SEC Info℠

Home

Search

My Interests

Help

Sign In

Please Sign In

Mac-Gray Corp – ‘10-K’ for 12/31/07

On:  Friday, 3/14/08, at 3:03pm ET   ·   For:  12/31/07   ·   Accession #:  1047469-8-2779   ·   File #:  1-13495

Previous ‘10-K’:  ‘10-K’ on 3/16/07 for 12/31/06   ·   Next:  ‘10-K/A’ on 3/13/09 for 12/31/07   ·   Latest:  ‘10-K’ on 3/15/13 for 12/31/12

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

 Text Wildcards:  ? (any letter/digit),  * (many).  Search Logic:  for Documents:  & (and),  | (or);  for Text:  | (anywhere),  "(&)" (near).  Details... 

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/14/08  Mac-Gray Corp                     10-K       12/31/07    7:1.1M                                   Merrill Corp/New/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML    902K 
 2: EX-10.42    Material Contract                                   HTML     12K 
 3: EX-10.43    Material Contract                                   HTML     17K 
 4: EX-23.1     Consent of Experts or Counsel                       HTML      8K 
 5: EX-31.1     Certification -- Sarbanes-Oxley Act - Sect. 302     HTML     13K 
 6: EX-31.2     Certification -- Sarbanes-Oxley Act - Sect. 302     HTML     13K 
 7: EX-32.1     Certification -- Sarbanes-Oxley Act - Sect. 906     HTML     10K 

Use these links to rapidly review the document
MAC-GRAY CORPORATION Annual Report on Form 10-K Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

COMMISSION FILE NUMBER 1-13495

MAC-GRAY CORPORATION
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (781) 487-7600

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý

         The aggregate market value of the voting and non-voting stock of the registrant held by non-affiliates of the registrant as of June 30, 2007 was $131,033,989.

         As of March 3, 2008, 13,310,163 shares of common stock of the registrant, par value $.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Registrants' Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2008, are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this report. Such Proxy Statement shall not be deemed to be "filed" as part of this Annual Report on Form 10-K, except for those parts therein which have been specifically incorporated by reference herein.

MAC-GRAY CORPORATION

Annual Report on Form 10-K

Table of Contents

i

PART I

Forward-Looking Statements

        Some of the statements made in this report under the captions "Risk Factors," "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report or in documents incorporated herein by reference are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify these statements by forward-looking words such as "anticipate," "assume," "believe," "estimate," "expect," "intend," and other similar expressions. Investors should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond the Company's control and which could materially affect actual results, performance or achievements. Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, without limitation, the factors described under Item 1A, "Risk Factors." Investors should carefully review all of the factors described therein, which may not be an exhaustive list of the factors that could cause these differences.

Item 1.    Business

Overview

        Unless the context requires otherwise, all references in this report to "we," "our," "Mac-Gray," the "Company," or "us" means Mac-Gray Corporation and its subsidiaries and predecessors.

        Since its founding in 1927, Mac-Gray Corporation has grown to become the second largest laundry facilities management contractor in the United States. Through our portfolio of card- and coin-operated laundry equipment located in laundry facilities across the country, we provide laundry convenience to residents of multi-unit housing such as apartment buildings, condominiums, colleges and university residence halls, and hotels and motels. Based on our ongoing survey of colleges and universities, we believe that we are the largest provider of such services to the college and university market in the United States. Mac-Gray Corporation was re-incorporated in Delaware in 1997.

        We derive our revenue principally as a laundry facilities management contractor for the multi-unit housing industry. We manage laundry rooms under long-term leases with property owners, colleges and universities and governmental agencies. We refer to these leases as "laundry leases" or "management contracts" and this business as "laundry facilities management." In 2007, 81% of our consolidated revenue was derived from laundry facilities management. As of December 31, 2007, our laundry facilities management business had revenue-generating laundry equipment operating in 43 states and the District of Columbia.

        Intirion Corporation ("Intirion"), which operates our MicroFridge® branded product sales business, derives revenue through the sale and rental of a family of patented combination refrigerator/freezer/microwave ovens, or "Units," and other household appliances to colleges and universities, military bases, the hotel and motel market, and assisted living facilities. Intirion also derives revenue through the sale of commercial laundry equipment to the United States military and is also a national distributor of Whirlpool Corporation's Maytag®, Amana®, Magic Chef®, KitchenAid®, Estate® and Whirlpool® brands of appliances using the brand name "Maytag Direct®."

        Our laundry equipment sales unit sells and services commercial laundry equipment manufactured by Whirlpool Corporation, Dexter Laundry Company, American Dryer Corporation and Primus Laundry Company. This business unit sells commercial laundry equipment to retail laundromats, restaurants, hotels, health clubs and similar institutional users that operate their own on-premise laundry facilities. We refer to this business as our "commercial laundry equipment sales business."

1

        Our reprographics business unit ("Copico") derives its revenue principally through managing college and municipal libraries' vended reprographic equipment, with operations concentrated in the Northeast United States. In the fourth quarter of 2006, the Company incurred an impairment charge for the write-off of a significant portion of the assets associated with the operations of this business unit.

Segment Information

        The following is a discussion of each of our reportable business segments: (i) Facilities Management and (ii) Product Sales. Financial information with regard to each business segment is reported in Note 15 to the Company's consolidated financial statements included in this report.

Facilities Management Segment

        Mac-Gray's facilities management segment includes both our laundry facilities management business and reprographics facilities management business. For the years ended December 31, 2006 and 2007, our facilities management segment accounted for approximately 83% and 82% of our total revenue, respectively, and 82% and 77% of our gross margin, respectively for each year.

Laundry Facilities Management Business

        Through our facilities management segment, we act as a laundry facilities management contractor with property owners or managers. Mac-Gray leases space within a property, in some instances improves the leased space with flooring, ceilings and other improvements ("betterments") and then installs and services the laundry equipment and collects the payments. The property owner or manager is usually responsible for maintaining, cleaning, and securing of the premises and payment of utilities. Under our long-term leases, we typically receive the exclusive right to provide and service laundry equipment within a multi-unit housing property in exchange for a negotiated percentage of the total revenue collected. We refer to this percentage as "facilities management rent." During the past five years, we have retained approximately 97% of our equipment base per year. Our gross additions to our equipment base for each of the years ended December 31, 2006 and 2007 through internally generated growth has equaled 4%. Our additions, net of lost business, has equaled 1% for each of the years ended December 31, 2006 and 2007. The machine base not retained is attributable to contracts lost to competitors, contracts the Company has chosen not to renew due to unacceptable margins, including some acquired contracts that did not meet our performance criteria and condominium conversions. Mac-Gray believes that its ability to retain its existing equipment base and grow it through internally generated growth in equipment installations is indicative of its service of, and attention to, property owners and managers. The Company also provides its customers with proprietary technologies such as LaundryView™ and LaundryLinx™ and continues to invest in research and development of such technologies. We generally have the ability to set and adjust the vend pricing for our equipment based upon local market conditions.

        Mac-Gray has centralized its administrative and marketing operations at its corporate headquarters in Waltham, Massachusetts. Mac-Gray also operates sales and/or service centers in Arizona (two locations), Colorado, Connecticut, Florida (two locations), Georgia, Illinois, Louisiana, Maine, Maryland, Massachusetts (two locations), New Jersey, New Mexico, New York (two locations), North Carolina, Oregon, Tennessee, Texas (three locations), Utah, Virginia, and Washington.

        Mac-Gray also generates revenue by leasing equipment to commercial laundry customers who choose neither to purchase equipment nor to become a laundry facilities management customer, but instead wish to maintain their own laundry rooms. This leasing business generated revenue of $4.0 million and $4.5 million for the years ended December 31, 2006 and 2007, respectively, and is included in the laundry facilities management business unit.

2

        Mac-Gray's laundry facilities management business has certain intrinsic characteristics in both its industry and its customer base, including the following:

        Revenue.    Mac-Gray operates as a laundry facilities management contractor under long-term leases and other arrangements with property owners or managers. Mac-Gray's efforts are designed to maintain these customer relationships over the long-term. Our typical leases have an original average term of approximately seven years, with an option to renew if mutually agreed upon by us and the owner or manager. In each of the past five years, we have retained contracts representing approximately 97% of our equipment base per year.

        Customers.    As of February 1, 2008, Mac-Gray provided laundry equipment and related services to approximately 69,000 laundry rooms located in 43 states throughout the continental United States and The District of Columbia. As of February 1, 2008, no customer contract accounted for more than 1% of Mac-Gray's laundry facilities management revenue. Mac-Gray serves customers in multi-unit housing facilities, including apartment buildings, college and university residence halls, condominiums and public-housing complexes.

        Seasonality.    The Company experiences moderate seasonality as a result of its operations in the college and university market. Revenues derived from the college and university market represented approximately 15% of the laundry facilities management revenue for 2007. Academic facilities management revenues are derived substantially during the school year in the first, second and fourth calendar quarters. Conversely, during the third calendar quarter when most colleges and universities are not in session, the Company increases its operating and capital expenditures when it has its greatest product installation activities. Product sales, principally of MicroFridge® branded products, to this market are typically higher during the third calendar quarter as compared to the rest of the calendar year, somewhat offsetting the seasonality effect of the laundry facilities management business unit.

        Competition.    The laundry facilities management industry is highly competitive, capital intensive and requires the delivery of reliable and prompt services to customers. Mac-Gray believes that customers consider a number of factors in selecting a laundry facilities management contractor, such as customer service, reputation, facilities management rent rates (including incentives), advance rents, range of products and services, and technology. Mac-Gray believes that different types of customers assign varied weight to each of these factors and that no one factor alone determines a customer's selection of a laundry facilities management contractor. Within any given geographic area, Mac-Gray may compete with local independent operators, regional and multi-regional operators. The industry is highly fragmented; consequently, Mac-Gray has grown by acquisitions, as well as through new equipment placement. Mac-Gray believes that it is the second largest laundry facilities management contractor in North America.

        Impact of Occupancy Rates.    The Company's laundry facilities management revenue is affected by multi-unit housing occupancy rates. Occupancy rates in the multi-unit housing industry are affected by several factors. These factors include local economic conditions, local employment levels, mortgage interest rates as they relate to first-time homebuyers, and the supply of apartments in specific markets. The Company is somewhat protected from revenue decreases caused by declining occupancy rates due to the variation of markets served, the various types of multi-unit housing facilities therein, and the percentage of revenue derived from colleges and universities. The Company monitors independent market research data regarding trends in occupancy rates in its markets to better understand laundry facilities revenue trends and variations.

        Suppliers.    The Company currently purchases substantially all of the equipment that it uses in its laundry facilities management business from Whirlpool Corporation ("Whirlpool"). In addition, the Company derives a portion of its revenue, as well as certain competitive advantages, from its position as a distributor of Whirlpool manufactured appliances. The Company has maintained a relationship

3

with Whirlpool and its predecessor, Maytag Corporation, since 1927. Either party upon written notice may terminate the purchase and distribution agreements between the Company and Whirlpool. A termination of, or substantial revision of the terms of, the contractual arrangements or business relationships with Whirlpool could have a material adverse effect on the Company's business, results of operations, financial condition and prospects.

Reprographics Facilities Management Business

        Our reprographics facilities management business unit, operating as Copico, is a provider of card- and coin-operated reprographics equipment and services to the academic and public library markets in the Northeast, and to a lesser extent in the Mid-Atlantic and the Midwest regions of the United States. Copico provides and services copiers and laser printers for the libraries of colleges, universities, graduate schools and public libraries. Copico represented less than 1% of the Company's consolidated revenue in 2007.

        Copico's revenue and corresponding operating income have been declining since 1999 when college libraries, followed by public libraries, began to make reference material available to patrons electronically. Electronic availability, widespread conversion to laser printers (free of charge in many school libraries) and other technical advancements have led to reduced use of vended copy machines resulting in reduced revenue at several accounts. As a result, in 2006 the Company recorded a pre-tax impairment charge of $2.5 million to write down the value of the reprographics business unit to its net realizable value. Copico continues to serve its customer base but is not actively seeking to expand the business.

Product Sales Segment

        Mac-Gray's product sales segment includes both Intirion and commercial laundry equipment sales. For the years ended December 31, 2006 and 2007, our product sales segment accounted for approximately 17% and 18% of our total revenue, respectively, and 18% and 23% of our gross margin, respectively.

Intirion Sales Business

        Revenue.    Our Intirion business unit consists of supplying combination refrigerator/ freezer/microwave ovens ("Units") to multi-unit housing facilities such as military bases, hotels, motels, colleges and universities and assisted living facilities under the brand names MicroFridge® and SnackMate™. The Intirion business unit revenue also includes sales of commercial laundry equipment to military installations. The Intirion business unit is a national distributor of Whirlpool's Maytag®, Amana® Magic Chef®, KitchenAid®, Estate® and Whirlpool® brands of appliances using Maytag Direct® as our brand name. For the years ended December 31, 2006 and 2007, our Intirion business unit accounted for approximately 11% of our total revenue for each year.

        Products.    The MicroFridge® branded product line with Safe Plug™ is a family of combination refrigerator/freezer/microwave ovens. The Units' circuitry has proven to be an important feature for those customers who have concerns about electrical capacity and seek a safer alternative to hot plates and other cooking or heating appliances. Sales efforts behind the MicroFridge® branded product have been focused on such "home-away-from-home" markets as military bases, hotels, motels, colleges and universities and assisted living facilities.

        Mac-Gray believes that the product line carrying the MicroFridge® brand enhances the Company's ability to provide multiple amenities to both its current customer base as well as future customers seeking one source to fill multiple needs.

4

        Customers.    The Intirion business unit revenue is derived from both the sale and rental of products carrying the MicroFridge® and SnackMate™ brands. In 2007, the largest market was government living, consisting principally of military bases. In this market, the MicroFridge® branded product line is available through government contracts with various governmental agencies. MicroFridge® branded units have been installed at more than 200 United States government facilities throughout the world. The second largest market was the hospitality lodging industry and assisted living market throughout the United States, to which we sell both directly and through an independent dealer network. MicroFridge® branded units are also sold and leased to the academic living market. The academic living market is composed of more than 1,800 colleges and universities across the United States that have on-campus residence halls. The MicroFridge® brands' presence in this market provides our sales staff with the opportunity to cross sell the Company's laundry facility management services and refrigerator/microwave product line.

        Competition.    In addition to large direct sellers, the Intirion business unit also competes with major retail stores and local and regional distributors who sell various brand-name compact refrigerators as well as microwave ovens to the markets where the MicroFridge® brand has a presence. Although we jointly hold a patent on combination units utilizing internal circuitry, there has been continuing competition from "similar look" products utilizing an external circuitry control mechanism. There also exists local and regional competition in the combination appliance rental business. Management believes that its brand equity gained from being the first entrant in the market enables it to compete effectively against new entrants in the combination appliance business. Principal competitors for MicroFridge® branded products include Absocold, Avanti, General Electric, Sears, Tatung, Home Depot, Lowe's, Wal-Mart, and several companies focused on the college rental marketplace.

        Suppliers.    The Intirion business unit maintains original equipment manufacturer, or "OEM," arrangements with two primary manufacturers: Sanyo E&E Corporation ("Sanyo"), and Nisshin Industry Co. Ltd. The principal patent underlying the MicroFridge® branded product is held jointly by Sanyo and us. The patented circuitry of the MicroFridge® branded units is marketed under the trade name Safe Plug®.

Commercial Laundry Equipment Sales and Services Business

        Through its commercial equipment sales and services business, Mac-Gray is a significant distributor for several commercial laundry equipment manufacturers, primarily Whirlpool. Mac-Gray does not manufacture any of the commercial laundry equipment that it sells. As an equipment distributor, Mac-Gray sells commercial laundry equipment to public retail laundromats, as well as to the multi-unit housing industry. In addition, Mac-Gray sells commercial laundry equipment directly to institutional purchasers, including hospitals, restaurants, and hotels, for use in their own on-premise laundry facilities. Mac-Gray is certified by the manufacturers to service the commercial laundry equipment that it sells. Installation and repair services are provided on an occurrence basis, not on a contractual basis. Related revenue is recognized at the time the installation service, or other service, is provided to the customer. For the years ended December 31, 2006 and 2007, our laundry equipment sales business unit accounted for approximately 6% and 7%, respectively, of our total revenue.

Employee Base

        As of February 1, 2008, the Company employed 831 full-time employees. No employee is covered by a collective bargaining agreement and the Company believes that its relationship with its employees is good.

5

Operating Characteristics

        The Company maintains a corporate staff as well as centralized finance, human resources, legal services, information technology and marketing departments. Regionally, the Company maintains service centers and warehouses staffed by local management, service technicians, collectors, customer service representatives and inventory handlers. These facilities service the Facilities Management segment as well as commercial laundry equipment sales.

        The Facilities Management segment's sales and marketing efforts are conducted primarily by employees of the Company. Outside service providers are used periodically for various matters, including equipment installation. The Product Sales segment uses an internal sales force and independent distributors in parts of the United States where business opportunities do not warrant a direct sales force.

Backlog

        Due to the nature of the Company's laundry facilities management business, backlogs do not exist. There is no significant backlog of orders in the Company's two sales businesses.

Contact Information

        The Company files its annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission, or "SEC." Company reports filed with the SEC are available at the SEC's website at www.sec.gov and the Company's website at www.macgray.com. The information contained on our website is not included as a part of, or incorporated by reference into, this annual report on Form 10-K.

        The Company's corporate offices are located at 404 Wyman Street, Suite 400, Waltham, Massachusetts, 02451-1212. The Company's telephone number is (781) 487-7600, its fax number is (781) 487-7606, and its email address for investor relations is ir@macgray.com.

Item 1A.    Risk Factors

        This annual report on Form 10-K contains statements which are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements contain projections of the Company's future results of operations or financial position or state other forward-looking information. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the Company's control. These risks, uncertainties and other factors may cause the Company's actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences are as follows:

If we are unable to establish new laundry facility leases, renew our existing laundry facility leases or retain relationships with our customers who are not subject to leases, our business, results of operations, cash flows and financial condition could be adversely affected.

        Our laundry facilities management business unit, which provided 81% of our total revenue for the year ended December 31, 2007, is highly dependent upon the renewal of leases with property owners and property management companies. Leases that we have entered into or renewed since 2001 provide for an average initial term of seven years. Approximately 10% to 15% of our leases are up for renewal each year. We have traditionally relied upon exclusive, long-term leases with our customers, as well as

6

frequent customer interaction and an emphasis on customer service, to assure continuity of financial and operating results. We cannot guarantee that in the future we will be able to establish long-term leases with new customers or renew existing long-term leases as they expire on favorable terms, or at all.

        Failure by us to continue to establish long-term leases with new customers, or to successfully renew existing long-term leases as they expire, could have a material adverse effect on our business, results of operations, cash flows and financial condition. Further, approximately 10% of our customers are not subject to leases, are subject to short-term leases of less than one year remaining, or have the right to terminate their lease with us at their option. Failure to retain these customers could have a material adverse effect on our business, results of operations, cash flows and financial condition.

We face strong competition in the outsourced laundry facilities management industry.

        The outsourced laundry facilities management industry is highly competitive, and we compete for long-term leases, both locally and nationally, with property owners and other operators in the industry. We compete based on customer service, reputation, facilities management rent rates, incentive payments and a range of products and services. Smaller local and regional operators typically have long-standing relationships with property owners and managers in their specific geographic market. As such, we may have difficulty penetrating such markets, as property owners and managers may be resistant to terminating such long-standing relationships. We also compete with property owners, as there is no guarantee that property owners will continue to outsource their laundry facilities management to operators. There is one competitor in the industry, Coinmach Corporation, with a larger installed equipment base than us. Competition in the industry may make it more difficult and more expensive to consummate acquisitions in the future and to maintain and expand our installed equipment base. In addition, some of our competitors may have less indebtedness than we do, and therefore more of their cash is potentially available for business purposes other than debt service. We cannot assure you that our results of operations, cash flows or financial condition will not be materially and adversely affected by competition, or that we will be able to maintain our profitability if the competitive environment changes.

Our cash flows may not be sufficient to finance the significant capital expenditures required to replace equipment, implement new technology, or make incentive payments to property managers.

        We must continue to make capital expenditures in order to maintain and replace our installed equipment base and implement new technology in our equipment. We must also make incentive payments to some property managers in order to secure new laundry leases and renew existing laundry leases. We cannot assure you that our resources or cash flows will be sufficient to finance anticipated capital expenditures and incentive payments for at least the next year. To the extent that available resources are insufficient to fund our capital needs, we may need to raise additional funds through public or private financings or curtail certain expenditures. These financings may not be available on favorable terms, or at all, and, in the case of equity financings, could result in dilution to stockholders. If we cannot maintain or replace our equipment as we require or implement our new technologies, our results of operations, cash flows and financial condition could be materially and adversely affected.

If we are unable to continue our relationships with Whirlpool Corporation and other equipment suppliers, our revenues could be reduced, and our ability to meet customer requirements could be materially and adversely affected.

        We purchase substantially all of the equipment that we use in our laundry facilities management business unit from Whirlpool. In addition, we derive a significant amount of our product sales revenue from our position as a distributor of Whirlpool commercial laundry products. We cannot assure you that Whirlpool will continue its relationship with us. If Whirlpool terminates its relationship with us,

7

our results of operations, cash flows and financial condition could be materially and adversely affected, and further, we may be unable to replace our relationship with Whirlpool with a comparable company on favorable terms, or at all. Whirlpool became our largest supplier of laundry equipment following its acquisition of Maytag Corporation in March 2006. There have been no significant changes in our relationship with Whirlpool as a result of the acquisition.

        In addition, we currently obtain the products used by our MicroFridge® branded business from two suppliers. If either of these suppliers terminates or demands a substantial revision of the contracts or business relationships currently in place, we may be unable to find a replacement in a timely manner, on favorable terms, or at all, which could have a material adverse affect on our results of operations and our ability to meet customer demands.

A decrease in multi-unit housing sector occupancy rates in the markets in which we conduct business could adversely affect our facilities management revenue.

        Our facilities management revenue from our operation of card- and coin-operated laundry equipment, particularly in the multi-unit housing sector, depends partially upon the level of tenant occupancy. The number of apartments occupied in an apartment building with a vended laundry facility directly affects our revenue. Extended periods of reduced occupancy in our clients' buildings could adversely affect our operations. The level of occupancy can be adversely affected by many market and general economic conditions, all of which are beyond our control, including:

•

local economic recessions and increases in the unemployment rate;



•

mortgage interest rates as they apply to first-time homebuyers;



•

oversupply of apartments; and



•

conversion of apartment units to condominiums with in-unit laundry hookups.

If we are unable to comply with our debt service requirements under existing or future indebtedness, our indebtedness could become payable immediately.

        Our current financing agreements require us to meet certain financial covenants. If we are unable to meet those requirements, our indebtedness could become immediately due and payable. If our debt were accelerated we would need to refinance or restructure our debt agreement as our current cash flow would be inadequate to retire our debt, which we may not be able to consummate on commercially reasonable terms, or at all.

If we are unable to access capital on acceptable financial terms, our ability to consummate acquisitions will be limited.

        The success of our long-term growth strategy is partially dependent upon our ability to identify, finance and consummate acquisitions on acceptable financial terms. Access to capital is subject to the following risks:

•

use of common stock as acquisition consideration may result in dilution to stockholders;



•

if our common stock does not maintain a sufficient valuation or if potential acquisition candidates are unwilling to accept shares of our common stock, then we would be required to increase our use of cash resources or other consideration to consummate acquisitions;



•

if we are unable to generate sufficient cash for acquisitions from existing operations, we will not be able to consummate acquisitions unless we are able to obtain additional capital through external financings, which we may not be able to consummate on commercially reasonable terms, or at all;

8

•

funding future acquisitions through debt financings would result in additional leverage; and



•

the agreements governing our indebtedness include significant limitations on our ability to borrow money for acquisitions and other purposes and, as a result, we may not be able to take advantage of acquisition opportunities.

We may have difficulties integrating future acquisitions into our business.

        We have in the past, and intend to in the future, engage in acquisitions to continue the expansion of our laundry facilities management business unit. The failure to successfully complete the integration of any acquisition would adversely affect our business and results of operations.

        Any future acquisitions could involve numerous risks, including:

•

potential disruption of our ongoing business and distraction of management;



•

difficulty integrating the operations of the acquired businesses;



•

unanticipated expenses related to equipment, maintenance and technology integration;



•

exposure to unknown liabilities, including litigation against the companies that we may acquire;



•

additional costs due to entering new geographic locations and duplication of key talent;



•

potential loss of key employees or customers of the acquired businesses;



•

the inability to achieve anticipated synergies or increase the revenue and profit of the acquired business; and



•

the expenditure of a disproportionate amount of money and time integrating acquired businesses, particularly operations located in new geographic regions and operations involving new lines of business.

        We may not be successful in addressing these risks or any other problems encountered in connection with any acquisitions.

Our internal controls over financial reporting may not be adequate and our independent auditors may not be able to certify as to their adequacy, which could have a significant and adverse effect on our business and reputation.

        Section 404 of the Sarbanes-Oxley Act of 2002 requires a reporting company such as ours to, among other things, annually review and disclose its internal controls over financial reporting, and evaluate and disclose changes in its internal controls over financial reporting quarterly. If we are not able to achieve and maintain adequate compliance, or our independent auditors are not able to certify as to the effectiveness of our internal control over financial reporting, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could adversely affect our results of operations and financial condition.

Our Intirion products may be susceptible to product liability claims for which our current levels of insurance coverage may not be adequate.

        Through our Intirion business, we market and distribute combination refrigerator/freezer/ microwave oven units under the brand names MicroFridge®, SnackMate™ and Intelli-Vault™. The sale and distribution of Intirion products, as well as other products, entails a risk of product liability claims. Although MicroFridge®, SnackMate™ and Intelli-Vault™ branded units are manufactured by third

9

parties under contract with us, we may still be subject to risks of product liability claims related to these units. Potential product liability claims may exceed the amount of our product liability insurance coverage or may be excluded from that coverage. We cannot assure you that we will be able to renew our existing product liability insurance at a cost and level of coverage comparable to that currently in place, if at all. In the event that our Intirion business is held liable for a claim for which it is not indemnified or for damages exceeding the limits of available product liability insurance coverage, the claim could have a material adverse effect on our business, results of operations and financial condition.

Inability to protect our trademarks and other proprietary rights could adversely impact our competitive position.

        We rely on patents, copyrights, trademarks, trade secrets, confidentiality provisions and employee and third party non-disclosure and non-solicitation agreements to establish and protect our intellectual property and proprietary rights. We cannot be certain that steps we have taken to protect our intellectual property and proprietary rights will be adequate or that third parties will not infringe or misappropriate any of our intellectual property or proprietary rights. While we have periodically made filings with the U.S. Patent and Trademark Office, we have traditionally relied upon the protections afforded by contract rights and common law ownership rights, and we cannot assure you that these contract rights and common law ownership rights will adequately protect our intellectual property and proprietary rights. Any infringement or misappropriation of our intellectual property and proprietary rights could damage their value and could have a material adverse effect on our business, results of operations and financial condition. We may have to engage in litigation to protect our rights to our intellectual property and proprietary rights, which could result in significant litigation expenses and require a significant amount of management's time.

        We own or license several registered and unregistered trademarks, including Mac-Gray®, Web®, Hof®, MicroFridge®, Intelligent Laundry™, LaundryView™, LaundryLinx™, PrecisionWash™, TechLinx™, VentSnake™, Intelli-Vault™, SnackMate™, LaundryAudit™ and e-issues™ that we use in the marketing and sale of our products. However, the degree of protection that these trademarks afford us is unknown and these trademarks may expire or be terminated. In the event that someone infringes on or misappropriates our trademarks, the brand images and reputation that we have developed could be damaged, which could have a material adverse effect on our business, results of operations and financial condition.

We are dependent on key personnel, and the loss of any of our key personnel could have a material adverse effect on our business, results of operations and financial condition.

        Our continued success will depend largely on the efforts and abilities of our executive officers, management teams and other key employees. The loss of any of these officers or other key employees could result in inefficiencies in our operations, lost business opportunities or the loss of one or more customers.

Our financial results have been and could further be negatively impacted by impairments of goodwill or other intangible assets required by SFAS 142 and the application of future accounting policies or interpretations of existing accounting policies.

        In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets referred to as "SFAS 142," we perform an annual assessment on goodwill and other intangible assets for impairment and also an assessment if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below it's carrying amount. See Note 2 to the consolidated financial statements and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in this Form 10-K.

10

        A downward revision in the fair value of one of our reporting units could result in additional impairments of goodwill under SFAS 142 and additional non-cash charges. Any charge resulting from the application of SFAS 142 could have a significant negative effect on our reported net loss. In addition, our financial results could be negatively impacted by the application of existing and future accounting policies or interpretations of existing accounting policies, any continuing impact of SFAS 142 or any negative impact relating to the application of Statement of Financial Accounting Standards No. 144, Accounting for the Improvement and Disposal of Long-Lived Assets.

We face risks associated with environmental regulation.

        Our businesses and operations are subject to federal, state and local environmental laws and regulations, including those governing the discharge of pollutants, the handling, generation, storage and disposal of hazardous materials, substances and wastes and the cleanup of contaminated sites. In connection with current or historical operations by us or at our sites, we could incur substantial costs, including clean-up costs, fines and civil or criminal sanctions, and third-party claims for property damage or personal injury, as a result of violations of, or liabilities under, environmental laws and regulations. While we are not aware of any existing or potential environmental claims against us that are likely to have a material adverse effect on our business or financial condition, we cannot guarantee you that we will not in the future incur liability or other costs under environmental laws and regulations that could have a material adverse effect on our business or financial condition.

We are controlled by a concentrated group of stockholders, whose interests could be in conflict with yours.

        As of December 31, 2007, our directors, executive officers, and certain of our stockholders related to such persons and their affiliates beneficially owned in the aggregate approximately 33.2% of the outstanding shares of our common stock (See Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters" below). This percentage ownership does not include options to purchase 691,654 shares of our common stock held by some of these persons, which options were exercisable at, or within 60 days subsequent to, December 31, 2007. If all of these options had been exercised as of December 31, 2007, then these stockholders and their affiliates would have beneficially owned 38.4% of the outstanding shares of our common stock. Additionally, we have entered into a stockholders' agreement, dated June 26, 1997, with some of these stockholders that gives them rights of first offer to purchase shares of our common stock offered for sale by another stockholder party thereto (See Item 13, "Certain Relationships and Related Transactions below). As a result of this concentration in ownership, these stockholders, acting together, have the ability to significantly influence the outcome of the election of directors and all other matters requiring approval by a majority of stockholders. Circumstances may arise in which the interests of this group of stockholders could be in conflict with interests of other stockholders.

Provisions in our charter and bylaws, Delaware law, and the shareholders agreement could have the effect of discouraging takeovers.

        Specific provisions of our charter and bylaws, as described below and in Footnote 14 to the Consolidated Financial Statements; sections of the corporate law of Delaware; the shareholder agreement, and powers of our Board of Directors may discourage takeover attempts not first approved by the Board of Directors, including takeovers which some stockholders may deem to be in their best interests. These provisions and powers of the Board of Directors could delay or prevent the removal of incumbent directors or the assumption of control by stockholders, even if the particular removal or assumption of control would be beneficial to stockholders. These provisions and powers of the Board of Directors could also discourage or make more difficult a merger, tender offer or proxy contest, even

11

if these events would be beneficial, in the short term, to the interests of some shareholders. The anti-takeover provisions and powers of the Board of Directors include, among other things:

•

the ability of our Board of Directors to issue shares of preferred stock and to establish the voting rights, preferences and other terms of such preferred stock;



•

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 our Board of Directors to determine the size of the Board of Directors and, subject to the rights of holders of any series of preferred stock, if issued, to fill vacancies thereon;



•

the vesting of exclusive authority in our Board of Directors, except as otherwise required by law, to call special meetings of stockholders;



•

advance notice requirements for stockholder proposals and nominations for election to the Board of Directors;



•

ownership restrictions, under the corporate law of Delaware, with limited exceptions, upon acquirers including their affiliates and associates of 15% or more of its common stock; and



•

our entry into a shareholder rights agreement providing for the issuance of rights that will cause substantial dilution to a person or group of persons that acquires 15% or more of the common shares unless the rights are redeemed.

Item 1B.    Unresolved SEC Staff Comments

        None.

Item 2.    Properties

        Mac-Gray rents approximately 32,000 square feet in Waltham, Massachusetts that it uses as its corporate headquarters and which houses the Company's administrative and central services. Mac-Gray owns a sales and service facility in Tampa, Florida consisting of approximately 12,000 square feet. At December 31, 2007, Mac-Gray leased the following regional facilities, which are largely operated as sales and service facilities, although limited administrative functions are also performed at many of them:

12

        All properties are primarily utilized for the laundry facilities management business except for the Walpole, Massachusetts facility, which is utilized by both the Product Sales segment and Copico. The Product Sales segment also leases space at public warehouses, where rent is based on handling and the number of Units stored.

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

Item 3.    Legal Proceedings

        From time to time, Mac-Gray is a party to litigation arising in the ordinary course of business. There can be no assurance that Mac-Gray's insurance coverage will be adequate to cover any liabilities resulting from such litigation. In the opinion of management, any liability that Mac-Gray might incur upon the resolution of currently pending litigation will not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations or cash flows.

        Our business and operations are subject to federal, state and local environmental laws and regulations, including those governing the discharge of pollutants, the handling, generation, disposal and storage of hazardous materials and wastes, and the cleanup of contaminated sites. In connection with current or historical operations by us or at our sites, we could incur substantial costs, including clean-up costs, fines and civil or criminal sanctions, and third-party claims for property damage or personal injury, as a result of violations of, or liabilities under, environmental laws and regulations. We believe that our operations are in material compliance with applicable environmental laws and regulations.

Item 4.    Submission of Matters to a Vote of Security Holders

        No matters were submitted to vote of security holders during the fourth quarter of 2007.

13

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Mac-Gray common stock is traded on the New York Stock Exchange, or NYSE, under the symbol "TUC."

        The following table sets forth the high and low sales prices for Mac-Gray common stock on the NYSE for the periods indicated.

        As of March 6, 2008 there were 137 shareholders of record of Mac-Gray common stock.

        The Company does not currently pay dividends to the holders of Mac-Gray common stock. The Company currently intends to retain future earnings, if any, for the development of its businesses and does not anticipate paying cash dividends on its common stock in the foreseeable future. Future determinations by the Board of Directors to pay dividends on the Company's common stock would be based primarily upon the financial condition, results of operations, and business requirements of the Company. Dividends, if any, would be payable at the sole discretion of the Board of Directors out of the funds legally available therefor. In addition, the payment of dividends is restricted under the Company's senior credit facilities.

        For information related to our stock option plans and employee stock purchase plans, see Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" below.

14

Item 6.    Selected Financial Data (Dollars in thousands, except per share data)

        Set forth below are selected historical financial data as of the dates and for the periods indicated. The selected 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 consolidated financial statements of Mac-Gray and the notes thereto included elsewhere in this report.

15

(1)

Includes the results of operations of the eastern region laundry facilities management assets acquired on January 16, 2004 from Web Service Company, Inc. for approximately $42,000.

(2)

Includes the results of operations of the western region laundry facilities management assets acquired on January 10, 2005 from Web Service Company, Inc. for approximately $113,000.

(3)

Includes the results of operations of the Maryland laundry facilities management assets acquired on August 8, 2007 from Hof Service Company, Inc. for approximately $43,000.

(4)

EBITDA is defined as net income before provision for income taxes, depreciation and amortization expense, and interest expense. Adjusted EBITDA is EBITDA further adjusted to exclude the items described in the table below. We have excluded these items because we believe they are not reflective of our ongoing operating performance. EBITDA and Adjusted EBIDTA are included in this report because they are a basis upon which our management and board of directors assess our operating performance. EBITDA and Adjusted EBITDA are not measures of our liquidity or financial performance under GAAP and should not be considered as alternatives to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity. The use of EBITDA and Adjusted EBITDA instead of net income has limitations as an analytical tool, including the exclusion of interest expense and depreciation and amortization expense, which represent significant and unavoidable operating costs given the level of indebtedness and the capital expenditures needed to maintain our business. Management compensates for these limitations by relying primarily on our GAAP results and by using EBITDA and Adjusted EBITDA only supplementally. Our management believes EBITDA and Adjusted EBITDA are useful to investors because they help enable investors to evaluate our business in the same manner as our management and because they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies with substantial financial leverage. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation.

(5)

Excludes $1,380, $1,579, $1,499, $1,776 and $2,003 in 2003, 2004, 2005, 2006 and 2007, respectively, of capital leases associated with vehicles acquired and used in the operation of the Company.

        The following is a reconciliation of net income to EBITDA and Adjusted EBITDA:

(1)

Includes the results of operations of the eastern region laundry facilities management assets acquired on January 16, 2004 from Web Service Company, Inc. for approximately $42,000.

(2)

Includes the results of operations of the western region laundry facilities management assets acquired on January 10, 2005 from Web Service Company, Inc. for approximately $113,000.

16

(3)

Includes the results of operations of the Maryland laundry facilities management assets acquired on August 8, 2007 from Hof Service Company, Inc. for approximately $43,000.

(4)

EBITDA is defined as net income before provision for income taxes, depreciation and amortization expense, and interest expense. Adjusted EBITDA is EBITDA further adjusted to exclude the items described in the table below. We have excluded these items because we believe they are not reflective of our ongoing operating performance. EBITDA and Adjusted EBIDTA are included in this report because they are a basis upon which our management and board of directors assess our operating performance. EBITDA and Adjusted EBITDA are not measures of our liquidity or financial performance under GAAP and should not be considered as alternatives to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity. The use of EBITDA and Adjusted EBITDA instead of net income has limitations as an analytical tool, including the exclusion of interest expense and depreciation and amortization expense, which represent significant and unavoidable operating costs given the level of indebtedness and the capital expenditures needed to maintain our business. Management compensates for these limitations by relying primarily on our GAAP results and by using EBITDA and Adjusted EBITDA only supplementally. Our management believes EBITDA and Adjusted EBITDA are useful to investors because they help enable investors to evaluate our business in the same manner as our management and because they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies with substantial financial leverage. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation.

(a)

Represents a pretax gain recognized in connection with the sale of certain laundry facilities management assets and related contracts.

(b)

Represents a pretax gain recognized in connection with the sale of a facility in Cambridge, Massachusetts on June 30, 2005.

17

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in Thousands)

        The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto presented elsewhere in this report.

        This report contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. These forward-looking statements reflect our current views about future events and financial performance. Investors should not rely on forward-looking statements because they are subject to a variety of factors that could cause actual results to differ materially from our expectations. Factors that could cause, or contribute to such differences include, without limitation, the factors described under Item 1A "Risk Factors."

        Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations or financial condition. In view of these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

        Mac-Gray was founded in 1927 and re-incorporated in Delaware in 1997. We conduct our business in the following four business units: (1) the laundry facilities management business unit, through which we manage laundry facilities in multi-unit housing; (2) the Intirion business unit, through which we sell a line of combination refrigerator/freezer/microwave oven units and Whirlpool appliances under the MicroFridge®, Snackmate™ and Maytag Direct® brands to multi-unit housing facilities such as hospitality and assisted living facilities, military housing, and colleges and universities; (3) the commercial laundry equipment sales business unit, through which we sell commercial laundry equipment; and (4) the reprographics business unit, through which we provide reprographics equipment and services to the academic and public library markets. We report our business in two segments: facilities management and product sales. Facilities management consists of our laundry facilities management and reprographics business units. Product sales consist of our commercial laundry equipment sales and Intirion business units.

        Our core business model is built on a stable demand for laundry services, combined with long-term leases, strong customer relationships, a broad customer base and predictable capital needs. For the years ended December 31, 2006 and 2007, our total revenue was $279,300 and $295,900, respectively. Approximately 82% and 81% of our total revenue for these periods, respectively, was generated by our laundry facilities management business unit. We generate laundry facilities management revenue primarily through long-term leases with property owners or property management companies granting us the exclusive right to install and maintain laundry equipment in common area laundry rooms within their properties, in exchange for a negotiated portion of the revenue we collect. As of December 31, 2007, approximately 90% of our installed machine base was located in laundry facilities subject to long-term leases, with a weighted average remaining term of approximately five years. Our capital costs are typically incurred in connection with new or renewed leases, and include investments in laundry equipment and card- and coin-operated systems, incentive payments to property owners or property management companies and/or expenses to refurbish laundry facilities. Our capital costs consist of a large number of relatively small amounts associated with our entry into or renewal of leases. Accordingly, our capital needs are predictable and largely within our control. For the years ended December 31, 2006 and 2007, we incurred approximately $25,900 and $27,200 of capital expenditures, respectively. In addition, we make incentive payments to property owners and property management

18

companies to secure our lease arrangements. We paid approximately $4,500 and $3,800 of incentive payments in the years ended December 31, 2006 and 2007, respectively.

        In addition, through our product sales segment, we generate revenue by selling commercial laundry equipment, our line of combination refrigerator/freezer/microwave oven units under the MicroFridge® and SnackMate™ brands and the full lines of Maytag®, Amana® Magic Chef®, KitchenAid®, Estate®, and Whirlpool® domestic laundry and kitchen appliances under our Maytag Direct® program. For the years ended December 31, 2006 and 2007, our product sales segment accounted for approximately 17% and 18% of our total revenue, respectively, and 18% and 23% of our gross margin, respectively.

        Our financial objective is to maintain and enhance profitability by retaining existing customers, adding customers in areas in which we currently operate, selectively expanding our geographic footprint and density through acquisitions, and controlling costs. One of the key challenges we face is maintaining and expanding our customer base in a competitive industry. We experience competition from other industry participants, including national, regional and local laundry facilities management operators and from property owners and property management companies who self-operate their laundry facilities. We devote substantial resources to our marketing and sales efforts and we focused on continued innovation in order to distinguish us from competitors. Approximately 10% to 15% of our laundry room leases are up for renewal each year. Over the past five calendar years, we have been able to retain, on average, approximately 97% of our total installed equipment base each year. For each of the years ended December 31, 2006 and 2007, we have been able to add 4% to our equipment base through internally generated growth. The machine base that has not been retained is attributable to contracts lost to competitors, contracts the Company has chosen not to renew due to unacceptable margins and condominium conversions.

        The Intirion business unit derives revenue through the sale and rental of its MicroFridge®, SnackMate™ and Maytag Direct® branded appliances to the hospitality industry and assisted living market, military bases and colleges and universities. The Intirion business unit also derives revenue through the sales of laundry equipment to the United States government and sales of kitchen appliances to the multi-housing market.

Recent Developments

        On February 28, 2007, we acquired the laundry facilities management assets and commercial laundry equipment distribution rights of a regional operator in the Southeast United States. On April 26, 2007, we acquired the laundry facilities management assets of a regional operator in New York. The combined cost of these acquisitions was approximately $5,200 and was funded by borrowings under our senior credit facilities. We estimate that the combined acquisitions will add approximately $4,700 of annual revenue.

        On August 8, 2007, we acquired the laundry facilities management assets of Hof Service Company, Inc. and Bobb Corp. in Maryland (the "Hof Acquisition"). The cost of this acquisition was approximately $43,000, which includes a contingent payment of $2,000, subject to the achievement of certain financial results. The Hof acquisition was funded using the accordion feature included in the Company's senior credit facilities, which increased the total credit line to $85,000. We estimate that the Hof Acquisition will add approximately $25,000 of annual revenue.

Results of Operations (Dollars in thousands, except per share data)

        The information presented below for the years ended December 31, 2006 and 2007 is derived from Mac-Gray's consolidated financial statements and related notes included in this report.

19

Revenue

Fiscal year ended December 31, 2007 compared to fiscal year ended December 31, 2006

        Total revenue increased by $16,575, or 6%, to $295,902 for the year ended December 31, 2007 compared to $279,327 for the year ended December 31, 2006. This growth in revenue is primarily attributable to an increase in laundry facilities management revenue associated with several acquisitions in 2007.

        Facilities management revenue.    Total facilities management revenue increased $10,622, or 5%, to $242,803 for the year ended December 31, 2007 compared to $232,181 for the year ended December 31, 2006. This increase is attributable to increases in revenue in the laundry facilities management business unit, due to the impact of several acquisitions during 2007 and an increase in the number of laundry leases through organic growth, offset to a small extent by decreases in revenue in the reprographics business unit.

        Within the facilities management segment, revenue in the laundry facilities management business unit increased $11,225, or 5%, to $240,944 for the year ended December 31, 2007 compared to $229,719 for the year ended December 31, 2006. The revenue generated by the acquired assets during 2007 accounted for virtually all of the increase in revenue in 2007 over 2006. Higher vacancy rates, and consequently reduced usage of our equipment in some of our markets, eclipsed some of the growth in a majority of our markets. The Company was able to maintain revenue from its core business that was consistent with 2006.

        Revenue in the reprographics business unit decreased $603, or 24%, to $1,859 for the year ended December 31, 2007 compared to $2,462 for the year ended December 31, 2006. In the years ended December 31, 2006 and 2007, the reprographics business unit accounted for less than 1% of consolidated revenue for each year. Due to the continued decline in the use of vended copiers in libraries and similar facilities, the reduction in the number of locations we operate, the difficulty of servicing fewer accounts over a wider territory, and the difficulty of predicting future income generation, the Company decided not to renew expiring contracts in selected geographic markets. This decision, in addition to the Company's inability to predict success at negotiating profitable contracts going forward for this business in any of its present markets, resulted in the Company taking a non-cash impairment charge of $1,639, net of tax, in the fourth quarter of 2006.

        Product sales revenue.    Product sales revenue increased $5,953, or 13%, to $53,099 for the year ended December 31, 2007 compared to $47,146 for the year ended December 31, 2006. The increase in revenue for the year ended December 31, 2007 as compared to the same period in 2006 is attributable to increases in revenue in the Intirion business unit and the laundry equipment sales business unit.

20

        Revenue in the Intirion business unit increased $3,008, or 10%, to $33,418 for the year ended December 31, 2007 compared to $30,410 for the year ended December 31, 2006. The increase is primarily attributable to an increase in sales to the government market. Sales in the academic sector also increased. Sales declined in the hospitality, retail and property management sectors. Our sales to the government will continue to fluctuate based on shifting budget priorities as well as the timing of the release of funds for military housing initiatives. Sales in the hospitality sector have benefited in recent years from an increase in capital spending by that industry. The level of spending by the hospitality industry began to level off in 2007.

        Revenue in the commercial laundry equipment sales business unit increased $2,945, or 18%, to $19,681 for the year ended December 31, 2007 compared to $16,736 for the year ended December 31, 2006. Sales in the commercial laundry equipment sales business unit are sensitive to the strength of the local economy, consumer confidence, local permitting and the availability and cost of financing to small businesses, and therefore, tend to fluctuate from period to period. The combination of these factors, coupled with the Company's marketing efforts focused towards new store developments, contributed to the increase in sales.

Cost of revenue

        Cost of facilities management revenue.    Cost of facilities management revenue includes rent paid to customers as well as costs associated with installing and servicing machines, costs of collecting, counting, and depositing facilities management revenue and the costs of delivering and servicing rented facilities management equipment. Cost of facilities management revenue increased $8,978, or 6%, to $162,839 for the year ended December 31, 2007, as compared to $153,861 for the year ended December 31, 2006. This increase is attributable primarily to the cost of facilities management rent associated with the increase in facilities management revenue of $10,622. Cost of facilities management revenue as a percentage of facilities management revenue was 67% for the year ended December 31, 2007 compared to 66% for the year ended December 31, 2006. Changes in facilities management rent as a percentage of facilities management revenue can be caused by new and renewed laundry leases and by other factors such as the amount of incentive payments and laundry room betterments invested in new or renewed laundry leases. As we vary the amount invested in a facility, the facilities management rent as a function of facilities management revenue can vary. Also affecting the rent can be the rate associated with acquired portfolios. Incentive payments and room betterments are amortized over the life of the laundry lease.

        Depreciation and amortization.    Depreciation and amortization increased by $2,254, or 6%, to $37,410 for the year ended December 31, 2007 as compared to $35,156 for the year ended December 31, 2006. Laundry facilities management equipment and contract rights are depreciated and amortized using the straight-line method. The increased depreciation and amortization expense is attributable to the amortization of acquired contracts, new equipment placed in laundry facilities at new locations, and replacement of older equipment with new equipment as contracts were renegotiated. In addition, due to management's decision not to recondition and redeploy equipment that is not as energy efficient as newer equipment, we disposed of certain laundry equipment in 2007 and 2006 that had a remaining net book value of $542 and $847, respectively. These costs are included in depreciation expense.

        Cost of product sales.    Cost of product sales consists primarily of the cost of laundry equipment, MicroFridge® branded equipment and parts and supplies sold, as well as salaries and related warehousing expenses as part of the product sales segment. Cost of product sales increased by $2,995, or 8%, to $40,347 for the year ended December 31, 2007 as compared to $37,352 for the year ended December 31, 2006. As a percentage of sales, cost of product sold was 76% for the year ended December 31, 2007 compared to 79% in 2006. The gross margin on product sales includes the gross margins from the commercial laundry equipment sales and Intirion business units. The gross margin in

21

the commercial laundry equipment sales business unit increased to 25% for the year ended December 31, 2007 as compared to 20% for the same period in 2006. The increase in margin is attributable to an increase in pricing and favorable product mix. The gross margin in the Intirion business unit increased to 23% for the year ended December 31, 2007 as compared to 20% for the same period in 2006. The increase in margin is attributable to some increases in pricing, the favorable mix of products sold as well as the Company's ability to achieve some efficiency in freight and warehousing costs.

Operating expenses

        General, administration, sales, marketing and depreciation and amortization expense.    General, administration, sales, marketing and depreciation and amortization expense increased by $387, or 1%, to $36,050 for the year ended December 31, 2007 as compared to $35,663 for the year ended December 31, 2006. As a percentage of total revenue, general, administration, sales, marketing and depreciation expense decreased to 12% for the year ended December 31, 2007 compared to 13% for the year ended December 31, 2006.

        Loss on early extinguishment of debt.    Effective December 29, 2006, the Company amended its bank credit facilities. As a result of this amendment, a portion of the unamortized financing costs amounting to $73, which had been incurred as part of the prior credit facility, were expensed in 2006.

        Gain on sale of assets.    Gain on sale of assets represents the gain from the sale of vehicles and other non-inventory assets in the ordinary course of business.

        Impairment of assets.    The revenue and corresponding operating income in our reprographics business unit have been declining since 1999 when college libraries, followed by public libraries, began to make reference material available to patrons electronically. Electronic availability, widespread conversion to laser printers (free of charge in many school libraries) and other technical advancements have led to reduced use of vended copy machines, resulting in reduced revenue at several accounts. During the fourth quarter of 2006, the Company performed an evaluation of the reprographics business unit and its long-term prospects. As a result of this evaluation, management determined that the carrying amount of the business unit's long lived assets exceeded the estimated undiscounted cash flows expected to result from operating this business unit, and recognized a non-cash, non-recurring impairment charge of $2,502, or $0.19 per diluted share before taxes ($1,639, or $0.12 per diluted share net of taxes.) This charge was calculated in accordance with SFAS No. 144, "Accounting for the Impairment or disposal of Long-Lived Assets" ("FAS 144"). Accordingly, the Company used a discounted cash flow model to calculate the amount of the impairment charge after it was determined that, pre-write-down, the carrying amount of the business unit's long lived assets exceeded the estimated undiscounted future cash flows expected to result from operating this business unit.

Income from operations

        Income from operations increased by $4,758, or 32%, to $19,510 for the year ended December 31, 2007 as compared to $14,752 for the year ended December 31, 2006. Excluding the cost of impairment of assets and loss on early extinguishment of debt, income from operations, as adjusted, would have been $19,510 for the year ended December 31, 2007, compared to $17,327 for the year ended 2006, or an increase of 13%. This increase is due primarily to the reasons discussed above. We have supplemented the consolidated financial statements presented according to generally accepted accounting principles (GAAP), using a non-GAAP financial measure of adjusted income from operations. Management believes presentation of this measure is useful to investors to enhance an overall understanding of our historical financial performance and future prospects. Adjusted income from operations, which is adjusted to exclude certain gains and losses from the comparable GAAP income from operations, is an indication of our baseline performance before gains, losses or other

22

charges that are considered by management to be outside of our core operating results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for income from operations or other measures prepared in accordance with GAAP.

        A reconciliation of income from operations in accordance with GAAP to income from operations, as adjusted, is provided below:

(1)

Represents a pre-tax charge associated with the reprographics business unit.

(2)

Represents unamortized costs related to terminated credit facilities.

Interest expense, net

        Interest expense, net of interest income, increased by $92, or less than 1%, to $13,745 for the year ended December 31, 2007 as compared to $13,653 for the year ended December 31, 2006. The increase is primarily attributable to an increase in the average borrowing in 2007 compared to 2006. The increase in our borrowing in 2007 is attributable to our 2007 acquisitions. The average borrowing rate was 7.1% for the year ended December 31, 2007 as compared to 7.2% for the year ended December 31, 2006.

Gain or loss related to derivative instruments

        The Company is party to interest rate swap agreements which it entered into to protect the interest rates on its debt. Certain of these swap agreements do not qualify as cash flow hedges. In accordance with the guidelines for accounting for derivatives, a non-cash expense of $1,737 and $96 has been charged to the income statement for the years ended December 31, 2007 and 2006, respectively.

Provision for income taxes

        The provision for income taxes increased by $1,362 to $1,509 for the year ended December 31, 2007 compared to $147 for the year ended December 31, 2006. The increase is the combination of an increase in taxable income, a decrease in the effective tax rate and a reduction in the reserve for uncertain tax positions. The effective tax rate, without considering the impact of the reduction in the reserve in 2006 and 2007, decreased to 41.9% from 54.5% for the year ended December 31, 2007 compared to the same period in 2006. The decrease in the effective tax rate is due to a change in the estimated rate at which the deferred state tax assets will be realized and the impact of permanent book/tax differences on the increased taxable income in 2007 compared to 2006. The reduction in the reserve for uncertain tax provisions further reduced the effective tax rate to 37.5% for the year ended 2007 and 14.7% for the year ended December 31, 2006. The reductions to the rates relate to the expiration of the statute of limitations for certain tax exposures.

Net income

        As a result of the foregoing, net income increased $1,663, or 194%, to $2,519 for the year ended December 31, 2007 as compared to $856 for the year ended December 31, 2006. Net income, as

23

adjusted for the items in the table below, increased $471, or 15%, to $3,605 for the year ended December 31, 2007 as compared to $3,134 for the year ended December 31, 2006.

        A reconciliation of net income, as reported to net income, as adjusted is provided below:

(1)

Represents a pre-tax charge associated with the reprographics business unit.

(2)

Represents the un-realized loss on interest rate protection contracts, which do not qualify for hedge accounting treatment.

(3)

Represents unamortized costs related to terminated credit facilities.

        To supplement the Company's consolidated financial statements presented on a generally accepted accounting principles (GAAP) basis, management has used a non-GAAP measure of net income. Management believes presentation of this measure is appropriate to enhance an overall understanding of our historical financial performance and future prospects. Adjusted net income, which is adjusted to exclude certain gains and losses from the comparable GAAP net income, is an indication of our baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results. These non-GAAP results are among the primary indicators management uses as a basis for evaluating the Company's financial performance as well as for forecasting future periods. For these reasons, management believes these non-GAAP measures can be useful to investors, potential investors and others.

        Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The Company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.

24

Fiscal year ended December 31, 2006 compared to fiscal year ended December 31, 2005

        The information presented below for the years ended December 31, 2005 and 2006 is derived from Mac-Gray's consolidated financial statements and related notes included in this report.

Revenue

        Total revenue increased by $18,704, or 7%, to $279,327 for the year ended December 31, 2006 compared to $260,623 for the year ended December 31, 2005. This growth in revenue is primarily attributable to an increase in laundry facilities management revenue associated with several acquisitions in 2006, additional laundry leases through organic growth, and vend increases.

        Facilities management revenue.    Total facilities management revenue increased $17,365, or 8%, to $232,181 for the year ended December 31, 2006 compared to $214,816 for the year ended December 31, 2005. This increase is attributable to increases in revenue in the laundry facilities management business unit, primarily due to the impact of several acquisitions during 2006, organic growth in the number of management contracts and vend increases partially offset to a small extent by decreases in revenue in the reprographics business unit.

        Within the facilities management segment, revenue in the laundry facilities management business unit increased $17,827, or 8%, to $229,719 for the year ended December 31, 2006 compared to $211,892 for the year ended December 31, 2005. The increase is attributable primarily to the revenue generated by the assets acquired during 2006, which accounted for approximately 50% of the 2006 increase over 2005. The remaining 50% is attributable to organic growth in the number of management contracts signed, increases in the vend prices charged for use of the equipment and an increase in revenue associated with the conversion of coin-operated locations to card-operated locations. Due to the convenience of card-operated systems, usage, and therefore revenue, typically increases upon the conversion from a coin-operated system.

        Revenue in the reprographics business unit decreased $462, or 16%, to $2,462 for the year ended December 31, 2006 compared to $2,924 for the year ended December 31, 2005. In the year ended December 31, 2006, the reprographics business unit accounted for less than 1% of consolidated revenue. Due to the continued decline in the use of vended copiers in libraries and similar facilities, the reduction in the number of locations we operate, the difficulty of servicing fewer accounts over a wider territory, and the difficulty of predicting future income generation, in the fourth quarter of 2006 the Company decided not to renew contracts which will expire in the next twelve months in selected geographic markets. This decision, in addition to the Company's inability to predict success at negotiating profitable contracts going forward for this business in any of its present markets, resulted in the Company taking a non-cash impairment charge of $1,639, net of tax, in the fourth quarter of 2006.

25

        Product sales revenue.    Product sales revenue increased $1,339, or 3%, to $47,146 for the year ended December 31, 2006 compared to $45,807 for the year ended December 31, 2005. The increase in revenue for the year ended December 31, 2006 as compared to the same period in 2005 is attributable to increases in revenue in the laundry equipment sales business unit.

        Revenue in the Intirion business unit decreased $103, or less than 1%, to $30,410 for the year ended December 31, 2006 compared to $30,513 for the year ended December 31, 2005. The decrease is primarily attributable to a decrease in sales to the academic market and government market, partially offset by an increase in hospitality and assisted living sales. The hospitality sales increase is attributable to an increase in capital spending by the industry and a full year of sales to several new distributors added by our Company in 2005. We believe the decrease in academic sales can be attributed to constraints by academic institutions on capital spending on amenity items. Our sales to the government are continually affected by changes in government spending priorities. We believe current spending on military housing improvements has been delayed as a result of current military efforts in the Middle East.

        Revenue in the commercial laundry equipment sales business unit increased $1,442, or 9%, to $16,736 for the year ended December 31, 2006 compared to $15,294 for the year ended December 31, 2005. Sales in the commercial laundry equipment sales business unit are sensitive to the strength of the local economy, consumer confidence, local permitting and the availability and cost of financing to small businesses, and therefore, tend to fluctuate from period to period. The combination of these factors, coupled with the Company's marketing efforts, contributed to the increase in sales.

Cost of revenue

        Cost of facilities management revenue.    Cost of facilities management revenue includes rent paid to customers as well as costs associated with installing and servicing machines and costs of collecting, counting, and depositing facilities management revenue, and the costs of purchasing, delivering and servicing rented facilities management equipment. Salaries, warehousing and other operating expenses include $1,104 which had been included in facilities management costs in 2005 have been reclassified to cost of sales for the product sales segment to conform to 2006's presentation. The following references to 2005 give effect to the reclassification. Cost of facilities management revenue increased $11,809, or 8%, to $153,861 for the year ended December 31, 2006, as compared to $142,052 for the year ended December 31, 2005. This increase is attributable primarily to the cost, primarily facilities management rent, associated with the increase in facilities management revenue of $17,365, partially offset by the costs associated with the 2005 hurricanes which did not recur in 2006. Included in the cost for the year ended December 31, 2005 are costs associated with the 2005 hurricanes. Adjusting 2005 total costs to exclude the hurricane costs, cost of facilities management as a percentage of facilities management revenue remained consistent at 66% for the years ended December 31, 2006 and 2005. Changes in facilities management rent as a percentage of facilities management revenue can be affected by new and renewed laundry leases and by other factors such as the amount of incentive payments and laundry room betterments invested in new or renewed laundry leases. As we vary the amount invested in a facility, the facilities management rent as a function of facilities management revenue can vary. Incentive payments and room betterments are amortized over the life of the laundry lease.

        Depreciation and amortization.    Depreciation and amortization increased by $3,819, or 12%, to $35,156 for the year ended December 31, 2006 as compared to $31,337 for the year ended December 31, 2005. Laundry facilities management equipment and contract rights are depreciated and amortized using the straight-line method. The increased depreciation expense is attributable to new equipment placed in laundry facilities at new locations and replacement of older equipment as contracts were renegotiated. In addition, due to management's decision not to recondition and redeploy equipment which is not as energy efficient as newer equipment, we disposed of certain laundry

26

equipment in 2006 that had a remaining net book value of $847. This cost is included in depreciation expense.

        Cost of product sales.    Cost of product sales consists primarily of the cost of laundry equipment, MicroFridge® branded equipment and parts and supplies sold, as well as salaries and related warehousing expenses as part of the product sales segment. Costs of $1,104 consisting of salaries and other operating expenses, which were included in the cost of facilities management revenue in 2005, have been reclassified to the product sales segment to conform to 2006's presentation. The following references to 2005 give effect to the reclassification. Cost of product sales increased by $1,179, or 3%, to $37,352 for the year ended December 31, 2006 as compared to $36,173 for the year ended December 31, 2005. As a percentage of sales, cost of product sold was consistent at 79% for the years ended December 31, 2006 and 2005. The gross margin on product sales includes the gross margins from the laundry equipment sales and Intirion business units. The gross margin in the laundry equipment sales business unit decreased to 20% for the year ended December 31, 2006 as compared to 24% for the same period in 2005. The decrease in margin is attributable to product mix and increased costs from our suppliers. The gross margin in the Intirion business unit increased to 20% for the year ended December 31, 2006 as compared to 18% for the same period in 2005. The slight increase in margin is attributable to the mix of products sold as well as the Company's ability to pass on some increased fuel costs.

Operating expenses

        General, administration, sales, marketing and depreciation expense.    General, administration, sales, marketing and depreciation expense increased by $4,213, or 13%, to $35,663 for the year ended December 31, 2006 as compared to $31,450 for the year ended December 31, 2005. As a percentage of total revenue, general, administration, sales, marketing and depreciation expense increased from 12% for the year ended December 31, 2005 to 13% for the year ended December 31, 2006. The increase in total expenses is primarily attributable to the costs incurred to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the non-cash expense related to stock compensation, which was required to be recorded in 2006 in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payments" ("FAS123(R)").

        Loss on early extinguishment of debt.    Unamortized financing costs of $461 related to the term loan were expensed in 2005. In connection with the senior credit facilities, we repaid them in full and terminated our 2003 senior credit facilities. Unamortized financing costs of $207 associated with our 2003 senior credit facilities were also expensed in 2005. Effective December 29, 2006, the Company amended its bank credit facilities. As a result of this amendment, a portion of the unamortized financing costs amounting to $73, which had been incurred as part of the prior credit facility, were expensed.

        Gain on sale of assets.    Gain on sale of assets represents the gain from the sale of vehicles and other non-inventory assets in the ordinary course of business. In the year ended December 31, 2005, the gain included $10,588 from the sale of our corporate headquarters.

        Impairment of assets.    The revenue and corresponding operating income in our reprographics business unit have been declining since 1999 when college libraries, followed by public libraries, began to make reference material electronically available to patrons. Electronic availability, widespread conversion to laser printers (free of charge in many school libraries) and other technical advancements have led to reduced use of vended copy machines resulting in reduced revenue at several accounts. During the fourth quarter of 2006, the Company performed an evaluation of the reprographics business unit and its long-term prospects. As a result of this evaluation, management determined that the carrying amount of the business unit's long lived assets exceeded the estimated undiscounted cash flows expected to result from operating this business unit, and recognized a non-cash, non-recurring

27

impairment charge of $2,502, or $0.19 per diluted share before taxes ($1,639, or $0.12 per diluted share net of taxes). This charge was calculated in accordance with SFAS No. 144, "Accounting for the Impairment or disposal of Long-Lived Assets" ("FAS 144"). Accordingly, the Company used a discounted cash flow model to calculate the amount of the impairment charge after it was determined that, pre-write-down, the carrying amount of the business unit's long lived assets exceeded the estimated undiscounted future cash flows expected to result from operating this business unit.

Income from operations

        Income from operations decreased by $14,926, or 50%, to $14,752 for the year ended December 31, 2006 as compared to $29,678 for the year ended December 31, 2005. Excluding the cost of non-cash compensation recorded in 2006, impairment of assets, loss on early extinguishment of debt and the gain on sale of certain assets, income from operations, as adjusted, would have been $18,474 for the year ended December 31, 2006, compared to $19,758 for the year ended 2005, or a decrease of 6%. This decrease is due primarily to the reasons discussed above. To supplement the consolidated financial statements presented according to generally accepted accounting principles (GAAP), we have used a non-GAAP financial measure of adjusted income from operations. Management believes presentation of this measure is useful to investors to enhance an overall understanding of our historical financial performance and future prospects. Adjusted income from operations, which is adjusted to exclude certain gains and losses from the comparable GAAP income from operations, is an indication of our baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for income from operations or other measures prepared in accordance with GAAP.

        A reconciliation of income from operations in accordance with GAAP to income from operations, as adjusted, is provided below:

(1)

On January 1, 2006, the Company adopted FAS123(R). These amounts represent expenses relating to issuances of equity awards in the periods presented.

(2)

Represents a pre-tax charge associated with the reprographics business unit.

(3)

Represents unamortized costs related to terminated credit facilities.

(4)

Represents a pre-tax gain recognized in connection with the sale of the Company's office and warehouse facility in Cambridge, Massachusetts on June 30, 2005.

28

Interest expense, net

        Interest expense, net of interest income, increased by $2,714, or 25%, to $13,653 for the year ended December 31, 2006 as compared to $10,939 for the year ended December 31, 2005. The increase is primarily attributable to an increase in the average borrowing rates to 7.2% for the year ended December 31, 2006 as compared to 5.9% for the year ended December 31, 2005. The increase in average borrowing rates is due, in large part, to the $150,000 of senior notes that we issued on August 16, 2005 and which bear interest at the rate of 7.625% per annum for which we recognized a full year's expense in 2006. Also contributing to the increase is our increased borrowing in 2006 of approximately $19,000 attributable to our 2006 acquisitions.

Gain or loss related to derivative instruments

        The Company is party to interest rate swap agreements that it had accounted for as cash flow hedges. The fair value of these swaps has been included in other comprehensive income in the equity section of the balance sheet. As a result of the reduction in the amount outstanding under our senior credit facilities, certain swap agreements no longer qualified for cash flow hedge accounting treatment. The revised accounting treatment resulted in an expense of $96 and a gain of $1,876 in the income statement for the years ended December 31, 2006 and 2005, respectively.

Provision for income taxes

        The provision for income taxes decreased by $8,416, or 98%, to $147 for the year ended December 31, 2006 compared to $8,563 for the year ended December 31, 2005. The decrease is the combination of a decrease in taxable income, an increase in the effective tax rate and a reduction in the reserve for uncertain tax positions. The effective tax rate, without considering the impact of the reduction in the reserve, increased to 54.5% from 41.5% for the year ended December 31, 2006 compared to the same period in 2005. The increase in the effective tax rate is due primarily to the impact of permanent book/tax differences on the decreased taxable income in 2006 compared to 2005. The reduction in the reserve for uncertain tax provisions further reduced the effective tax rate to 14.7% for the year ended December 31, 2006. This reduction relates to the expiration of the statute of limitations as of September 15, 2006 for certain state tax exposures.

Net income

        As a result of the foregoing, net income decreased $11,196, or 93%, to $856 for the year ended December 31, 2006 as compared to $12,052 for the year ended December 31, 2005. Net income, as adjusted for the items in the table below, decreased $1,125, or 21%, to $4,114 for the year ended

29

December 31, 2006 as compared to $5,239 for the year ended December 31, 2005. A reconciliation of net income, as reported to net income, as adjusted is provided below:

(1)

On January 1, 2006, the Company adopted FAS 123(R). These amounts represent expenses relating to issuances of equity awards in the periods presented.

(2)

Represents a pre-tax gain recognized in connection with the sale of the Company's office and warehouse facility in Cambridge, Massachusetts on June 30, 2005.

(3)

Represents a pre-tax charge associated with the reprographics business unit.

(4)

Represents the un-realized (gain) loss on interest rate protection contracts, which do not qualify for hedge accounting treatment.

(5)

Represents unamortized costs related to terminated credit facilities.

        To supplement the Company's consolidated financial statements presented on a generally accepted accounting principles (GAAP) basis, management has used a non-GAAP measure of net income. Management believes presentation of this measure is appropriate to enhance an overall understanding of our historical financial performance and future prospects. Adjusted net income, which is adjusted to exclude certain gains and losses from the comparable GAAP net income, is an indication of our baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results. These non-GAAP results are among the primary indicators management uses as a basis for evaluating the Company's financial performance as well as for forecasting future periods. For these reasons, management believes these non-GAAP measures can be useful to investors, potential investors and others.

        Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The Company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.

Liquidity and Capital Resources (Dollars in thousands)

        We believe that we can satisfy our working capital requirements and funding of capital needs with internally generated cash flow and, as necessary, borrowings under our revolving loan facility described

30

below. Included in the capital requirements that we expect to be able to fund during 2008 is approximately $30,000 of laundry equipment, laundry room betterments, and contract incentives incurred in connection with new customer leases and the renewal of existing leases.

        We historically have not needed sources of financing other than our internally generated cash flow and our revolving credit facilities to fund our working capital, capital expenditures and smaller acquisitions. As a result, we anticipate that our cash flow from operations and revolving credit facilities will be sufficient to meet our anticipated cash requirements for at least the next twelve months.

        From time to time, we consider potential acquisitions. We believe that any future acquisitions of significant size would likely require us to obtain additional debt or equity financing. In the past, we have been able to obtain such financing for other material transactions on terms that we believed to be reasonable. However, it is possible that we may not be able to find acquisition financing on favorable terms in the future.

        Our current long-term liquidity needs are principally the repayment of the outstanding principal amounts of our long-term indebtedness, including borrowings under our senior credit facilities. We are unable to project with certainty whether our long-term cash flow from operations will be sufficient to repay our long-term debt when it comes due. If this cash flow were insufficient, then we would need to refinance such indebtedness or otherwise amend its terms to extend the maturity dates. We cannot make any assurances that such refinancing or amendments, if necessary, would be available on reasonable terms, if at all.

Operating Activities

        For the years ended December 31, 2005, 2006 and 2007, cash flows provided by operating activities were $37,798, $36,403 and $43,645, respectively. Cash flows from operations consist primarily of facilities management revenue and equipment sales, offset by the cost of facilities management revenues, cost of product sold, and selling, general and administration expenses. The increase for the year ended December 31, 2007 as compared to the year ended December 31, 2006 is primarily attributable to ordinary changes in working capital. The most significant increases in cash flows provided by operating activities were depreciation and amortization expense, non-cash compensation expense, non-cash expense related to derivative instruments, and an increase in accounts payable, accrued facilities management rent and accrued expenses. The increase in depreciation and amortization expense is primarily attributable to the contract rights and equipment we acquired in 2007. The increase in accounts payable, accrued facilities management rent and accrued expenses was also attributable to the acquisitions in 2007. The most significant decrease in cash flows provided by operating activities was caused by an increase in accounts receivable.

Investing Activities

        For the years ended December 31, 2005, 2006 and 2007, cash flows used in investing activities were $120,251, $44,975 and $73,387, respectively. The increase for the year ended December 31, 2007 as compared to the year ended December 31, 2006 is attributable to the payment for certain acquisitions of laundry facilities management assets during 2007 of $46,626. Other capital expenditures for the years ended December 31, 2007 and 2006 totaled $27,154 and $25,911, respectively.

Financing Activities

        For the years ended December 31, 2005, 2006 and 2007, cash flows provided by financing activities were $87,008, $9,520 and $31,073, respectively. Cash flows provided by financing activities consist primarily of proceeds from and repayments of bank borrowings, which increased in 2007 due to borrowings to fund acquisitions.

31

        Effective December 29, 2006, we amended our senior bank credit facilities, reducing the credit line to $65,000 (with the option, subject to customary terms and conditions, to increase the line up to $100,000, in increments of not less than $10,000, over the life of the facility), reducing the interest rate on outstanding borrowings, modifying certain covenants and extending the maturity date to December 29, 2011. Concurrent with the Hof Acquisition, we increased the credit line to $85,000. The senior credit facilities are collateralized by a blanket lien on all of our assets and our two subsidiaries, Mac-Gray Services, Inc. and Intirion Corporation, as well as a pledge by the Company of all of the capital stock of its two subsidiaries. Borrowings outstanding under the revolving line of credit bear interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate (adjusted for statutory reserves) plus an applicable percentage, ranging from 1.00% to 1.50% (1.50% as of December 31, 2007) determined quarterly by reference to the funded debt ratio, or (ii) in the case of alternate base rate loans and swing line loans, the higher of (a) the federal funds rate plus 0.50% or (b) the annual rate of interest announced by JPMorgan Chase Bank, N.A. as its "prime rate," in each case, plus an applicable percentage, ranging from 0.00% to 0.50% (0.50% as of December 31, 2007), determined and payable quarterly by reference to the funded debt ratio. Under the senior credit facilities, we pay a commitment fee equal to a percentage, ranging from 0.25% to 0.30%, determined and payable quarterly by reference to the funded debt ratio, of the average daily-unused portion of the revolver under the senior credit facility. This commitment fee percentage was 0.30% as of December 31, 2007.

        As of December 31, 2007, there was $55,000 outstanding under the revolving line of credit and $860 in outstanding letters of credit under the senior credit facilities. The available balance under the revolving line of credit was $29,140 at December 31, 2007. The average interest rate on the borrowings outstanding under the senior credit facilities at December 31, 2006 and 2007 were 5.94% and 6.20%, respectively, including the applicable spread paid to the banks.

        The credit agreement for the senior credit facilities includes customary covenants, including, but not limited to, restrictions pertaining to: (i) the incurrence of additional indebtedness, (ii) limitations on liens, (iii) making distributions, dividends and other payments, (iv) the making of certain investments and loans, (v) mergers, consolidations and acquisitions, (vi) dispositions of assets, (vii) the maintenance of minimum consolidated net worth, maximum funded debt ratios, minimum consolidated cash flow coverage ratios, and maximum senior secured leverage ratios, (viii) transactions with affiliates, (ix) sale and leaseback transactions, (x) entering into swap agreements, and (xi) changes to governing documents, in each case subject to numerous baskets, exceptions and thresholds. The funded debt ratio, consolidated cash flow coverage ratio and senior secured leverage ratio that we were required to meet as of December 31, 2007 were 4.25 to 1.00, 1.10 to 1.00, and 2.50 to 1.00, respectively. We were in compliance with these and all other financial covenants at December 31, 2007.

        The credit agreement for the senior credit facilities provides for customary events of default, including, but not limited to: (i) failure to pay any principal or interest when due, (ii) failure to comply with covenants, (iii) any material representation or warranty made by the Company proving to be incorrect in any material respect, (iv) defaults relating to or acceleration of other material indebtedness, (v) certain insolvency or receivership events affecting the Company or any of its subsidiaries, (vi) a change in control, (vii) material judgments, claims or liabilities against the Company or (viii) a material defect in the lenders' lien against the collateral securing the obligations under the credit agreement. There were no events of default under the senior credit facilities at December 31, 2007.

        On August 16, 2005, we issued senior unsecured notes in the amount of $150,000. These notes bear interest at 7.625% payable semi-annually each February and August. The maturity date of the notes is August 15, 2015. The senior credit facilities were amended to permit the offering of the notes and modify certain of the covenants applicable to the senior credit facilities. The proceeds from the

32

senior notes, less financing costs, were used to retire the term loan and pay down the revolver under the senior credit facilities.

        On and after August 15, 2010, we will be entitled, at our option, to redeem all or a portion of these notes at the redemption prices (expressed in percentages of principal amount on the redemption date,) plus accrued interest to the redemption date, if redeemed, during the 12-month period commencing on August 15 of the years set forth below:

        Subject to certain conditions, we will be entitled, at our option, on one or more occasions prior to August 15, 2008 to redeem notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes originally issued at a redemption price (expressed as a percentage of principal amount on the redemption date) of 107.625%, plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more equity offerings.

        The terms of the senior notes include customary covenants, including, but not limited to, restrictions pertaining to: (i) incurrence of additional indebtedness and issuance of preferred stock, (ii) payment of dividends on or making of distributions in respect of capital stock or making certain other restricted payments or investments, (iii) entering into agreements that restrict distributions from restricted subsidiaries, (iv) sale or other disposition of assets, including capital stock of restricted subsidiaries, (v) transactions with affiliates, (vi) incurrence of liens, (vii) sale/leaseback transactions, and (viii) merger, consolidation or sale of substantially all of our assets, in each case subject to numerous baskets, exceptions and thresholds. We were in compliance with these and all other financial covenants at December 31, 2007.

        The terms of the senior notes provide for customary events of default, including, but not limited to: (i) failure to pay any principal or interest when due, (ii) failure to comply with covenants and limitations, (iii) certain insolvency or receivership events affecting us or any of our subsidiaries and (iv) unsatisfied material judgments, claims or liabilities against us. There were no events of default under the senior notes at December 31, 2007.

        Unamortized financing costs of $668 and $73, related to our senior credit facilities, were expensed during the years ended December 31, 2005 and 2006, respectively.

        Capital lease obligations on our fleet of vehicles totaled $3,068 and $3,521 at December 31, 2006 and 2007, respectively.

        We have entered into standard International Swaps and Derivatives Association, or ISDA, interest rate swap agreements to manage the interest rate risk associated with our senior credit facilities. For a description of our interest rate swap agreements see Item 3, "Quantitative and Qualitative Disclosures About Market Risk."

33

Contractual Obligations

        A summary of the Company's contractual obligations and commitments related to its outstanding long-term debt and future minimum lease payments related to our vehicle fleet, corporate headquarters and warehouse rent and minimum facilities management rent as of December 31, 2007 is as follows:

        We anticipate that available funds from current operations, existing cash and other sources of liquidity will be sufficient to meet current operating requirements and anticipated capital expenditures. However, we may require external sources of financing for any significant future acquisitions. Further, our senior credit facility matures on December 29, 2011. The repayment of this facility may require external financing.

Off Balance Sheet Arrangements

        At the years ended December 31, 2005, 2006 and 2007, the Company had no relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off balance sheet arrangements, or other contractually narrow or limited purposes.

Seasonality

        We experience moderate seasonality as a result of our operations in the college and university market. Revenues derived from the college and university market represented approximately 15%, or $36,000, of our total facilities management revenue in 2007. Academic facilities management and rental revenues are derived substantially during the school year in the first, second and fourth calendar quarters. Conversely, our operating and capital expenditures have historically been higher during the third calendar quarter when we install a large amount of equipment while colleges and universities are generally on summer break. Product sales, principally of MicroFridge® branded products, to this market are typically higher during the third calendar quarter as compared to the rest of the calendar year, somewhat offsetting the seasonality effect of the laundry facilities management business unit.

Inflation

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

Critical Accounting Policies and Estimates

        The preparation of our consolidated financial statements in accordance with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if another, also reasonable, amount was used or a change in the estimate is reasonably likely from period to period. We base our assumptions on historical

34

experience and on other estimates that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates.

        Our critical accounting policies, as described in Note 2 to the Mac-Gray audited consolidated financial statements included elsewhere in this report, "Significant Accounting Policies," state our policies as they relate to significant matters: cash and cash equivalents, revenue recognition, provision for doubtful accounts, inventories, provision for inventory reserves, goodwill and intangible assets, impairment of long-lived assets, financial instruments and fair value of financial instruments.

        Cash and cash equivalents.    We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Included in cash and cash equivalents is an estimate of cash not yet collected at period-end that remains at laundry facilities management and reprographics customer locations. At December 31, 2007 and 2006, this totaled $9,646 and $9,027, respectively. We record the estimated cash not yet collected as cash and cash equivalents and facilities management revenue. We also record the estimated related facilities management rent expense. These estimates are based upon historical collection trends, so that total cash at the end of each period will be reasonably stated.

        Revenue recognition.    We recognize laundry facilities management and reprographics revenue on the accrual basis. Rental revenue on MicroFridge® branded products is recognized ratably over the related contractual period. Included in deferred revenue and deposits is an estimate of refunds due to customers. We recognize revenue from product sales upon shipment of the products unless otherwise specified. We offer limited duration warranties on MicroFridge® branded products and, at the time of sale, provide reserves for all estimated warranty costs based upon historical warranty costs. Actual costs have not exceeded our estimates. Shipping and handling fees charged to customers are recognized upon shipment of the products and are included in revenue with related cost included in cost of sales.

        We have entered into long-term lease transactions that meet the qualifications of a sales-type lease for certain equipment. For these transactions, the amount of revenue recognized upon product shipment is the present value of the minimum lease payments, excluding executory costs and excluding profits on executory costs, discounted at the interest rate implicit in the lease. Interest revenue is recognized over the life of the rental agreement. At December 31, 2007 and 2006, we had $3,017 and $1,758, respectively, in receivables related to sales-type leases. These receivables have been recorded net of unearned interest income of $555 and $324 at December 31, 2007 and 2006, respectively. These receivables are primarily due ratably over the next seven years and have been classified as other current assets and other long-term assets, as appropriate, on the balance sheet. The related reserve for uncollectible lease receivables at December 31, 2007 and 2006 was $17 and $26, respectively. All installation and repair services are provided on an occurrence basis, not on a contractual basis. Related revenue is recognized at the time the installation service, or other service, is provided to the customer.

        We believe our accounting for facilities management revenue, rental revenue, service fees and long-term lease transactions are appropriate for us, properly matching the earnings process with the proper reporting period.

        Provision for doubtful accounts.    On a regular basis, we review the adequacy of our provision for doubtful accounts for trade accounts receivable and lease receivables based on historical collection results and current economic conditions, using factors based on the aging of our trade accounts receivable and lease receivables. In addition, we estimate specific additional allowances based on indications that a specific customer may be experiencing financial difficulties.

        Inventories.    Inventories are stated at the lower of cost (as determined using the average cost method) or market and primarily consist of finished goods. Based on the nature of our inventory, being laundry and MicroFridge® branded equipment, and our inventory handling practices, we believe the lower of cost or market is the most appropriate valuation method for us.

35

        Provision for inventory reserves.    On a regular basis, we review the adequacy of our reserve for inventory obsolescence based on historical experience, product knowledge and frequency of shipments.

        Goodwill and intangible assets.    Intangible assets primarily consist of various non-compete agreements, customer lists, goodwill and contract rights recorded in connection with acquisitions. The non-compete agreements are amortized using the straight-line method over the life of the agreements, which range from five to fifteen years. Customer lists are amortized using the straight-line method over fifteen years. Contract rights are amortized using the straight-line method over fifteen or twenty years. The life assigned to acquired contracts is based on several factors, including: (i) the seller's renewal rate of the contract portfolio for the most recent years prior to the acquisition, (ii) the number of years the average contract has been in the seller's contract portfolio, (iii) the overall level of customer satisfaction within the contract portfolio and (iv) our ability to maintain or exceed the level of customer satisfaction maintained by the seller prior to the acquisition by us. We are accounting for acquired contract rights on a pool-basis based on the fact that, in general, no single contract accounts for more than 2% of the revenue of any acquired portfolio and the fact that few of the contracts are predicted to be terminated, either prior to or at the end of the contract term. Based on our experience, we believe that these costs associated with various acquisitions are properly recognized and amortized over a reasonable length of time.

        Impairment of long-lived assets.    We review long-lived assets, including fixed assets, acquired contract rights and intangible assets with definitive lives, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Our annual impairment test for contract rights assigned a 15-year amortization period consists of comparing the current number of machines under contract and the current cash flow of all our contracts in the market where the portfolios were acquired to the original number of machines acquired and the cash flow as predicted by us at the time of the acquisition. For those contract rights assigned a 20-year amortization period, our annual impairment test consists primarily of identifying the accumulated retention rate of the specific contract portfolio in order to assess the appropriateness of the net book value of the related contract rights. If impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis.

        In accordance with FAS 142, we test our goodwill annually for impairment and whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The goodwill impairment review consists of a two-step process of first comparing the fair value of the reporting unit with its carrying value. If this fair value exceeds the carrying value, no further analysis or goodwill impairment charge is required. If the fair value is below the carrying value, the Company would proceed to the next step, which is to measure the amount of the impairment loss. Any such impairment loss would be recognized in the Company's results of operations in the period the impairment loss arose.

        In measuring whether goodwill is impaired, the Company uses an estimate of its future undiscounted cash flows of the business over the estimated remaining life. If the Company's expectation of future undiscounted net cash flows indicates an impairment, the Company would write down the appropriate assets to their estimated realizable values based on discounted cash flows. In estimating expected future cash flows for determining whether an asset is impaired, assets are grouped at the lowest level for which there is identifiable cash flows.

        Financial instruments.    We account for derivative instruments in accordance with Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), and Statement of Financial Accounting Standard No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of FASB No. 133" ("FAS 138"). These statements require us to recognize derivatives on our balance sheet at fair value.

36

Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the intended use of the derivative. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. We have designated some of our interest rate swap agreements as cash flow hedges. Accordingly, the change in fair value of the agreements is recognized in other comprehensive income and the ineffective portion of the change is recognized in earnings immediately.

        Fair value of financial instruments.    For purposes of financial reporting, we have determined that the fair value of financial instruments approximates book value at December 31, 2007 and 2006, based upon terms currently available to us in financial markets. The fair value of the interest rate swaps is the estimated amount that we would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter party.

New Accounting Pronouncements

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. FAS 157 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company is currently reviewing this new accounting standard but does not expect it to have a material impact on its financial statements.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of No. 115" ("FAS 159"), which is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. FAS 159 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company is currently reviewing this new accounting standard but does not expect it to have a material impact on its financial statements.

        In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)"). SFAS 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which the Company obtains control of one or more businesses, including those sometimes referred to as "true mergers" or "mergers of equals" and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009.

        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. SFAS No. 160 applies prospectively as of January 1,

37

2009, except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        The Company is exposed to a variety of risks, including changes in interest rates on its borrowings. In the normal course of its business, the Company manages its exposure to these risks as described below. The Company does not engage in trading market-risk sensitive instruments for speculative purposes.

Interest Rates—

        The table below provides information about the Company's debt obligations including debt obligations that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The fair market value of long-term debt approximates book value at December 31, 2007.