Stericycle

Stericycle, Inc. Annual Report

2005

E X P E R T S   I N   I N F E C T I O N   C O N T R O L   A N D   H E A L T H C A R E   C O M P L I A N C E   S E R V I C E S

Dear Fellow Shareholders:

2005 was another solid year for Stericycle. We continued to set new
financial records by building our core business, growing across 
new geographies, expanding our services and driving for operational 
efficiencies while at the same time significantly strengthening our
balance sheet. Stericycle is positioned for continued revenue and
profit growth in 2006 and beyond.

Revenues in 2005 grew to $609.5 million, an 18.1% increase over
2004. Gross margins for 2005 were 44.0% versus 44.2% in 2004.
Operating income rose 15.6% to $168.4 million compared to $145.7
million in 2004. Operating margins for the year were 27.6% versus
28.2% in 2004. Under generally accepted accounting principles
(“GAAP”), after-tax net income decreased by 14.1% to $67.2 million
and diluted earnings per share decreased 12.4% to $1.48 per share.
Non-GAAP net income for 2005 was $94.0 million, a 15.2%
increase over non-GAAP net income of $81.6 million for 2004.
Non-GAAP diluted earnings per share for 2005 were $2.07 per
share, a 16.9% increase over non-GAAP diluted earnings per share
for 2004 of $1.77 per share. Excluded from our non-GAAP numbers
in 2005 are the costs related to the preliminary settlement of the
3CI class action litigation, the write-down of our note receivable
with our former South African joint venture, licensing legal 
settlement, loan refinancing expenses and fixed asset impairment
expenses. Excluded from our non-GAAP numbers in 2004 are
expenses related to loan refinancing and fixed asset impairments.

ACCOMPLISHMENTS IN 2005
We continued to strengthen Stericycle’s industry leadership position as
the only national provider of integrated medical waste and healthcare
compliance services across North America. We successfully increased
the penetration of our new Steri-SafeSM OSHA compliance program
for small quantity generators throughout the United States, gained
further acceptance of our new Bio Systems sharps management
program in new domestic geographies, and continued to expand our
operations in both the United Kingdom and Mexico. In addition,
we significantly expanded our presence in the pharmaceutical services
business.

Domestic  Growth: Our small quantity generator business revenues
grew approximately 9% as a result of our focused direct selling efforts
and our innovative Steri-SafeSM OSHA compliance program. We 
now have approximately 95,000 Steri-SafeSM subscribers, up from
approximately 87,000 a year ago. We successfully continued the 
roll out of our Bio Systems sharps management service into new
geographies, adding more than 250 new accounts in 2005.
Domestically, we integrated nine acquisitions of medical waste
businesses into our existing collection route, transfer station and
treatment plant infrastructure. We also strengthened our position 
in providing reverse logistics and compliance services to the 
pharmaceutical industry supply chain by both organic growth and
acquisitions. In 2005, we acquired two leading trade return and
recall service providers to pharmaceutical manufacturers, Universal
Solutions International, Inc. and NNC Group, LLC, and are well
positioned for future growth. 

International  Growth:  We strengthened our position inter-
nationally through the growth of our businesses in the United
Kingdom, Mexico and Canada.

Cash  Flow  Generation: We continued to generate strong free
cash flow from operations, which was used to fund growth and
improve our balance sheet. During 2005, we invested $26.3 million
of the $94.3 million in cash generated from operations into our
infrastructure. We expanded our non-incineration treatment network
and supported the growth of Bio Systems. In addition, we used
$139.7 million for acquisitions and expanded our revolving credit

facility to $550.0 million. Finally, we repurchased $60.7 million in
stock on the open market.

PRIORITIES FOR 2006
By building on Stericycle’s industry leadership position in 2005, we
are confident that we have established the operating platform needed
to drive future growth and explore new frontiers for our business.
We have the following priorities for 2006:

Domestic  Growth:  Our focus will be on our Steri-SafeSM and
Bio Systems service offerings. Our marketing efforts to small quantity
generators will concentrate on selling our Steri-SafeSM OSHA com-
pliance services and infectious waste management services. Our pri-
mary focus in marketing to large quantity generators will be
extending the momentum of the Bio Systems sharps management
program. We will focus on creating shareholder value from the
acquired pharmaceutical services businesses by creating best-in-class
customer service, organic growth and meeting customer needs 
with additional service offerings.

International  Growth: We will remain focused on pursuing
attractive international market opportunities directed to providing
value to our shareholders over the course of the next several years.

Profit  Growth:  We are committed to continuing our track 
record of improving our operating margins. We will seek to further
improve our collection route densities, reduce our long haul trans-
portation costs, reduce our plant operating costs and improve 
efficiency in the pharmaceutical services operations. Our culture of
continuous improvement encourages the sharing of best practices
and productivity improvement ideas across our entire organization.

Ser vice  Innovation  and  Environmental  Leadership:
During 2006, we will continue fulfilling our twin commitments of
being responsive to our customers’ needs and being an environmental
leader by offering services suited for both our large and small 
customers. Our innovative Steri-SafeSM OSHA compliance services
and infection control and compliance products continue to help
customers enjoy a safer, more compliant workplace in a cost effective
manner. Other innovative outsourcing programs such as our Bio
Systems sharps management service offers significant environmental
benefits by reducing waste volume and conserving valuable natural
resources. As more and more healthcare providers switched during
2005 to our Bio Systems service, thousands of pounds of plastic 
and cardboard that had been discarded was instead eliminated from
the waste stream, providing a significant environmental benefit. 

• • •

We are very excited and confident about our future. Stericycle is a
clear leader in providing medical waste management, OSHA com-
pliance services and pharmaceutical services. We will focus on the
many growth opportunities our industry leadership position affords
us and will continue to refine the efficiency of our operations,
while maintaining our strong focus on safety and regulatory com-
pliance. We thank you for your support.

Jack W. Schuler
Chairman

Mark C. Miller

President and CEO

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

Form 10-K

(Mark One)
¥

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005

n

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from

to

or

Commission File Number 0-21229

Stericycle, Inc.

(Exact name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

36-3640402
(I.R.S. Employer
Identification Number)

28161 North Keith Drive
Lake Forest, Illinois 60045
(Address of Principal Executive Offices including Zip Code)

(847) 367-5910
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes ¥

No n

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports

pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes n

No ¥

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 ¥

No n

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 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. ¥

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act

Rule 12b-2). Yes ¥

No n

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes n

No ¥

The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to

the price at which common equity was last sold as of the last business day of the registrant’s most recently completed
second fiscal quarter (June 30, 2005) was: $2,147,249,555.

On February 27, 2006, there were 44,002,862 shares of the Registrant’s Common Stock outstanding.

Information required by Items 10, 11, 12 and 13 of Part III of this Report is incorporated by reference from the

Registrant’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on May 3, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Stericycle, Inc.

2005 ANNUAL REPORT ON FORM 10-K

INDEX

Part I

Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.

Part II

Item 5. Market for the Registrant’s Common Equity, and Related Stockholder Matters and Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risks . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements and Supplemental Data . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . .
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part III

Item 10. Directors and Executive Officers of the Registrant
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part IV

Page

2
12
15
15
16
17

18
19
20
28
28
60
60
60

60
61

61
61
61

62
64

1

Item 1. Business

PART I

Unless the context requires otherwise, “we,” “us” or “our” refers to Stericycle, Inc. and its subsidiaries on

a consolidated basis.

Company Overview

Our business is the management of medical waste, infection control and pharmaceutical returns and the

provision of related compliance services. Our product and service offerings include:

(cid:129) our industry-leading Stericycle medical waste management services;

(cid:129) our Bio Systems» sharps management services that reduce the risk of needle sticks in hospitals;

(cid:129) our Steri-Safe» OSHA and HIPPA compliance programs;

(cid:129) an assortment of products for infection control; and

(cid:129) our Direct Return» pharmaceutical returns and product recall management services under the Stericycle

Pharmaceutical Services unit.

We are the largest regulated medical waste management company in North America, serving approxi-

mately 333,000 customers throughout the United States, Puerto Rico, Canada, Mexico and the United
Kingdom. In North America we have a fully integrated, national medical waste management network. Our
network includes 45 treatment/collection centers and 105 additional transfer/collection sites. We use this
network to provide a broad range of services to our customers. Our medical waste treatment technologies
include our proprietary electro-thermal-deactivation system, or ETD, as well as traditional methods such as
autoclaving and incineration. In the United Kingdom we have a fully integrated waste management network,
which includes 12 treatment/collection centers and two additional transfer/collection sites.

We also serve pharmacies, distributors and manufacturers of pharmaceutical products by managing the
return and disposal of expired or surplus pharmaceutical products and by managing the recall of pharmaceu-
tical products being recalled by the manufacturer.

In addition, we offer consulting and regulatory compliance services in areas that are related to our

medical waste and pharmaceutical returns services.

We benefit from significant customer diversification, with no single customer accounting for more than
2% of total revenues, and our top 10 customers accounting for approximately 8% of total revenues. Our two
principal groups of customers include approximately 325,000 small medical waste generators such as
outpatient clinics, medical and dental offices and long-term and sub-acute care facilities and approximately
7,700 large medical waste generators such as hospitals, blood banks and pharmaceutical manufacturers.

Industry Overview

Since the 1980s, government regulation has increasingly required the proper handling and disposal of the

medical waste generated by the health care industry. Regulated medical waste is generally considered any
medical waste that can cause an infectious disease, including single-use disposable items, such as needles,
syringes, gloves and other medical supplies; cultures and stocks of infectious agents; and blood products.

We believe that the United States market for our regulated medical waste services is approximately
$3.0 billion and in excess of $10.0 billion globally. Industry growth is driven by a number of factors. These
factors include:

Pressure To Reduce Healthcare Costs. The health care industry is under pressure to reduce costs and

improve efficiency. We believe that our services can help health care providers reduce costs by reducing their
handling and compliance costs, reducing their potential liability related to employee exposure to blood borne

2

pathogens and other infectious material, and reducing the amount of time and money invested in infection
control and compliance.

Shift to Off-Site Treatment. We believe that managed care and other health care cost-containment
pressures are causing patient care to continue to shift from institutional higher-cost acute-care settings to less
expensive, smaller, off-site treatment alternatives. Many common diseases and conditions are now being
treated in smaller non-institutional settings. We believe that these non-institutional off-site health care
expenditures will continue to grow as cost-cutting pressures increase.

Aging of U.S. Population. The average age of the U.S. population is increasing. As people age, they
typically require more medical attention and a wider variety of tests and procedures. In addition, as technology
improves more tests and procedures become available. All of these factors lead to increased medical waste.

Environmental and Safety Regulation. We believe that many businesses that are not currently using
outsourced medical waste services are unaware either of the need for proper training of employees or the
U.S. Occupational Safety and Health Administration, or OSHA, requirements regarding the handling of
medical waste. These businesses include manufacturing facilities, schools, restaurants, casinos, hotels and
generally all businesses where employees may come into contact with blood borne pathogens. In addition,
home health care is currently unregulated and may become subject to similar blood borne pathogen regulations
in the future.

The medical waste management industry is subject to extensive regulation beyond the Medical Waste

Tracking Act or MWTA. For example, the stringent Clean Air Act regulations adopted in 1997 limit the
discharge into the atmosphere of pollutants released by medical waste incineration. These regulations have
increased the costs of operating medical waste incinerators and have resulted in significant closures of on-site
treatment facilities, thereby increasing the demand for off-site treatment services. In addition, OSHA has
issued regulations concerning employee exposure to blood borne pathogens and other potentially infectious
materials that require, among other things, special procedures for the handling and disposal of medical waste
and annual training of all personnel who may be exposed to blood and other body fluids. These regulations
underlie the expansion of our service offerings to include OSHA compliance services for health care
providers.

The pharmaceutical returns (or reverse distribution) industry arose in response to the need to facilitate the

return of unused, expired or recalled drugs to the manufacturer for credit and proper destruction. Stericycle
Pharmaceutical Services provides pharmaceutical returns management, recall services and pharmaceutical
product disposal services to pharmacies, distributors and manufacturers of pharmaceutical products.

We operate our pharmaceutical services business from five centers located in Florida, Georgia, Illinois,

Indiana and New Jersey.

Competitive Strengths

We believe that we benefit from the following competitive strengths, among others:

Broad Range of Services. We offer our customers a broad range of services to help them develop
internal systems and processes, which allow them to manage their medical waste efficiently and safely. For
example, we have developed programs to help train our customers’ employees on the proper methods of
handling medical waste in order to reduce potential employee exposure. Other services include those designed
to help clients ensure and maintain compliance with OSHA regulations, sharps management services (Bio
Systems), infection control tracking and pharmaceutical returns. We also supply specially designed containers
for use by most of our large account customers, including our Steri-Tub» container, a reusable leak and
puncture-resistant container, made from recycled plastic, which we developed and patented.

Established National Network.

In North America our 45 medical waste treatment/collection centers and
five pharmacy returns centers in 28 states, Puerto Rico, Canada and Mexico give us a national network in the
regulated medical waste and significant scale in the pharmaceutical services industry. The extensive federal,
state and local laws and regulations governing the regulated medical waste industry and the pharmaceutical

3

services industry typically require some type of governmental approval for new facilities. We have significant
experience in obtaining and maintaining these permits, authorizations and other types of governmental
approvals. We believe that a network similar in scale and scope to ours would be extremely expensive and
time-consuming for a national competitor to develop.

Low-Cost Operations. We are often the low-cost provider of medical waste management within the

areas we serve. Our low costs result from our vertically integrated network and broad geographic presence.

Diverse Customer Base and Revenue Stability. We have developed strong contracts and service

agreements with a diverse network of established customers. Our top 10 medical waste customers account for
approximately 8% of our medical waste revenues, and no single customer accounts for more than 2% of
revenues. We are also generally protected from regulatory changes and other factors, which affect our costs,
because our medical waste contracts typically contain provisions that allow us to adjust our prices to reflect
any additional costs caused by changes in regulations or any other increases in our operating costs.

Strong Sales Network and Proprietary Database. We use both telemarketing and direct sales efforts to

obtain new medical waste customers. In addition, we have a large database of potential new small account
customers, which we believe gives us a competitive advantage in identifying and reaching this higher-margin
sector.

Experienced Senior Management Team. Our five most senior executives collectively have over 100 years

of management experience in the health care, consumer and waste management industries.

Business Strategy

Our goals are to strengthen our position as a leading provider of integrated medical waste, pharmaceutical

services and compliance services and to continue to improve our profitability. Components of our strategy to
achieve these goals include:

Improve Margins. We intend to continue actively to work to improve our margins by increasing our base
of small account customers and focusing on service strategies that more efficiently meet the needs of our large
account customers. We have successfully raised the percentage of our revenues from small account customers
from 33% of domestic revenues in the fourth quarter of 1996 to 63% in the fourth quarter of 2005, which has
contributed to an increase in our operating income margins. Small account customers typically do not produce
a sufficient volume of regulated medical waste on an individual basis to justify capital expenditures on their
own waste treatment facilities or the expense of hiring regulatory compliance personnel. We believe that the
number of small account customers and the opportunities for the sale of ancillary services and products to
both large and small account customers will continue to grow.

Expand Range of Services and Products. We believe that we have the opportunity to expand our

business by increasing the range of products and services that we offer to our existing medical waste
customers. For example, through our Steri-SafeSM program, we now offer OSHA compliance services to health
care providers, and our mercury mail-back program enables customers to manage waste that should be handled
separately. Our acquisition of Scherer Healthcare, Inc. in January 2003 provided the opportunity to market its
Bio Systems sharps management program in new geographic service areas, and we continually research and
test new products and service offerings for our customers. After establishing our first center in Lake Forest,
Illinois in 2003, we have expanded our pharmaceutical returns and recall business through our acquisitions in
2005 of Automated Health Technologies, Universal Solutions, Inc., L.L. Horizons, Inc. and NNC Group, LLC.

Seek Complementary Acquisitions. As described below, we actively seek strategic opportunities to
acquire businesses that expand our national and international network of treatment centers and increase our
customer and product base. We also consider acquisitions that can leverage the skills and infrastructure that
we have in place, for example, our acquisition of the Bio Systems sharps management program. We believe
that strategic acquisitions can enable us to gain operating efficiencies through increased utilization of our
service infrastructure as well as to expand our services offered to our customers and to expand the product
offerings and geographic service areas in which we operate.

4

Acquisitions

Evaluation and Integration. Our management team has substantial experience in evaluating potential

acquisition candidates and determining whether a particular medical waste management or related service
business can be successfully integrated into our business.

We have established an efficient procedure for integrating newly acquired companies into our business
while minimizing disruption of our operations. Once a business is acquired, we implement programs designed
to improve customer service, sales, marketing, routing, equipment utilization, employee productivity, operating
efficiencies and overall profitability.

Acquisitions History. We completed a total of 100 acquisitions from 1993 through 2005, including nine
domestic medical waste management businesses in 2005. The most significant of these was our acquisition in
November 1999 of the medical waste business of Browning Ferris Industries, Inc. (“BFI”) in the United States,
Canada and Puerto Rico. At the time, BFI was the largest provider of regulated medical waste services in the
United States.

In 2005, our majority owned subsidiary in Mexico completed the acquisition of seven medical waste
management companies in Mexico, and our United Kingdom subsidiary completed two acquisitions in the
United Kingdom.

In addition, in 2005 we acquired four pharmaceutical returns and product recall businesses: Automated

Health Technologies, Inc., Universal Solutions, Inc., L.L. Horizons, Inc and NNC Group, LLC.

Collection and Transportation. We consider efficiency of collection and transportation to be a critical
element of our medical waste operations because it represents the largest component of our operating costs.

The use of transfer stations is an important component of our collection and transportation operations. We

utilize transfer stations in a “hub and spoke” configuration, which allows us to expand our geographic service
area and increase the volume of medical waste that can be treated at a particular facility.

As part of our collection operations, we supply specially designed containers for use by most of our large
account customers and many of our larger small account customers. We have developed a comprehensive line
of reusable leak and puncture-resistant plastic containers. The containers enable our customers to reduce costs
by reducing the number of times that materials and supplies are handled, eliminate the cost of corrugated
boxes and potentially reduce liability resulting from human contact with medical waste. In order to maximize
regulatory compliance and minimize potential liability, we will not accept medical waste unless it is properly
packaged by customers in containers that we have either supplied or approved.

Treatment and Disposal. Upon arrival at a treatment facility, containers or boxes of medical waste are

typically scanned to verify that they do not contain any unacceptable substances like radioactive material. Any
container or box that is discovered to contain unacceptable waste is returned to the customer and the
appropriate regulatory authorities are informed. After inspection, the waste is treated using one of our various
treatment technologies. Upon completion of the particular process, the resulting waste or incinerator ash is
transported for resource recovery, recycling or disposal in a landfill operated by third parties unaffiliated with
us. We do not own any landfills. After the plastic containers such as our Steri-Tub» or Bio Systems containers
have been emptied, they are washed, sanitized and returned to customers for re-use.

Consulting Services. Before our trucks pick up medical waste, our integrated waste management
approach attempts to “build in” efficiencies that will yield logistical advantages. For example, our consulting
services can assist our customers in reducing the volume of medical waste that they generate. In addition, we
provide customers with the documentation necessary for compliance with applicable regulations, which, if they
complete the documentation properly, will reduce regulatory interruptions to their businesses to verify
compliance.

5

Documentation. We provide complete documentation to our customers for all medical waste that we
collect, including the name of the generator, date of pick-up and date of delivery to a treatment facility. We
believe that our documentation system meets all applicable federal, state and local regulations including those
mandated by the U.S. Department of Transportation, or DOT.

Marketing and Sales

Marketing Strategy. We use both telemarketing and direct sales efforts to obtain new customers.

Our more than 1,300 drivers also may participate in our marketing and sales efforts by actively soliciting

small account customers while they service their routes.

Small Account Customers. We have targeted small account customers as a growth area of our medical
waste business. We believe that these customers offer a higher relative profit potential on small revenue per
customer compared to other potential customers. We believe that these customers view the potential risks of
non-compliance with applicable state and federal medical waste regulations as disproportionate to the cost of
the services that we provide. We believe that this factor has been the basis for the significantly higher gross
margins that we have achieved with our small account customers relative to our large account customers.

Steri-SafeSM. Our Steri-SafeSM OSHA compliance program provides an integrated medical waste manage-

ment and compliance-assistance service for small account customers and other healthcare providers who
typically lack the internal personnel and systems to comply with OSHA blood borne regulations. Customers
for our Steri-SafeSM service pay a predetermined subscription fee in advance for medical waste collection and
treatment services and can also choose from available packages of training and education services and
products designed to help them to comply with OSHA regulations. Approximately 95,000 small account
customers are enrolled in this program. We believe that the implementation of our Steri-SafeSM service will
provide us with new and enhanced opportunities to leverage our existing customer base through the program’s
prepayment structure and diversified product and service offerings.

We also operate several “mail-back” programs through which we can reach small account customers

located in outlying areas that would be inefficient to serve using our regular route structure. Mail-back
programs are also used in home care patient settings where there is a focus on reducing the potential injuries
to workers at recycling centers or other solid waste handling locations.

Large Account Customers. We believe that we have been successful in serving large account customers
and plan to continue to serve those customers as long as satisfactory levels of profitability can be maintained.
Our marketing and sales efforts to large account customers are conducted by full-time account executives
whose responsibilities include identifying and attracting new customers and serving our existing account base
of approximately 7,700 large account customers. In addition to securing new contracts, our marketing and
sales personnel provide consulting services to our health care customers, assisting them in reducing the amount
of medical waste that they generate, training their employees on safety issues and implementing programs to
audit, classify and segregate medical waste in a proper manner.

Our Bio Systems sharps management offering can enhance our revenue and margin potential per account.

The Bio Systems service offering can help our customers eliminate plastic and cardboard from their waste
stream while providing a safe and cost effective way for them to deal with the disposal of their sharp objects
(such as needles, syringes, etc.).

Our Stericycle Pharmaceutical Services unit can streamline manufacturer return credits, recalls, enhance

inventory management capabilities and deliver online business information related to expired medications.

We believe that the implementation of more stringent Clean Air Act and other federal regulations directly

and indirectly affecting medical waste will continue to enable us to improve our marketing efforts to large
account customers because the additional costs that they will incur to comply with these regulations will make
the costs of our services more attractive, particularly in the event they use their own incinerators.

6

National Accounts. As a result of our extensive geographic coverage, we are capable of servicing
national account customers (i.e., customers requiring medical waste disposal services at various geographically
dispersed locations). We will continue to selectively focus on national accounts.

Contract and Service Agreements. We have long-term contracts with substantially all of our customers.
We negotiate individual service agreements with each large account and small account customer. Although we
have a standard form of agreement, particularly for small account customers, terms may vary depending upon
the customer’s service requirements and the volume of medical waste generated and, in some jurisdictions,
requirements imposed by statute or regulation. Service agreements typically include provisions relating to the
types of containers, frequency of collection, pricing, treatment of waste and documentation for tracking
purposes. Each agreement also specifies the customer’s obligation to pack its medical waste in approved
containers. Substantially all of our agreements with small account customers contain automatic renewal
provisions.

International

In 1998, we formed Medam S.A. de C.V., or Medam, a Mexican joint venture company, in which we now

have a 64.5% interest, to utilize our ETD technology to treat medical waste primarily in the Mexico City
market. From 2001 through 2004, Medam completed the acquisition of five medical waste businesses in
Mexico and, as noted, in 2005, it completed seven acquisitions.

In 1999, we established a joint venture in Argentina, Medam, B.A. Srl, in which we have a 37.5%

interest, to utilize our ETD technology to treat medical waste primarily in the Buenos Aires market.

In 2000, we entered into agreements with Aso Cement Co., Ltd and Aso Mining Co., Ltd, to establish an

ETD treatment facility in Japan. In 2002, we entered into agreements with Medical Safety Systems of
Hokkaido, Japan to establish a second ETD treatment facility in Japan, and in 2003, we entered into
agreements with Shiraishi-Sogyo Co. Ltd. of Tochigi, Japan to establish a third ETD treatment facility. Under
these agreements, we supplied ETD treatment equipment and provide ongoing consulting assistance in the
operation of the equipment.

In 2001, we concluded an agreement with SteriCorp Limited, an Australian company, under which we

provided financing to SteriCorp through the purchase of convertible notes, licensed our ETD technology to it
for use in Australia and certain other countries, and agreed to sell to it an ETD processing line and assist in its
installation.

In 2004, we completed our first acquisition in Europe with the purchase of White Rose Environmental,

Ltd in Leeds, England. In 2005, our United Kingdom subsidiary completed the acquisitions of Healthcare
Waste Limited, which operated a medical waste business in England, and Indigo Equity Holdings Limited
(formerly known as Waste Solutions, Inc.), which operated a medical waste business in England and Wales.

Treatment Technologies

We currently use both non-incineration technologies (our proprietary ETD technology and autoclaving)

and incineration technologies for treating regulated medical waste.

Stericycle was founded on the belief that there was a need for safe, secure, and environmentally

responsible management of regulated medical waste. From our beginning we have championed the use of non-
incineration, alternate treatment technologies such as our patented ETD process. While we recognize that some
state regulations as currently in force mandate that some types of medical waste must be incinerated, we also
know from years of experience working with our customers that there are ways to reduce the amount of waste
that is ultimately incinerated. The most effective strategy that we have seen involves comprehensive education
of our customers in waste minimization and segregation. Working in cooperation with our customers, we have
made tremendous strides in shifting away from incineration and moving towards alternate treatment technol-
ogies. At the end of 2005, incineration constituted less than 9% of our treatment capacity in North America.

7

Autoclaving. Autoclaving treats medical waste with steam at high temperature and pressure to kill
pathogens. Autoclaving alone does not change the appearance of waste, and some landfill operators may not
accept recognizable medical waste, but autoclaving may be combined with a shredding or grinding process to
render the medical waste unrecognizable.

ETD Treatment Process. ETD includes a system for grinding medical waste. After grinding, ETD uses

an oscillating field of low-frequency radio waves to heat medical waste to temperatures that destroy pathogens
such as viruses, bacteria, fungi and yeast, without melting the plastic content of the waste.

We believe that ETD offers advantages over many other methods of treating medical waste. We believe

that it is easier to get permits for ETD facilities than for incineration facilities because ETD does not produce
regulated air or water emissions. ETD facilities also can be more cost-effective to construct than incinerators
or autoclaves with shredding capability. ETD also renders medical waste unrecognizable and thus more
acceptable for landfills and reduces the volume of waste as well.

Incineration.

Incineration burns medical waste at elevated temperatures and reduces it to ash. Incinera-
tion reduces the volume of waste, and it is the recommended treatment and disposal option for some types of
medical waste such as anatomical waste or residues from chemotherapy procedures. Air emissions from
incinerators can contain certain byproducts, which are subject to federal, state and, in some cases, local
regulation. In some circumstances the ash byproduct of incineration may be regulated.

Competition

The medical waste services industry is highly competitive, and barriers to entry into the collection and

disposal business are very low. The industry consists of many different types of service providers, including a
large number of regional and local companies. Another major source of competition is the on-site treatment of
medical waste by some large-quantity generators, particularly hospitals.

In addition, we face potential competition from businesses that are attempting to commercialize alternate

treatment technologies or products designed to reduce or eliminate the generation of medical waste, such as
reusable or degradable medical products.

We compete for service agreements primarily on the basis of cost-effectiveness, quality of service and
geographic location. We also compete by trying to demonstrate to customers that we can do a better job in
reducing their potential liability. Our ability to obtain new service agreements may be limited by the fact that
a potential customer’s current vendor may have an excellent service history or a long-term service contract or
may offer prices to the potential customer that are lower than ours.

Governmental Regulation

The medical waste management industry is subject to extensive and frequently changing federal, state and

local laws and regulations. This statutory and regulatory framework imposes compliance burdens and risks on
us, including requirements to obtain and maintain government permits. These permits grant us the authority,
among other things:

(cid:129) to construct and operate treatment and transfer facilities;

(cid:129) to transport medical waste within and between relevant jurisdictions; and

(cid:129) to handle particular regulated substances.

Our permits must be periodically renewed and are subject to modification or revocation by the regulatory

authority. We are also subject to regulations that govern the definition, generation, segregation, handling,
packaging, transportation, treatment, storage and disposal of medical waste. We are also subject to extensive
regulations designed to minimize employee exposure to medical waste. In addition, we are subject to foreign
laws and regulations.

Federal Regulation. Four federal agencies have authority over medical waste. These agencies are the
U.S. Environmental Protection Agency or EPA, Occupational Safety and Health Administration or OSHA,

8

Department of Transportation or DOT and the U.S. Postal Service. These agencies regulate medical waste
under a variety of statutes and regulations.

Medical Waste Tracking Act of 1988.

In the late 1980s, the EPA outlined a two-year demonstration
program pursuant to MWTA, which was added to the Resource Conservation and Recovery Act of 1976.

In regulations implementing the MWTA, the EPA defined medical waste and established guidelines for its

segregation, handling, containment, labeling and transport. The MWTA demonstration program expired in
1991, but the MWTA established a model followed by many states in developing their specific medical waste
regulatory frameworks.

Clean Air Act Regulations.

In August 1997, the EPA adopted regulations under the Clean Air Act

Amendments of 1990 that limit the discharge into the atmosphere of pollutants released by medical waste
incineration. These regulations required every state to submit to the EPA for approval a plan to meet minimum
emission standards for these pollutants. See “— State and Local Regulation.” We currently operate six
incinerators in the United States. We believe these incinerators are in compliance with applicable state
requirements.

Occupational Safety and Health Act of 1970. The Occupational Safety and Health Act of 1970

authorizes OSHA to issue occupational safety and health standards. Various standards apply to certain aspects
of our operations, and govern such matters as exposure to blood borne pathogens and other potentially
infectious materials.

Resource Conservation and Recovery Act of 1976. The Resource Conservation and Recovery Act of
1976, or RCRA created standards for the generation, transportation, treatment, storage and disposal of solid
and hazardous wastes. Medical wastes are currently considered non-hazardous solid wastes under RCRA.
However, some substances collected by us from some of our customers, including photographic fixer developer
solutions, lead foils and dental amalgam, are considered hazardous wastes.

We use landfills operated by parties unrelated to us for the disposal of treated medical waste from our
ETD facilities and for the disposal of incinerator ash and autoclaved waste. We do not own or operate any
landfills.

Following treatment, waste from our ETD and autoclave facilities is disposed of as nonhazardous waste.

At our incineration facilities, we test ash from the incineration process to determine whether it must be
disposed of as hazardous waste.

We employ quality control measures to check incoming medical waste for specific types of hazardous

substances. Our customer agreements also require our customers to exclude different kinds of hazardous
substances or radioactive materials from the medical waste they provide us. We use a different type of contract
for the relatively small number of customers from whom we pick up hazardous wastes.

DOT Regulations. The U.S. DOT has put regulations into effect under the Hazardous Materials

Transportation Authorization Act of 1994 which require us to package and label medical waste in compliance
with designated standards, and which incorporate blood borne pathogens standards issued by OSHA. Under
these standards, we must, among other things, identify our packaging with a “biohazard” marking on the outer
packaging, and our medical waste container must be sufficiently rigid and strong to prevent tearing or bursting
and must be puncture-resistant, leak-resistant, properly sealed and impervious to moisture.

Comprehensive Environmental Response, Compensation and Liability Act of 1980. The Comprehensive
Environmental Response, Compensation and Liability Act of 1980, or CERCLA, established a regulatory and
remedial program to provide for the investigation and cleanup of facilities that have released or threaten to
release hazardous substances into the environment. CERCLA and state laws similar to it may impose strict,
joint and several liability on the current and former owners and operators of facilities from which releases of
hazardous substances have occurred and on the generators and transporters of the hazardous substances that
come to be located at these facilities. Responsible parties may be liable for substantial site investigation and
cleanup costs and natural resource damages, regardless of whether they exercised due care and complied with
applicable laws and regulations. If we were found to be a responsible party for a particular site, we could be

9

required to pay the entire cost of the site investigation and cleanup, even though other parties also may be
liable. This result would be the case if we were unable to identify other responsible parties, or if those parties
were financially unable to contribute money to the cleanup.

United States Postal Service. We have obtained permits from the U.S. Postal Service to conduct our
“mail-back” programs, pursuant to which customers mail approved “sharps” (needles, knives, broken glass and
the like) containers directly to our treatment facilities.

State and Local Regulation. We conduct business in 47 states. Each state has its own regulations related

to the handling, treatment and storage of medical waste. Although there are many differences among the
various state laws and regulations, many states have followed the medical waste model under the MWTA and
have implemented programs under RCRA. In each of the states where we operate a treatment facility or a
transfer station, we are required to comply with numerous state and local laws and regulations as well as our
operating plan for each site. In addition, many local governments have ordinances, local laws and regulations,
such as zoning and health regulations, which affect our operations.

States usually regulate medical waste as a solid or “special” waste and not as a hazardous waste under

RCRA. State definitions of medical waste include:

(cid:129) microbiological waste (cultures and stocks of infectious agents);

(cid:129) pathology waste (human body parts from surgical procedures and autopsies);

(cid:129) blood and blood products; and

(cid:129) sharps.

Most states require segregation of different types of medical waste at the hospital or other location where they
were created. A majority of states require that the universal biohazard symbol or a label appear on medical
waste containers. Storage regulations may apply to the party generating the waste, the treatment facility, the
transport vehicle, or all three. Storage rules seek to identify and secure the storage area for public safety as
well as set standards for the manner and length of storage. Many states require employee training for safe
environmental cleanup through emergency spill and decontamination plans. Many states also require that
transporters carry spill equipment in their vehicles. Those states whose regulatory framework relies on the
MWTA model have tracking document systems in place. One state (Washington) regulates the prices that we
may charge. We maintain numerous governmental permits and licenses to conduct our business. Our permits
vary from state to state based upon our activities within that state and on the applicable state and local laws
and regulations.

We believe that we are currently in compliance in all material respects with our permits and applicable

laws and regulations, including state requirements regarding air emissions from incinerators.

Foreign Territorial Regulation. We are subject to substantial regulation by the governments of the
foreign jurisdictions in which we do business. We believe that we have obtained all permits required by the
relevant regulatory authorities.

If we expand our operations into other foreign jurisdictions, we will be required to comply with the laws

and regulations of each of those jurisdictions.

Permitting Process. Each state in which we currently operate, and each state in which we may operate

in the future, has a specific permitting process.

We have been successful in obtaining permits for our current medical waste transfer, treatment and
processing facilities and for our transportation operations. Several of our past attempts to construct and operate
medical waste treatment facilities, however, have met with significant community opposition. In some of these
cases, we have withdrawn our permit application.

The pharmaceutical returns business is highly regulated, both on the federal and state level.

10

Once out-dated or recalled pharmaceutical products have been sorted at our returns center, pharmaceutical
products that will be disposed of instead of being returned to their manufacturer may be considered hazardous
waste and require handling in compliance with U.S. Food and Drug Administration or FDA, EPA, RCRA and
DOT regulations.

Most states have licensing requirements for reverse distributors of pharmaceutical products. We believe

we are in compliance with all federal and state licensing requirements applicable to our pharmaceutical
services business.

Patents and Proprietary Rights

We consider the protection of our technology to be important to our business. Our policy is to protect our

technology by a variety of means, including applying for patents in the United States and in some foreign
countries.

We hold 14 United States patents relating to the ETD treatment process and other aspects of processing

medical waste. We have filed or have been assigned patent applications in several foreign countries and we
have received patents in Australia, Canada, France, Mexico and the United Kingdom.

The term of the first-to-end of our existing United States patents relating to our ETD treatment process

will currently end in May 2009 and the term of the last-to-end will currently end in January 2019.

We own federal registrations of the trademarks “Steri-Fuel»,” “Steri-Plastic»,” “Steri-Tub»,” “Direct

Return»,” the service mark Stericycle» and a service mark consisting of a nine-circle design.

Potential Liability and Insurance

The medical waste industry involves potentially significant risks of statutory, contractual, tort and

common law liability claims. Potential liability claims could involve, for example:

(cid:129) cleanup costs;

(cid:129) personal injury;

(cid:129) damage to the environment;

(cid:129) employee matters;

(cid:129) property damage; or

(cid:129) alleged negligence or professional errors or omissions in the planning or performance of work.

We could also be subject to fines or penalties in connection with violations of regulatory requirements.

We carry $35 million of liability insurance (including umbrella coverage), and under a separate policy,
$10 million of aggregate pollution and legal liability insurance ($5 million per incident), which we consider
sufficient to meet regulatory and customer requirements and to protect our employees, assets and operations.
Our pollution liability insurance excludes liabilities under CERCLA. There can be no assurance that we will
not face claims under CERCLA or similar state laws resulting in substantial liability for which we are
uninsured and which could have a material adverse effect on our business.

Our insurance programs utilize large deductible plans offered by a commercial insurance company. Large

deductible plans allow us the benefits of cost-effective risk financing while protecting us from catastrophic
risk with specific stop loss insurance limiting the amount of self-funded exposure for any one loss and
aggregate stop loss insurance limiting the self-funding exposure for any one year.

Employees

As of December 31, 2005, we had 4,320 full-time and 111 part-time employees (including employees of
our subsidiaries). Approximately 347 of our drivers, transportation helpers and plant workers are covered by a
total of eight collective bargaining agreements with local unions of the International Brotherhood of Teamsters.

11

These agreements expire at various dates from October 2006 to June 2010. We consider our employee
relations to be satisfactory.

Website Access

We maintain an Internet website, http://www.stericycle.com, providing a variety of information about us.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, that we file with the Securities and Exchange Commission are available, as soon
as reasonably practicable after filing, at the investors’ page on our website, http://www.stericycle.com/
investor.htm, or by a direct link to our filings on the SEC’s free website, http://www.sec.gov.

Item 1A. Risk Factors

We are subject to extensive governmental regulation which it is frequently difficult, expensive and time-
consuming to comply with.

The medical waste management industry is subject to extensive federal, state and local laws and

regulations relating to the collection, transportation, packaging, labeling, handling, documentation, reporting,
treatment and disposal of regulated medical waste. Our business requires us to obtain many permits,
authorizations, approvals, certificates or other types of governmental permission from every jurisdiction where
we operate. We believe that we currently comply in all material respects with all applicable permitting
requirements. State and local regulations change often, however, and new regulations are frequently adopted.
Changes in the regulations could require us to obtain new permits or to change the way in which we operate
under existing permits. We might be unable to obtain the new permits that we require, and the cost of
compliance with new or changed regulations could be significant.

Many of the permits that we require, especially those to build and operate treatment plants and transfer

facilities, are difficult and time-consuming to obtain. They may also contain conditions or restrictions that
limit our ability to operate efficiently, and they may not be issued as quickly as we need them (or at all). If we
cannot obtain the permits that we need when we need them, or if they contain unfavorable conditions, it could
substantially impair our operations and reduce our revenues.

The handling and treatment of hazardous medical waste carries with it the risk of personal injury to
employees and others.

Our business requires us to handle materials that may be infectious or hazardous to life and property in

other ways. While we try to handle such materials with care and in accordance with accepted and safe
methods, the possibility of accidents, leaks, spills, and acts of God always exists. Examples of possible
exposure to such materials include:

(cid:129) truck accidents;

(cid:129) damaged or leaking containers;

(cid:129) improper storage of medical waste by customers;

(cid:129) improper placement by customers of materials into the waste stream that we are not authorized or able

to process, such as certain body parts and tissues; or

(cid:129) malfunctioning treatment plant equipment.

Human beings, animals or property could be injured, sickened or damaged by exposure to medical waste.

This in turn could result in lawsuits in which we are found liable for such injuries, and substantial damages
could be awarded against us.

While we carry liability insurance intended to cover these contingencies, particular instances may occur
that are not insured against or that are inadequately insured against. An uninsured or underinsured loss could
be substantial and could impair our profitability and reduce our liquidity.

12

The handling of medical waste exposes us to the risk of environmental liabilities, which may not be
covered by insurance.

As a company engaged in medical waste management, we face risks of liability for environmental

contamination. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980,
or CERCLA, and similar state laws impose strict liability on current or former owners and operators of
facilities that release hazardous substances into the environment as well as on the businesses that generate
those substances and the businesses that transport them to the facilities. Responsible parties may be liable for
substantial investigation and clean-up costs even if they operated their businesses properly and complied with
applicable federal and state laws and regulations. Liability under CERCLA may be joint and several, which
means that if we were found to be a business with responsibility for a particular CERCLA site, we could be
required to pay the entire cost of the investigation and clean-up even though we were not the party responsible
for the release of the hazardous substance and even though other companies might also be liable.

Our pollution liability insurance excludes liabilities under CERCLA. Thus, if we were to incur liability

under CERCLA and if we could not identify other parties responsible under the law whom we are able to
compel to contribute to our expenses, the cost to us could be substantial and could impair our profitability and
reduce our liquidity. Our customer service agreements make clear that the customer is responsible for making
sure that only appropriate materials are disposed of. If there were a claim against us that a customer might be
legally liable for, we might not be successful in recovering our damages from the customer.

The level of governmental enforcement of environmental regulations has an uncertain effect on our
business and could reduce the demand for our services.

We believe that the government’s strict enforcement of laws and regulations relating to medical waste

collection and treatment has been good for our business. These laws and regulations increase the demand for
our services. A relaxation of standards or other changes in governmental regulation of medical waste could
increase the number of competitors or reduce the need for our services.

If we are unable to acquire other medical waste businesses, our revenue and profit growth may be
slowed.

Historically our growth strategy has been based in substantial part on our ability to acquire other medical

waste businesses. We do not know whether in the future we will be able to:

(cid:129) identify suitable businesses to buy;

(cid:129) complete the purchase of those businesses on terms acceptable to us;

(cid:129) improve the operations of the businesses that we do buy and successfully integrate their operations into

our own; or

(cid:129) avoid or overcome any concerns expressed by regulators.

We compete with other potential buyers for the acquisition of other medical waste companies. This
competition may result in fewer opportunities to purchase companies that are for sale. It may also result in
higher purchase prices for the businesses that we want to purchase.

We also do not know whether our growth strategy will continue to be effective. Our business is

significantly larger than before, and new acquisitions may not have the desired benefits that we have obtained
in the past.

The implementation of our acquisition strategy could be affected in certain instances by the concerns of
state regulators, which could result in our not being able to realize the full synergies or profitability of
particular acquisitions.

We may become subject to inquiries and investigations by state antitrust regulators from time to time in

the course of completing acquisitions of other medical waste businesses. In order to obtain regulatory

13

clearance for a particular acquisition, we could be required to modify certain operating practices of the
acquired business or to divest ourselves of one or more assets of the acquired business. Changes in the terms
of our acquisitions required by regulators or agreed to by us in order to settle regulatory investigations could
impede our acquisition strategy or reduce the anticipated synergies or profitability of our acquisitions. The
likelihood and outcome of inquiries and investigations from state regulators in the course of completing
acquisitions cannot be predicted.

Aggressive pricing by existing competitors and the entrance of new competitors could drive down our
profits and slow our growth.

The medical waste industry is very competitive because of low barriers to entry, among other reasons.
This competition has required us in the past to reduce our prices, especially to large account customers, and
may require us to reduce our prices in the future. Substantial price reductions could significantly reduce our
earnings.

We face direct competition from a large number of small, local competitors. Because it requires very little

money or technical know-how to compete with us in the collection and transportation of medical waste, there
are many regional and local companies in the industry. We face competition from these businesses, and
competition from them is likely to exist in the new locations to which we may expand in the future. In
addition, large national companies with substantial resources may decide to enter the medical waste industry.
For example, Waste Management, Inc., a major solid waste treatment company, announced in February 2005
that it intended to begin offering medical waste management services to hospitals and possibly other large
quantity generators of medical waste.

Our competitors could take actions that would hurt our growth strategy, including the support of
regulations that could delay or prevent us from obtaining or keeping permits. They might also give financial
support to citizens’ groups that oppose our plans to locate a treatment or transfer facility at a particular
location.

Restrictions in our senior unsecured credit facility may limit our ability to pay dividends, incur additional
debt, make acquisitions and make other investments.

Our senior unsecured credit facility contains covenants that restrict our ability to make distributions to

stockholders or other payments unless we satisfy certain financial tests and comply with various financial
ratios.

It also contains covenants that limit our ability to incur additional indebtedness, acquire other businesses
and make capital expenditures, and imposes various other restrictions. These covenants could affect our ability
to operate our business and may limit our ability to take advantage of potential business opportunities as they
arise.

The loss of our senior executives could affect our ability to manage our business profitably.

We depend on a small number of senior executives. Our future success will depend upon, among other

things, our ability to keep these executives and to hire other highly qualified employees at all levels. We
compete with other potential employers for employees, and we may not be successful in hiring and keeping
the executives and other employees that we need. We do not have written employment agreements with any of
our executive officers, and officers and other key employees could leave us with little or no prior notice, either
individually or as part of a group. Our loss of or inability to hire key employees could impair our ability to
manage our business and direct its growth.

Our expansion into foreign countries exposes us to unfamiliar regulations and may expose us to new
obstacles to growth.

We plan to grow both in the United States and in foreign countries. We have established substantial
operations in Canada, Mexico and the United Kingdom. Foreign operations carry special risks. Although our

14

business in foreign countries has not yet been affected, our business in the countries in which we currently
operate and those in which we may operate in the future could be limited or disrupted by:

(cid:129) government controls;

(cid:129) import and export license requirements;

(cid:129) political or economic insecurity;

(cid:129) trade restrictions;

(cid:129) changes in tariffs and taxes;

(cid:129) exchange rate fluctuations;

(cid:129) our unfamiliarity with local laws, regulations, practices and customs;

(cid:129) restrictions on repatriating foreign profits back to the United States;

(cid:129) difficulties in staffing and managing international operations.

Foreign governments and agencies often establish permit and regulatory standards different from those in

the United States. If we cannot obtain foreign regulatory approvals, or if we cannot obtain them when we
expect, our growth and profitability from international operations could be limited. Fluctuations in currency
exchange could have similar effects.

Litigation is always unpredictable and adverse judgments against us could require us to pay substantial
amounts.

We are parties to private antitrust litigation described elsewhere in this report (see Part I, Item 3 — Legal
Proceedings). We do not believe that any of the lawsuits against us has merit, and we are vigorously defending
the litigation. Litigation, however, is by its nature unpredictable, and the outcome of these lawsuits cannot be
assessed with any degree of certainty. Our insurance may or may not cover some or any of the claims in these
lawsuits, and to the extent that it does not, we, and not an insurance company, would have to bear the financial
burden of any adverse judgment. The potential thus exists for unanticipated adverse judgments against us which
may be substantial in amount and which could materially impair our cash reserves and financial condition.

Our earnings could decline if we write-off intangible assets, such as goodwill.

As a result of purchase accounting for our various acquisitions, our balance sheet at December 31, 2005

contains goodwill, net of accumulated amortization, of $685.2 million and other intangible assets, net of
accumulated amortization, of $63.1 million (including indefinite lived intangibles of $18.5 million). In
accordance with FAS 142, we evaluate on an ongoing basis, using the fair value of reporting units, whether
facts and circumstances indicate any impairment of the value of indefinite-lived intangible assets such as
goodwill. As circumstances after an acquisition can change, the value of these intangible assets may not be
realized by us. If we were to determine that a significant impairment has occurred, we would be required to
incur non-cash write-offs of the impaired portion of goodwill and other unamortized intangible assets, which
could have a material adverse effect on our results of operations in the period in which the write-off occurs.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease office space for our corporate offices in Lake Forest, Illinois. In North America we own or lease

three ETD treatment facilities, nine incineration facilities, 31 autoclave facilities and two facilities that use a
combination of these methods or other methods. All of our treatment facilities also serve as collection sites.
We own or lease 105 additional transfer and collection sites, eight additional sales/administrative sites, four
pharmaceutical services processing sites and three facilities for storage of supplies. These totals include eight
sites owned or leased by our majority-owned subsidiary, 3CI Complete Compliance Corporation (“3CI”). In
the United Kingdom we lease nine incineration facilities and three autoclave facilities. We also lease two

15

additional transfer and collection sites and one administrative site. We consider that these treatment facilities
are adequate for our present and anticipated needs.

We do not own or operate any landfills or any other type of disposal site. After treatment, all remaining

waste materials are transported to unaffiliated third parties for permanent disposal.

Item 3. Legal Proceedings

We operate in a highly regulated industry and deal with regulatory inquiries or investigations from time

to time that may be instituted for a variety of reasons. We are also involved in a variety of civil litigation from
time to time.

3CI Litigation.

In November 2005, we entered into a preliminary settlement to resolve class action

litigation by the minority shareholders of our majority-owned subsidiary, 3CI Complete Compliance Corpora-
tion (“3CI”), in which 3CI joined with the class as a plaintiff. This litigation is pending in state court in
Louisiana (Robb, et al. v. Stericycle, Inc., et al., First Judicial District Court, Caddo Parish, Louisiana
(No. 467704-A)) (the “Louisiana Litigation”). We have described this litigation on a number of occasions,
including our report on Form 10-K for 2004.

Under the terms of the preliminary settlement, we agreed to pay $32.5 million in cash to a trust fund to
be established by a claims administrator approved by the court for the purpose of (i) settling all claims in the
Louisiana Litigation and in related litigation in state court in Texas (3CI Complete Compliance Corporation v.
Waste Systems, Inc., et al., 269th Judicial District, Harris County, Texas (No. 2003-46899)), (ii) canceling or
otherwise acquiring all of the shares of 3CI common stock held by members of the plaintiff class and
(iii) paying court-approved administrative expenses and legal fees. In accordance with the terms of the
preliminary settlement, we made the required $32.5 million deposit with the claims administrator following
the court’s preliminary approval of the settlement in December 2005.

The preliminary settlement remains subject to the court’s final approval. A hearing on final approval was

held on February 21, 2006. The court has not yet rendered its decision.

The parties to the preliminary settlement intend that, through the settlement, we will acquire sufficient
shares of 3CI common stock so that, with the shares that we and one of our subsidiaries already own, we will
own 90% or more of 3CI’s outstanding common stock. This level of ownership would enable us to acquire the
balance of the outstanding 3CI common stock through a “short-form” merger under Delaware law. If we do
acquire 90% or more of 3CI’s common stock as contemplated, we intend to conduct such a short-form merger
as soon as practicable as we determine.

Private Antitrust Litigation.

In January 2003, we were sued in federal court in Arizona by a private

plaintiff claiming anticompetitive conduct in Arizona, Colorado and Utah from November 1997 to the present
and seeking certification of the lawsuit as a class action on behalf of all customers of ours in the three-state
area during this period. Over the next several months, four similar suits were filed in federal court in Utah,
Arizona, Colorado and New Mexico. These five lawsuits have been consolidated for multidistrict proceedings
in federal court in Utah, and the plaintiffs have filed a consolidated class action complaint, superseding their
prior, separate complaints, alleging various anticompetitive conduct, including monopolization of the market
for medical waste services. In December 2004 the plaintiffs filed a motion for class certification, and in
October 2005 the court heard arguments on the plaintiffs’ motion. The court has not yet issued a ruling.
Discovery in these proceedings is at an early stage.

In December 2003, a sixth suit was filed in federal court in Utah alleging monopolistic and other

anticompetitive conduct in California from 1999 through the present and seeking certification of the lawsuit as
a class action on behalf of all California customers of ours during this period. In December 2004 the plaintiffs
filed a motion for class certification, and in October 2005 the court heard arguments on the plaintiffs’ motion.
The court has not yet issued a ruling. Discovery in this lawsuit, which is coordinated with discovery in the
multidistrict proceedings, is at an early stage.

16

In February 2003, we were sued in federal court in Utah by a third-party hauler of medical waste alleging
various anticompetitive conduct, including an alleged denial of access to one of our incinerators. Discovery in
this lawsuit, which is consolidated with discovery in the multidistrict proceedings, is at an early stage.

We do not believe that any of these lawsuits has merit and are vigorously defending them.

Other Litigation.

In Australia, we are in arbitration with SteriCorp Limited over the ETD equipment

that we sold to them. Discovery is pending in these proceedings. We currently expect that the arbitration
hearing will be held during the second quarter of 2006.

During 2005, we were in arbitration regarding various disputes under an exclusive marketing and
distribution license agreement with a licensor of software. The licensor claimed, among other things, that our
license had ceased to be exclusive because of our failure to pay minimum royalties under the license
agreement, and we claimed, among other things, that the licensor’s actions entitled us to rescind the license
agreement and to be repaid the $1.8 million license fee we had paid. On March 1, 2006, the arbitrator awarded
the licensor $0.4 million in damages for breach of the license agreement and denied all of the parties’ other
claims, including our claim for rescission, and the license agreement was effectively terminated. As a result of
the arbitrator’s decision we wrote-off the remaining $1.4 million unamortized portion of our license intangible
asset.

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

No matter was submitted to a vote of our stockholders during the fourth quarter of 2005.

Executive Officers of the Registrant

Supplemental Information

The following table contains certain information regarding our five current executive officers:

Name

Position

Mark C. Miller . . . . . . . . . . . . . . . . . President, Chief Executive Officer and a Director
Richard T. Kogler . . . . . . . . . . . . . . . Executive Vice President and Chief Operating Officer
Frank J.M. ten Brink . . . . . . . . . . . . . Executive Vice President and Chief Financial Officer
Richard L. Foss. . . . . . . . . . . . . . . . . Executive Vice President, Corporate Development
Shan S. Sacranie . . . . . . . . . . . . . . . . Executive Vice President, International

Age

50
46
49
51
53

Mark C. Miller has served as our President and Chief Executive Officer and a director since joining us in

May 1992. From May 1989 until he joined us, Mr. Miller served as vice president for the Pacific, Asia and
Africa in the International Division of Abbott Laboratories, which he joined in 1976 and where he held a
number of management and marketing positions. He is a director of Ventana Medical Systems, Inc. Mr. Miller
received a B.S. degree in computer science from Purdue University, where he graduated Phi Beta Kappa.

Richard T. Kogler joined us as Chief Operating Officer in December 1998. From May 1995 through
October 1998, Mr. Kogler was vice president and chief operating officer of American Disposal Services, Inc.,
a solid waste management company. From October 1984 through May 1995, Mr. Kogler served in a variety of
management positions with Waste Management, Inc. Mr. Kogler received a B.A. degree in chemistry from
St. Louis University.

Frank J.M. ten Brink has served as our Executive Vice President, Finance and Chief Financial Officer
since June 1997. From 1991 until 1996 he served as chief financial officer of Hexacomb Corporation, and
from 1996 until joining us, he served as chief financial officer of Telular Corporation. Prior to 1991, he held
various financial management positions with Interlake Corporation and Continental Bank of Illinois. Mr. ten
Brink received a B.B.A. degree in international business and a M.B.A. degree in finance from the University
of Oregon.

17

Richard L. Foss has served as our Executive Vice President for Corporate Development since February
2003. From 1999 to 2002, Mr. Foss was a vice president and director of worldwide product marketing in the
personal communication sector at Motorola Inc., and from 1977 until 1999, he held a number of management
and marketing positions at The Proctor & Gamble Company, including serving as a vice president and general
manager in the health care segment. Mr. Foss received a B.S. degree in chemistry and an M.B.A degree from
Rensselear Polytechnic Institute.

Shan S. Sacranie joined us in May 2003 and became our Executive Vice President, International in

November 2003. From 2001 to 2002 he was chief executive for Appliance Controls Group, Inc. and from
1995 to 2001, he was president of Oak Industries Inc. From 1978 to 1995 he held a number of management
positions for Honeywell. Mr. Sacranie holds a BA degree (Hons) in economics from the University of Bombay,
an M.B.A. degree from Minnesota State University and a J.D. in from the William Mitchell College of Law.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

As of February 27, 2006, we had approximately 196 stockholders of record.

The following table provides the high and low sales prices of our Common Stock for each calendar

quarter during our two most recent fiscal years:

Quarter

First quarter 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

49.23
51.74
53.06
47.35
51.60
53.82
59.47
63.52

Low

43.12
45.43
44.36
41.79
44.20
43.92
50.58
54.36

We did not pay any cash dividends during 2005 and have never paid any dividends on our capital stock.
We currently expect that we will retain future earnings for use in the operation and expansion of our business
and do not anticipate paying any cash dividends in the foreseeable future. See Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”

18

In May 2002 our Board of Directors authorized the Company to repurchase up to 3,000,000 shares of our
common stock, in the open market or through privately negotiated transactions, at times and in amounts in the
Company’s discretion. In February 2005, at a time when we had purchased a cumulative total of
1,478,430 shares, the Board authorized the Company to purchase up to an additional 1,478,430 shares, thereby
giving the Company the authority to purchase up to a total of 3,000,000 additional shares. The following table
provides information about our purchases during the year ended December 31, 2005 of shares of our common
stock.

Issuer Purchases of Equity Securities

Period

January 1-January 31, 2005 . . . . . . . .
February 1-February 28, 2005. . . . . . .
March 1-March 31, 2005 . . . . . . . . . .
April 1-April 30, 2005 . . . . . . . . . . . .
May 1-May 31, 2005 . . . . . . . . . . . . .
June 1-June 30, 2005 . . . . . . . . . . . . .
July 1-July 31, 2005 . . . . . . . . . . . . . .
August 1-August 31, 2005 . . . . . . . . .
September 1-September 30, 2005 . . . .
October 1-October 31, 2005 . . . . . . . .
November 1-November 30, 2005 . . . .
December 1-December 31, 2005 . . . . .

Total
Number of Shares
(or Units)
Purchased

Average
Price
Paid per
Share
(or Unit)

Total
Number of Shares
(or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs

—
544,000
204,600
117,600
—
—
—
—
146,600
187,700
—
50,000

—
45.88
44.56
43.92
—
—
—
—
55.33
55.59
—
57.38

—
544,000
204,600
117,600
—
—
—
—
146,600
187,700
—
50,000

Maximum
Number (or
Approximate
Dollar
Value) of
Shares (or
Units) that
May Yet Be
Purchased
Under the
Plans or
Programs

1,868,570
2,803,000
2,598,400
2,480,800
2,480,800
2,480,800
2,480,800
2,480,800
2,334,200
2,146,500
2,146,500
2,096,500

Item 6. Selected Consolidated Financial Data

Statements of Income Data(1)
Revenues . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Net income applicable to Common
Stock . . . . . . . . . . . . . . . . . . . . .

Diluted net income per share of

Common Stock(2) . . . . . . . . . . .
Depreciation and amortization . . . .
Other Data
Cash provided by operating

activities . . . . . . . . . . . . . . . . . .
Cash used in investing activities . . .
Cash (used in) provided by

financing activities . . . . . . . . . . .

Year Ended December 31,

2005

2004

2003

2002

2001

(Dollars in thousands, except per share amounts)

$ 609,457
168,355
67,154

$ 516,228
145,655
78,178

$453,225
126,397
65,781

$401,519
100,832
45,724

$359,024
73,294
14,710

67,154

78,178

65,781

45,037

12,167

1.48
21,431

1.69
21,803

1.43
17,255

1.01
14,981

0.35
25,234

$

94,327
(156,001)

$ 114,611
(105,093)

$123,887
(57,635)

$ 98,731
(49,470)

$ 64,550
(36,673)

59,500

(6,941)

(66,820)

(53,705)

(17,806)

19

Balance Sheet Data (at
December 31)(1)

Cash, cash equivalents and short-

term investments . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . .
Long-term debt, net of current

Year Ended December 31,

2005

2004

2003

2002

2001

(Dollars in thousands, except per share amounts)

$
8,545
1,047,660

$

7,949
834,141

$
7,881
707,462

$
8,887
667,095

$ 13,017
614,530

maturities . . . . . . . . . . . . . . . . . .

348,841

190,431

163,016

224,124

267,365

Convertible redeemable preferred

stock . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . .

—
$ 521,634

—
$ 495,372

20,944
$407,820

28,049
$326,729

44,872
$232,510

(1) See Note 4 to the Consolidated Financial Statements for information concerning our acquisitions during

the three years ended December 31, 2005.

(2) See Note 10 to the Consolidated Financial Statements for information concerning the computation of net

income per common share. In 2005, net income includes costs related to the 3CI preliminary settlement of
class action litigation of $23.4 million net of tax, South Africa note receivable write-down of $1.5 million
net of tax, fixed asset impairments of $0.5 million net of tax, acquisition-related costs of $0.5 million net
of tax, settlement of licensing litigation of $1.1 million net of tax, and items related to debt restructuring
of $0.3 million net of tax which negatively impacted EPS by $0.60 per share. Of the total of $27.3 million
of such items, $3.4 million were non-cash items. In 2004, net income includes acquisition-related costs of
$0.5 million net of tax, fixed asset write-offs of $0.7 million net of tax, and items related to debt restruc-
turing and redemption of senior subordinated debt of $2.8 million net of tax that negatively impacted EPS
by $0.09 per share. Of the total of $4.0 million of such items, $1.4 million were non-cash items. In 2003,
net income includes acquisition-related costs of $0.4 million net of tax and items related to debt restructur-
ing and subordinated debt repurchase of $2.0 million net of tax, which negatively impacted EPS by
$0.04 per share. Of the total of $2.4 million of such items, $0.5 million were non-cash items. In 2002, net
income includes acquisition-related costs of $0.2 million net of tax, fixed asset write-offs of $1.8 million
net of tax and items related to debt restructuring and subordinated debt repurchases of $1.4 million net of
tax, which negatively impacted EPS by $0.08 per share. Of the total of $3.4 million of such items,
$2.0 million were non-cash items. In 2001, net income includes acquisition-related costs of $0.2 million
net of tax, fixed asset write offs of $2.0 million net of tax and items related to debt restructuring and sub-
ordinated debt repurchases, of $7.3 million net of tax, which negatively impacted EPS by $0.12 per share.
Of the total of $9.5 million of such items, $5.5 million were non-cash items.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion of our financial condition and results of operations should be read in

conjunction with our consolidated financial statements and related notes in Item 8 of this Report.

Introduction

We are the largest provider of regulated medical waste services in North America. In addition we offer

OSHA compliance services to health care providers and other monitoring services. During 2004, we acquired
White Rose Environmental Ltd., which is a leading provider of regulated medical waste services in the United
Kingdom.

We derive our revenues from services to two principal types of customers: (i) outpatient clinics, medical

and dental offices, biomedical companies, pharmacies municipal entities, long-term and sub-acute care
facilities and other smaller-quantity generators of regulated medical waste (“small account” customers) and
(ii) hospitals, blood banks, pharmaceutical manufacturers and other larger-quantity generators of regulated
medical waste (“large account” customers).

20

Substantially all of our services are provided pursuant to customer contracts specifying either scheduled

or on-call services, or both. Contracts with small account customers generally provide for annual price
increases and have an automatic renewal provision unless the customer notifies us to the contrary prior to the
expiration of the current term of the contract. Contracts with hospitals and other large account customers,
which may run for more than one year, typically include price escalator provisions, which allow for price
increases generally tied to an inflation index or set at a fixed percentage.

We also serve pharmacies, distributors and manufacturers of pharmaceutical products by managing the
return and disposal of expired or surplus pharmaceutical products and by managing the recall of pharmaceu-
tical products being recalled by the manufacturer. In 2005, we completed four acquisitions of companies that
provide these services.

As of December 31, 2005, we served approximately 333,000 customers, of which approximately 325,000

were small account customers and approximately 7,700 were large account customers.

Critical Accounting Policies and Procedures

Our discussion and analysis of our financial condition and results of operations are based upon our

consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires that we make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities. We believe that of our significant accounting policies
(see Note 2 to our consolidated financial statements), the following ones may involve a higher degree of
judgment on our part and greater complexity of reporting.

Revenue Recognition. We recognize revenue for our medical waste services at the time of medical waste
collection. Revenue and costs on contracts to supply our proprietary ETD treatment equipment are recognized
based on shipment of equipment and services provided for in the individual contract. We routinely review total
estimated costs and shipments to complete each contract and revise the revenues and estimated gross margin
on the contract as necessary. Payments received in advance are deferred and recognized as services are
provided. Royalty revenues are calculated based on measurements specified in each contract or license and
revenues are recognized at the end of each reporting period when the activity being measured has been
completed. Revenues from product sales are recognized at the time the goods are shipped to the ordering
customer. Software licensing revenues are recognized on a prorated basis over the term of the license
agreement. Revenues from pharmaceutical services are recorded at the time services are performed. We do not
have any contracts in a loss position. Losses would be recorded when known and estimable for any contracts
that should go into a loss position. Payments received in advance are deferred and recognized as services are
provided.

Goodwill and Other Identifiable Intangible Assets. Goodwill associated with the excess purchase price

over the fair value of assets acquired is not amortized. We have determined that our permits have indefinite
lives and, accordingly are not amortized. This position is in accordance with Statements of Financial
Accounting Standards (“FAS”) No. 142, which became effective for fiscal years beginning after December 15,
2001.

Our balance sheet at December 31, 2005 contains goodwill, net of accumulated amortization, of
$685.2 million. In accordance with FAS 142, we evaluate on at least an annual basis, using the fair value of
reporting units, whether goodwill is impaired. If we were to determine that a significant impairment has
occurred, we would be required to incur non-cash write-offs of the impaired portion of goodwill that could
have a material adverse effect on our results of operations in the period in which the write-off occurs. We use
the market value of our stock as the current measurement of total fair value of our reporting units and any
unforeseen material drop in our stock price maybe an indicator of a potential impairment of goodwill. The
results of the 2005 impairment test conducted in June 2005 did not show any impairment of goodwill, and
there have not occurred any events since that time that indicate that an impairment situation exists.

21

Our permits are currently tested for impairment annually at December 31 or more frequently if
circumstances indicate that they may be impaired. We use a discounted cash flow model as the current
measurement of the fair value of the permits. The estimate of cash flow is based upon, among other things,
certain assumptions about expected future operating performance and an appropriate discount rate determined
by management. Our estimates of discounted cash flow may differ from actual cash flow due to, among other
things; inaccuracies in economic estimates and actual cash flow could materially affect the future financial
value of the permits. The results of the 2005 impairment test did not show any impairment of our permits and
no events have occurred since that time that would indicate an impairment situation exists.

Other identifiable intangible assets, such as customer lists, tradenames and covenants not-to-compete, are

currently amortized using the straight-line method over their estimated useful lives. We have determined that
our medical waste business customer lists have 40-year lives and our pharmaceutical services business
customer lists have 20-year lives. These assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may be less than the undiscounted cash flows.
There have been no indicators of impairment of these intangibles (see Note 8 to our consolidated financial
statements).

During 2005 we were in arbitration proceedings regarding various disputes under an exclusive marketing
and distribution license agreement with a licensor of software. On March 1, 2006, subsequent to year-end, the
arbitrator awarded damages to the licensor and the license agreement was effectively terminated. Although this
event occurred after the end of the year, we are required to write-off the unamortized portion of the license fee
that we had previously paid. The effect is a reduction in the carrying amount of this intangible by $1.8 million
and a reduction in the accumulated amortization of $0.4 million.

Income Taxes. Deferred income tax liabilities and assets are determined based on the differences
between the financial statement and income tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.

Accounts Receivable. Accounts receivable consist primarily of amounts due to us from our normal
business activities. Accounts receivable balances are determined to be delinquent when the amount is past due
based on the contractual terms with the customer. We maintain an allowance for doubtful accounts to reflect
the expected uncollectibility of accounts receivable based on past collection history and specific risks
identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts
when we have determined that the receivable will not be collected and/or when the account has been referred
to a third party collection agency. No single customer accounts for more than 2% of our revenues.

Insurance. Our insurance for worker’s compensation, vehicle liability and physical damage, and
employee-related health care benefits is obtained using high deductible insurance polices. A third-party
administrator is used to process all such claims. We require all workers’ compensation, vehicle liability and
physical damage claims to be reported within 24 hours. As a result, we accrue our worker’s compensation,
vehicle and physical damage liability based upon the claim reserves established by the third-party administra-
tor at the end of each reporting period. Our employee health insurance benefit liability is based on our
historical claims experience rate. Our earnings would be impacted to the extent that actual claims vary from
historical experience. We review our accruals associated with the exposure to these liabilities for adequacy at
the end of each reporting period.

Litigation. We operate in a highly regulated industry and deal with regulatory inquiries or investigations

from time to time that may be instituted for a variety of reasons. We are also involved in a variety of civil
litigation from time to time. Settlements from litigation would be recorded when known, probable and
estimable.

Stock Option Plans. We have issued stock options to employees and directors as an integral part of our

compensation programs. Accounting principles generally accepted in the United States allow alternative
methods of accounting for these plans. We have chosen to account for our stock option plans under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). As
required by FAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure, calculations of

22

pro forma net income and earnings per share, computed in accordance with the method prescribed by
FAS No. 123, Accounting for Stock-Based Compensation, are set forth in Note 11 to our consolidated
financial statements.

We will adopt the provisions of FAS 123 (revised 2004), Share-Based Payments, (“FAS 123R”) on
January 1, 2006. Among other things, FAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements based on their fair values
beginning with the first interim or annual period after January 1, 2006. See Note 2-New Accounting
Pronouncements in Item 8, Financial Statements and Supplemental Data for further information.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

The following summarizes (in thousands) our operations:

Year Ended December 31,

2005

2004

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $609,457
324,988
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,432
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0% $516,228
53.3% 271,189
2.7% 16,833

100.0%
52.5%
3.3%

Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .

341,420

56.0% 288,022

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition related costs . . . . . . . . . . . . . . . . . . . . . . . . .

Total selling, general and administrative expenses . . . . . . .
Write off fixed as sets . . . . . . . . . . . . . . . . . . . . . . . . . . .

268,037
93,033
3,403
1,596
778

98,810
872

44.0% 228,206
15.3% 75,653
2,540
0.6%
2,430
0.3%
773
0.1%

16.2% 81,396
1,155
0.1%

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . .

168,355

27.6% 145,655

Write-down of note receivable with former joint venture . .
Licensing legal settlement . . . . . . . . . . . . . . . . . . . . . . . .
3CI legal settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,495
1,823
36,481
67,154

0.4%
0.3%
6.0%
11.0%

—
—
—
78,178

Earnings per share — diluted . . . . . . . . . . . . . . . . . . . . . . $

1.48

$

1.69

55.8%

44.2%
14.7%
0.5%
0.5%
0.1%

15.8%
0.2%

28.2%

—
—
—
15.1%

Revenues. Our revenues increased $93.2 million, or 18.1%, to $609.5 million in 2005 from $516.2 mil-
lion in 2004. Revenues generated from the sale of ETD equipment and licensing of technology internationally
were $1.0 million during 2005, compared to $8.2 million during 2004. This decrease is a result of the delivery
of a large portion of an order of ETD equipment to a customer in Japan in 2004. During 2005, acquisitions
less than one year old contributed approximately $63.6 million to the increase in our revenues from 2004. For
the year, internal growth for small account customers increased approximately 9% while revenues from large
quantity customers increased by approximately 5%.

During 2005, the size of the regulated medical waste market in the United States remained relatively

stable. Through our acquisition of White Rose Environmental Ltd. in June 2004 and subsequent United
Kingdom acquisitions in 2005, we were able to expand our geographic presence outside of North America.

Cost of Revenues. Our cost of revenues increased $53.4 million or 18.5%, to $341.4 million during
2005, from $288.0 million during 2004. The increase was primarily related to the increase in revenues during
2005 compared to 2004. Our gross margin percentage decreased to 44.0% during 2005 from 44.2% during
2004 as we experienced higher energy related costs. Domestic energy costs increased in 2005, which were
partially offset by higher revenues related to fuel surcharges. Employee benefit costs as a percentage of

23

compensation costs decreased by 2.0% in 2005. This was a result of the changes to our employee healthcare
programs including changes to our providers and program formats.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses

increased to $98.8 million during 2005, from $81.4 million during 2004. This increase was primarily the result
of increased spending on marketing our Steri-SafeSM program and Bio Systems sharps management program
and the expansion into the pharmaceutical services programs. Bad debt expense increased during 2005 to
$2.7 million from $0.8 million in 2004 due to higher sales and increased write-offs in 2005. In addition, as
noted in the cost of revenues discussion above, employee benefit costs as a percentage of compensation costs
decreased in 2005. Amortization decreased to $1.6 million during 2005, from $2.4 million during 2004 as a
result of intangibles becoming fully amortized at the end of 2004. Selling, general and administrative expenses
as a percentage of revenue increased to 16.2% during 2005 compared to 15.8% in 2004.

Income from Operations.

Income from operations increased to $168.4 million during 2005 from
$145.7 million during 2004. The increase was due to higher revenues partially offset by higher costs of
revenues and selling, general and administrative expenses. During the year ended December 31, 2005 3CI
Complete Compliance Corporation, of which we own a majority of the common stock, recorded a non-cash
impairment charge of $0.9 million on its Springhill, Louisiana building and property. During the year ended
December 31, 2004 we recorded a non-cash write-down of idled Stericycle incinerator equipment at our
Baltimore, Maryland and Terrell, Texas facility of $1.2 million. Income from operations as a percentage of
revenue decreased to 27.6% during 2005 from 28.2% during 2004 as a result of the factors described above.

Interest Expense and Interest Income.

Interest expense increased to $13.0 million during 2005, from

$11.2 million during 2004, primarily due to higher debt levels during the year. Interest income was $0.8 million
during 2005 and $0.6 million during 2004.

Write-down of note receivable. During 2005 we wrote-down a $2.5 million note receivable that we had
recorded from the sale of interest in our former South African joint venture when we had determined that the
amount was uncollectible.

Legal Settlements. During November 2005 we incurred $36.5 million in expenses related to the
preliminary settlement of the 3CI class action litigation and related legal expenses. In December 2005, we
recorded a cash charge of $0.4 million for damages and a non-cash charge of $1.4 million, representing the
write-off of the unamortized portion of a license fee that we previously paid, as a result of an arbitrator’s
award in March 2006 and the license agreement being effectively terminated.

Debt Extinguishments and Refinancing Expenses. During 2005 we incurred $0.5 million in refinancing

expense for non-cash accelerated amortization of financing fees related to amendments to our bank credit
facility agreements. During 2004 we repurchased the remaining $50.9 million of our senior subordinated notes.
As a result, in 2004 we incurred $3.1 million in redemption premium expenses and $1.1 million in non-cash
accelerated amortization of financing fees associated with the repurchase of the notes.

Income Tax Expense.

Income tax expense for the years 2005 and 2004 reflects an effective tax rate of
approximately 40.0% and 39.2%, respectively, for federal and state income taxes. Excluding the effect of the
legal settlement expense, the effective tax rate for 2005 was 39%.

24

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

The following summarizes (in thousands) our operations:

Year Ended December 31,

2004

2003

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $516,228
271,189
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,833
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0% $453,225
52.5% 243,170
3.3% 13,430

100.0%
53.7%
3.0%

Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .

288,022

55.8% 256,600

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition related costs . . . . . . . . . . . . . . . . . . . . . . . . .

Total selling, general and administrative expenses . . . . . . .
Write off fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

228,206
75,653
2,540
2,430
773

81,396
1,155

145,655
78,178

44.2% 196,625
14.7% 65,733
1,975
0.5%
1,850
0.5%
670
0.1%

15.8% 70,228
—
0.2%

28.2% 126,397
15.1% 65,781

56.6%

43.4%
14.5%
0.4%
0.4%
0.1%

15.5%
—

27.9%
14.5%

Earnings per share — diluted . . . . . . . . . . . . . . . . . . . . . . $

1.69

$

1.43

Revenues. Our revenues increased $63.0 million, or 13.9%, to $516.2 million in 2004 from $453.2 mil-
lion in 2003. Revenues generated from the sale of ETD equipment and licensing of technology internationally
were $8.2 million during 2004, compared to $2.8 million during 2003. This increase is a result of the delivery
of a large portion of an order of ETD equipment to a customer in Japan in 2004. During 2004, acquisitions
less than one year old contributed approximately $47.6 million to the increase in our revenues from 2003. For
the year, internal growth for small account customers increased approximately 9% while revenues from large
quantity customers decreased by approximately 4% because of our program of improving lower-margin
accounts. This margin improvement program identifies large quantity customers with margins below internally
acceptable thresholds and we make adjustments to pricing or service in an effort to improve the margin. These
adjustments may result in our not renewing the customer contract and therefore may result in a reduction of
revenues.

During 2004, the size of the regulated medical waste market in the United States remained relatively

stable. Through our acquisition in June of White Rose Environmental Ltd., we were able to expand our
geographic presence outside of North America.

Cost of Revenues. Our cost of revenues increased $31.4 million or 12.2%, to $288.0 million during
2004, from $256.6 million during 2003. The increase was primarily related to the increase in revenues during
2004 compared to 2003. Our gross margin percentage increased to 44.2% during 2004 from 43.4% during
2003 as we realized improvements from our continuous programs to improve margins on our large quantity
business, increased our number of small quantity customers electing our Steri-SafeSM program from 70,000 to
87,000 and improved our transportation productivity by increasing route density. During the year fuel prices as
a percent of revenue increased by 20%. Employee benefit costs as a percentage of compensation costs
decreased by 3.3% in 2004. This was a result of the changes implemented in late 2003 to our employee
healthcare programs including changes to our third-party administrators and providers. The lower gross
margins of White Rose, which started consolidating into our financials in June 2004, reduced the gross margin
percentage for the consolidated business by 134 basis points in 2004.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses

increased to $81.4 million during 2004, from $70.2 million during 2003. This increase was primarily the result
of increased spending as a result on marketing our Steri-SafeSM program and the national rollout of the Bio

25

Systems sharps management program and the acquisition of White Rose in June 2004. Amortization increased
to $2.4 million during 2004, from $1.9 million during 2003. Acquisition related costs increased to $0.8 million
in 2004 from $0.7 million in 2003. Bad debt expense decreased during 2004 to $0.8 million from $2.0 million
in 2003. This decrease was the result of improved collections and decreased write-offs during 2004. Legal
expenses increased to $5.4 million in 2004 from $3.4 million in 2003 as a result of litigation expense of
which, $1.5 million was incurred by our majority-owned subsidiary 3CI under the direction of the special
committee of its board of directors. In addition, as noted in the cost of revenues discussion above, employee
benefit costs as a percentage of compensation costs decreased in 2004. Selling, general and administrative
expenses as a percentage of revenue increased to 15.8% during 2004 compared to 15.5% in 2003.

Income from Operations.

Income from operations increased to $145.7 million during 2004 from

$126.4 million during 2003. The increase was due to higher revenues, offset by higher costs of revenues and
selling, general and administrative expenses. During the year ended December 31, 2004 we had a non-cash
write down of idled incinerator equipment and related spare parts in the amount of $1.2 million. Income from
operations as a percentage of revenue increased to 28.2% during 2004 from 27.9% during 2003 as a result of
the factors described above.

Interest Expense and Interest Income.

Interest expense decreased to $11.2 million during 2004, from

$12.8 million during 2003, primarily due to lower debt levels and lower interest rates during the year. Interest
income was $0.6 million during 2004 and 2003.

Debt Extinguishments and Refinancing Expenses. During 2004 we repurchased the remaining $50.9 mil-
lion of our senior subordinated notes compared to a repurchase of $17.8 million of notes in 2003. As a result,
in 2004 we incurred $3.1 million in redemption premium expenses and $1.1 million in non-cash accelerated
amortization of financing fees associated with the repurchase of the notes compared to $2.8 million and
$0.5 million, respectively, in 2003. In addition, we amended our bank credit facility agreement in 2004 and
paid $0.3 million in financing fees.

Income Tax Expense.

Income tax expense for the years 2004 and 2003 reflects an effective tax rate of

approximately 39.2% and 39.5%, respectively, for federal and state income taxes.

Liquidity and Capital Resources

In June 2005, we obtained a new $400.0 million senior unsecured revolving credit facility maturing in
June 2010 in place of our existing senior secured credit facility. The new credit facility reduced the interest
rates that we are charged by reducing the applicable margin that is added to the relevant interest rate. The new
credit facility also allowed us to borrow in pre-approved currencies other than United States dollars. Our
borrowings bear interest at fluctuating interest rates determined, at our election in advance for any quarterly or
other applicable interest period, by reference to (i) a “base rate” (the higher of the prime rate at Bank of
America, N.A. or 0.5% above the rate on overnight federal funds transactions) or (ii) the London Interbank
Offered Rate, or LIBOR, plus, in either case, the applicable margin within the relevant range of margins
provided in our credit agreement. The applicable margin is based upon our consolidated leverage ratio. As of
December 31, 2005, the margin for interest rates on borrowings under our new credit facility was 0.0% on
base rate loans and 0.75% on LIBOR loans.

In December 2005, we amended our $400.0 million senior unsecured revolving credit facility. The facility
was increased to $550.0 million, with additional capacity available up to $650.0 million upon request. We also
increased the letter of credit sub-limit from $125.0 million to $150.0 million.

Our amended credit facility requires us to comply with various financial, reporting and other covenants
and restrictions, including a restriction on dividend payments. At December 31, 2005, our material financial
covenants were as follows:

(cid:129) The permitted maximum leverage ratio is 3.00:1.00. As of December 31, 2005, our actual leverage ratio

was 1.80:1.00.

26

(cid:129) The permitted minimum interest coverage ratio is 3.00:1.00. As of December 31, 2005, our actual

interest coverage ratio was 16.45:1.00.

As of December 31, 2005, we had $291.7 million of borrowings outstanding under our senior unsecured
credit facility, which includes foreign currency borrowings of $5.2 million. In addition, we had $65.9 million
committed to outstanding letters of credit.

Working Capital. At December 31, 2005, our working capital was $45.3 million compared to working

capital of $32.3 million at December 31, 2004. As noted, we have available a $550.0 million revolving line of
credit under our senior unsecured credit facility and at December 31, 2005 had borrowed $291.7 million under
this line and had an additional $65.9 million committed in letters of credit.

Net Cash Provided or Used. Net cash provided by operating activities was $94.3 million during the year

ended December 31, 2005 compared to $114.6 million for 2004. This decrease primarily reflects higher
accounts receivable, accrued liability balances and lower net income. The decrease in net income was
primarily the result of the $23.4 million, net of tax, recorded for the preliminary settlement of the 3CI class
action litigation. Net cash provided by operating activities in 2005 included a $7.4 million tax benefit from
disqualifying dispositions of stock options.

Net cash used in investing activities for 2005 was $156.0 million compared to $105.1 million for 2004.

This increase is primarily attributable to the increase in payments for acquisitions. Cash investments in
acquisitions and international joint ventures for 2005 were $139.7 million compared to $72.4 million in 2004.
The increase was primarily the result of our acquisition of pharmaceutical return businesses. In addition, in
2005 we sold the Consumer Products Division of Universal Solutions, Inc., which we had acquired as part of
the Universal Solutions, Inc. acquisition, and received $10.3 million of net proceeds. Capital expenditures were
$26.3 million for 2005, for investments in capital equipment to support a nationwide rollout of the Bio Systems
sharps management program and other improvements in our infrastructure, compared to $33.3 million in 2004.
As of December 31, 2005 we had less than 9% of our treatment capacity in North America in incineration and
approximately 91% in non-incineration technologies such as our proprietary ETD technology and autoclaving.
The implementation of our commitment to move away from incineration in North America may result in a
write-down of the incineration equipment as and when we close incinerators that we are currently operating.
Our commitment to move away from incineration in North America is in the nature of a goal to be
accomplished over an undetermined number of years. Because of uncertainties relating, among other things, to
customer education and acceptance and legal requirements to incinerate portions of the medical waste, we do
not have a timetable for this transition or specific plans to close any of our existing incinerators.

Net cash provided by financing activities was $59.5 million during 2005 compared to $6.9 million net

cash used in financing activities in 2004. During 2005 we borrowed money to fund acquisitions, stock
repurchases and the 3CI legal settlement. In addition, we made debt repayments of $198.9 million when we
terminated our 2001 senior credit facility, $60.7 million in common stock repurchases, $12.8 million
repayments on promissory notes and $0.8 million for capital leases. In 2005, we also amended our
$400.0 million senior unsecured revolving credit facility. The facility was increased to $550.0 million, in
which we borrowed $371.5 million and made debt repayments of $79.8 million.

In addition, at December 31, 2005 we had $68.0 million outstanding primarily related to promissory notes

issued in connection with acquisitions made during 2002 through 2005.

27

Contractual Cash Commitments. The following table displays our future contractual cash commitments.

Payments Due by Period (In Thousands)

Total

Long term debt* . . . . . . . . . . . . . . . . . .
Capital lease obligations* . . . . . . . . . . .
Purchasing obligations . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . .
Other long-term liabilities* . . . . . . . . . .

$441,224
1,298
1,650
97,742
3,187

Less than
1 Year

$30,504
1,068
864
24,747
839

1-3 Years

4-5 Years

$ 98,832
230
786
47,364
1,634

$309,151
—
—
15,550
417

After
5 Years

$ 2,737
—
—
10,081
297

Total contractual cash obligations. . . . . .

$545,101

$58,022

$148,846

$325,118

$13,115

* The long-term debt, capital lease and other long-term liabilities items include both the future principal pay-
ment amount as well as an amount calculated for expected future interest payments. For long-term debt
with variable rates of interest, management used judgment to estimate the future rate of interest.

At December 31, 2005 we had $65.9 million in stand-by letters of credit issued.

We anticipate that our operating cash flow, together with borrowings under our senior secured credit
facility, will be sufficient to meet our anticipated future operating expenses, capital expenditures and debt
service obligations as they become due during the next 12 months and the foreseeable future.

Guarantees. We have guaranteed a loan to the Azoroa Bank in Japan on behalf of Shiraishi-Sogyo Co.
Ltd (“Shiraishi”). Shiraishi is a customer in Japan that is expanding their medical waste management business
and has a five-year loan with a current balance of $6.5 million with the Azoroa Bank that expires in June
2009. Management currently believes no amount will be paid under the guarantee.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risks arising from changes in interest rates on our senior unsecured credit

facility. Our interest rate exposure results from changes in LIBOR or the base rate, which are used to
determine the applicable interest rates under our revolving credit facility. Our potential loss over one year that
would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate
on all of our variable rate obligations would be approximately $2.9 million.

We have exposure to commodity pricing for gas and diesel fuel for our trucks. We do not hedge these

items to manage the exposure.

Item 8. Consolidated Financial Statements and Supplemental Data

Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) under
the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, a company’s
principal executive and principal financial officers and effected by the company’s board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company’s internal control over financial reporting includes those policies
and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the

transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of

financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company; and

28

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisi-

tion, use or disposition of the Company’s assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control —
Integrated Framework.

Based on this assessment and those criteria, management concludes that the Company maintained

effective internal control over financial reporting as of December 31, 2005.

The Company’s independent auditors have issued an attestation report on management’s assessment of the

Company’s internal control over financial reporting. That report appears on page 30.

Lake Forest, IL
March 1, 2006

Stericycle, Inc.

29

Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting

The Board of Directors and Shareholders of Stericycle, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Stericycle, Inc. maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Stericycle, Inc.’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the
company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight

Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, management’s assessment that Stericycle, Inc. maintained effective internal control over

financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Stericycle, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005 based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Stericycle, Inc. and Subsidiaries as of December 31,
2005 and 2004, and the related consolidated statements of income, cash flows and changes in shareholders’
equity for each of the three years in the period ended December 31, 2005 and our report dated March 1, 2006
expressed an unqualified opinion thereon.

Chicago, Illinois
March 1, 2006,

/s/ Ernst & Young LLP

30

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
Stericycle, Inc.

We have audited the accompanying consolidated balance sheets of Stericycle, Inc. and Subsidiaries as of

December 31, 2005 and 2004, and the related consolidated statements of income, cash flows and changes in
shareholders’ equity for each of the three years in the period ended December 31, 2005. Our audits also
included the financial statement schedule listed in the Index at Item 15(a). These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight

Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Stericycle, Inc. and Subsidiaries at December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight

Board (United States), the effectiveness of Stericycle, Inc.’s internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2006
expressed an unqualified opinion thereon.

Chicago, Illinois
March 1, 2006,

/s/ Ernst & Young LLP

31

STERICYCLE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, less allowance for doubtful accounts of $4,810 in 2005 and $4,188 in

2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parts and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property, plant and equipment:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internally developed software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other assets:

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, less accumulated amortization of $8,965 in 2005 and $7,951 in 2004 . . . . . .
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2005

2004

(In thousands, except for
share and per share data)

$

7,825
720

$ 7,850
99

103,703
5,263
6,523
3,164
13,452
3,392
144,042

8,190
48,149
144,795
21,581
1,101
11,220
235,036
(98,816)
136,220

685,169
61,641
10,672
9,916
767,398

74,888
4,259
6,716
3,423
13,296
4,961
115,492

8,352
44,951
126,689
18,940
—
12,527
211,459
(75,947)
135,512

516,808
50,800
9,517
6,012
583,137

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,047,660

$834,141

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of long term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current portion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shareholders’ equity:

Common stock (par value $.01 per share, 80,000,000 shares authorized, 44,149,722 issued and
outstanding in 2005, 44,732,070 issued and outstanding in 2004). . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,044
27,872
48,450
10,394

98,760
348,841
71,549
6,876

442
259,075
546
261,571
521,634
$1,047,660

$ 13,218
17,998
44,411
7,611

83,238
190,431
57,477
7,623

448
298,046
2,461
194,417
495,372
$834,141

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

32

STERICYCLE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

2005

Year Ended December 31,
2004
(In thousands, except per share data)

2003

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Costs and expenses:

609,457

$

516,228

$

453,225

Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses. . . . . . . . . . . . . .
Write off of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition related expenses . . . . . . . . . . . . . . . . . . . . . . . . .

Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt extinguishments and refinancing . . . . . . . . . . . . . . . . . .
Write-down of note receivable with former joint venture. . . . .
Licensing legal settlement . . . . . . . . . . . . . . . . . . . . . . . . . . .
3CI legal settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

341,420
98,032
872
778

441,102

168,355

764
(13,011)
(447)
(2,495)
(1,823)
(36,481)
(2,882)

(56,375)

111,980
44,826

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

67,154

Earnings per share — Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Earnings per share — Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $

1.52

1.48

$

$

$

288,022
80,623
1,155
773

370,573

145,655

558
(11,186)
(4,574)
—
—
—
(1,889)

(17,091)

128,564
50,386

78,178

1.77

1.69

$

$

$

256,600
69,558
—
670

326,828

126,397

550
(12,848)
(3,268)
—
—
—
(2,102)

(17,668)

108,729
42,948

65,781

1.59

1.43

Weighted average number of common shares outstanding —

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44,284,580

44,250,913

41,439,020

Weighted average number of common shares outstanding —

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45,310,509

46,195,897

46,097,802

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

33

STERICYCLE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

2005

Year Ended December 31,
2004
(In thousands)

2003

OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:

Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of note receivable with former joint venture . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees paid for extinguishment of senior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of licensing intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale and impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of disqualifying dispositions of stock options and exercise of non-qualified stock

options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change in operating assets and liabilities, net of effects of acquisitions:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parts and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 67,154

$ 78,178

$ 65,781

27
447
2,495
—
1,431
872

7,432
19,835
1,596
13,514

(19,679)
(962)
(1,909)
7,393
(8,056)
2,737

21
1,094
—
3,147
—
1,515

7,719
19,373
2,430
13,849

(4,986)
(494)
6,301
(5,123)
(5,926)
(2,487)

76
484
—
2,784
—
295

10,044
15,405
1,850
9,576

5,983
1,720
(1,710)
(515)
11,363
751

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

94,327

114,611

123,887

INVESTING ACTIVITIES:

Payments for acquisitions and international investments, net of cash acquired . . . . . . . . . . . . . .
Proceeds from maturity/(purchases) of short-term investments . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of assets from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(139,696)
(621)
10,328
302
(26,314)

(72,408)
542
—
85
(33,312)

(37,222)
(129)
—
688
(20,972)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(156,001)

(105,093)

(57,635)

FINANCING ACTIVITIES:

Proceeds from issuance of notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of senior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net borrowings (repayments) from 2001 senior credit facility . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 2001 senior credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings on 2005 senior credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments on 2005 senior credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase/cancellation of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from other issuances of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

735
—
(12,845)
27,500
(198,853)
371,522
(79,853)
(1,484)
(795)
(60,657)
14,230

Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59,500

Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,149
(25)
7,850

12,435
(54,012)
(4,402)
61,695
—
—
—
—
(996)
(34,847)
13,186

(6,941)

(1,967)
610
7,240

1,132
(20,559)
(6,023)
(37,187)
—
—
—
(395)
(1,117)
(13,204)
10,533

(66,820)

(567)
(1,135)
8,375

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

7,825

$

7,850

$ 7,240

Non-cash activities:

Net issuances of notes payable for certain acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 49,736

$ 17,795

Net issuances of common stock and warrants for certain acquisitions . . . . . . . . . . . . . . . . . . .

$

— $

441

$

$

—

204

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

34

STERICYCLE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2005, 2004 and 2003

Issued
and
Outstanding
Shares

Additional
Paid-In
Capital

Amount

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’
Equity

Retained
Earnings

Treasury
Stock

(In thousands)

Balances at December 31, 2002. . . . . . .

40,437

$404

$277,531

$ 50,458

$(1,435)

$ (229)

$326,729

Issuance of common stock for exercise of
options and warrants and employee
stock purchases . . . . . . . . . . . . . . . .
Conversion of Preferred Stock . . . . . . . .

Purchase/Cancellation of treasury stock . .

Common stock and warrants issued for

acquisitions . . . . . . . . . . . . . . . . . .

Tax benefit of disqualifying dispositions
of stock options and exercise of non-
qualified stock options . . . . . . . . . . .
Currency translation adjustment . . . . . . .

Change in fair value of cashflow hedge. .

Net income . . . . . . . . . . . . . . . . . . . .

Comprehensive income . . . . . . . . . . . .

960
812

(343)

2

—
—

—

—

—

10
8

(3)

1

—
—

—

—

—

10,390
7,097

(14,636)

205

10,044
—

—

—

—

—
—

—

—

—
—

—

65,781

—

—
—

1,435

—

—
—

—

—

—

—
—

—

—

—
527

232

—

—

10,400
7,105

(13,204)

206

10,044
527

232

65,781

66,540

Balances at December 31, 2003. . . . . . .

41,868

$420

$290,631

$116,239

$ —

$

530

$407,820

Issuance of common stock for exercise of
options and warrants and employee
stock purchases . . . . . . . . . . . . . . . .

Conversion of Preferred Stock . . . . . . . .
Purchase/Cancellation of treasury stock . .

Common stock and warrants issued for

acquisitions . . . . . . . . . . . . . . . . . .

Tax benefit of disqualifying dispositions
of stock options and exercise of non-
qualified stock options . . . . . . . . . . .

Currency translation adjustment . . . . . . .
Change in fair value of cashflow hedge. .

Net income . . . . . . . . . . . . . . . . . . . .

Comprehensive income . . . . . . . . . . . .

808

2,836
(789)

9

—

—
—

—

—

8

28
(8)

—

—

—
—

—

—

13,178

20,916
(34,839)

441

7,719

—
—

—

—

—

—
—

—

—

—
—

78,178

—

—

—
—

—

—

—
—

—

—

—

—
—

—

—

1,934
(3)

—

—

13,186

20,944
(34,847)

441

7,719

1,934
(3)

78,178

80,109

Balances at December 31, 2004. . . . . . .

44,732

$448

$298,046

$194,417

$ —

$ 2,461

$495,372

Issuance of common stock for exercise of
options and warrants and employee
stock purchases . . . . . . . . . . . . . . . .
Purchase/Cancellation of treasury stock . .

Tax benefit of disqualifying dispositions
of stock options and exercise of non-
qualified stock options . . . . . . . . . . .
Currency translation adjustment . . . . . . .

Change in fair value of cashflow hedge. .

Net income . . . . . . . . . . . . . . . . . . . .

Comprehensive income . . . . . . . . . . . .

668
(1,250)

7
(13)

14,241
(60,644)

—
—

—

—

—
—

—

—

7,432
—

—

—

—
—

—
—

—

67,154

—
—

—
—

—

—

—
—

14,248
(60,657)

—
(1,817)

(98)

—

7,432
(1,817)

(98)

67,154

65,239

Balances at December 31, 2005. . . . . . .

44,150

$442

$259,075

$261,571

$ —

$

546

$521,634

The accompanying notes are an integral part of these financial statements

35

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005

Unless the context requires otherwise, “we,” “us” or “our” refers to Stericycle, Inc. and its subsidiaries on

a consolidated basis.

Note 1 — Description of Business

We were incorporated in 1989 and presently serve approximately 333,000 customers throughout the
United States, Puerto Rico, Canada, Mexico and the United Kingdom. In North America we have a fully
integrated, national medical waste management network. Our network includes 45 treatment/collection centers
and 105 additional transfer and collection sites. We use this network to provide a broad range of services to
our customers. Our medical waste treatment technologies include our proprietary electro-thermal-deactivation
system, or ETD, as well as traditional methods such as autoclaving and incineration. In the United Kingdom
we have a fully integrated waste management network, which includes 12 treatment/collection centers and two
additional transfer/collection sites.

We also serve pharmacies, distributors and manufacturers of pharmaceutical products, from five process-
ing centers within the United States, by managing the return and disposal of expired or surplus pharmaceutical
products and by managing the recall of pharmaceutical products being recalled by the manufacturer.

Note 2 — Summary of Significant Accounting Policies

Principles of Consolidation:

The consolidated financial statements include the accounts of Stericycle, Inc. and its wholly owned
subsidiaries as well as our 64.5% ownership in Medam S.A. de C.V. (“Medam”) (a Mexican company) and
67.5% common stock ownership in 3CI Complete Compliance Corporation (“3CI”). All significant intercom-
pany accounts and transactions have been eliminated. In addition, we have a 37.5% ownership in Medam B.A.
Srl (an Argentine company), which is accounted for using the equity method. Minority interest expense related
to our majority owned subsidiaries and our equity interest in the income or loss of unconsolidated subsidiaries
are included in the other income (expense).

Revenue Recognition:

We recognize revenue for our medical waste services at the time of medical waste collection. Revenue

and costs on contracts to supply our proprietary ETD treatment equipment are recognized based on shipment
of equipment and services provided for in the individual contract. We routinely review total estimated costs
and shipments to complete each contract and revise the revenues and estimated gross margin on the contract
as necessary. Payments received in advance are deferred and recognized as services are provided. Royalty
revenues are calculated based on measurements specified in each technology contract and revenues are
recognized at the end of each reporting period when the activity being measured has been completed.
Revenues from product sales are recognized at the time the goods are shipped to the ordering customer.
Software licensing revenues are recognized on a prorata basis over the term of the license agreement.
Revenues from pharmaceutical services are recorded at the time services are performed. We do not have any
contracts in a loss position. Losses would be recorded when known and estimable for any contracts that should
go into a loss position. Payments received in advance are deferred and recognized as services are provided.

Cash Equivalents and Short-Term Investments:

We consider all highly liquid investments with a maturity of less than three months when purchased to be
cash equivalents. Short-term investments consist of certificates of deposit, which mature in less than one year.

36

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

Property, Plant and Equipment:

Property, plant and equipment are stated at cost. Depreciation and amortization, which include the

depreciation of assets recorded under capital leases, are computed using the straight-line method over the
estimated useful lives of the assets as follows:

Buildings and Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 30 years
Machinery and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 20 years
Containers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 to 20 years
Transportation Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 to 10 years
Office Equipment and Furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 10 years
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 7 years

During the year ended December 31, 2005, 3CI of which we own a majority of the common stock,

recorded a non-cash impairment charge of $0.9 million on its Springhill, Louisiana building and property.
During the year ended December 31, 2004 we recorded a non-cash write-down of idled Stericycle incinerator
equipment at our Baltimore, Maryland and Terrell, Texas facility of $1.2 million.

During 2004 we evaluated the estimated useful life of our reusable Bio Systems containers by performing

durability studies. Based on these studies we determined that the useful life of the containers was actually
longer than our current life used to calculate depreciation. During 2004 we adjusted the total useful lives from
3 years to 17 years for containers that had been purchased during 2003 and 2004. In addition we adjusted the
useful lives on the containers originally acquired with the Scherer Healthcare acquisition in January 2003 to a
total of 10 years from the date of the original purchase. The impact of the change in the estimated useful life
was immaterial to our results in 2004.

Goodwill and Intangibles:

Goodwill and other indefinite lived intangibles are not amortized but are subject to an annual impairment
test. According to Statements of Financial Accounting Standards (“FAS”) No. 142, other intangible assets will
continue to be amortized over their useful lives. We have determined that our customer relationships have
useful lives from 20 to 40 years based upon the type of customer. We have non-compete intangibles with
useful lives from one to five years. We have tradename intangibles with useful lives from 20 to 40 years. We
have a software technology intangible with a useful life of five years. We have determined that our permits
have indefinite lives and thus they are not amortized.

Income Taxes:

Deferred income tax liabilities and assets are determined based on the differences between the financial
statement and income tax basis of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.

Accounts Receivable:

Accounts receivable consist primarily of amounts due to us from our normal business activities. Accounts
receivable balances are determined to be past due when the amount is overdue based on the contractual terms
with the customer. We maintain an allowance for doubtful accounts to reflect the expected uncollectibility of
accounts receivable based on past collection history and specific risks identified among uncollected accounts.
Accounts receivable are written off against the allowance for doubtful accounts when we have determined that
the receivable will not be collected and/or when the account has been referred to a third party collection
agency.

37

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

Financial Instruments:

Our financial instruments consist of cash and cash equivalents, short-term investments, derivatives,
accounts receivable and payable and long-term debt. The fair values of these financial instruments were not
materially different from their carrying values. Financial instruments, which potentially subject us to
concentrations of credit risk, consist principally of accounts receivable. Credit risk on trade receivables is
minimized as a result of the large size of our customer base. No single customer represents greater than 2% of
total accounts receivable. We perform ongoing credit evaluation of our customers and maintain allowances for
potential credit losses. For any contracts in loss positions, losses are recorded when known and estimable.
These losses, when incurred, have been within the range of our expectations.

Use of Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles
requires us to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Some areas where we make estimates include allowance for doubtful accounts, credit
memo reserve, accrued employee health and welfare benefits, income tax liabilities and accrued auto and
workers’ compensation insurance claims. Such estimates are based on historical trends and on various other
assumptions that are believed to be reasonable under the circumstances. Actual results could differ from our
estimates.

Derivative Instruments:

We have three forward contracts for the purchase of Sterling (GBP) as hedging instruments for an
intercompany loan from the parent company to our subsidiary in the United Kingdom, Stericycle International
Ltd, which are described more fully in Note 7. The subsidiary borrowed the funds for the purchase of White
Rose. The forward contracts align with the anticipated repayment schedule of the loan and the last contract
expires in July 2009. On October 1, 2005, we prospectively designated our existing foreign currency forward
contracts as cash flow hedges to receive hedge accounting treatment.

Stock-Based Compensation:

At December 31, 2005, we have stock-based compensation plans, which are described more fully in
Note 11. We have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (“APB 25”) and related interpretations in accounting for employee stock options using
the intrinsic value method because the alternative fair value accounting method provided for under Statement
of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”),
requires use of option valuation models that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of our employee stock options equals the market price of the
underlying stock on the measurement date (date of grant), no compensation expense is recognized.

38

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

The following table illustrates the effect on net income and earnings per share if we had applied the fair

value recognition of FAS 123 to stock-based employee compensation (in thousands except per share
information).

2005

2004

2003

Stock options expense included in net income . . . . . . . . . . . . . . . .

$

16

$

13

$

46

As reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma impact of stock options, net of tax . . . . . . . . . . . . . . . . .
Pro forma impact of employee stock plan, net of tax . . . . . . . . . . .

$67,154
(5,940)
(127)

$78,178
(5,540)
(111)

$65,781
(6,172)
(149)

Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$61,087

$72,527

$59,460

Earnings per share Basic — as reported . . . . . . . . . . . . . . . . . . . . .

$ 1.52

$ 1.77

$ 1.59

Basic — pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.38

$ 1.64

$ 1.43

Diluted — as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.48

$ 1.69

$ 1.43

Diluted — pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.36

$ 1.58

$ 1.30

Foreign Currency Translation:

Assets and liabilities of foreign affiliates that use the local currency as their functional currency are
translated at current exchange rates, and income statement accounts are translated at the average rates during
the period. Related translation adjustments are reported as a component of comprehensive income (loss)
directly in equity.

Environmental Matters:

We record a liability for environmental remediation or damages when a cleanup program becomes

probable and the costs or damages can be reasonably estimated. We do not have environmental liabilities
recorded at December 31, 2005 nor are we aware of any issues at our facilities that could initiate the need for
environmental remediation.

Reclassifications:

Certain amounts in the 2003 and 2004 financial statements have been reclassified to conform to the 2005

presentation.

New Accounting Standards:

In December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS 123R, which
replaces FAS 123 and supersedes APB 25. FAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on their fair
values beginning with the first interim or annual period after January 1, 2006. The pro forma disclosures
previously permitted under FAS 123 no longer will be an alternative to financial statement recognition. We
will begin expensing stock options in the first quarter of 2006 and will use the modified prospective transition
method. The modified prospective method requires that compensation expense be recorded for both new
awards and awards previously granted but not fully vested as of the adoption date. We anticipate that we will
continue to use the Black-Scholes option-pricing model to determine the fair value of options granted to
employees. We expect the adoption of FAS 123R will have a material impact on our consolidated statements

39

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

of income and earnings per share. We have no reason to believe that the amounts reported as a result of the
adoption will be materially different from our currently disclosed pro forma amounts.

Note 3 — Income Taxes

Significant components of our income tax expense for the years ended December 31, are as follows (in

thousands):

Deferred

2005

2004

2003

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,186
2,730

$12,308
1,941

$ 8,945
2,162

Current

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,916

14,249

11,107

26,349
4,561

30,910

29,714
6,423

36,137

26,992
4,849

31,841

Total Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$44,826

$50,386

$42,948

A reconciliation of the income tax provision computed at the federal statutory rate to the effective tax

rate for the years ended December 31, is as follows:

Federal statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of:

2005

2004

2003

35.0% 35.0% 35.0%

State taxes , net of federal tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.1% 4.2% 4.2%
0.9% —% 0.3%

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40.0% 39.2% 39.5%

Cash payments for income taxes were $28.1 million, $25.9 million and $16.7 million for the years ended

December 31, 2005, 2004 and 2003, respectively.

40

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

Our deferred tax liabilities and assets as of December 31 are as follows (in thousands):

2005

2004

Deferred tax liabilities:

Property, plant, and equipment
Goodwill and other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(12,732)
(58,817)

$(11,073)
(46,404)

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(71,549)

(57,477)

Deferred tax assets:

Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating tax loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,389
1,394
3,669
—

6,146
3,456
4,616
(922)

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,452

13,296

Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(58,097)

$(44,181)

At December 31, 2005, net operating loss carry forwards for U.S. federal income tax purposes have been

fully utilized, excluding net operating loss carry forwards related to 3CI. We have a foreign tax credit of
approximately $0.5 million, which will begin to expire beginning in 2010. Undistributed earnings of foreign
subsidiaries are considered to be permanently invested, and therefore, no U.S. deferred taxes are recorded
thereon. The cumulative amounts of such earnings are $22.3 million at December 31, 2005, and it was not
practible to estimate the U.S. and withholding tax thereon assuming repatriation. 3CI, our majority owned
subsidiary, has net operating loss carry forwards for federal and state purposes of $10.0 million beginning to
expire in 2006. Stericycle has net operating loss carry forwards for state purposes of $4.4 million, which
expire through 2018.

Note 4 — Acquisitions and Divestiture

During the year ended December 31, 2005 we completed the acquisition of nine domestic medical waste
businesses and four pharmaceutical returns (reverse distribution) businesses, our Mexican subsidiary completed
the acquisition of seven medical waste businesses and our United Kingdom subsidiary completed the
acquisition of two medical waste businesses. No individual acquisition or the acquisitions in aggregate were
significant to our operations.

During the quarter ended March 31, 2005 our Mexican subsidiary, Medam S.A. de C.V. (“Medam”)

acquired selected assets of Servicios Ecologicos PEGE y Asociados S. De R.L. de C.V.

During the quarter ended June 30, 2005 we completed six acquisitions of medical waste businesses,
consisting of selected assets of Envirotech of America, Inc. which operated in central New York, Medical
Systems, Inc., which operated in Missouri, BioClean, Inc., which operated in western New York, all of the
stock of Sanford Motors, Inc. and two affiliated companies, which operated in eastern Pennsylvania and New
Jersey, selected assets of Five Star Waste, Inc., which operated in Florida, and selected assets of Bio-Med Tec
Inc. and an affiliated company, which operated in West Virginia and southern Ohio. We also acquired all of
the stock of Automated Health Technologies, Inc., a pharmaceutical returns company based in Florida. Our
United Kingdom subsidiary, Stericycle International Ltd., acquired all of the stock of Healthcare Waste
Limited (formerly known as Select Environmental Limited) and Medam completed the acquisition of all of the
stock of Planta Incineradora de Residuos Biologicos Infecciosos, S.A. de C.V., Soluciones Ecologicas
Integrales, S.A. de C.V. and L.A.E. Gabriela Hernandez Romo.

41

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

During the quarter ended September 30, 2005 we completed two acquisitions of medical waste businesses,

consisting of all of the stock of Nicklin Associates Inc., which operated in New York, Maryland and
Washington D.C. and selected assets of Med-Trac Inc., which operated in Pennsylvania. Medam completed the
acquisition of selected assets of Impulso Mexicano, S.A. de C.V. and selected assets of Biol. Donaji de la
Caridad Gutierrez Garcia.

During the quarter ended December 31, 2005 we acquired all of the stock of Iowa Medical Waste

Reduction Center, Inc., which operated in Iowa. In addition, we completed the acquisition of three pharmaceu-
tical returns businesses, consisting of selected assets of L.L. Horizons, Inc. (also known as Certified Returns)
which operated in Florida, all of the stock of Universal Solutions International Inc., which operated in North
Carolina, Georgia and New Jersey and all of the stock of NNC Group, LLC, which operated in Indiana. In
conjunction with the acquisition of Universal Solutions International Inc., we sold selected assets of their
consumer products division to Carolina Supply Chain Services LLC for $12.3 million, of which $10.3 million
was the net amount received in cash with $2.0 million being held in escrow. Medam completed the acquisition
of selected assets of Servicios Integrales En Manejo de Residuos S.A. de C.V., (formerly known as Simar) and
our United Kingdom subsidiary, Stericycle International, Ltd., acquired all of the stock of Indigo Equity
Holdings Limited, (formerly known as Waste Solution Inc.).

The aggregate net purchase price of these acquisitions during 2005 was approximately $189.4 million, of

which approximately $139.7 million was paid in cash and $49.7 million was paid by the issuance of notes
payable.

As of December 31, 2005 the valuation of certain goodwill and intangibles assets associated with the

acquisitions have not been finalized.

During the year ended December 31, 2004 we completed the acquisition of two domestic medical waste
businesses, Medam completed the acquisition of three medical waste businesses and Stericycle International,
LLC completed one acquisition. No individual acquisition or the acquisitions in aggregate were significant to
our operations.

During the quarter ended March 31, 2004 we completed the acquisition of two medical waste businesses,

consisting of selected assets of American Waste Industries, Inc., which operated in Virginia, Maryland and
North Carolina.

During the quarter ended June 30, 2004 we completed the acquisition of selected assets of Texas
Environmental Services, Inc., which operated in Texas and Stericycle International Ltd., completed the
acquisition of all the common stock of White Rose Environmental Ltd (“White Rose”), which operated in the
United Kingdom.

During the quarter ended September 30, 2004 Medam completed the acquisition of all of the common
stock of Sterimed S.A. de C.V., all of the remaining stock of Proterm de Mexico JV. S.A. de C.V. and selected
assets of Bio-Infex Servicios Y Technologia SA De CV.

The aggregate net purchase price of these acquisitions during 2004 was approximately $90.6 million, of
which approximately $72.4 million was paid in cash, $17.8 million was paid by the issuance of notes payable
and $0.4 million was paid by the issuance of unregistered shares of our common stock.

During the year ended December 31, 2003 we completed the acquisition of four medical waste
businesses, our Canadian subsidiary completed one acquisition, and our majority owned subsidiary, 3CI
Complete Compliance Corporation (“3CI”), completed one acquisition. In addition, we completed the
acquisition of a pharmaceutical returns software company. No individual acquisition or the acquisitions in
aggregate were significant to our operations.

42

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

During the quarter ended March 31, 2003 we completed the acquisition of two medical waste businesses,

consisting of all of the common and preferred stock of Scherer Healthcare, Inc. which operated in 10
northeastern and Mid-Atlantic states and selected assets of Kuglen Services, Ltd., LLP, which operated in
Texas.

During the quarter ended June 30, 2003 we completed the acquisition of selected assets of Environmental

Management Group, Inc., which operated a medical waste business in Ohio and Kentucky. Our majority
owned subsidiary, 3CI, acquired selected assets of PMT USA, Inc., dba Air & Sea Environmental, which
operated a medical waste business in southeast Texas.

During the quarter ended September 30, 2003 we completed the acquisition of selected assets of NAWA

Medical Disposal, L.L.C., which operated a medical waste business in western Texas. In addition, we acquired
substantially all of the assets of Pharmacy Software Solutions, Inc. (“PSSI”), a pharmaceutical returns software
company based in Illinois. Our wholly owned Canadian subsidiary completed the acquisition of selected assets
of Enviro-Med Canada, Inc., which operated a medical waste business in northern Ontario.

The aggregate net purchase price of these acquisitions during 2003 was approximately $37.4 million, of

which approximately $37.2 million was paid in cash; $0.2 million was paid by the issuance of unregistered
shares of our common stock.

For financial reporting purposes these acquisition transactions were accounted for using the purchase
method of accounting. The total purchase price for 2005, 2004 and 2003 of $189.4 million, $90.6 million and
$37.4 million, respectively, net of cash acquired, was allocated to the assets acquired and liabilities assumed
based on the estimated fair market value at the date of acquisition. The total purchase price for acquisitions
completed in 2004 and 2003 includes the value of 8,323 and 1,906 shares respectively, of our common stock
issued to the sellers. In certain cases, the purchase price is or was subject to downwards adjustment if revenues
from customer contracts acquired failed to reach certain specified levels. The excess of the purchase price over
the fair market value of the net assets acquired is reflected in the accompanying consolidated balance sheets as
goodwill. Goodwill was recorded in the amounts of $170.0 million and $49.6 million during the years of 2005
and 2004, respectively. The results of operations of these acquired businesses have been included in the
consolidated statements of income from the date of the acquisition.

Note 5 — Long Term Debt

Long-term debt consists of the following at December 31:

2005

2004

(In thousands)

Obligations under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Senior Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,209
291,669
68,007

Less: Current Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

360,885
12,044

$

1,500
171,353
30,796

203,649
13,218

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $348,841

$190,431

43

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

Payments due on long-term debt excluding capital lease obligations, during each of the five years

subsequent to December 31, 2005 are as follows:

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(In thousands)

$ 11,037
23,897
12,439
9,230
299,217
3,856

$359,676

We paid interest of $13.5 million, $11.5 million and $13.6 million for the years ended December 31,

2005, 2004 and 2003, respectively.

Property under capital leases included with property, plant and equipment in the accompanying Consol-

idated Balance Sheets is as follows at December 31:

2005

2004

Machinery and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less — accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .

$

(In thousands)
401
5,936
(5,831)

43
5,786
(5,823)

$

506

$

6

Amortization related to these capital leases is included with depreciation expense.

Minimum future lease payments under capital leases are as follows (in thousands):

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,068
195
35
—
—

Total minimum lease payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less amounts representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Present value of net minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,298
(89)

1,209
1,007

Long-term obligations under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 202

Senior Credit Facility

In June 2005, we obtained a new $400.0 million senior unsecured revolving credit facility maturing in
June 2010, containing a letter of credit sub limit of $125.0 million, in place of our existing senior secured
credit facility.

The new revolving credit facility, provided under a credit agreement with various financial institutions,
reduced the interest rates that we are charged by reducing the applicable margin that is added to the relevant

44

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

interest rate. The new facility also allows us to borrow in pre-approved currencies other than United States
dollars. Our borrowings bear interest at fluctuating interest rates determined, at our election in advance for any
quarterly or other applicable interest period, by reference to (i) a “base rate” (the higher of the prime rate at
Bank of America, N.A. or 0.5% above the rate on overnight federal funds transactions) or (ii) the London
Interbank Offered Rate, or LIBOR, plus, in either case, the applicable margin within the relevant range of
margins provided in our credit agreement. The applicable margin is based upon our consolidated leverage
ratio. As of December 31, 2005, the margin for interest rates on borrowings under our revolving new credit
facility was zero on base rate loans and 0.75% on LIBOR loans.

Our credit agreement requires us to comply with various financial, reporting and other covenants and
restrictions, including restrictions on dividend payments. At December 31, 2005, we were in compliance with
these covenants and restrictions.

In December 2005, we increased our revolving credit facility from $400.0 million to $550.0 million and

also increased the letter of credit sub limit from $125.0 million to $150.0 million.

As of December 31, 2005, we had $291.7 million of borrowings outstanding under our senior unsecured
credit facility, which includes foreign currency borrowings of $5.2 million. In addition, we had $65.9 million
committed to outstanding letters of credit. The weighted average rate of interest on the unsecured revolving
credit facility was 4.99% per annum.

As of December 31, 2004, our senior secured credit facility consisted of a $205.0 million revolving credit

facility and a Term A loan in the principal amount of $62.4 million.

As of December 31, 2004, we had $171.4 million of borrowings outstanding under our senior secured
credit facility, of which $109.0 million consisted of borrowings under the revolving credit component and
$62.4 million under the Term A component. In addition at December 31, 2004 we had $30.9 million of
standby letters of credit issued under our revolving credit component. As of December 31, 2004, the margin
for interest rates on borrowings under our revolving credit facility and the Term A component was zero on
base rate loans and 1.25% on LIBOR loans. The average rate of interest on the revolving credit facility was
3.64% per annum and the average rate of interest on the Term A loan was 3.66% per annum. This secured
credit facility was replaced in June 2005 with the unsecured credit facility discussed above.

Senior Subordinated Notes

On November 15, 2004 we redeemed the remaining $50.9 million of our senior subordinated notes in

accordance with the terms of the governing specified in the trust indenture. The redemption price was
106.1875% of the principal face amount plus accrued interest as of the redemption date. The interest rate for
the senior subordinated notes was 123⁄8% per annum. These notes had a maturity date of November 15, 2009.

Notes Payable

At December 31, 2005 we had promissory notes, primarily issued as a result of acquisitions totaling
$68.0 million. The weighted average interest rate on these notes is 5.30%. The fixed rate to floating rate ratio
is 78.4% to 21.6%. The weighted average maturity is approximately 4.2 years.

At December 31, 2004 we had $17.5 million outstanding related to promissory notes issued in connection

with acquisitions during 2002 and 2004, consisting primarily of a three-year note issued as part of the White
Rose Environmental Ltd. acquisition, which had an outstanding balance of $10.9 million at December 31,
2004.

45

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

Guarantees

We have guaranteed a loan to the Azoroa Bank in Japan on behalf of Shiraishi-Sogyo Co. Ltd.

(“Shiraishi”). Shiraishi is a customer in Japan that is expanding their medical waste management business and
has a five-year loan with a current balance of $6.5 million with the Azoroa Bank that expires in June 2009.

Note 6 — Accrued Liabilities

Accrued liabilities at December 31 consist of the following items (in thousands):

2005

2004

Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued professional liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities — other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 7,394
5,596
12,075
3,950
2,684
3,105
13,646

$ 5,370
4,470
12,913
9,235
554
2,038
9,831

Total accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$48,450

$44,411

Note 7 — Derivative Instruments

In July 2004, we entered into four forward contracts to hedge a GBP Sterling-based intercompany loan
between our US-based subsidiary, Stericycle International L.L.C. and our subsidiary in the United Kingdom,
Stericycle International Ltd. The subsidiary borrowed the funds for the purchase of White Rose. The forward
contracts align with the anticipated repayment schedule of the loan and the last contract expires in July 2009.
Initially, we did not elect hedge accounting on the forward contracts and have been recognizing the change in
value of the hedges through other income (expense). This amount has been generally offset by the currency
adjustment to the intercompany receivable. During 2004 the cost of the forward contract was immaterial to our
net income.

On October 1, 2005, we prospectively designated these existing forward contracts as cash flow hedges

and are using hedge accounting. We expect the income related to this hedge accounting election will be
$0.1 million, recognized over the remaining life of the contracts through interest income. During 2005 and
2004 the cost of the forward contracts recognized was immaterial to our net income. As of December 31,
2005, the total notional amount of hedges outstanding is GBP 13.0 million. At December 31, 2005 the hedges
were determined to be 100% effective.

Note 8 — Goodwill and Other Intangible Assets

In June 2001, the FASB issued FAS No. 141, Business Combinations, and FAS No. 142, Goodwill and

Other Intangible Assets. Under FAS 142, goodwill and other indefinite lived intangibles are no longer
amortized and are subject to an annual impairment test, or to more frequent testing if circumstances indicate
that they may be impaired. In 2005 and 2004 we performed our annual impairment evaluations and determined
that there was no impairment. At December 31, 2005 and 2004, we had $18.5 million and $17.4 million,
respectively, of indefinite lived intangibles that consist of environmental permits for which we performed an
annual impairment test, and determined there was no impairment.

46

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

We have two geographical reporting segments, United States and Foreign Countries, both of which have
goodwill. The changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2004
was as follows (in thousands):

United
States

Balance as of January 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . $458,593
16,988
Goodwill acquired during year . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Effect of currency fluctuation on carrying value . . . . . . . . . . . . .

Balance as of December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . .
Goodwill acquired during year . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of currency fluctuation on carrying value . . . . . . . . . . . . .

475,581
145,915
—

Foreign
Countries

$ 6,353
32,638
2,236

41,227
24,035
(1,589)

Total

$464,946
49,626
2,236

516,808
169,950
(1,589)

Balance as of December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . $621,496

$63,673

$685,169

According to FAS 142, other intangible assets will continue to be amortized over their useful lives.

During the year ended December 31, 2005 we recorded at fair value the intangibles acquired in

connection with our acquisitions of Sanford Motors, Iowa Medical Waste Reduction Center, Automated Health
Technologies, L.L. Horizons, Bio-Med Tech, Envirotech, Bio Clean, Medical Systems, Med Trac, and the
acquisitions completed by our United Kingdom and Mexican subsidiaries. We assigned $13.3 million to
customer relationships with amortization periods of 20 to 40 years, $1.7 million to facility environmental
permits with indefinite lives and $0.4 million to non-compete agreements with amortization periods of one to
five years.

During 2005 we were in arbitration proceedings regarding various disputes under an exclusive marketing

and license agreement with a licensor of software. On March 1, 2006, subsequent to year-end, the arbitrator
awarded in favor of the licensor. Although this event occurred after the end of the year, we are required to
write-off the unamortized portion of the license fee that we had previously paid because the license agreement
was effectively terminated. The effect is a reduction in the carrying amount of this intangible by $1.8 million
and a reduction in the accumulated amortization of $0.4 million.

During the year ended December 31, 2004 we recorded at fair value the intangibles acquired in

connection with our acquisitions of PSSI, American Waste Industries, Inc. Texas Environmental Services, Inc.,
White Rose Environmental Ltd., and Sterimed S.A.de C.V. We assigned $11.7 million to customer relation-
ships with amortization periods of 20 to 40 years, $2.2 million to tradenames with an amortization period of
20 to 40 years, $6.4 million to facility environmental permits with indefinite lives, $0.5 million to a software
license with an amortization period of 5 years and $0.2 million to non-compete agreements with amortization
periods of one to five years.

47

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

As of December 31, the value of the amortizing intangible assets were as follows (in thousands):

Gross
Carrying Amount
2005
2004

Accumulated
Amortization

2005

2004

Non-compete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,881
40,978
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,575
Tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500
License agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
141
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,528
28,551
3,790
2,300
141

$6,046
2,385
274
208
52

$5,716
1,526
187
477
45

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,075

$41,310

$8,965

$7,951

During the year ended December 31, 2005, 2004 and 2003 the aggregate amortization expense was
$1.6 million, $2.4 million and $1.9 million respectively. The estimated amortization expense, in thousands, for
each of the next five years is as follows for the years ended December 31:

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,779
1,760
1,531
1,409
1,299

Note 9 — Lease Commitments

We lease various plant equipment, office furniture and equipment, motor vehicles and office and

warehouse space under operating lease agreements, which expire at various dates over the next twelve years.
The leases for most of the properties contain renewal provisions.

Rent expense for 2005, 2004, and 2003 was $25.8 million, $21.2 million and $18.2 million, respectively.

Minimum future rental payments under non-cancelable operating leases that have initial or remaining
terms in excess of one year as of December 31, 2005 for each of the next five years and in the aggregate are
as follows:

(In thousands)

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,747
19,529
15,636
12,200
8,808
16,822

Total minimum rental payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$97,742

48

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

Note 10 — Net Income per Common Share

The following table sets forth the computation of basic and diluted net income per share:

Year Ended December 31,
2004
(In thousands, except share and per share data)

2005

2003

Numerator:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

67,154

$

78,178

$

65,781

Denominator:

Denominator for basic earnings per share —

weighted-average shares . . . . . . . . . . . . . . . . . . .

44,284,580

44,250,913

41,439,020

Effect of dilutive securities:

Employee stock options . . . . . . . . . . . . . . . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible preferred stock . . . . . . . . . . . . . . . . .

1,025,822
107
—

1,142,564
8,613
793,807

1,814,728
8,386
2,835,668

Dilutive potential common shares . . . . . . . . . . . . . .

1,025,929

1,944,984

4,658,782

Denominator for diluted earnings per share —

adjusted weighted-average shares and assumed
conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Basic net income per share . . . . . . . . . . . . . . . . . . .

Diluted net income per share . . . . . . . . . . . . . . . . . .

45,310,509

46,195,897

46,097,802

$

$

1.52

1.48

$

$

1.77

1.69

$

$

1.59

1.43

For additional information regarding outstanding employee stock options and outstanding warrants, see

Note 11.

In 2005, 2004 and 2003, options and warrants to purchase 33,208 shares, 55,719 shares and 13,623 shares,

respectively, at exercise prices of $44.22-$62.21, $46.95-$51.14 and $35.05-$49.84, respectively, were not
included in the computation of diluted earnings per share because the effect would be antidilutive.

Note 11 — Preferred Stock, Stock Options and Warrants

Preferred Stock

At December 31, 2005 and 2004 we had 1,000,000 authorized shares of preferred stock and no shares

issued or outstanding.

Stock Options

We have adopted five stock option plans: (i) the 2005 Incentive Stock Option Plan (the “2005 Plan”),

which our stockholders approved in April 2005; (ii) the 2000 Nonstatutory Stock Option Plan (the “2000
Plan”), which our Board of Directors adopted in February 2000; (iii) the 1997 Stock Option Plan (the “1997
Plan”), which our stockholders approved in April 1997; (iv) the Directors Stock Option Plan (the “Directors
Plan”), which our shareholders approved in July 1996 (prior to our initial public offering in August 1996); and
(v) the 1995 Incentive Compensation Plan (the “1995 Plan”), which our stockholders approved in September
1995.

The 2005 Plan authorizes awards of stock options and stock appreciation rights for a total of

2,400,000 shares; as amended, the 2000 Plan authorizes stock option grants for a total of 3,500,000 shares; the

49

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

1997 and 1995 Plans each authorize stock option grants for a total of 3,000,000 shares; and as amended, the
Directors Plan authorizes stock option grants for a total of 1,170,000 shares.

The 2005 Plan provides for the grant of nonstatutory stock options (“NSOs”) and incentive stock options

intended to qualify under section 422 of the Internal Revenue Code (“ISOs”) as well as stock appreciation
rights; the 2000 Plan provides for the grant of NSOs; the 1997 and 1995 Plans each provide for the grant of
NSOs and ISOs; and the Directors Plan provides for the grant of NSOs.

The 2005 Plan authorizes awards to our officers, employees and consultants and, following the expiration

of the Directors Plan in May 2006, to our directors; the 2000 Plan authorizes stock option grants to our
employees and consultants but not to our officers and directors; the 1997 and 1995 Plans each authorize stock
option grants to our officers, directors, employees and consultants; and the Directors Plan authorizes stock
option grants to our outside directors.

The exercise price per share of an option granted under any of our stock option plans may not be less

than the closing price of a share of our common stock on the date of grant. The maximum term of an option
granted under any plan may not exceed 10 years. An option may be exercised only when it is vested and, in
the case of an option granted to an employee (including an officer), only while he or she remains an employee
and for a limited period following the termination of his or her employment.

Options granted to officers and employees generally vest over five years. During 2005, options granted to

officers and employees generally vested at the rate of 20% of the option shares on each of the first five
anniversaries of the option grant date. During 2004, options granted to officers and employees generally vested
at the rate of 20% of the option shares on the first anniversary of the option grant date and then at the rate of
1/60 of the option shares for each of the next 48 months. In 2000, our Board of Directors approved the 2000
Nonstatutory Stock Option Plan (the “2000 Plan”), which in total now provides for the granting of
3,500,000 shares of our common stock in the form of stock options to employees, (but not to officers or
directors).

Shares of the Company’s common stock have been reserved for issuance upon the exercise of outstanding
options and warrants. These shares, which include both shares available for option grant and shares granted as
options but not yet exercised, have been reserved as follows at December 31, 2005:

367,615
1995 Plan options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
602,112
1996 Directors Plan options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1997 Plan options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
952,182
2000 Plan options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,202,468
2005 Plan options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400,000
1,000
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total shares reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,525,377

50

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

A summary of stock option information follows:

2005

2004

2003

Shares

Outstanding at beginning of

year . . . . . . . . . . . . . . . . . . 3,420,298
897,687
Granted . . . . . . . . . . . . . . .
(646,035)
Exercised . . . . . . . . . . . . . .
(79,101)
Cancelled/Forfeited. . . . . . .

Outstanding at end of year . . . 3,592,849
Exercisable at end of year . . . 1,840,013
Available for future grant . . . . 2,931,528

Weighted
Average
Exercise
Price

$27.13
48.44
21.19
39.84

33.24
$23.91

Weighted
Average
Exercise
Price

$21.02
44.74
16.13
29.26

27.13
$20.03

Shares

3,653,799
805,069
(797,946)
(240,624)

3,420,298
1,770,681
1,349,114

Weighted
Average
Exercise
Price

$14.95
32.36
12.08
22.33

21.02
$15.62

Shares

3,610,373
981,267
(831,491)
(106,350)

3,653,799
1,617,059
1,913,559

Options outstanding and exercisable as of December 31, 2005 by price range:

Range of Exercise Price

Shares

Options Outstanding
Outstanding
Average
Remaining
Life in Years

Weighted
Average
Exercise
Price

$4.000-$10.125 . . . . . . . . . . . . . . . . .
$10.344-$22.505 . . . . . . . . . . . . . . . .
$22.910-$27.370 . . . . . . . . . . . . . . . .
$30.699-$35.050 . . . . . . . . . . . . . . . .
$35.430-$44.050 . . . . . . . . . . . . . . . .
$44.220-$45.710 . . . . . . . . . . . . . . . .
$45.800-$45.800 . . . . . . . . . . . . . . . .
$44.850-$62.210 . . . . . . . . . . . . . . . .

553,560
401,355
382,425
466,943
250,143
568,859
620,873
348,691

3,592,849

3.51
5.11
6.08
7.05
7.31
8.19
9.13
9.22

6.95

$ 7.78
16.38
27.23
34.85
38.48
44.36
45.80
53.19

Options Exercisable

Weighted
Average
Exercise
Price

$ 7.78
16.46
27.19
34.72
38.13
44.31
45.80
47.81

Shares

552,060
367,892
243,090
246,375
149,831
184,417
3,035
93,313

$33.24

1,840,013

$23.91

We have elected to follow APB 25, “Accounting for Stock Issued to Employees” and related interpreta-

tions in accounting for its employee stock options because, as discussed below, the alternative fair value
accounting provided for under FAS 123, “Accounting for Stock-Based Compensation”, requires use of option
valuation models that were not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of our employee stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

Pro forma information regarding net income and net income per share is required by FAS 123 as if we

had accounted for our employee stock options granted subsequent to December 31, 1994 under the fair value
method of that statement. Options granted were valued using the Black-Scholes option-pricing model. In 2005,
in anticipation of the adoption of FAS 123R on January 1, 2006, we reviewed the values of the variables used
to determine the fair value of its stock options granted in 2003, 2004 and 2005. We determined that the values
of the expected volatility, weighted average expected life of the option and risk-free interest rates variables
should be modified slightly in order to provide a better estimate of the fair value of the employee stock
options. The modifications resulted in an immaterial reduction in the pro forma stock option expense in 2005,
2004 and 2003. The following revised assumptions were used in 2005, 2004 and 2003: expected volatility of
0.32 in 2005, 0.42 in 2004 and 0.49 in 2003; risk-free interest rates of 4.05% in 2005, 3.43% in 2004, and

51

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

2.97% in 2003; a dividend yield of 0%; and a weighted-average expected life of the option of 52 months in
2005, 56 months 2004 and 56 months in 2003. The revised weighted-average fair values of options granted
during 2005, 2004 and 2003 were $14.52 per share, $15.57 per share, and $13.73 per share, respectively.

Option value models require the input of highly subjective assumptions. Because our employee stock

options have characteristics significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the
existing method does not necessarily provide a reliable single measure of the fair value of its employee stock
options.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense

over the option-vesting period. Our pro forma information follows (in thousands, except for per share
information):

Year Ended December 31,
2004

2003

2005

Stock options expense included in net income . . . . . . . . . . . . . . . .

$

16

$

13

$

46

As reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma impact of stock options, net of tax . . . . . . . . . . . . . . . . .
Pro forma impact of employee stock plan, net of tax . . . . . . . . . . .
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$67,154
(5,940)
(127)
$61,087

$78,178
(5,540)
(111)
$72,527

$65,781
(6,172)
(149)
$59,460

Earnings per share

Basic — as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.52

$ 1.77

$ 1.59

Basic — pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.38

$ 1.64

$ 1.43

Diluted — as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.48

$ 1.69

$ 1.43

Diluted — pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.36

$ 1.58

$ 1.30

Warrants:

In June 2000, in connection with our acquisition of an additional 15% interest in Medam, we issued
warrants to purchase 88,748 shares of our common stock. Of these warrants, warrants for 62,256 shares were
immediately exercisable, while the remaining 26,492 shares become exercisable over five years. The exercise
price of the warrants is $8.75 per share. In 2001, warrants to purchase 65,190 shares were exercised. In 2003,
warrants to purchase 12,966 shares were exercised. In 2005, warrants to purchase 10,592 shares were
exercised. At December 31, 2005 there were no warrants outstanding.

In September 2003, in connection with our acquisition of NAWA Medical Disposal L.L.C. we issued
warrants to purchase 1,000 shares of our common stock. The warrants will become exercisable in September
2008. The exercise price of the warrants is $47.25 per share. At December 31, 2005 all of the warrants were
outstanding.

Note 12 — Employee Benefit Plan

We have a 401(k) defined contribution retirement savings plan covering substantially all employees. Each

participant may elect to defer a portion of his or her compensation subject to certain limitations. We may
contribute up to 50% of the first 5% of compensation contributed to the plan by each employee up to a

52

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

maximum of $1,500 per annum. Our contributions for the years ended December 31 2005, 2004 and 2003
were approximately $1.3 million, $1.3 million and $1.1 million, respectively.

Note 13 — Employee Stock Purchase Plan

In October 2000, our Board of Directors adopted the Stericycle, Inc. Employee Stock Purchase Plan (the
“ESPP”) effective as of July 1, 2001. Our stockholders approved the ESPP in May 2001. The ESPP authorizes
300,000 shares of our common stock to be purchased by employees at a 15% discount from the market price
of the stock through payroll deductions during two six-month offerings each year. An employee who elects to
participate in an offering is granted an option on the first day of the offering for a number of shares equal to
the employee’s payroll deductions under the ESPP during the offering period (which may not exceed $5,000)
divided by the option price per share. The option price per share is the lower of 85% of the closing price of a
share of our common stock on the first trading day of the offering period or 85% of the closing price on the
last trading day of the offering period. Every employee who has completed one year’s employment as of the
first day of an offering and who is a full-time employee, or a part-time employee who customarily works at
least 20 hours per week, is eligible to participate in the offering. During 2005, 2004 and 2003, 18,572 shares,
20,363 shares and 22,012 shares, respectively, were issued through the ESPP.

Note 14 — Non-Consolidating Joint Ventures

We have an investment in a joint venture, Medam, B.A. Srl, an Argentine corporation, which was formed
to utilize our ETD technology to treat medical waste primarily in the Buenos Aires market. Our investment in
the joint venture was $2.6 million and $2.8 million at December 31, 2005 and 2004 respectively, which is
included in other long-term assets.

In 2005, 2004 and 2003, we recorded $0.3 million, $0.2 million and $1.7 million, respectively, of equity

losses related to the above joint venture, which was recorded in the other income (expense).

During January 2004 we sold our minority interest investment in Evertrade Medical Waste (Pty) Ltd, a
South African company and the associated current receivables and loans due from the joint venture to Reno
Africa PTE Ltd for cash and an $8.1 million note receivable. During the fourth quarter of 2005 the remaining
unpaid loan balance was $2.5 million. During December 2005 we determined that the issuer of the note would
be unable to generate the remaining cash to pay off the note receivable and therefore we wrote-off the
remaining $2.5 million balance as uncollectible at December 31, 2005.

Note 15 — Legal Proceedings

We operate in a highly regulated industry and must deal with regulatory inquiries or investigations from

time to time that may be instituted for a variety of reasons. We are also involved in a variety of civil litigation
from time to time.

3CI Litigation.

In November 2005, we entered into a preliminary settlement to resolve class action

litigation by the minority shareholders of our majority-owned subsidiary, 3CI Complete Compliance Corpora-
tion (“3CI”), in which 3CI joined with the class as a plaintiff. This litigation is pending in state court in
Louisiana (Robb, et al. v. Stericycle, Inc., et al., First Judicial District Court, Caddo Parish, Louisiana
(No. 467704-A)) (the “Louisiana Litigation”). We have described this litigation on a number of occasions,
including our report on Form 10-K for 2004.

Under the terms of the preliminary settlement, we agreed to pay $32.5 million in cash to a trust fund to
be established by a claims administrator approved by the court for the purpose of (i) settling all claims in the
Louisiana Litigation and in related litigation in state court in Texas (3CI Complete Compliance Corporation v.
Waste Systems, Inc., et al., 269th Judicial District, Harris County, Texas (No. 2003-46899)), (ii) canceling or

53

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

otherwise acquiring all of the shares of 3CI common stock held by members of the plaintiff class and
(iii) paying court-approved administrative expenses and legal fees. In accordance with the terms of the
preliminary settlement, we made the required $32.5 million deposit with the claims administrator following
the court’s preliminary approval of the settlement in December 2005.

The preliminary settlement remains subject to the court’s final approval. A hearing on final approval was

held on February 21, 2006. The court has not yet rendered its decision.

The parties to the preliminary settlement intend that, through the settlement, we will acquire sufficient
shares of 3CI common stock so that, with the shares that we and one of our subsidiaries already own, we will
own 90% or more of 3CI’s outstanding common stock. This level of ownership would enable us to acquire the
balance of the outstanding 3CI common stock through a “short-form” merger under Delaware law. If we do
acquire 90% or more of 3CI’s common stock as contemplated, we intend to conduct such a short-form merger
as soon as practicable as we determine.

Private Antitrust Litigation.

In January 2003, we were sued in federal court in Arizona by a private

plaintiff claiming anticompetitive conduct in Arizona, Colorado and Utah from November 1997 to the present
and seeking certification of the lawsuit as a class action on behalf of all customers of ours and of Browning-
Ferris Industries, Inc. in the three-state area during the period in question. Over the next three months, four
similar suits were filed in federal court in Utah, Arizona, Colorado and New Mexico. In February and May
2003, two additional suits were filed, in federal court in Utah and Arizona, claiming substantially the same
anticompetitive conduct but not seeking class action certification. In December 2003, an eighth suit was filed
in federal court in Utah claiming monopolistic and other anticompetitive conduct in California during the prior
four years and seeking certification of the suit as a class action on behalf of all California customers of ours
during this four-year period. These eight suits were subsequently consolidated before the same judge in federal
court in Utah. The first five suits were consolidated under one consolidated class action complaint; the next
two suits were consolidated for discovery purposes; and the eighth suit was coordinated for discovery
purposes. In June 2004 we settled, for an immaterial amount, the suit filed in May 2003, which, as noted, did
not seek class action certification.

Proceedings in the remaining seven suits remain in the discovery stage. We do not believe that any of

these suits has merit and are vigorously defending them.

Other Litigation.

In Australia, we are in arbitration with SteriCorp Limited over the ETD equipment

that we sold to them. Discovery is pending in these proceedings. We currently expect that the arbitration
hearing will be held during the second quarter of 2006.

During 2005, we were in arbitration regarding various disputes under an exclusive marketing and
distribution license agreement with a licensor of software. The licensor claimed, among other things, that our
license had ceased to be exclusive because of our failure to pay minimum royalties under the license
agreement and we claimed, among other things, that the licensor’s actions entitled us to rescind the license
agreement and to be repaid the $1.8 million license fee that we had paid. On March 1, 2006, the arbitrator
awarded the licensor $0.4 million in damages for breach of the license agreement and denied all of the parties’
other claims, including our claim for rescission, and the license agreement was effectively terminated. As a
result of the arbitrator’s decision we wrote-off the remaining $1.4 million unamortized portion of our license
intangible asset.

Note 16 — Products and Services and Geographic Information

FAS 131, Disclosures about Segments of an Enterprise and Related Information, requires segment
information to be reported based on information utilized by executive management to internally assess
performance and make operating decisions. In determining our reportable operating segments, management

54

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

determined that we have two reportable segments, United States and foreign operations, based on our
consideration of the following criteria:

(cid:129) the same services are provided,

(cid:129) the same types of customers are serviced,

(cid:129) the same types of medical waste collection, transportation and treatment methods are utilized,

(cid:129) their regulatory environments are similar but vary based upon country specific regulations, and

(cid:129) they employ the same sales and marketing techniques and activities.

Summary information for our reportable segments is as follows:

2005

Year Ended December 31,
2004
(In thousands)

2003

Revenues:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 508,247
101,210

$449,501
66,727

$429,638
23,587

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 609,457

$516,228

$453,225

Income before income taxes:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 102,286
9,694

$119,387
9,177

$103,339
5,390

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 111,980

$128,564

$108,729

Total assets:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 978,027
69,633

$775,476
58,665

$694,818
12,644

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,047,660

$834,141

$707,462

Long-lived assets:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 859,497
44,121

$689,178
29,471

$602,009
7,716

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 903,618

$718,649

$609,725

Revenues are attributed to countries based on the location of customers. Intercompany revenues recorded

by the United States for work performed in Canada are eliminated prior to reporting United States revenues.
The amounts eliminated were $0.1 million, $0.1 million and $0.3 million for 2005, 2004 and 2003
respectively. The same accounting principles and critical accounting policies are used in the preparation of the
financial statements for both reporting segments.

55

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

Detailed information for our United States reporting segment is as follows:

Medical waste management services . . . . . . . . . . . . . . . . . . . . . $495,469
12,778
Pharmaceutical returns services . . . . . . . . . . . . . . . . . . . . . . . .

2005

Year Ended December 31,
2004
(In thousands)
$448,485
1,016

$429,638
—

2003

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $508,247

$449,501

$429,638

Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt extinguishment and refinancing . . . . . . . . . . . . . . . . . . . .
3CI settlement of class action litigation . . . . . . . . . . . . . . . . . . .
Licensing legal settlement
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,621
197
36,481
1,823
102,286
41,298

9,340
4,574
—

11,964
3,268
—

119,387
50,136

103,339
43,007

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,988

$ 69,251

$ 60,332

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,317

$ 17,029

$ 15,526

Detailed information for our Foreign reporting segment is as follows:

Medical waste management services . . . . . . . . . . . . . . . . . . . . . $100,147
1,063
Proprietary equipment and technology license sales . . . . . . . . . .

2005

Year Ended December 31,
2004
(In thousands)
$58,590
8,137

$20,774
2,813

2003

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $101,210
626
Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250
Debt extinguishment and refinancing . . . . . . . . . . . . . . . . . . . .
9,694
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,528
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$66,727
1,288
—
9,177
250

$23,587
334
—
5,390
(59)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,166

$ 8,927

5,449

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . $

5,114

$ 4,774

$ 1,729

56

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

Note 17 — Selected Quarterly Financial Data (Unaudited)

The following table summarizes our unaudited consolidated quarterly results of operations as reported for

2005 and 2004 (in thousands, except for per share amounts):

First
Quarter
2005

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,578
60,933
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,095
Income from operations. . . . . . . . . . . . . . . . . . . . .
—
3CI legal settlement . . . . . . . . . . . . . . . . . . . . . . .
Licensing legal settlement . . . . . . . . . . . . . . . . . . .
—
Write-down of note receivable with former joint

venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
*Basic earnings per common share . . . . . . . . . . . .
*Diluted earnings per common share . . . . . . . . . . .

—
21,815
0.49
0.48

First
Quarter
2004

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $117,556
53,155
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,691
Income from operations. . . . . . . . . . . . . . . . . . . . .
19,124
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.44
*Basic earnings per common share . . . . . . . . . . . .
0.42
*Diluted earnings per common share . . . . . . . . . . .

Second
Quarter
2005

$149,148
65,279
41,983
—
—

—
22,982
0.52
0.51

Second
Quarter
2004

$123,793
55,335
34,606
18,867
0.43
0.41

Third
Quarter
2005

$153,176
67,588
41,952
—
—

—
23,383
0.53
0.52

Third
Quarter
2004

$135,989
59,167
38,214
21,128
0.47
0.46

Fourth
Quarter
2005

$166,555
74,237
45,325
36,481
1,823

2,495
(1,026)
(0.02)
(0.02)

Fourth
Quarter
2004

$138,890
60,549
38,144
19,059
0.42
0.42

(cid:129) The fourth quarter of 2005 includes $36.5 million ($23.4 million after tax) in 3CI legal settlement

expenses, $1.8 million ($1.1 million after tax) in licensing legal settlement, $2.5 million ($1.5 million
after tax) in non-cash write-down of a note receivable with a former joint venture.

(cid:129) The third quarter of 2005 includes $0.9 million ($0.5 million after tax) in a non-cash write-down of

impaired building and property.

(cid:129) The fourth quarter of 2004 includes $3.1 million ($1.9 million after tax) in redemption premium

expense and $1.1 million ($0.7 million after tax) in non-cash accelerated amortization of financing fees.
See Note 5-Long Term Debt — Senior Subordinated Notes.

(cid:129) The second quarter of 2004 includes a $1.2 million ($0.7 million after tax) non-cash write-down of

idled incinerator equipment and related spare parts.

(cid:129) Earnings per share are calculated on a quarterly basis, and, as such, the amounts may not total the

calculated full-year earnings per share.

Note 18 — Subsequent Event

On February 27, 2006 we completed the acquisition of Sterile Technologies Group Limited, a leading

provider of medical waste management services in Ireland and the United Kingdom, for approximately
$131 million, of which $114 million was paid in cash and $17 million was paid by assumption of debt. Sterile

57

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005

Technologies Group Limited is headquartered in Dublin, Ireland and provides medical waste management
services to customers in Ireland, Scotland, England and Wales.

During 2005 we were in arbitration proceedings regarding various disputes under an exclusive marketing

and distribution license agreement with a licensor of software. See Note 15, Legal Proceedings — Other
Litigation. On March 1, 2006, after we had announced our 2005 results on February 7, 2006, the arbitrator
awarded the licensor $0.4 million in damages for breach of the agreement and denied all of the parties’ other
claims, and the license agreement was effectively terminated. As a result of the arbitrator’s award, we are
required to record a pre-tax cash charge of $0.4 million and a pretax non-cash charge of $1.4 million,
representing the write-off of the unamortized portion of the license fee that we had paid.

Although the arbitrator’s award is a subsequent event that occurred after the end of the year, we were

required to record these charges for the quarter and year ended December 31, 2005. As a result, our net
income for the quarter and year ended December 31, 2005 are reduced by $1.1 million, net of tax, from the
net income for the quarter and year that we announced on February 7, 2006. We have included a new line
item, licensing legal settlement, on the consolidated statements of income and have made related changes to
the other consolidated financial statements, to which these notes are an integral part.

58

STERICYCLE, INC. AND SUBSIDIARIES

SCHEDULE II — VALUATION AND ALLOWANCE ACCOUNTS

Balance
12/31/02

Charges
to Expenses

Allowance for doubtful accounts . . . . . . .
Accrued severance and closure costs . . . .
Accrued transition expenses . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . .

$3,779
125
—
$7,050

$ 1,953
—
670
$(6,128)

Other
Charges(1)
(In thousands)
$263
—
—
$ —

Write-offs/
Payments

Balance
12/31/03

$(1,846)
(110)
(670)

$4,149
15
—
$ — $ 922

Allowance for doubtful accounts . . . . . . .
Accrued severance and closure costs . . . .
Deferred tax valuation allowance . . . . . . .

Allowance for doubtful accounts . . . . . . .
Deferred tax valuation allowance . . . . . . .

Balance
12/31/03

Charges
to Expenses

Other
Charges(1)

Write-offs/
Payments

Balance
12/31/04

$4,149
15
$ 922

Balance
12/31/04

$4,188
$ 922

$763
(15)
$ —

$175
—
$ —

$(899)
—
$ —

Charges
to Expenses

Other
Charges(1)

Write-offs/
Payments

$2,645
$ —

$1,215
$ —

$(3,238)
$ (922)

$4,188
—
$ 922

Balance
12/31/05

$4,810
$ —

(1) Amounts consist primarily of costs assumed from acquired companies recorded prior to the date of

acquisition

59

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Statement

Disclosure.

None.

Item 9A. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our President and Chief Executive Officer and our Chief
Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of
the end of the fiscal year covered by this Report. On the basis of this evaluation, our President and Chief
Executive Officer and our Chief Financial Officer each concluded that our disclosure controls and procedures
were effective.

The term “disclosure controls and procedures” is defined in Rule 13a-14(e) of the Securities Exchange
Act of 1934 as “controls and other procedures designed to ensure that information required to be disclosed by
the issuer in the reports, files or submits under the Act is recorded, processed, summarized and reported,
within the time periods specified in the [Securities and Exchange] Commission’s rules and forms.” Our
disclosure controls and procedures are designed to ensure that material information relating to us and our
consolidated subsidiaries is accumulated and communicated to our management, including our President and
Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding our
required disclosures.

(b) Internal control over financial reporting

Management’s Report on Internal Control over Financial Reporting and our Independent Registered

Public Accounting Firm’s Attestation Report are included in Item 8.

(c) Changes in internal controls

There were no significant changes in our internal controls or in other factors that could significantly

affect those controls during the quarter ended December 31, 2005.

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this Item regarding our directors is incorporated by reference to the

information contained under the caption “Election of Directors” in our definitive proxy statement for our 2006
Annual Meeting of Stockholders to be held on May 3, 2006, to be filed pursuant to Regulation 14A.

The information required by this Item regarding our executive officers is contained under the caption

“Executive Officers of the Registrant” in Part I of this Report.

The information required by this Item regarding compliance with Section 16(a) of the Securities

Exchange Act of 1934 is incorporated by reference to the information contained under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our 2006
Annual Meeting of Stockholders to be held on May 3, 2006, to be filed pursuant to Regulation 14A.

We have adopted a code of business conduct that applies generally to all of our employees and, in
addition, we have a adopted a finance department code of ethics that applies specifically to our President and
Chief Executive Office, Chief Financial Officer, Vice President-Finance and the members of our finance
department. Both codes are available on our website, www.stericycle.com, under “About Us/Corporate

60

Overview,” Any amendment to or waiver of the finance department code of ethics will be posted on our
website within five business days after the date of the amendment or waiver.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference to the information contained under the

caption “Executive Compensation” in our definitive proxy statement for our 2006 Annual Meeting of
Stockholders to be held on May 3, 2006, to be filed pursuant to Regulation 14A.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

The information required by this Item is incorporated by reference to the information contained under the

captions “Stock Ownership” and “Executive Compensation” in our definitive proxy statement for our 2006
Annual Meeting of Stockholders to be held on May 3, 2006 to be filed pursuant to Regulation 14A.

Item 13. Certain Relationships and Related Transactions

No information is required by this Item.

Item 14. Principal Accountant Fees and Services

Audit Fees

The aggregate fees billed by our independent public accountants, Ernst & Young LLP, for professional
services rendered in connection with the audit of our annual financial statements and review of our interim
financial statements included in our quarterly reports on Form 10-Q for the fiscal year ended December 31,
2005 were approximately $568,000. This amount includes approximately $34,000 for the statutory audit of the
financial statements of our subsidiary operating in Puerto Rico and approximately $63,000 for the specific
scope audit and statutory audit of our subsidiary operating in the United Kingdom. In addition Ernst and
Young LLP billed us approximately $297,000 in connection with the audit of our internal controls over
financial reporting.

The aggregate fees billed by our independent public accountants, Ernst & Young LLP, for professional
services rendered in connection with the audit of our annual financial statements and review of our interim
financial statements included in our quarterly reports on Form 10-Q for the fiscal year ended December 31,
2004 were approximately $484,000. This amount includes approximately $24,000 for the statutory audit of the
financial statements of our subsidiary operating in Puerto Rico and approximately $64,000 for the specific
scope audit and statutory audit of our subsidiary operating in the United Kingdom. In addition Ernst and
Young LLP billed us approximately $230,000 in connection with the audit of our internal controls over
financial reporting.

Audit Related Fees

In the years ended December 31, 2005 and 2004 Ernst & Young LLP did not bill us for any audit related

fees. Ernst & Young LLP did not perform any other assurance or related services during either of these two
fiscal years.

Tax Fees

Ernst & Young LLP did not provide any tax compliance, tax advice or tax planning services to us during

the fiscal years ended December 31, 2005 and 2004.

All Other Fees

Ernst & Young LLP did not provide any other services to us during the fiscal years ended December 31,

2005 and 2004.

61

In accordance with policies adopted by the Audit Committee of our Board of Directors, all audit and non-

audit related services to be performed for us by our independent public accountants must be approved in
advance by the Committee.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) List of Financial Statements, Financial Statement Schedule and Exhibits

We have filed the following financial statements and financial statement schedule as part of this report:

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements — Stericycle, Inc. and Subsidiaries

Consolidated Balance Sheets at December 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for Each of the Years in the Three-Year Period Ended

December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period

Ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Shareholders’ Equity For Each of the Years in the

Three-Year Period Ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II — Valuation and Allowance Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

We have filed the following exhibits with this report:

Page

29
30

31

32

33

34
35
57

Exhibit
Index

3.1*

3.2*

3.3*

3.4
4.1*

10.1

10.2

10.3*†

Description

Filed with
Electronic
Submission

Amended and restated certificate of incorporation (incorporated by reference to Exhibit 3.1 to
our 1996 Form S-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First certificate of amendment
to amended and restated certificate of incorporation
(incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed
November 29, 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second certificate of amendment
to amended and restated certificate of incorporation
(incorporated by reference to Exhibit 3.4 to our annual report on Form 10-K for 2002) . . .
Amended and restated bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specimen certificate for shares of our common stock, par value $.01 per share (incorporated
by reference to Exhibit 4.1 to our 1996 Form S-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Agreement dated as of June 30, 2005 entered into by us and certain subsidiaries of ours
as borrowers or guarantors, Bank of America, N.A., as administrative agent, swing line lender,
a lender and letter of credit issuer, other lenders party to the Credit Agreement, JPMorgan
Chase Bank, N.A., as syndication agent, and Fortis Capital Corp. and Calyon-New York
Branch, as co-documentation agents (incorporated by reference to our current report on
Form 8-K filed July 7, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amendment No. 1 to Credit Agreement, dated as of December 29, 2005, entered into by us and
certain subsidiaries of ours as borrowers or guarantors), various lenders party to the Credit
Agreement, Bank of America, N.A. and Comerica Bank, as letter of credit issuers, Bank of
America, N.A., as swingline lender and Bank of America, N.A., as administrative agent . .
Directors Stock Option Plan (Amended and Restated) (“Directors Plan”) (incorporated by
reference to Exhibit 4.1 to our registration statement on Form S-8 filed August 2, 2001
(Registration No. 333-66542)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

62

x

x

Exhibit
Index

Description

Filed with
Electronic
Submission

10.9*†

10.8*†

10.6*†

10.7*†

10.4*†

10.5*†

10.10*†

First amendment to Directors Plan (incorporated by reference to Exhibit 10.9 to our annual
report on Form 10-K for 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form of stock option agreement for option grant under Directors Plan (incorporated by
reference to Exhibit 10.1 to our quarterly report on Form 10-Q for the quarter ended
September 30, 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1997 Stock Option Plan (“1997 Plan”) (incorporated by reference to Exhibit 10.3 to our annual
report on Form 10-K for 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First amendment to 1997 Plan (incorporated by reference to Exhibit 10.9 to our 1999
Form S-3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second amendment to 1997 Plan (incorporated by reference to Exhibit 10.12 to our annual
report on Form 10-K for 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third amendment to 1997 Plan (incorporated by reference to Exhibit 10.16 to our annual
report on Form 10-K for 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2000 Nonstatutory Stock Option Plan (“2000 Plan”)
(incorporated by reference to
Exhibit 10.13 to our annual report on Form 10-K for 2001) . . . . . . . . . . . . . . . . . . . . . . .
10.11*† First amendment to 2000 Plan (incorporated by reference to Exhibit 10.14 to our annual report
on Form 10-K for 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.12*† Second amendment to 2000 Plan (incorporated by reference to Exhibit 10.15 to our annual
report on Form 10-K for 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.13*† Third amendment to 2000 Plan (incorporated by reference to Exhibit 4.2 to our registration
statement on Form S-8 filed December 20, 2002 (Registration No. 333-102097)). . . . . . . .
2005 Incentive Stock Plan (“2005 Plan”) (incorporated by reference to Exhibit 4.1 to our
registration statement on Form S-8 filed August 9, 2005 (Registration No. 333-127353) . .
Form of stock option agreement for option grant under 1997 Plan, 2000 Plan and 2005 Plan. .
Form of stock option agreement for bonus conversion option grant under 1997 Plan, 2000 Plan
and 2005 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.17*† Employee Stock Purchase Plan (“ESPP”) (incorporated by reference to Exhibit 4.1 to our
registration statement on Form S-8 filed August 2, 2001 (Registration No. 333-66544) . . .
10.18*† First amendment to ESPP (incorporated by reference to Exhibit 10.21 to our annual report on
Form 10-K for 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Code of ethics (incorporated by reference to Exhibit 10.14 to our annual report on Form 10-K
for 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consent of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . .
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer . . . . . . . . . . . . . . . . . . .
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer . . . . . . . . . . . . . . . . . . .
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer . . . . . . .

21
23
31.1
31.2
32

10.15†
10.16†

10.14*†

14

x

x

x
x
x
x
x

* Previously filed
† Management contract or compensatory plan required to be filed pursuant to Item 601 of Regulation S-K

References to our “1996 Form S-1” are to our registration statement on Form S-1 as declared effective on

August 22, 1996 (Registration No. 333-05665); and references to our “1999 Form S-3” are to our registration
statement on Form S-3 as declared effective on February 4, 1999 (Registration No. 333-60591).

63

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.

SIGNATURES

Stericycle, Inc.

By: /s/ MARK C. MILLER
Mark C. Miller
President and Chief Executive Officer

Date: March 6, 2006.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the

following persons in the capacities and on the dates indicated.

Name

Title

Date

JACK W. SCHULER

/s/
Jack W. Schuler

/s/ MARK C. MILLER
Mark C. Miller

/s/ FRANK J.M. TEN BRINK
Frank J.M. ten Brink

/s/ ROD F. DAMMEYER
Rod F. Dammeyer

/s/ PATRICK F. GRAHAM
Patrick F. Graham

JONATHAN T. LORD, M.D.

/s/
Jonathan T. Lord, M.D.

JOHN PATIENCE

/s/
John Patience

/s/ THOMAS R. REUSCHÉ
Thomas R. Reusché

/s/ L. JOHN WILKERSON, PH.D.
L. John Wilkerson, Ph.D.

/s/ PETER VARDY
Peter Vardy

Chairman of the Board of Directors

March 6, 2006

President and Chief Executive Officer
and a Director (Principal
Executive Officer)

Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)

Director

Director

Director

Director

Director

Director

Director

64

March 6, 2006

March 6, 2006

March 6, 2006

March 6, 2006

March 6, 2006

March 6, 2006

March 6, 2006

March 6, 2006

March 6, 2006

(This page intentionally left blank)

(This page intentionally left blank)

2005

Corporate Information

O f f i c e r s

Mark C. Miller

President, Chief Executive Officer and Director

Richard Kogler

Executive Vice President, Chief Operating Officer

Frank J.M. ten Brink

Executive Vice President, Chief Financial Officer

Richard L. Foss

Executive Vice President, Corporate Development

Shan S. Sacranie

Executive Vice President, International

B o a r d   o f   D i r e c t o r s

Jack W. Schuler • Chairman of the Board

Chairman, Nominating and Governance Committee
Member Audit Committee

Mark C. Miller • President & Chief Executive Officer

Patrick F. Graham

Member Compensation Committee

John Patience

Co-Founder & Partner • Crabtree Partners
Member Nominating and Governance Committee
Member Audit Committee

Peter Vardy

Managing Partner • Peter Vardy & Associates (Ret.)
Member Compensation Committee

L. John Wilkerson, Ph.D.

General Partner • Galen Partners, L.P.
Chairman, Compensation Committee

Rod F. Dammeyer

President • CAC, LLC
Chairman, Audit Committee
Member Nominating and Governance Committee

Thomas R. Reusché

Retired Co-Founder • Madison Dearborn Partners, Inc.
Member Audit Committee

Jonathan T. Lord, M.D.

Senior Vice President and Chief Innovation Officer
Humana, Inc.
Member Compensation Committee
Member Nominating and Governance Committee

I n d e p e n d e n t   A u d i t o r s

Ernst & Young LLP
Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606

L e g a l   C o u n s e l

Johnson and Colmar
300 S. Wacker Drive, Suite 1000
Chicago, Illinois 60606

Tr a n s f e r   A g e n t

LaSalle Bank N.A.
135 S. LaSalle Street, Suite 1960
Chicago, Illinois 60603

F o r m   1 0 - K

Additional copies of this Annual Report or Form 10-K
filed with the Securities and Exchange Commission are
available, without charge, upon request from the company,
Investor@stericycle.com or (800) 643-0240 ext. 2012.

A n n u a l   M e e t i n g

The annual meeting of stockholders will be held 
on Wednesday, May 3, 2006 at 2:30 PM at 
Crowne Plaza Chicago O’Hare
5440 River Road
Rosemont, Illinois 60018.

N a s d a q ® S y m b o l

SRCL

28161 N. Keith Drive
Lake Forest, IL 60045

(800) 643-0240

www.stericycle.com