) (57)
(Increase) decrease in
inventory................... (125) (137) 224 385 170
Increase in prepaid expenses
and other assets............ (650) (1,386) (1,299) (880) (1,291)
Increase (decrease) in
accounts payable, accrued
commissions and accrued
expenses.................... 704 687 2,939 217 (2,559)
------- ------- -------- -------- --------
Net cash flows provided
by operating
activities.............. 10,650 10,417 13,650 5,682 3,546
------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures......... (5,679) (4,421) (7,635) (2,986) (2,998)
Acquisition of businesses
(Note 2).................... -- (821) (14,487) (12,869) (4,958)
Proceeds from sales of
property and equipment...... 66 137 52 52 --
------- ------- -------- -------- --------
Net cash flows used in
investing activities.... (5,613) (5,105) (22,070) (15,803) (7,956)
------- ------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on long-
term debt and capital lease
obligations................. (2,207) (2,490) (2,171) (4,891) (1,185)
Principal payments on
deferred retirement
obligations................. -- -- -- -- (44)
Retirement of line of credit
and term loan............... -- -- (5,378) -- (18,646)
Advances on line-of-credit,
net......................... -- 1,327 18,247 15,730 27,274
Contribution of capital...... -- 1,009 1,404 294 --
Cash dividends paid.......... (3,921) (3,395) (4,520) (2,237) (3,173)
Cash paid to repurchase
shares of common stock...... -- -- (125) (125) --
Cash paid for refinancing of
long term debt.............. -- -- (75) (75) --
------- ------- -------- -------- --------
Net cash flows provided
by (used in) financing
activities.............. (6,128) (3,549) 7,382 8,696 4,226
------- ------- -------- -------- --------
Increase (decrease) in cash and
cash equivalents.............. (1,091) 1,763 (1,038) (1,425) (184)
Cash and cash equivalents,
beginning of year............. 3,210 2,119 3,882 3,882 2,844
------- ------- -------- -------- --------
Cash and cash equivalents, end
of year....................... $ 2,119 $ 3,882 $ 2,844 $ 2,457 $ 2,660
======= ======= ======== ======== ========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid................ $ 1,125 $ 1,161 $ 1,944 $ 603 $ 1,251
Income taxes paid............ 170 242 384 268 153
</TABLE>

The accompanying notes are an integral part of these financial statements

F-6
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS

Basis of Presentation--The combined financial statements include the
accounts of Mac-Gray Co., Inc. and Mac-Gray, L.P., (collectively, the
Company). Mac-Gray Co., Inc. is the sole general partner of Mac-Gray, L.P.
which was formed in August of 1995. Mac-Gray Co., Inc. and Mac-Gray, L.P. are
both 100% owned by the same shareholders and are under common management.

Unaudited Interim Financial Statements--The accompanying financial
information as of June 30, 1997 and for the six month periods ended June 30,
1996 and 1997 is unaudited. The unaudited interim financial information as of
and for the six month period ended June 30, 1997 is reflective of the
reorganization of the Company (Note 13) and the acquisition of Sun Services of
America, Inc. and R. Bodden Coin-Op-Laundry, Inc. (Note 13), both of which
occurred on April 17, 1997. Accordingly, the unaudited interim financial
information as of and for the six month period ended June 30, 1997 has been
presented on a consolidated basis. The unaudited interim financial information
as of and for the six month period ended June 30, 1996 has been prepared on
the same basis as the accompanying annual financial statements. In the opinion
of management, such interim financial information reflects adjustments
consisting of normal and recurring adjustments necessary for a fair
presentation of such financial information. The unaudited results of
operations for the interim periods ended June 30, 1996 and 1997 are not
necessarily indicative of the results of operations to be expected for any
other interim period or for the full year.

Principles of Combined Financial Statements--The combined financial
statements include the accounts of the Company, including the 1995 and 1996
Acquisitions (Note 2) from the respective acquisition dates. All significant
intercompany transactions and balances have been eliminated in combination.

Description of the Business--The Company generates the majority of its
revenue from card and coin route laundry rooms located in the Northeastern,
Midwestern and Southeastern United States. The Company's principal customer
base is the multi-housing market, which consists of apartments, condominium
units, colleges and universities. The Company also sells, services and leases
commercial laundry equipment to commercial laundromats and institutions. The
majority of the Company's purchases of coin route laundry equipment is from
one supplier.

2. ACQUISITIONS

Acquisitions--On August 31, 1995, the Company acquired certain assets of
Commercial Appliance, Inc. (the 1995 Acquisition). During 1996, the Company
acquired certain assets of six coin-operated laundry businesses or divisions
(the 1996 Acquisitions). The 1995 and 1996 Acquisitions were paid in cash,
with one exception, which also included a note payable of $1,074. The 1995 and
1996 Acquisitions were accounted for using the purchase method of accounting.
Accordingly, the purchase price assigned to the assets acquired was the fair
market values on the respective acquisitions dates. Purchase price in excess
of the fair value of assets acquired was allocated to goodwill. The Company's
combined financial statements include the results of the 1995 and 1996
Acquisitions from their respective acquisition dates. The purchase price
allocations for the 1995 and 1996 Acquisitions are summarized as follows:

F-7
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
1995 1996
ACQUISITION ACQUISITIONS
----------- ------------
<S> <C> <C>
Acquisition price, including non-compete and
consulting agreement payments: $821 $15,561
==== =======
Fair market value of assets acquired:
Inventory.......................................... $ 90 $ 547
Prepaid expenses and other current assets.......... -- 167
Coin-route equipment............................... 167 3,413
Intangible assets:
Non-compete agreements............................ -- 1,250
Goodwill.......................................... 564 10,184
---- -------
Total............................................ $821 $15,561
==== =======
</TABLE>

In connection with the financing of the 1996 Acquisitions, the Company
entered into a Credit Agreement on April 1, 1996 (Note 8).

Pro forma 1995 and 1996 revenue and net income information has not been
provided due to lack of historical financial data of the acquired entities.

3. SIGNIFICANT ACCOUNTING POLICIES

Cash, Cash Equivalents and Available-For-Sale Security--The Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.

The Company accounts for their investment in a marketable equity security in
accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Debt and Equity Securities" (SFAS 115). SFAS 115
requires marketable equity securities classified as available-for-sale to be
reported at fair value, with the unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax.

F-8
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

Revenue Recognition--The Company recognizes coin route laundry revenue on
the accrual basis. Sales revenue from the Company's commercial sale of
equipment and parts is recognized upon shipment of the orders.

Allowance for Doubtful Accounts--The Company maintains an allowance for
doubtful accounts of $330 at December 31, 1995 and 1996 and of $358 at June
30, 1997.

Concentration of Credit Risk--Financial instruments which potentially expose
the Company to concentration of credit risk include trade receivables,
generated by the Company as a result of the selling and leasing of laundry
machines. To minimize this risk, ongoing credit evaluations of customers'
financial condition are performed and reserves are maintained. The Company
typically does not require collateral.

Fair Value of Financial Instruments--For purposes of financial reporting,
the Company has determined that the fair value of financial instruments
approximates book value at December 31, 1995 and 1996, based upon terms
currently available to the Company in financial markets.

Inventories--Inventories consist of laundry machines and parts purchased for
commercial sale. Inventories are stated at the lower of cost (as determined
using the first-in, first-out method) or market.

Property, Plant and Equipment--Property, plant and equipment are stated at
cost and depreciated using the straight-line method over the estimated useful
lives of the respective assets. Expenditures for maintenance and repairs are
charged to operations as incurred; acquisitions, major renewals, and
betterments are capitalized.

Coin route equipment--not yet placed in service--These assets represent
laundry machines that management estimates will be installed in coin route
laundry rooms and have not been purchased for commercial sale.

Intangible Assets--Intangible assets primarily consist of various non-
compete agreements and goodwill recorded in connection with the 1995 and 1996
Acquisitions (Note 2). The non-compete agreements are amortized using the
straight-line method over the life of the agreements, which ranges from two to
five years. Goodwill is amortized over fifteen years from the acquired
companies respective dates of acquisitions.

Impairment of Long-Lived Assets--Impairment losses are recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount.

Income Taxes--Mac-Gray Co., Inc., which has elected "S Corporation" status,
and Mac-Gray, L.P. are "pass through" entities for income tax purposes, except
for taxes assessed by those states that do not recognize Mac-Gray Co., Inc.'s
"S Corporation" status. Accordingly, earnings and losses are included on the
income tax returns of the respective equity owners.

The Company accounts for income taxes utilizing the asset and liability
method as prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the provisions of SFAS 109,
the current or deferred tax consequences of a transaction are measured by
applying the provisions of enacted tax laws to determine the amount of taxes
payable currently or in future years. The classification of net current and
non-current deferred tax assets or liabilities depend upon the nature of the
related asset or liability. Deferred income taxes are provided

F-9
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
for temporary differences between the income tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Earnings Per Share--Given the capital structure of the Company, historical
earnings per share information is not considered meaningful or relevant and
has not been presented in the accompanying financial statements (Note 15).

New Accounting Pronouncements--The Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), is
effective for transactions entered into in fiscal years that begin after
December 15, 1995 (fiscal 1996 for the Company). SFAS 123 encourages entities
to account for employee stock options or similar equity instruments using a
fair value approach for all such plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). Those entities which elect to remain with the accounting in APB 25
are required to include pro forma disclosures of net income and earnings per
share as if the fair value-based method of accounting had been applied, to the
extent that pro forma net income and earnings per share differ materially from
reported amounts. The Company elected to continue to account for such plans
under the provisions of APB 25. Therefore, there was no effect on the
Company's financial position or results of operations as a result of this
pronouncement. In addition, as the Company's only outstanding stock options
were issued on December 30, 1996, the difference between net income as
reported for 1996 and pro forma net income calculated under the guidance
provided by FAS 123 was not material (Note 12).

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ---------------
(YEARS) 1995 1996
----------- ------- -------
<S> <C> <C> <C>
Coin route equipment............................... 10 $49,965 $58,610
Buildings and improvements......................... 15-32 5,368 6,531
Furniture and fixtures............................. 5-7 3,423 4,062
Trucks and autos................................... 3-5 1,429 1,776
Land and improvements.............................. -- 334 309
------- -------
60,519 71,288
Less: accumulated depreciation..................... 35,430 40,428
------- -------
25,089 30,860
Coin route equipment, not yet placed in service.... 715 1,052
------- -------
Property, plant and equipment, net................. $25,804 $31,912
======= =======
</TABLE>

Depreciation and amortization of property, plant and equipment totaled
$4,218, $4,477 and $5,176 for the years ended December 31, 1994, 1995 and
1996, respectively.

F-10
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

During 1994, 1995 and 1996, the Company acquired vehicles under capital
leases with a cost of $175, $356 and $328, respectively.

At December 31, 1995 and 1996, trucks and autos includes $1,156 and $1,449,
respectively, of capital leased equipment with an accumulated amortization
balance of $738 and $1,052, respectively.

5. INTANGIBLE ASSETS

Intangible assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
------ -------
<S> <C> <C>
Goodwill........................................................ $ 664 $10,348
Covenants-not-to-compete........................................ 799 2,549
Other........................................................... 159 153
------ -------
1,622 13,050
Less: accumulated amortization.................................. 718 1,559
------ -------
Intangible assets, net.......................................... $ 904 $11,491
====== =======
</TABLE>

6. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
Accrued profit sharing........................................... $ 275 $ 307
Accrued interest................................................. 122 134
Accrued salaries................................................. 176 78
Current portion of deferred compensation......................... 104 104
Other............................................................ 204 372
------ ------
Accrued expenses................................................. $ 881 $ 995
====== ======
</TABLE>

7. DEFERRED RETIREMENT OBLIGATION

The deferred retirement obligation at December 31, 1995 and 1996 relates to
payments due to a shareholder of the Company in connection with a retirement
agreement which provides for annual payments of $104 until the death of the
shareholder. The liability at December 31, 1995 and 1996 has been estimated
based upon the life expectancy of the shareholder utilizing actuarial tables.

F-11
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

8. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Line of credit, prime rate, due April 1, 1998...... $ 1,327 $ -- $ --
Bank note, prime rate plus .5% to 1.5%, quarterly
installments, due April 1, 1998................... 4,050 -- --
Revolving credit facility.......................... -- 1,607 --
Credit agreement:
Revolving line of credit......................... -- 11,776 --
Acquisition line of credit....................... -- 3,635 --
Working capital line of credit................... -- 650 --
Senior secured credit facility:
Revolving credit and term loan facility, prime
plus .5% (9.25% at June 30, 1997), due April 14,
1999 (Note 13).................................. -- -- 26,282
Unsecured notes payable to former shareholders:
Variable rate note, lesser of prime rate plus 2%
or 9%, quarterly principal payments beginning
January 1, 1996 (8.25% at December 31, 1996).... 4,160 3,360 2,960
Fixed rate notes, 8.4% interest rate, due Septem-
ber 1, 1997 and June 1, 2000.................... 2,046 2,046 1,746
Discount note, 6% imputed interest rate
(estimated fair market rate), quarterly
installments, due December 31, 2003............. 2,962 2,613 2,427
Fixed note, 8.75% interest rate, due January 1,
2001............................................ -- 421 407
Note payable, 8% fixed interest rate, semi-annual
principal payments, due September 1, 1999....... -- -- 281
Note payable, 11.5% fixed interest rate, monthly
principal payments, due September 1, 1999....... 325 249 208
Acquisition note payable, 8% imputed interest
rate (estimated fair market rate), monthly
payments, due May 31, 2006...................... -- 1,010 961
------- ------- -------
Total long-term debt........................... 14,870 27,367 35,272
Less: current portion.............................. 3,027 4,042 2,370
------- ------- -------
$11,843 $23,325 $32,902
======= ======= =======
</TABLE>

CREDIT AGREEMENT AND REVOLVING CREDIT FACILITY

In connection with the financing of the 1996 Acquisitions (Note 2), the
Company entered into a Credit Agreement with a bank which provides for
borrowings under a Revolving Line of Credit, Working Capital Line of Credit
and Acquisition Line of Credit of up to $14,000, $1,500 and $4,000,
respectively. Borrowings under the Credit Agreement are restricted to
providing working capital requirements of the Company and funding future
acquisitions. The amounts available to be borrowed under the Revolving Line of
Credit are automatically reduced by $910 semi-annually. As of December 31,
1996, $18,600 was available to be borrowed under the aggregate Credit
Agreement. The Credit Agreement expires on April 1, 2001 (Note 13).

F-12
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

During June 1996, the Company entered into an agreement with a bank which
provides a Revolving Credit Facility with aggregate borrowings of up to
$4,500. As of December 31, 1996, $2,893 was available to be borrowed under the
Revolving Credit Facility. The Revolving credit facility expires on May 1,
2001 (Note 13).

A portion of the proceeds from the Credit Agreement and the Revolving Credit
Facility were used to pay the balance of the Bank Note and Line of Credit
outstanding prior to the refinancing of the Company.

Letters of Credit--The Credit Agreement and the Revolving Credit Facility
provide for the issuance of standby letters of credit up to $2,200 in the
aggregate. At December 31, 1996, outstanding letters of credit amounted to
$1,526.

Interest--Borrowings under the Credit Agreement and the Revolving Credit
Facility bear interest, at the Company's option, at either (1) the banks'
prime interest rate (the "Prime Rate") or (2) 2.5% plus the rate at which
certain Eurodollar deposits are offered in the interbank Eurodollar market
(the "LIBOR Rate") or (3) 2.5% plus the rate at which funds are offered in the
secondary markets (the "Cost of Funds Rate") (8.25% rate, the Prime Rate, at
December 31, 1996).

FUTURE PAYMENTS

As of December 31, 1996, the scheduled future principal payments of long-
term debt are as follows:

<TABLE>
<S> <C>
1997............................................................. $ 4,042
1998............................................................. 1,870
1999............................................................. 1,871
2000............................................................. 2,241
2001............................................................. 1,049
Thereafter....................................................... 16,294
-------
$27,367
=======
</TABLE>

SENIOR SECURED CREDIT FACILITY (UNAUDITED)

On April 17, 1997, outstanding debt under the Credit Agreement and Revolving
Credit Facility was refinanced under terms of an amended and restated
agreement (Note 13).

At June 30, 1997, $23,718 was available to be borrowed under the Senior
Secured Credit Facility. The Senior Secured Credit Facility provides for the
issuance of standby letters of credit of up to $15,000 in the aggregate. At
June 30, 1997, outstanding letters of credit amounted to $10,363.

9. STATE INCOME TAXES

Provision for state income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current state income tax..................................... $324 $305 $405
Deferred state income tax.................................... 64 69 60
---- ---- ----
Total state income taxes..................................... $388 $374 $465
==== ==== ====
</TABLE>

F-13
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

The Company's 1994, 1995 and 1996 effective tax rates differ from the
applicable statutory tax rates due to meals and entertainment expenses and
goodwill amortization recorded for book that are not deductible for income tax
purposes. In addition to the aforementioned items, the Company's 1996
effective tax rate differs from the statutory tax rate due to taxable losses
generated by Mac-Gray, L.P. for which only a 10% tax benefit (equivalent to
Mac-Gray Co., Inc.'s general partnership interest in Mac-Gray, L.P.) was
recognized by the Company.

The net deferred tax liability in the accompanying balance sheets includes
the following amounts of deferred tax assets and liabilities:

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation........................................... $229 $202
Other........................................................... 60 73
---- ----
Net deferred tax asset............................................ 289 275
---- ----
Deferred tax liabilities:
Accelerated depreciation........................................ 875 915
Other........................................................... 3 7
---- ----
Net deferred tax liabilities...................................... 878 922
---- ----
Total........................................................... $589 $647
==== ====
</TABLE>

10. COMMON STOCK REDEMPTION

On January 1, 1996, the Company redeemed 2,275 shares of its common stock at
$240 per share from minority shareholders. The aggregate redemption price was
$546, consisting of cash in the amount of $125 and the issuance of five-year
promissory notes in the amount of $421, bearing interest at 8.75% per year.

11. COMMITMENTS AND CONTINGENCIES

Leases--The Company leases certain equipment and facilities under non-
cancelable operating leases. The Company also leases certain vehicles under
capital leases.

Future minimum lease payments under non-cancelable operating and capital
leases consist of the following:

<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1997................................................... $301 $ 309
1998................................................... 179 290
1999................................................... 51 261
2000................................................... -- 161
2001................................................... -- 64
---- ------
Future lease payments.................................... 531 $1,085
======
Less: amount representing interest (8.5% at December 31,
1996)................................................... 87
----
444
Present value future minimum lease payments less amounts
due within one year..................................... 251
----
Amounts due after one year............................... $193
====
</TABLE>

F-14
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

Rent expense incurred by the Company under non-cancelable operating leases
totaled $98, $123 and $256 for the years ended December 31, 1994, 1995 and
1996, respectively.

Guaranteed Commission Payments--The Company operates coin laundry routes
under various lease agreements in which the Company is required to make
minimum guaranteed commission payments to the respective property owners. The
following is a schedule by years of future minimum guaranteed commission
payments required under these lease agreements that have initial or remaining
non-cancelable contract terms in excess of one year as of December 31, 1996:

<TABLE>
<S> <C>
1997............................................................. $ 2,746
1998............................................................. 2,321
1999............................................................. 1,879
2000............................................................. 1,530
2001............................................................. 1,002
Thereafter....................................................... 2,833
-------
$12,311
=======
</TABLE>

Guarantee of Indebtedness--At December 31, 1996, Mac-Gray Co., Inc. is a
guarantor on a line-of-credit for a customer in the amount of $689. The
customer has incurred substantial losses in its last three fiscal years ended
December 31, 1996. While the guarantee is secured by a pledge of the borrowing
company's assets, it is uncertain if those assets and profits from continuing
operations will be adequate to retire the line-of-credit. The Company has
recorded a reserve of $250 at December 31, 1996 for estimated losses on this
guarantee. In management's opinion, the range of the estimated loss to be
incurred in connection with the Company's guarantee of the customer's line-of-
credit in excess of the amount recorded at December 31, 1996 will not have a
material adverse impact on the results of operations or the financial position
of the Company.

Litigation--The Company is involved in various litigation proceedings
arising in the normal course of business. In the opinion of management, the
Company's ultimate liability, if any, under pending litigation would not
materially affect its financial condition or the results of its operations.

12. EMPLOYEE BENEFIT AND STOCK PLANS

Retirement Plans--The Company maintains a qualified profit-sharing/401(k)
plan (the Plan) covering substantially all employees. The Company's
contributions to the Plan are at the discretion of the Board of Directors.
Costs under the Plan amounted to $534, $535 and $532 for the years ended
December 31, 1994, 1995 and 1996, respectively.

1996 Stock Option Plan

Mac-Gray Co., Inc. adopted its 1996 Stock Option and Incentive Plan (the
1996 Plan) effective December 30, 1996. The 1996 Plan provides several types
of Mac-Gray Co., Inc. equity-based compensation awards. Under the provisions
of the 1996 Plan, the maximum number of shares of common stock that may be
awarded is 15,000 shares, of which 3,873 are available for grant at December
31, 1996. Officers, employees, directors, consultants or other key persons of
Mac-Gray Co., Inc. and Mac-Gray, L.P. who are responsible for or contribute to
management, growth or profitability of

F-15
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
the Company are eligible to participate in the 1996 Plan. Awards, when made,
may be in the form of stock options, restricted stock, unrestricted stock
options, and dividend equivalent rights.

On December 30, 1996, 11,127 stock options were issued with an exercise
price of $499.50 per share (fair market value on the date of grant). These
options do not vest or become exercisable until the sixth anniversary of the
date of grant unless shares of the Company's common stock are registered under
the Securities Act of 1933 (see Note 14), in which case options automatically
vest in an amount of 20% per year on each of the first through fifth
anniversaries of the date of grant. No options were exercised or canceled
during 1996. The fair value of options granted at grant date was estimated to
be $175.00 which was determined using the Black-Scholes option pricing model
and the following assumptions for fiscal 1996: risk free interest rate of 6.2%
and expected option term of 7 years. Other than the stock option grants, there
were no other grants of equity-based compensation awards during 1996. At
December 31, 1996, the weighted average remaining life of options granted was
approximately 10 years.

13. SUBSEQUENT EVENTS (UNAUDITED)

Reorganization of the Company

On April 17, 1997, Mac-Gray Co., Inc. and Mac-Gray, L.P. were reorganized to
create Mac-Gray Corporation (the Parent). The Parent acquired all of the
outstanding common stock of Mac-Gray Co., Inc. and all of the outstanding
limited partnership interest of Mac-Gray, L.P. in exchange for 6,367,800
shares of the Parent's common stock (Note 15). Concurrently, Mac-Gray, L.P.
was merged with and into Mac-Gray Co., Inc., which will continue to operate as
a wholly owned subsidiary of the Parent. The authorized capital stock of the
Parent consists of 30,000,000 shares of common stock, $.01 par value per
share, and 5,000,000 shares of undesignated preferred stock issuable in series
by the Board of Directors of the Parent.

The unaudited June 30, 1997 financial statements are reflective of the
reorganization of the Company.

Acquisition of Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry,
Inc.

On April 17, 1997, the Parent acquired in exchange for 612,026 shares of its
common stock, (approximate value of $7,797), approximately $2,170 in cash,
$850 of a deferred obligation, and assumption of approximately $2,787 in debt,
each of Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry, Inc.
(collectively, Sun Services). The shares of the Parent's common stock are
redeemable by the shareholder under certain circumstances, which include the
timing of the planned initial public offering (Note 14). The redeemable common
stock has been valued at a contractual put price of $12.74 per common share.

Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry are 100% owned
by the same shareholder. The Parent acquired all of the outstanding capital
stock of Sun Services, which was accounted for pursuant to the purchase method
of accounting. Based upon preliminary purchase accounting, goodwill of
approximately $11,600 arose from this transaction, which will be amortized
over 20 years.

The results of Sun Services' operations are reflected in the unaudited June
30, 1997 financial statements subsequent to the date of acquisition.

F-16
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Amended and Restated Credit Agreement and Revolving Credit Facility

On April 17, 1997, the Parent entered into a credit agreement (the Credit
Facility) with a bank which provides for borrowings under (i) a revolving line
of credit and term loan facility and (ii) a revolving working capital line of
credit facility of up to $45,000 and $5,000, respectively. Outstanding
indebtedness under the Credit Facility bears interest, at the Parent's option,
at a rate equal to the prime rate plus up to .5% or LIBOR plus 2.5% with the
margin over the prime rate and LIBOR decreasing after the consummation of the
pending offering of the Parent's common stock (Note 14). The Credit Facility
restricts payments of dividends and other distributions, restricts the Parent
from making certain acquisitions, incurring indebtedness and requires it to
maintain certain financial ratios. The Credit Facility is secured by pledges
of assets of the Parent and its subsidiaries. Bank indebtedness of the Company
outstanding prior to the effective date of the Credit Facility was
subsequently assumed under the Credit Facility.

The unaudited June 30, 1997 financial statements are reflective of the
amended and restated credit agreement and revolving credit facility.

1997 Stock Option Plan

On April 7, 1997, the Parent adopted the 1997 Stock Option and Incentive
Plan (the 1997 Plan). The terms of the 1997 Plan are substantially the same as
the terms of the 1996 Plan (Note 12) that was adopted by Mac-Gray Co., Inc. in
December 1996. Concurrent with the reorganization of the Company, the options
issued pursuant to the 1996 Plan were assumed by the Parent under the 1997
Plan and the 1996 Plan was terminated. The options assumed by the Parent under
the 1997 Plan were reflective of the exchange of common stock between the
Parent and Mac-Gray Co., Inc. Accordingly, 556,350 options with an exercise
price of $9.99 per share issued pursuant to the 1996 Plan were assumed by the
Parent under the 1997 Plan.

In August 1997, the Parent adjusted the exercise price of the 548,850
remaining options outstanding under the 1997 Plan from $9.99 per share to
$8.80 per share. The adjustment was made to restore the economic position of
the option holders as a result of the planned dividend of $9,000 (Note 15) to
be paid immediately following the consummation of Mac-Gray Corporation's
initial public offering (Note 14).

14. PENDING INITIAL PUBLIC OFFERING OF COMMON STOCK

Mac-Gray Corporation intends to file a Registration Statement on Form S-1
for purposes of selling shares of previously unissued common stock. The net
proceeds from the sale of the common stock are intended to be used primarily
to repay existing indebtedness outstanding under the Credit Facility and to
fund the distribution of approximately $9,000 (Note 15) to be paid immediately
following the consummation of such offering.

15. UNAUDITED PRO FORMA AS ADJUSTED INFORMATION

Balance Sheet

The unaudited pro forma as adjusted balance sheet as of June 1997 has been
adjusted to reflect the retroactive effect of the Company's change in income
tax status from an S corporation to a C corporation whereby approximately
$4,300 of net deferred tax liabilities are required to be recorded by the
Company, in accordance with SFAS 109, upon consummation of the initial public
offering of the Parent's common stock (Note 14).

F-17
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

The unaudited pro forma as adjusted balance sheet has also been adjusted to
give effect to a dividend that is planned to be declared by the Parent
immediately prior to the consummation of the Parent's initial public offering
(Note 14). The $9,000 dividend, which was estimated for purposes of presenting
the pro forma as adjusted balance sheet, will be paid pro-rata immediately
following the consummation of the Parent's initial public offering (Note 14)
to the shareholders of the Parent of record immediately prior to the
consummation of such offering, which include the former shareholders of Mac-
Gray, Co., Inc., the former partners of Mac-Gray, L.P. and the former
shareholder of Sun Services.

Statement of Income

Unaudited pro forma as adjusted data reflects adjustments to the combined
statement of income for each of the three years in the period ended December
31, 1996 and for the six months ended June 30, 1996 and 1997. Such adjustments
consider the effect on the Company's operations as if the Company was subject
to federal and state income taxes on a corporate level. Accordingly, the pro
forma as adjusted income tax provision and pro forma as adjusted net income
have been calculated, using an estimated income tax rate of 40%, as if the
Company was subject to income taxation as a C corporation during all periods
presented.

Earnings Per Share

Unaudited pro forma as adjusted net income per share was calculated for the
respective periods by dividing the respective unaudited pro forma as adjusted
net income amounts by the weighted average number of shares of common and
common equivalent shares outstanding, giving effect to the exchange of shares
between the Parent and the Company (Note 13), using the treasury stock method.
Common share equivalents consist of common stock which may be issuable upon
exercise of outstanding stock options. Pursuant to Securities and Exchange
Commission rules for calculating net income per share in an initial public
offering (Note 14), all shares issued within twelve months of the offering,
including common stock equivalents, are considered in computing common and
common share equivalents.

F-18
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Mac-Gray Co., Inc.
and the Partners of Mac-Gray, L.P.

In our opinion, the accompanying combined statement of income presents
fairly, in all material respects, the combined results of operations of Mac-
Gray Co., Inc. and Mac-Gray, L.P. (the "Companies") for the two month period
ended February 28, 1997 in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Companies'
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.

PRICE WATERHOUSE LLP
Boston, Massachusetts
April 4, 1997

F-19
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
TWO MONTHS
ENDED
FEBRUARY 28,
1997
------------
<S> <C>
Revenue............................................................ $ 11,911
----------
Cost of revenue:
Commissions...................................................... 4,865
Laundry route expenditures....................................... 2,192
Depreciation and amortization.................................... 1,146
Cost of equipment sales.......................................... 951
----------
Total cost of revenue.......................................... 9,154
----------
Operating expenses:
General and administration....................................... 711
Sales and marketing.............................................. 813
Depreciation..................................................... 98
----------
Total operating expenses....................................... 1,622
----------
Income from operations............................................. 1,135
Interest expense................................................. (372)
Other income..................................................... 8
----------
Income before provision for income taxes......................... 771
Provision for income taxes....................................... 71
----------
Net income......................................................... $ 700
==========
UNAUDITED PRO FORMA DATA (NOTE 6)
Income before provision for income taxes......................... $ 771
Provision for income taxes....................................... (308)
----------
Pro forma net income............................................... $ 463
==========
Pro forma net income per common share.............................. $ 0.07
==========
Pro forma weighted average common shares outstanding............... 6,588,618
==========
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-20
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY L.P.

NOTES TO COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS

Basis of Presentation--The combined statement of income for the two month
period ended February 28, 1997 includes the accounts of Mac-Gray Co., Inc. and
Mac-Gray, L.P., (collectively, the Company). Mac-Gray Co., Inc. is the general
partner of Mac-Gray, L.P. which was formed in August of 1995. Mac-Gray Co.,
Inc. and Mac-Gray, L.P. are 100% owned by the same shareholders and are under
common management. The February 28, 1997 combined statement of income is
presented in order to comply with the Securities and Exchange Commission's
requirement that at least nine months of audited financial information are
presented for certain acquisitions.

Principles of Combined Financial Statements--The combined statement of
income has been prepared by combining the results of operations of Mac-Gray
Co., Inc. and Mac-Gray, L.P. for the two month period ended February 28, 1997.
All significant intercompany transactions and balances have been eliminated in
combination.

Description of the Business--The Company generates the majority of its
revenue from card and coin route laundry rooms in the Northeastern, Midwestern
and Southeastern United States. The Company's principal customer base is the
multi-housing market, which consists of apartments, condominium units,
colleges and universities. The Company also sells, services and leases
commercial laundry equipment to commercial laundromats and institutions. The
majority of the Company's purchases of coin route laundry equipment is from
one supplier.

2. SIGNIFICANT ACCOUNTING POLICIES

Depreciation of Property, Plant and Equipment--Property, plant and equipment
are depreciated using the straight-line method over the estimated useful lives
of the respective assets. Expenditures for maintenance and repairs are charged
to operations as incurred; acquisitions, major renewals, and betterments are
capitalized. The estimated useful lives of the Company's property, plant and
equipment are as follows:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
CATEGORY (YEARS)
-------- ------------
<S> <C>
Coin route equipment....................................... 10
Buildings and improvements................................. 15-32
Furniture and fixtures..................................... 5-7
Trucks and autos........................................... 3-5
</TABLE>

Depreciation expense of property, plant and equipment totaled $1,032 for the
two months ended February 28, 1997.

Amortization of Intangibles--Intangible assets primarily consist of various
non-compete agreements as well as goodwill recorded in connection with various
acquisitions made by the Company during fiscal 1995 and 1996. The non-compete
agreements are amortized using the straight-line method over the life of the
agreements, which range in term from two to five years. Goodwill is amortized
over fifteen years from the acquired companies respective dates of
acquisition. Amortization expense totaled $229 for the two months ended
February 28, 1997.

F-21
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED STATEMENT OF INCOME--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Impairment of Long-Lived Assets--Impairment losses are recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount.

Income Taxes--Mac-Gray Co., Inc., which has elected "S corporation" status,
and Mac-Gray, L.P. are "pass through" entities for income tax purposes, except
for taxes assessed by those states that do not recognize Mac-Gray Co., Inc.'s
"S corporation" status. Accordingly, earnings and losses are included on the
income tax returns of the respective equity owners.

The Company accounts for income taxes utilizing the asset and liability
method as prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the provisions of SFAS 109,
the current or deferred tax consequences of a transaction are measured by
applying the provisions of enacted tax laws to determine the amount of taxes
payable currently or in future years. Deferred income taxes are provided for
temporary differences between the income tax basis of assets and liabilities
and their carrying amounts for financial reporting purposes.

New Accounting Pronouncements--The Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), is
effective for transactions entered into in fiscal years that begin after
December 15, 1995 (fiscal 1996 for the Company). SFAS 123 encourages entities
to account for employee stock options or similar equity instruments using a
fair value approach for all such plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). Those entities which elect to remain with the accounting in APB 25
are required to include pro forma disclosures of net income and earnings per
share as if the fair value-based method of accounting had been applied, to the
extent that pro forma net income and earnings per share differ materially from
reported amounts. The Company elected to continue to account for such plans
under the provisions of APB 25. Therefore, there was no effect on the
Company's financial position or results of operations as a result of this
pronouncement. In addition, the difference between net income as reported for
the two months ended February 28, 1996 and pro forma net income calculated
under guidance provided by FAS 123 was not material (Note 5).

F-22
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED STATEMENT OF INCOME--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
3. INCOME TAXES

State income taxes consist of a current income tax provision of $71 for the
two months ended February 28, 1997.

The Company's effective tax rate for the two months ended February 28, 1997
differs from the applicable statutory tax rates due to meals and entertainment
expenses and goodwill amortization recorded for book that are not deductible
for income tax purposes. In addition to the aforementioned items, the
Company's effective tax rate for the two months ended February 28, 1997
differs from the statutory tax rate due to taxable losses generated by Mac-
Gray, L.P. for which only a 10% tax benefit (equivalent to Mac-Gray Co.,
Inc.'s general partnership interest in Mac-Gray, L.P.) was recognized by the
Company.

4. COMMITMENTS AND CONTINGENCIES

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997........................................................ $ 2,746
1998........................................................ 2,321
1999........................................................ 1,879
2000........................................................ 1,530
2001........................................................ 1,002
Thereafter.................................................. 2,833
-------
$12,311
=======
</TABLE>

Guarantee of Indebtedness--At February 28, 1997, Mac-Gray Co., Inc. is a
guarantor on a line-of-credit for a customer in the amount of $689. The
customer has incurred substantial losses in its last three fiscal years ended
December 31, 1996. While the guarantee is secured by a pledge of the borrowing
company's assets, it is uncertain if those assets and profits from continuing
operations will be adequate to retire the line-of-credit. The Company has
recorded a reserve of $250 at February 28, 1997 for estimated losses on this
guarantee. In management's opinion, the range of the estimated loss to be
incurred in connection with the Company's guarantee of the customer's line-of-
credit in excess of the amount recorded at February 28, 1997 will not have a
material adverse impact on the results of operations or the financial position
of the Company.

Leases--The Company leases certain equipment and facilities under non-
cancelable operating leases. Rent expense incurred by the Company under non-
cancelable operating leases totaled $49 for the two month period ended
February 28, 1997.

F-23
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED STATEMENT OF INCOME--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

Future minimum lease payments under non-cancelable operating leases consist
of the following:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997............................................................ $ 309
1998............................................................ 290
1999............................................................ 261
2000............................................................ 161
2001............................................................ 64
------
$1,085
======
</TABLE>

5. EMPLOYEE BENEFIT AND STOCK PLANS

1996 Stock Option Plan

On December 30, 1996, 11,127 stock options, with an exercise price of
$499.50 per share (fair market value on the date of grant), were issued and
remained outstanding as of February 28, 1997. These options do not vest or
become exercisable until the sixth anniversary of the date of grant unless
shares of the Company's common stock are registered under the Securities Act
of 1933 (Note 8), in which case options automatically vest in an amount of 20%
per year on each of the first through fifth anniversaries of the date of
grant. No options, or other equity-based compensation awards, were issued,
exercised or canceled during the two months ended February 28, 1997. The fair
value of options granted at grant date was estimated to be $175.00 which was
determined using the Black-Scholes option pricing model and the following
assumptions for fiscal 1996: risk free interest rate of 6.2% and expected
option term of 7 years. At February 28, 1997, the weighted average remaining
life of options granted was approximately 10 years.

6. UNAUDITED PRO FORMA DATA

Statement of Income

The unaudited pro forma data reflects adjustments to the combined statement
of income for the period ended February 28, 1997. Such adjustments consider
the effect on the Company's operations as if the Company was subject to
federal and state income taxes on a corporate level. Accordingly,

F-24
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED STATEMENT OF INCOME--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
the pro forma income tax provision and the pro forma net income have been
calculated, using an estimated income tax rate of 40%, as if the Company was
subject to income taxation as a C corporation during the period presented.

Earnings Per Share

Unaudited pro forma net income per share was calculated for the period by
dividing the unaudited pro forma net income amount by the weighted average
number of shares of common and common equivalent shares outstanding, giving
effect to the exchange of shares between the Parent and the Company (Note 7),
using the treasury stock method. Common share equivalents consist of common
stock which may be issuable upon exercise of outstanding stock options.
Pursuant to Securities and Exchange Commission rules for calculating net
income per share in an initial public offering (Note 8), all shares issued
within twelve months of the offering, including common stock equivalents, are
considered in computing common and common share equivalents.

7. SUBSEQUENT EVENTS (UNAUDITED)

Reorganization of the Company

The authorized capital stock of the Parent consists of 30,000,000 shares of
common stock, $.01 par value per share, and 5,000,000 shares of undesignated
preferred stock issuable in series by the Board of Directors of the Parent.

Acquisition of Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry,
Inc.

On April 17, 1997, the Parent acquired in exchange for 612,026 shares of its
common stock, (approximate value of $7,797), approximately $2,170 in cash,
$850 of a deferred payment obligation and the assumption of approximately
$2,787 of debt, each of Sun Services of America, Inc. and R. Bodden Coin-Op-
Laundry, Inc. (collectively, Sun Services). The shares of the Parent's common
stock are redeemable by the shareholder under certain circumstances, which
include the timing of the planned initial public offering (Note 8). The
approximate value of the Parent's common stock issued in connection with the
Sun Services acquisition was determined based upon a contractual put price of
$12.74 per common share.

Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry, Inc. are 100%
owned by the same shareholder. The Parent acquired all of the outstanding
capital stock of Sun Services, which will be accounted for pursuant to the
purchase method of accounting. Based upon preliminary purchase accounting,
goodwill of approximately $11,600 arose from this transaction, which will be
amortized over 20 years.

Amended and Restated Credit Agreement and Revolving Credit Facility

On April 17, 1997, the Parent, entered into a credit agreement (the Credit
Facility) with a bank which provides for borrowings under (i) a revolving line
of credit and term loan facility and (ii) a

F-25
<PAGE>

MAC-GRAY CO., INC. AND MAC-GRAY, L.P.

NOTES TO COMBINED STATEMENT OF INCOME--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
revolving working capital line of credit facility of up to $45,000 and $5,000,
respectively. Outstanding indebtedness under the Credit Facility bears
interest, at the Parent's option, at a rate equal to the prime rate plus .5%
or LIBOR plus 2.5%, with the margin over the prime rate and LIBOR decreasing
after the consummation of the pending initial public offering of the Parent's
common stock (Note 8). The Credit Facility restricts payments of dividends and
other distributions, restricts the Parent from making certain acquisitions,
incurring indebtedness and requires it to maintain certain financial ratios.
The Credit Facility is secured by pledges of assets of the Parent and its
subsidiaries. Bank indebtedness of the Company outstanding prior to the
effective date of the Credit Facility was subsequently assumed under the
Credit Facility.

1997 Stock Option Plan

On April 7, 1997, the Parent adopted the 1997 Stock Option and Incentive
Plan (the 1997 Plan). The terms of the 1997 Plan are substantially the same as
the terms of the 1996 Plan (Note 5) that was adopted by Mac-Gray Co., Inc. in
December 1996. Concurrent with the reorganization of the Company, the options
issued pursuant to the 1996 Plan were assumed by the Parent under the 1997
Plan and the 1996 Plan was terminated. The options assumed by the Parent under
the 1997 Plan were reflective of the exchange of common stock between the
Parent and Mac-Gray Co., Inc. Accordingly, 556,350 options with an exercise
price of $9.99 per share issued pursuant to the 1996 Plan were assumed by the
Parent under the 1997 Plan.

In August 1997, the Parent adjusted the exercise price of the 548,850
remaining options outstanding under the 1997 Plan from $9.99 per share to
$8.80 per share. The adjustment was made to restore the economic position of
the option holders as a result of the planned dividend of $9,000 to be paid
immediately following the consummation of the Parent's initial public offering
(Note 8).

8. PENDING INITIAL PUBLIC OFFERING OF COMMON STOCK

Mac-Gray Corporation intends to file a Registration Statement on Form S-1
for purposes of selling shares of previously unissued common stock. The net
proceeds from the sale of the common stock are intended to be used primarily
to repay existing indebtedness outstanding under the Credit Facility and to
fund the distribution of approximately $9,000 to be paid immediately following
consummation of such offering.

F-26
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholder of Sun Services
of America, Inc. and R. Bodden
Coin-Op-Laundry, Inc.

In our opinion, the accompanying combined balance sheet and the related
combined statement of income, of changes in stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of Sun
Services of America, Inc. and R. Bodden Coin-Op-Laundry, Inc. (the
"Companies") at December 31, 1996, and the results of the Companies'
operations and cash flows for the year ended December 31, 1996 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Companies' management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Boston, Massachusetts
May 2, 1997

F-27
<PAGE>

SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.

COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Trade receivables, net of allowance for doubtful
accounts of $16.................................... $ 33 $ 22
Due from shareholder................................ 173 173
Inventory........................................... 164 151
Prepaid expenses and other current assets........... 230 242
------ ------
Total current assets.............................. 600 588
Property and equipment, net........................... 1,693 1,687
Intangible assets, net................................ 1,540 1,651
Prepaid commissions and other assets.................. 787 734
------ ------
Total assets...................................... $4,620 $4,660
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................... $ 765 $ 765
Accounts payable.................................... 329 169
Accrued expenses.................................... 383 462
------ ------
Total current liabilities......................... 1,477 1,396
------ ------
Long-term debt........................................ 2,209 2,268
------ ------
Commitments and contingencies (Note 10)............... -- --
Stockholder's equity:
Common stock--Sun Services of America, Inc., $1 par
value; 1,000 shares authorized; 30 shares issued
and outstanding.................................... -- --
Common stock--R. Bodden Coin-Op-Laundry Inc. $1 par
value; 7,000 shares authorized; 1,000 shares issued
and outstanding.................................... 1 1
Additional paid-in capital.......................... 90 90
Retained earnings................................... 843 905
------ ------
Total stockholder's equity........................ 934 996
------ ------
Total liabilities and stockholder's equity........ $4,620 $4,660
====== ======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-28
<PAGE>

SUN SERVICES OF AMERICA, INC. AND R. BODDEN COIN-OP-LAUNDRY, INC.

COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------
1996 1996 1997
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Revenue............................................ $6,664 $1,628 $2,032
------ ------ ------
Cost of revenue:
Commissions...................................... 2,718 723 797
Laundry route expenditures....................... 820 193 183
Depreciation and amortization.................... 655 129 209
Cost of equipment sales.......................... 277 19 164
------ ------ ------
Total cost of revenue.......................... 4,470 1,064 1,353
------ ------ ------
Operating expenses:
General and administration....................... 1,220 292 307
Sales and marketing.............................. 160 30 47
Depreciation..................................... 25 5 6
------ ------ ------
Total operating expenses....................... 1,405 327 360
------ ------ ------
Income from operations............................. 789 237 319
Interest expense................................. (267) (42) (89)
Other expense, net............................... (60) (3) --
------ ------ ------
Net income......................................... $ 462 $ 192 $ 230
====== ====== ======
</TABLE>

The accompanying notes are an integral part of these financial statements

F-29
<PAGE>

SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.

COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK--SHARES COMMON STOCK--VALUE
--------------------------- ---------------------------
SUN SERVICES R. BODDEN SUN SERVICES R. BODDEN ADDITIONAL
OF COIN-OP- OF COIN-OP- PAID-IN RETAINED
AMERICA, INC. LAUNDRY, INC. AMERICA, INC. LAUNDRY, INC. CAPITAL EARNINGS TOTAL
------------- ------------- ------------- ------------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 30 1,000 $-- $ 1 $90 $ 772 $ 863
Net income............. -- -- -- -- -- 462 462
Dividends.............. -- -- -- -- -- (391) (391)
--- ----- ---- ---- --- ----- -----
Balance, December 31,
1996................... 30 1,000 -- 1 90 843 934
Net income (unau-
dited)................ -- -- -- -- -- 230 230
Dividends (unaudited).. -- -- -- -- -- (168) (168)
--- ----- ---- ---- --- ----- -----
Balance, March 31, 1997
(unaudited)............ 30 1,000 $-- $ 1 $90 $ 905 $ 996
=== ===== ==== ==== === ===== =====
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-30
<PAGE>

SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.

COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------
1996 1996 1997
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 462 $ 192 $ 230
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 680 134 215
Changes in assets and liabilities:
(Increase) decrease in trade receivables,
net........................................ (26) (2) 11
(Increase) in shareholder receivable........ (10) -- --
(Increase) decrease in inventory............ (46) (1) 13
(Increase) decrease in prepaid expenses and
other current assets....................... (329) (185) 1
Increase (decrease) in accounts payable and
accrued expenses........................... 172 (197) (81)
------- ------ ------
Net cash provided by (used in) operating
activities................................. 903 (59) 389
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (444) (105) (15)
Acquisition of businesses (Note 3).............. (1,720) (300) (265)
------- ------ ------
Net cash used in investing activities......... (2,164) (405) (280)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under line of credit agreement, net.... 116 163 143
Principal payments on long-term debt............ (953) (627) (194)
Proceeds from issuance of long-term debt........ 2,507 984 110
Dividends paid.................................. (391) (56) (168)
Cash paid for refinancing of debt............... (18) -- --
------- ------ ------
Net cash provided by (used in) financing
activities................................... 1,261 464 (109)
------- ------ ------
Net change in cash and cash equivalents........... $ -- $ -- $ --
======= ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 241 $ 25 $ 64
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-31
<PAGE>

SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

1. BASIS OF PRESENTATION AND THE BUSINESS

Basis of Presentation--The accompanying combined financial statements
include the accounts of Sun Services of America, Inc. (Sun Services) and R.
Bodden Coin-Op-Laundry, Inc. (Bodden) (collectively, the Companies). The
Companies are 100% owned by the same shareholder and are under common
management.

Nature of Business--The Companies are engaged in the coin operated laundry
business throughout Florida. The majority of the Companies' customers are
apartment complexes and laundromats. The Companies lease coin operated laundry
equipment to their customers for percentages of the monies collected. The
majority of the Companies purchases of coin route laundry equipment are from
one supplier.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Combined Interim Financial Statements--The accompanying combined
financial information as of March 31, 1997 and for the three month periods
ended March 31, 1996 and 1997 is unaudited. The interim financial statements
have been prepared on the same basis as the accompanying annual financial
statements. In the opinion of management, such interim financial information
reflects adjustments consisting of normal and recurring adjustments necessary
for a fair presentation of such financial information. The unaudited results
of operations for the interim periods ended March 31, 1996 and 1997 are not
necessarily indicative of the results of operations to be expected for any
other interim period or for the full year.

Principles of Combined Financial Statements--The combined financial
statements include the accounts of Sun Services and Bodden, including the 1996
Acquisitions (Note 3) from their respective acquisition dates. All significant
intercompany transactions and balances have been eliminated in combination.

Cash and Cash Equivalents--The Companies consider all highly liquid
investments with original maturity of three months or less to be cash
equivalents.

Concentration of Credit Risk--Financial instruments which potentially expose
the Companies to concentrations of credit risk consist principally of trade
receivables generated by the Companies as a result of the selling and leasing
of laundry machines. To minimize this risk, ongoing credit evaluations of
customer's financial condition are performed and reserves are maintained. The
Companies typically do not require collateral.

Inventory--Inventory is stated at the lower of cost or market with cost
determined using the first-in, first-out method.

Property and Equipment--Property and equipment are recorded at cost.
Expenditures for repairs and maintenance are charged to expense as incurred;
expenditures for renewals and betterments are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.

Intangible Assets--Intangible assets primarily consist of various non-
compete agreements and goodwill recorded in connection with the 1996
Acquisitions (Note 3). The non-compete agreements are amortized using the
straight-line method over the life of the agreements, which range from five to

F-32
<PAGE>

SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
seven years. Goodwill is amortized over fifteen years from the acquired
companies respective dates of acquisition.

Income Taxes--Sun Services and Bodden have elected to be taxed as "S
corporations" as defined in the Internal Revenue Code. This results in the
pass-through of any taxable income directly to the shareholder. Accordingly,
no taxes are provided on the earnings attributable to the Companies.

Earnings Per Share--Given the capital structure of the Companies, historical
earnings per share information is not considered meaningful or relevant and
has not been presented in the accompanying financial statements.

3. ACQUISITIONS

During 1996, the Companies acquired certain assets of a number of coin-
operated laundry businesses (the 1996 Acquisitions). The 1996 Acquisitions
were paid in cash, with the exception of the Coin Laundry Leasing acquisition,
which also included a deferred note payable of $350. The 1996 Acquisitions
were accounted for using the purchase method of accounting. Accordingly, the
purchase price assigned to the assets and liabilities assumed was their fair
market values on the respective acquisition dates. Purchase price in excess of
the fair value of net assets acquired was allocated to goodwill. The
Companies' combined financial statements includes the results of the 1996
Acquisitions from their respective acquisition dates. The 1996 Acquisitions
purchase price allocation is summarized as follows:

<TABLE>
<CAPTION>
1996
ACQUISITIONS
------------
<S> <C>
Acquisition price, including non-compete payments and other
direct acquisition costs.................................. $2,070
======
Fair market value of assets acquired:
Inventory................................................ 110
Coin-route equipment..................................... 485
Other fixed assets....................................... 28
Intangible assets:
Non-compete............................................ 15
Goodwill............................................... 1,432
------
Total................................................ $2,070
======
</TABLE>

In connection with financing the 1996 Acquisitions, the Companies entered
into a Credit Agreement on January 26, 1996 (Note 8).

The pro forma effect of the 1996 Acquisitions was not material to the
results of the Companies' historical operations or the Companies' historical
financial position.

F-33
<PAGE>

SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. PREPAID COMMISSIONS OTHER CURRENT ASSETS

Prepaid commissions other assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Prepaid commissions......................................... $140
Other receivables........................................... 40
Prepaid insurance........................................... 29
Other....................................................... 21
----
$230
====
</TABLE>

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
ESTIMATED
LIFE DECEMBER 31,
(YEARS) 1996
--------- ------------
<S> <C> <C>
Coin-route equipment................................ 8 $2,708
Furniture and fixtures.............................. 7 140
Vehicles............................................ 5 189
Computer equipment.................................. 4 49
Leasehold improvements.............................. 2-3 15
------
3,101
Less: accumulated depreciation...................... 1,408
------
Property and equipment, net......................... $1,693
======
</TABLE>

Depreciation expense for the year ended December 31, 1996 was approximately
$360.

6. INTANGIBLE ASSETS

Intangible assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Goodwill.................................................... $1,746
Non-compete agreements...................................... 290
Other....................................................... 18
------
2,054
Less: accumulated amortization.............................. 514
------
Intangible assets, net...................................... $1,540
======
</TABLE>

F-34
<PAGE>

SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

7. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Accrued commissions........................................... $218
Accrued payroll............................................... 28
Accrued interest and loan fees................................ 63
Other......................................................... 74
----
$383
====
</TABLE>

8. LONG-TERM DEBT

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Note payable, 8% fixed interest rate, semi-annual principal
payments, due September 1, 1999........................... $ 300
Credit Agreement
Line of credit........................................... 432
Acquisition note......................................... 773
Term loan A facility..................................... 917
Term loan B facility..................................... 523
Other.................................................... 29
------
Total long-term debt................................... 2,974
Less: current portion...................................... 765
======
Total.................................................. $2,209
======
</TABLE>

CREDIT AGREEMENT

In connection with the Companies 1996 Acquisitions (Note 3), the Companies
entered into a new Credit Agreement in January of 1996. The Credit Agreement
consists of a $700 Line of Credit; a $850 Acquisition Note; a $1,100 Term A
Facility, payable in thirty-five equal monthly installments beginning March
1996; and a $584 Term Loan B Facility, payable in thirty-seven monthly
installments of $6 beginning March 1996, with a balloon payment due April
1999. Borrowings under the Credit Agreement are restricted to only provide for
working capital requirements of the Companies and fund future permitted
acquisitions and capital expenditures. As of December 31, 1996, $346 was
available to be borrowed under the Credit Agreement. The Credit Agreement
expires in April of 1999.

A portion of the proceeds from the Credit Agreement were used to pay down
the Companies' outstanding debt under the previous credit facilities.

Interest--Borrowings under the Credit Agreement bear interest at 1% above
the banks prime interest rate (the "Prime Rate") (9.25% rate as of December
31, 1996). In addition, the Companies shall pay 3% of annual gross revenues
generated by all permitted acquisitions financed by proceeds from the
Acquisition Note.

F-35
<PAGE>

SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

Termination--The Credit Agreement may be terminated at any time after the
first two years without a penalty or premium. If borrowings under the Credit
Agreement are pre-paid within the first two years, the Companies must pay a
prepayment penalty of up to 2% of the total amounts available under the Credit
Agreement. In addition, the Companies are required to pay the bank 3% of the
average monthly gross revenues of the permitted acquisition multiplied by the
number of months remaining in the term of the Credit Agreement.

Amendment--In January of 1997, the Credit Agreement was amended to increase
the borrowings available under the line of credit to $850.

As of December 31, 1996, the scheduled future principal payments of long-
term debt are as follows:

9. EMPLOYEE BENEFIT PLAN

The Companies maintain a qualified profit sharing/401(k) plan (the "Plan")
covering substantially all employees. The Companies' contributions to the Plan
are at the discretion of the Board of Directors. Costs under the Plan amounted
to $4 for the year ended December 31, 1996.

10. COMMITMENT AND CONTINGENCIES

Operating Leases--The Companies lease facilities under three non-cancelable
operating leases. Total lease expense incurred for the year ended December 31,
1996 was approximately $74. These leases expire during fiscal 1998. The future
minimum payments under these leases are $77 and $55 in 1997 and 1998,
respectively.

Guaranteed Commissions--The Companies operate coin laundry routes under
various lease agreements in which the Companies are required to make minimum
guaranteed commission payments to the respective property owners. During 1996,
the Companies made guaranteed commission payments of approximately $150 as
required under certain lease agreements.

Litigation--The Companies are involved in various litigation proceedings
arising in the normal course of business. In the opinion of management, the
Companies ultimate liability, if any, under pending litigation would not
materially affect their financial condition or the results of their
operations.

10. RELATED PARTY

Periodically, the Companies make loans to their sole shareholder. The
balance of these shareholder loans is included on the accompanying balance
sheet as due from shareholder. The due from shareholder balance at December
31, 1996 included approximately $36 of interest imputed at 6%.

F-36
<PAGE>

SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

11. SUBSEQUENT EVENT (UNAUDITED)

On April 17, 1997, Mac-Gray Corporation acquired all of the outstanding
common stock of Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry,
Inc., in exchange for 612,026 shares of its common stock ($7,797 approximate
value), approximately $2,170 in cash, $850 of a deferred obligation and the
assumption of outstanding indebtedness of the Companies of approximately
$2,787.

F-37
<PAGE>

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPEC-
TUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
The Company.............................................................. 14
Termination of S Corporation Status...................................... 14
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Historical Combined Financial Data.............................. 18
Unaudited Pro Forma Financial Data....................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 31
Management............................................................... 42
Certain Relationships and Related Transactions........................... 52
Principal Stockholders................................................... 54
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 63
Experts.................................................................. 64
Additional Information................................................... 64
Index to Financial Statements............................................ F-1
</TABLE>

----------------

UNTIL NOVEMBER 10, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE COMMON SHARES OFFERED, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.

4,000,000 SHARES

MAC-GRAYCORPORATION

COMMON STOCK
($.01 PAR VALUE)

LOGO

SALOMON BROTHERS INC

SMITH BARNEY INC.

FIRST ALBANY CORPORATION

PROSPECTUS

DATED OCTOBER 16, 1997