<SUBMISSION>
<ACCESSION-NUMBER>0000950129-01-001398
<TYPE>10-K
<PUBLIC-DOCUMENT-COUNT>9
<PERIOD>20001231
<FILING-DATE>20010313
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>WASTE MANAGEMENT INC
<CIK>0000823768
<ASSIGNED-SIC>4953
<IRS-NUMBER>731309529
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-K
<ACT>34
<FILE-NUMBER>001-12154
<FILM-NUMBER>1567135
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>1001 FANNIN STREET
<STREET2>STE 4000
<CITY>HOUSTON
<STATE>TX
<ZIP>77002
<PHONE>7135126200
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>1001 FANNIN STREET
<STREET2>SUITE 4000
<CITY>HOUSTON
<STATE>TX
<ZIP>77002
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>USA WASTE SERVICES INC
<DATE-CHANGED>19920703
</FORMER-COMPANY>
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<TYPE>10-K
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<FILENAME>h84376e10-k.txt
<DESCRIPTION>WASTE MANAGEMENT INC - DATED DECEMBER 31, 2000
<TEXT>

<PAGE>   1

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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

(MARK ONE)
[X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                      SECURITIES AND EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

[ ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                      SECURITIES AND EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM           TO

                         COMMISSION FILE NUMBER 1-12154

                             WASTE MANAGEMENT, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                <C>
                  DELAWARE                                          73-1309529
      (State or other jurisdiction of                            (I.R.S. employer
       incorporation or organization)                          identification no.)

       1001 FANNIN STREET, SUITE 4000
               HOUSTON, TEXAS                                         77002
  (Address of principal executive offices)                          (Zip code)
</TABLE>

       Registrant's telephone number, including area code: (713) 512-6200

          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
              TITLE OF EACH CLASS                        NAME OF EXCHANGE ON WHICH REGISTERED
              -------------------                        ------------------------------------
<S>                                                   <C>
Common Stock, $.01 par value                                    New York Stock Exchange
4% Convertible Subordinated Debentures due 2002
</TABLE>

          Securities registered pursuant to Section 12(g) of the Act:
                 5.75% Convertible Subordinated Notes due 2005

     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 [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations 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.  [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 8, 2001, was approximately $16,902,407,699. The
aggregate market value was computed by using the closing price of the common
stock as of that date on the New York Stock Exchange. (For purposes of
calculating this amount only, all directors and executive officers of the
registrant have been treated as affiliates.)

     The number of shares of Common Stock, $.01 par value, of the registrant
outstanding at March 8, 2001, was 624,244,514 (excluding treasury shares of
5,377,308).

                      DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                   DOCUMENT                                  INCORPORATED AS TO
                   --------                                  ------------------
<S>                                            <C>
           Proxy Statement for the
     2001 Annual Meeting of Stockholders                          Part III
</TABLE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
  <S>        <C>                                                            <C>
                                      PART I

  Item 1.    Business....................................................     1
  Item 2.    Properties..................................................    13
  Item 3.    Legal Proceedings...........................................    14
  Item 4     Submission of Matters to a Vote of Security Holders.........    14

                                     PART II

  Item 5.    Market for Registrant's Common Equity and Related
             Stockholder Matters.........................................    14
  Item 6.    Selected Financial Data.....................................    15
  Item 7.    Management's Discussion and Analysis of Financial Condition
             and Results of Operations...................................    16
  Item 7A.   Quantitative and Qualitative Disclosure About Market Risk...    29
  Item 8.    Financial Statements and Supplementary Data.................    31
  Item 9.    Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosures...................................    79

                                     PART III

  Item 10.   Directors and Executive Officers of the Registrant..........    79
  Item 11.   Executive Compensation......................................    80
  Item 12.   Security Ownership of Certain Beneficial Owners and
             Management..................................................    80
  Item 13.   Certain Relationships and Related Transactions..............    80

                                     PART IV

  Item 14.   Financial Statement Schedules, Exhibits, and Reports on Form
             8-K.........................................................    80
</TABLE>

                                        i
<PAGE>   3

                                     PART I

ITEM 1. BUSINESS.

GENERAL

     Waste Management, Inc. is one of the largest publicly-owned companies
providing integrated waste services in North America. Through our subsidiaries,
we provide collection, transfer, recycling and resource recovery, and disposal
services. We are also a leading developer, operator and owner of waste-to-energy
facilities in the United States. Our customers include commercial, industrial,
municipal and residential customers, other waste management companies,
governmental entities and independent power markets. During 2000, none of our
customers accounted for more than 5% of our operating revenue. We employed
approximately 57,000 people as of December 31, 2000.

     The Company was incorporated in Oklahoma in 1987 under the name "USA Waste
Services, Inc." and was reincorporated as a Delaware company in 1995. In 1998,
we merged with Waste Management, Inc., who became our 100% owned subsidiary and
whose name we changed to Waste Management Holdings, Inc., or "WM Holdings." At
the same time, we changed our name to Waste Management, Inc. When the terms
"Waste Management," "WMI," the "Company," or "we" are used in this document,
those terms are being used to refer to Waste Management, Inc., its subsidiaries,
affiliates and predecessors, unless the context requires otherwise. The
Company's principal executive offices are located at 1001 Fannin Street, Suite
4000, Houston, Texas 77002. Our telephone number at that address is (713)
512-6200. Our stock is traded on the New York Stock Exchange under the symbol
"WMI."

     In past years, the waste management industry went through a period of
significant consolidation. Through acquisitions, we grew from a regional
provider of solid waste collection, transfer and disposal services to a national
and international provider of solid waste services as well as recycling,
portable sanitation, industrial cleaning, hazardous waste management and
radioactive waste management services. We also became a leading developer of
facilities for, and a provider of services to, the waste-to-energy and
waste-fuel powered independent power markets. By year end 1998, we were
operating throughout the United States, in Canada, Mexico, throughout Europe,
the Pacific Rim, South America and in other select international markets.

     In 1999, the Company announced a strategic plan focused on emphasizing
internal growth and focusing on our core business -- North American solid waste
management services. As part of the plan, beginning in 1999 and throughout 2000,
we sold the majority of our international operations and certain of our non-
integrated North American solid waste operations. We also have sold, or
announced agreements to sell, most of our non-solid waste operations, including
our: low-level and other radioactive waste operations; organic residuals
operations; industrial services and hazardous waste treatment operations; and
independent power plants. The proceeds from the sales were used to repay a
portion of our debt. More information about these sales and our debt repayments
can be found in Notes 4 and 7 to the consolidated financial statements.

     Also as part of the plan, we began other initiatives in 1999 that continued
through 2000, including:

     - Linking our information technology initiatives to our business strategy
       and rolling out new software systems that give our employees better tools
       to do their jobs;

     - Developing standard policies and procedures, and increasing the flow of
       communication in an effort to streamline our business and bring more
       discipline and accountability, but at the same time maintain
       decentralized operations, so that authority is still close to the
       customer; and

     - Restoring a capital expenditure policy that focuses on the internal
       growth rather than the external growth of the Company.

     We plan to continue focusing on internal growth and profits as opposed to
external growth, or growth through acquisitions. We believe that there remain
opportunities to expand our services through acquisitions of businesses and
operations that can be effectively integrated with our operations, and will
pursue those opportunities when available. However, our goal is to refocus on
our core business of North American solid

                                        1
<PAGE>   4

waste management and build a stronger company by continuing to find new ways to
increase efficiency, improve productivity and achieve greater profitability.

OPERATIONS

  General

     The table below shows for each of the three years in the three-year period
ended December 31, 2000 the total revenues (in millions) contributed by our
principal lines of business. More information about the results of operations
for our principal lines of business is included in Note 15 to the consolidated
financial statements.

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      1999      1998
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
North American Solid Waste:
  Collection............................................  $ 7,675   $ 7,553   $ 6,964
  Disposal..............................................    3,366     3,267     3,169
  Transfer..............................................    1,394     1,195     1,054
  Recycling and other...................................      805       664       653
  Intercompany..........................................   (2,022)   (1,994)   (1,696)
                                                          -------   -------   -------
                                                           11,218    10,685    10,144
WM International........................................      809     1,651     1,534
Non-solid waste.........................................      465       791       948
                                                          -------   -------   -------
Operating revenues......................................  $12,492   $13,127   $12,626
                                                          =======   =======   =======
</TABLE>

  North American Solid Waste

     The Company's North American solid waste, or "NASW," operations are
comprised of six geographic operating Areas with similar economic
characteristics. The services provided by the NASW Areas include collection,
transfer, disposal (solid waste landfills, hazardous waste landfills and
waste-to-energy facilities), recycling and other services in the United States,
Canada and Mexico.

     Collection.  Collection involves picking up and transporting waste from
where it was generated to a transfer station or site of disposal. Depending on
the type of customer being served, we generally provide collection services
under one of two types of arrangements:

     - For commercial and industrial collection services, there is generally a
       one to three-year service agreement. The fees under the agreements are
       determined by factors such as collection frequency, type of collection
       equipment furnished by the Company, type and volume or weight of the
       waste collected, the distance to the disposal facility, labor cost and
       cost of disposal. As part of the service, we provide steel containers to
       most of the commercial and industrial customers to store their solid
       waste. The containers range in size from one to 45 cubic yards and are
       designed so that they can be lifted mechanically and either emptied into
       a truck's compaction hopper or directly into a disposal site. By using
       containers, we can service most of our commercial and industrial
       customers with trucks operated by only one employee.

     - For most residential collection services, there is a contract with, or
       franchise granted by, a municipality or regional authority that has
       granted the Company the exclusive right to service all or a portion of
       the homes in that jurisdiction. These contracts or franchises are
       typically for one to five years, but can sometimes be much longer. The
       fees for residential collection are either paid by the authorities from
       their tax revenues or service charges, or are paid directly by the
       residents receiving the service.

     Transfer Stations.  A transfer station is a facility located near
residential and commercial collection routes where solid waste is received from
trucks and then transferred to and compacted in large, specially constructed
containers for transportation to disposal sites. Fees at transfer stations are
usually based on the type and volume or weight of the waste transferred and the
transportation distance to the disposal site. At

                                        2
<PAGE>   5

December 31, 2000, we operated approximately 300 transfer stations in North
America. There are two main reasons for using transfer stations:

     - Their use reduces the costs associated with transporting waste to final
       disposal sites. This is because consolidating and compacting the waste
       increases the density of the waste, allowing more waste to be transported
       in one trip. The consolidation of the waste therefore also improves the
       use of collection personnel and equipment.

     - The use of transfer stations can also help us internalize disposal costs.
       Internalization means we are able to pay ourselves, rather than a third
       party, the fees charged to dispose of waste we picked up. This is because
       a greater percentage of the waste we collect can be efficiently disposed
       of at one of our own disposal sites, rather than having to use one owned
       by a third party.

     Disposal.  Landfills are the main depository for solid waste in North
America. Solid waste landfills are located on land with geological and
hydrological properties that limit the possibility of water pollution, and are
operated under prescribed procedures. Currently, solid waste landfills must be
designed, permitted, operated and closed in compliance with federal, state and
local regulations pursuant to Subtitle D of the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"). The operation of a solid waste
landfill includes excavation, construction of liners and final caps, continuous
spreading and compacting of waste, and covering of waste with earth or other
inert material at least once a day. These operations are carefully planned to
maintain sanitary conditions and to ensure the best possible use of the airspace
and prepare the site so it can ultimately be used for other purposes.

     Access to a disposal facility, such as a solid waste landfill, is a
necessity for all solid waste management companies. While access can be obtained
to disposal facilities owned or operated by unaffiliated third parties, we
believe it is usually preferable for our collection operations to use disposal
facilities that we own or operate. That way, access can be assured on favorable
terms, and the Company achieves greater internalization, or pays itself instead
of a third party. The fees charged at disposal facilities, which are known as
"tipping fees," are based on market factors and the type and weight or volume of
solid waste deposited and the type and size of the vehicles used in the
transportation of the waste.

     We also operate 5 secure hazardous waste landfills in the United States.
Under RCRA, all hazardous waste landfills must be permitted by the federal
government, and all of ours have obtained such permits. These landfills must
also comply with certain operating standards, and our hazardous waste landfills
have received the permits and approvals needed to accept hazardous waste,
although some of them can only accept certain kinds of hazardous waste. Only
hazardous waste in a stable, solid form which meets applicable regulatory
requirements can be deposited in our secure disposal cells. Additionally, our
hazardous waste landfills are sited, constructed and operated in a manner
designed to provide long-term containment of the waste.

     Additionally, hazardous waste sometimes can be treated before disposal.
Generally, these treatments involve the separation or removal of solid materials
from liquids and chemical treatments that involve the transformation of wastes
into inert materials. The Company operates a hazardous waste facility at which
it isolates treated hazardous wastes in liquid form by injection into deep wells
that have been drilled in rock formations far below the base of fresh water to a
point that is separated by other substantial geological confining layers.

                                        3
<PAGE>   6

     We owned or operated 305 solid waste and hazardous landfills at December
31, 2000. The tonnage volume that we received in 2000 is shown below (in
thousands):

<TABLE>
<CAPTION>
                                                      # OF SITES   TOTAL TONS   TONS PER DAY
                                                      ----------   ----------   ------------
<S>                                                   <C>          <C>          <C>
Solid waste.........................................     300        119,676         440
Hazardous...........................................       5          1,794           7
                                                         ---        -------         ---
                                                         305        121,470         447
                                                                                    ===
Closed during 2000..................................       7            198
Sold during 2000....................................      23          1,851
                                                         ---        -------
                                                         335        123,519
                                                         ===        =======
</TABLE>

     Based on remaining permitted capacity as of December 31, 2000 and projected
annual disposal volumes, the average remaining landfill life for these landfills
was approximately 18 years. When based on remaining permitted capacity and
probable expansion capacity, the average remaining landfill life for these
landfills was approximately 29 years. For the Company's operating landfills as
of December 31, 2000, the expected remaining airspace capacity in cubic yards
and the expected remaining landfill gate tons is shown below (in thousands):

<TABLE>
<CAPTION>
                                                                  PROBABLE
                                                      PERMITTED   EXPANSION     TOTAL
                                                      ---------   ---------   ---------
<S>                                                   <C>         <C>         <C>
Remaining cubic yards...............................  3,068,114   1,835,985   4,904,099
Remaining tonnage...................................  2,446,683   1,477,775   3,924,458
</TABLE>

     The estimated operating lives, based on remaining permitted and probable
expansion capacity and projected annual disposal volume, in years, as of
December 31, 2000, is as follows:

<TABLE>
<CAPTION>
                                                  0 TO 5   6 TO 10   11 TO 20   21 TO 40   41+   TOTAL
                                                  ------   -------   --------   --------   ---   -----
<S>                                               <C>      <C>       <C>        <C>        <C>   <C>
Owned/operated through lease....................    33       29         48         73      76     259
Contracts, primarily with municipalities........    19        4          7         10       6      46
                                                    --       --         --         --      --     ---
Total...........................................    52       33         55         83      82     305
</TABLE>

     In the ordinary course of business, we apply for and generally receive
landfill airspace expansions prior to reaching permitted capacities and we
generally receive operating contract renewals prior to the end of disposal site
operating agreements.

     Recycling.  The Company provides recycling services in the United States
and Canada through its Recycle America(R), Recycle Canada(R) and other programs.
Recycling involves the removal of reusable materials from the waste stream for
processing and sale or other disposition for use in various applications.
Participating commercial and industrial operations use containers to separate
recyclable paper, glass, plastic and metal wastes for collection, processing and
sale by the Company. Fees are determined by such considerations as competition,
frequency of collection, type and volume or weight of the recyclable material,
degree of processing required, distance the recyclable material must be
transported and value of the recyclable material.

     As part of our residential solid waste collection services, we engage in
curbside collection of recyclable materials from residences in the United States
and Canada. Curbside recycling services generally involve the collection of
recyclable paper, glass, plastic and metal waste materials, which may be
separated by residents into different waste containers or commingled with other
recyclable materials. The recyclable materials are then typically deposited at a
local materials recovery facility ("MRF"), where they are sorted and processed
for sale. We operate over 190 MRFs for the receipt and processing of recyclable
materials. Our processing of recyclable materials includes separating recyclable
materials according to type and baling or otherwise preparing the separated
materials for sale.

                                        4
<PAGE>   7

     Other.  We operate and own 16 waste-to-energy facilities in the United
States. Our waste-to-energy projects are capable of processing up to 23,750 tons
of solid waste per day. The heat from this combustion process is converted into
high-pressure steam, which typically is used to generate electricity for sale to
public utility companies under long-term contracts.

     At 66 of our owned or operated solid waste landfill facilities, we are
engaged in methane gas recovery operations. These operations involve the
installation of a gas collection system into a solid waste landfill facility.
Through the gas collection system, gas generated by decomposing solid waste is
collected and transported to a gas-processing facility at the landfill site.
Through physical and chemical processes, methane gas is separated from
contaminants. The processed methane gas is then generally either sold directly
to industrial users or to an affiliate of the Company which uses it as a fuel to
power electricity generators. Electricity generated by these facilities is sold,
usually to public utilities or industrial customers under long-term sales
contracts, often under terms or conditions which are subject to approval by
regulatory authorities.

     We rent and service portable restroom facilities to municipalities and
commercial customers under the name Port-o-let(R), and provide street and
parking lot sweeping services.

     We also provide in-plant services, or "IPS," which is an outsourcing of our
employees to provide full service waste management to customers at their plants.
Because we have vertically integrated waste management operations, we are able
to provide customers with full management of their waste, including choosing the
right sized containers, finding recycling opportunities, minimizing their waste,
and transporting and disposing of their waste.

  WM International

     The Company's international, or "WM International," operations include all
of our operations outside of North America. The WM International operations
include the collection and transportation of solid, hazardous and medical wastes
and recyclable materials and the treatment and disposal of recyclable materials.
Also included are the operation of solid and hazardous waste landfills,
municipal and hazardous waste incinerators, water and waste water treatment
facilities, hazardous waste treatment facilities, waste-fuel powered independent
power facilities, and the construction of treatment or disposal facilities for
third parties.

     As discussed above, part of our 1999 strategic plan was to divest all of
our WM International operations. As of December 31, 2000, all of our WM
International operations had been divested except for certain operations in
Sweden and our operations in Argentina and Israel. These operations are expected
to be sold in 2001.

  Non-Solid Waste Services

     The Company's non-solid waste operations include all hazardous waste
management and other North American non-solid waste services (except for
hazardous waste landfills, which are included in NASW operations), including
low-level and other radioactive waste services, geosynthetic manufacturing and
installation services and independent power projects. Hazardous waste management
services include the collection, transfer and treatment of hazardous waste. The
Company's low-level and other radioactive waste services generally consist of
disposal, processing and various other special services related to these types
of waste. Additionally, the Company provides hazardous, radioactive and mixed
waste program and facilities management services. The geosynthetic manufacturing
and installation services generally involve the making and installing of
landfill liners. Finally, the services included in the Company's independent
power projects are the operation and, in some cases the ownership, of
independent power projects that either cogenerate electricity and thermal energy
or generate electricity alone for sale to customers, including public utilities
and industrial customers.

     These operations are considered "non-core," since they are not part of our
NASW operations. Therefore, as discussed above, as part of the 1999 strategic
plan, we sold all of these operations other than the geosynthetic manufacturing
and installation services and independent power projects in 2000. However, we
expect to sell these operations in 2001.

                                        5
<PAGE>   8

COMPETITION

     The solid waste industry is very competitive. The competition we encounter
is from a number of publicly-held companies, locally-owned private solid waste
services companies, and large commercial and industrial companies handling their
own waste collection or disposal operations. We also have competition from
municipalities and other regional government authorities with respect to
residential and commercial solid waste collection and solid waste landfills. The
municipalities and other regional governmental authorities can sometimes offer
lower direct charges to the customer for the same service by subsidizing the
cost of services through the use of tax revenues and tax-exempt financing.

     Operating costs, disposal costs, and collection fees vary widely throughout
the geographic areas in which we operate. The prices that we charge are
determined locally, and typically vary by the volume, type of waste collected,
treatment requirements, risks involved in the handling or disposing of waste,
frequency of collections, distance to final disposal sites, labor costs and
amount and type of equipment furnished to the customer. Intense competition is
encountered for both quality of service and pricing. From time to time,
competitors may reduce the price of their services and accept lower profit
margins in an effort to expand or maintain market share or to successfully
obtain competitively bid contracts.

EMPLOYEES

     At December 31, 2000, the Company had approximately 57,000 full-time
employees, of which approximately 8,000 were employed in clerical,
administrative, and sales positions, 3,000 in management, and the balance in
collection, disposal, transfer station and other operations. Approximately
15,000 of our employees are covered by collective bargaining agreements. The
Company has not experienced a significant work stoppage, and management
considers its employee relations to be good.

INSURANCE AND FINANCIAL ASSURANCE OBLIGATIONS

     We carry a broad range of insurance coverages, including general liability,
automobile liability, real and personal property, workers' compensation,
directors' and officers' liability, environmental impairment liability, and
other coverages we believe are customary to the industry. Except as discussed in
the "Legal Proceedings" section of this report, we do not expect the impact of
any known casualty, property, environmental insurance or other contingency to be
material to our financial condition, results of operations or cash flows.

     Through December 31, 2000, we have not experienced any difficulty in
obtaining insurance. However, if we were unable to obtain adequate insurance in
the future, or decided to operate without insurance, any partially or completely
uninsured claim against the Company, if successful and of sufficient magnitude,
could have a material adverse effect upon our financial condition, results of
operations or cash flows. Additionally, our continued access to casualty and
pollution legal liability insurance with sufficient limits at acceptable terms
is an important aspect of obtaining revenue-producing waste service contracts.

     Municipal and governmental waste management contracts typically require
performance bonds or bank letters of credit to secure performance. We are also
required to provide financial assurance for the final closure and post-closure
obligations with respect to our landfills. We establish financial assurance in
different ways, depending on the jurisdiction, including escrow-type accounts
funded by revenues during the operational life of a facility, letters of credit
from third parties, surety bonds and traditional insurance. However, we also
establish financial assurance through "captive insurance" which is insurance
provided by our wholly-owned, but independent, regulated insurance company
subsidiary, National Guaranty Insurance Company ("NGIC"). NGIC is authorized to
write up to $925 million in insurance policies or surety bonds for our final
closure and post-closure requirements. When the use of NGIC is not acceptable,
we have other alternatives as mentioned above.

     As of December 31, 2000, we had provided letters of credit of approximately
$1.7 billion, surety bonds of approximately $2.8 billion and insurance policies
of approximately $900 million to municipalities, customers and regulatory
authorities supporting tax-exempt bonds, performance of landfill final closure
and post-closure requirements, insurance contracts, municipal contracts and
financial guarantee obligations. We have not experienced difficulty in obtaining
financial assurance for our current operations. However, continued

                                        6
<PAGE>   9

availability of surety bonds, letters of credit and insurance policies in
sufficient amounts at acceptable rates is an important aspect of obtaining
additional tax-exempt financing, municipal collection contracts and obtaining or
retaining disposal site or transfer station operating permits.

REGULATION

     The Company's business is subject to extensive and evolving federal, state,
local and foreign environmental, health, safety, and transportation laws and
regulations. These regulations are administered by the EPA in the United States,
various other federal, state, and local environmental, zoning, transportation,
land use, health, and safety agencies in the United States and various other
agencies outside of the United States. Many of these agencies regularly examine
the Company's operations to monitor compliance with these laws and regulations.

     Governmental authorities have the power to enforce compliance with these
laws and regulations and to obtain injunctions or impose civil or criminal
penalties in case of violations.

     Because the major component of our business is the collection and disposal
of solid waste in an environmentally sound manner, a significant amount of our
capital expenditures are related, either directly or indirectly, to
environmental protection measures, including compliance with federal, state and
local provisions that have been enacted or adopted regulating the discharge of
materials into the environment. There are costs associated with siting, design,
operations, monitoring, site maintenance, corrective actions, financial
assurance, and facility closure and post-closure obligations. In connection with
our acquisition, development or expansion of a landfill or transfer station, we
must often spend considerable time, effort and money to obtain required permits
and approvals. There can not be any assurances that we will be able to obtain
governmental approvals needed. Once obtained, operating permits are subject to
modification and revocation by the issuing agency. Compliance with these and any
future regulatory requirements could require the Company to make significant
capital and operating expenditures. However, most of these expenditures are made
in the normal course of business and do not place us at any competitive
disadvantage.

     The primary United States federal statutes affecting the Company's business
are summarized below:

     - RCRA, regulates the handling, transportation and disposal of hazardous
       and non-hazardous wastes and delegates authority to states to develop
       programs to ensure the safe disposal of solid wastes. In 1991, the EPA
       issued its final regulations under Subtitle D of RCRA, which set forth
       minimum federal performance and design criteria for solid waste
       landfills. These regulations must be implemented by the states, although
       states can impose requirements that are more stringent than the Subtitle
       D standards. The Company could incur costs in complying with these
       standards; however, we do not believe that such costs would have a
       material adverse effect on our operations. From time to time, the Company
       may incur costs in complying with these standards in the ordinary course
       of its operations; however all of the Company's planned landfill
       expansions will be engineered to meet or exceed applicable Subtitle D
       requirements.

     - The Comprehensive Environmental Response, Compensation and Liability Act
       of 1980, as amended ("CERCLA"), provides for the cleanup of sites from
       which there is a release or threatened release of a hazardous substance
       into the environment. CERCLA's primary means for accomplishing
       remediation of such problems is to impose liability for cleanup of
       disposal sites on current owners and operators, former owners and
       operators at the time of disposal as well as the generators of the waste
       and the transporters who select the disposal site. Liability under CERCLA
       is not dependent on the intentional disposal of hazardous wastes. It can
       be based upon the release or threatened release even as a result of
       lawful, unintentional and non-negligent action, of any one of the more
       than 700 "hazardous substances" listed by the EPA, even in very small
       quantities.

     - The Federal Water Pollution Control Act of 1972 (the "Clean Water Act"),
       establishes rules for regulating the discharge of pollutants into
       streams, rivers, groundwater, or other surface waters from a variety of
       sources, including solid waste disposal sites. If run-off from the
       Company's operations may be discharged into surface waters, the Clean
       Water Act requires us to apply for and obtain discharge

                                        7
<PAGE>   10

       permits, conduct sampling and monitoring, and, under certain
       circumstances, reduce the quantity of pollutants in those discharges. In
       1990, the EPA issued additional rules under the Clean Water Act, which
       establish standards for management of storm water runoff from landfills
       and which require landfills to obtain storm water discharge permits. In
       addition, if a landfill or a transfer station discharges wastewater
       through a sewage system to a publicly owned treatment works, the facility
       must comply with discharge limits imposed by the treatment works. Also,
       if development of a landfill may alter or affect "wetlands," a permit may
       have to be obtained before such development could commence. This
       requirement is likely to affect the construction or expansion of many
       landfill sites. The Clean Waster Act provides for civil, criminal and
       administrative penalties for violations of its provisions.

     - The Clean Air Act of 1970, as amended (the "Clean Air Act"), provides for
       increased federal, state and local regulation of the emission of air
       pollutants. The EPA has applied the Clean Air Act to certain of our
       operations, including solid waste landfills and waste collection
       vehicles. Additionally, in 1996, the EPA issued new emission guidelines
       for solid waste landfills. These regulations impose limits on air
       emissions from solid waste landfills. These guidelines, along with the
       new permitting programs established under the recent Clean Air Act
       amendments, will likely subject solid waste landfills to significant new
       permitting requirements and, in some instances, require installation of
       methane gas recovery systems to reduce emissions to allowable limits.
       However, the costs of compliance with Clean Air Act permitting and
       emission control requirements are not anticipated to have a material
       adverse effect on the Company. At 66 of our facilities, methane gas is
       recovered and used to power electricity production facilities.

     - The Occupational Safety and Health Act of 1970, as amended ("OSHA"),
       establishes certain employer responsibilities, including maintenance of a
       workplace free of recognized hazards likely to cause death or serious
       injury, compliance with standards promulgated by the Occupational Safety
       and Health Administration, and various record keeping, disclosures and
       procedural requirements. Various standards for notices of hazards, safety
       in excavation and demolition work, and the handling of asbestos, may
       apply to our operations.

     There are also various state and local regulations that affect our
operations. Generally, states have their own laws and regulations that are
sometimes more strict than comparable federal laws and regulations governing
solid waste disposal, water and air pollution, releases and cleanup of hazardous
substances and liability for such matters. Additionally, our collection and
landfill operations could be affected by the trend toward requiring the
development of waste reduction and recycling programs. Legislative and
regulatory measures to either require or encourage waste reduction at the source
and waste recycling have also been considered by the United States Congress and
the EPA.

     Various states have enacted, or are considering enacting, laws that
restrict the disposal within the state of solid waste generated outside the
state. While laws that overtly discriminate against out-of-state waste have been
found to be unconstitutional, some laws that are less overtly discriminatory
have been upheld in court. Additionally, certain state and local governments
have enacted "flow control" regulations, which attempt to require that all waste
generated within the state or local jurisdiction be deposited at specific sites.
In 1994, the United States Supreme Court ruled that a flow control ordinance was
unconstitutional. However, from time to time, the United States Congress has
considered legislation authorizing states to adopt regulations, restrictions, or
taxes on the importation of out-of-state or out-of-jurisdiction waste. These
congressional efforts have been unsuccessful. The United States Congress'
adoption of legislation allowing restrictions on interstate transportation of
out-of-state or out-of-jurisdiction waste or certain types of flow control, or
the adoption of legislation affecting interstate transportation of waste at the
state level, could adversely affect the Company's solid waste management
services.

     Many states and local jurisdictions have enacted "fitness" laws that allow
the agencies that have jurisdiction over waste services contracts or permits to
deny or revoke these contracts or permits based on the applicant or permit
holder's compliance history. Some states and local jurisdictions go further and
consider the compliance history of the parent, subsidiaries or affiliated
companies, in addition to the applicant or permit
                                        8
<PAGE>   11

holder. These laws authorize the agencies to make determinations of an applicant
or permit holder's fitness to be awarded a contract to operate and to deny or
revoke a contract or permit because of unfitness unless there is a showing that
the applicant or permit holder has been rehabilitated through the adoption of
various operating policies and procedures put in place to assure future
compliance with applicable laws and regulations.

FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS

     When we use words like "may," "believe," "expect," "anticipate," "should,"
"estimate," "project," "plan," their opposites and similar expressions, the
Company is making forward-looking statements. These expressions are most often
used in statements relating to business plans, strategies, anticipated benefits
or projections about the anticipated revenues, earnings or other aspects of our
operating results. We make these statements in an effort to keep stockholders
and the public informed about our business and have based these forward-looking
statements on our current expectations about future events. You should view such
statements with caution. These statements are not guarantees of future
performance or events. As noted elsewhere in this report, all phases of our
business are subject to uncertainties, risks and other influences, many of which
the Company has no control over. Additionally, any of these factors, either
alone or taken together, could have a material adverse effect on the Company and
could change whether any forward-looking statement ultimately turns out to be
true.

     Outlined below are some of the risks that the Company faces and that could
affect our business and financial statements for 2001 and beyond. However, they
are not the only risks that the Company faces. There may be additional risks
that we do not presently know or that we currently believe are immaterial which
could also impair our business.

  We Face Uncertainties Relating to Pending Litigation and Investigations

     On three different occasions during July and August 1999, we lowered our
expected earnings per share for the three months ended June 30, 1999.
Additionally, in February 1998, Waste Management Holdings announced restatements
of its prior-period financial statements.

     More than 30 lawsuits that claim to be based on our 1999 announcements have
been filed against us and some of our current and former officers and directors.
These lawsuits, which have been consolidated into one action, assert various
claims under the federal securities laws, including claims that (i) the
projections we made about our June 30, 1999 earnings were false and misleading,
(ii) we failed to disclose information about our earnings projections that would
have been important to purchasers of our stock, (iii) we made further
misrepresentations after July 29,1999 about our operations and finances,
resulting in the Company taking a pre-tax charge of $1.76 billion in the third
quarter of 1999, and (iv) we made false or misleading representations in the
registration statement and prospectus filed with the SEC in connection with our
July 1998 acquisition of WM Holdings. The plaintiffs also claim that certain of
our current and former officers and directors sold their common stock during
times when they knew the price was artificially inflated by the alleged
misstatements and omissions.

     Additionally, individuals who sold their businesses to us, WM Holdings or
other companies we later acquired have filed lawsuits against us and WM Holdings
alleging various claims, including fraud, breach of contract, breach of
warranty, overvaluation of the stock they received and other claims similar to
those included in the class action described above.

     Other lawsuits relating to the facts described above, including derivative
actions, have been filed against Waste Management Holdings and us. We recently
announced a proposed settlement, which is subject to court approval, with
respect to the derivative suit against WM Holdings relating to the February 1998
restatement of earnings, as well as claims by former officers of WM Holdings for
retirement and other benefits withheld by us.

     The SEC has commenced a formal investigation against WM Holdings with
respect to its previously filed financial statements for the years 1991 and
earlier through 1997, and the NYSE has notified us that it is reviewing
transactions in our common stock before our July 6, 1999 earnings announcement.

                                        9
<PAGE>   12

     We and our subsidiaries are also currently involved in other civil
litigation and governmental proceedings relating to the conduct of our business.

     We do not believe it is feasible to predict or determine the outcome or
resolution of any of these proceedings or investigations. In addition, the
timing of the final resolutions to these matters is uncertain. The possible
outcomes or resolutions to these matters or any new litigation or governmental
proceedings could include judgments against us or settlements and could require
substantial payments by us. We believe that adverse outcomes or any other
resolution, such as settlements, could have a material adverse effect on our
financial condition, results of operations and cash flows.

  We Could Be Liable For Environmental Damages Resulting From Our Operations

     We could be liable if our operations cause environmental damage to our
properties or to nearby landowners, particularly as a result of the
contamination of drinking water sources or soil. Under current law, we could
even be held liable for damage caused by conditions that existed before we
acquired the assets or operations involved. Also, we could be liable if we
arrange for the transportation, disposal or treatment of hazardous substances
that cause environmental contamination, or if a predecessor owner made such
arrangements and under applicable law we are treated as a successor to the prior
owner. Any substantial liability for environmental damage could have a material
adverse effect on our financial condition, results of operations and cash flows.

     In the ordinary course of our business, we have in the past, and may in the
future, become involved in a variety of legal and administrative proceedings
relating to land use and environmental laws and regulations. These include
proceedings in which:

     - agencies of federal, state, local or foreign governments seek to impose
       liability on us under applicable statutes, sometimes involving civil or
       criminal penalties for violations, or to revoke or deny renewal of a
       permit we need; and

     - citizen groups, adjacent landowners or governmental agencies oppose the
       issuance of a permit or approval we need, allege violations of the
       permits under which we operate or laws or regulations to which we are
       subject, or seek to impose liability on us for environmental damage.

     The adverse outcome of one or more of these proceedings could have a
material adverse effect on our financial condition, results of operations and
cash flows.

     From time to time, we have received citations or notices from governmental
authorities that our operations are not in compliance with our permits or
certain applicable environmental or land use laws and regulations. In the future
we may receive additional citations or notices. We generally seek to work with
the authorities to resolve the issues raised by such citations or notices.
However, we cannot guarantee that we will always be successful in this regard.
Where we are not successful, we may incur fines, penalties or other sanctions
that could have a material adverse effect on our financial condition, results of
operations and cash flows.

     Our insurance for environmental liability meets or exceeds statutory
requirements. However, because we believe that the cost for such insurance is
high relative to the coverage it would provide, our coverages are generally
maintained at statutorily required levels. Due to the limited nature of our
insurance coverage for environmental liability, if we were to incur liability
for environmental damage, such liability could have a material adverse effect on
our financial condition, results of operations and cash flows.

  Governmental Regulations May Restrict Our Operations Or Increase Our Costs Of
  Operations

     Stringent government regulations at the federal, state and local level in
the United States and in other countries in which we have operations have a
substantial impact on our business. A large number of complex laws, rules,
orders and interpretations govern environmental protection, health, safety, land
use, zoning,

                                        10
<PAGE>   13

transportation and related matters. Among other things, they may restrict our
operations and adversely affect our financial condition, results of operations
and cash flows by imposing conditions such as:

     - limitations on the siting and construction of new waste disposal,
       transfer or processing facilities or the expansion of existing
       facilities;

     - limitations and regulations on collection and disposal prices, rates and
       volumes;

     - limitations or bans on disposal or transportation of out-of-state waste
       or certain categories of waste; or

     - mandates regarding the disposal of solid waste.

     Regulations also affect the siting, design and closure of landfills and
could require us to undertake investigatory or remedial activities, curtail
operations or close a landfill temporarily or permanently. Future changes in
these regulations may require us to modify, supplement or replace equipment or
facilities. The costs of complying with these regulations could be substantial.

     In order to develop, expand or operate a landfill or other waste management
facility, we must have various facility permits and other governmental
approvals, including those relating to zoning, environmental protection and land
use.

  We Face Potential Difficulties In Continuing To Expand And Manage Our Growth

     We have made a number of acquisitions, some of them substantial, and
continue to pursue operations that can be effectively integrated with our
existing operations. Our future financial results and prospects depend in part
on our ability to successfully manage and improve the operating efficiencies and
productivity of these acquired operations. In particular, whether the
anticipated benefits of acquired operations are ultimately achieved will depend
on a number of factors, including our ability to achieve administrative cost
savings, rationalization of collection routes, insurance and bonding cost
reductions, general economies of scale, and our ability, generally, to
capitalize on our asset base and strategic position. Moreover, our ability to
operate successfully will depend on a number of factors, including competition
from other waste management companies, availability of working capital, ability
to maintain margins on existing or acquired operations, and the management of
costs in a changing regulatory environment.

     Our future and past acquisitions involve certain other potential risks,
including:

     - our failure to accurately assess all of the pre-existing liabilities of
       acquired companies;

     - unexpected difficulties in successfully integrating the operations of
       acquired companies with our existing operations;

     - risks and uncertainties regarding government-forced divestitures;

     - restraints imposed by federal and state agencies regarding market
       concentration and competitor behavior;

     - a lack of attractive acquisition opportunities;

     - our inability to obtain the capital required to finance potential
       acquisitions on satisfactory terms;

     - the businesses we acquire not proving profitable; and

     - our incurring additional indebtedness or issuing additional equity
       securities as a result of future acquisitions.

  Our Accounting Policies Concerning Unamortized Capitalized Expenditures Could
  Result In A Material Charge Against Our Earnings

     In accordance with generally accepted accounting principles, we capitalize
certain expenditures and advances relating to acquisitions, pending
acquisitions, and disposal site development and expansion projects. We expense
indirect acquisition costs, such as executive salaries, general corporate
overhead, public affairs
                                        11
<PAGE>   14

and other corporate services, as incurred. Our policy is to charge against
earnings any unamortized capitalized expenditures and advances relating to any
facility or operation that is permanently shut down, any pending acquisition
that is not consummated, and any disposal site development or expansion project
that is not completed. The charge against earnings is reduced by any portion of
the capitalized expenditure and advances that we estimate will be recoverable,
through sale or otherwise. In future periods, we may be required to incur
charges against earnings in accordance with our policy. Depending on the
magnitude, any such charges could have a material adverse effect on our results
of operations.

  The Development And Acceptance Of Alternatives To Landfill Disposal And
  Waste-To-Energy Facilities Could Reduce Our Ability To Operate At Full
  Capacity

     Our customers are increasingly using alternatives to landfill disposal,
such as recycling and composting. In addition, state and local governments are
increasingly mandating recycling and waste reduction at the source and
prohibiting the disposal of certain types of wastes, such as yard wastes, at
landfills or waste-to-energy facilities. These developments could reduce the
volume of waste going to landfills and waste-to-energy facilities in certain
areas, which may affect our ability to operate our landfills and waste-to-energy
facilities at full capacity, as well as the prices that we can charge for
landfill disposal and waste-to-energy services.

  Our Business Is Seasonal In Nature And Our Revenues And Results Vary From
  Quarter To Quarter

     Our operating revenues are usually lower in the winter months, primarily
because the volume of waste relating to construction and demolition activities
usually increases in the spring and summer months, and the volume of industrial
and residential waste in certain regions where we operate usually decreases
during the winter months. Our first and fourth quarter results of operations
typically reflect this seasonality. In addition, particularly harsh weather
conditions may result in the temporary suspension of certain of our operations.

  Fluctuations In The Price Of Recyclable Materials Affect Our Operating
  Revenues

     Recyclable materials that we process for sale include paper, plastics,
aluminum and other commodities which are subject to significant price
fluctuations. These fluctuations will affect our future operating revenues and
income.

  Intense Competition Could Reduce Our Profitability

     We encounter intense competition from governmental, quasi-governmental and
private sources in all aspects of our operations. In North America, the industry
consists of several large national waste management companies, and local and
regional companies of varying sizes and financial resources. We compete with
numerous waste management companies as well as with counties and municipalities
that maintain their own waste collection and disposal operations. These counties
and municipalities may have financial competitive advantages because tax
revenues and tax-exempt financing are available to them. In addition,
competitors may reduce their prices to expand sales volume or to win
competitively bid municipal contracts.

  We May Need Additional Capital If Our Cash Flow Is Less Than Expected

     We currently expect to generate sufficient cash flow from our operations in
2001 to cover our anticipated cash needs for capital expenditures, acquisitions
and other cash expenditures. If our cash flow from operations during 2001 is
less than currently expected, or our capital requirements increase, either due
to strategic decisions or otherwise, we may elect to incur further indebtedness
or issue equity securities to cover any additional capital needs. However, we
cannot guarantee that we will be successful in obtaining additional capital on
acceptable terms.

     Our credit facilities require us to comply with certain financial ratios.
If our cash flows are less than expected or our capital requirements are more
than expected, we may not be in compliance with the ratios. This would result in
a default under our credit agreements. If there were a default, we may not be
able to get waivers or amendments to our credit facilities, and the lenders
could choose to declare all outstanding borrowings due and payable. If that
happened, there can be no assurances that we could fully repay the
                                        12
<PAGE>   15

amounts due. Since we are partially dependent on our credit facilities to fund
borrowing needs, any default would have a material adverse effect on our
consolidated financial condition and results of operation.

  Efforts by Labor Unions to Organize our Employees Could Divert Management
  Attention and Increase our Operating Expenses

     In the past, labor unions have made attempts to organize our employees, and
these efforts may continue in the future. Certain groups of our employees have
chosen to be represented by unions, and we have negotiated collective bargaining
agreements with some of the groups. We cannot predict which, if any, groups of
employees may seek union representation in the future or the outcome of
collective bargaining. The negotiation of these agreements could divert
management attention and result in increased operating expenses and lower net
income. If we are unable to negotiate acceptable collective bargaining
agreements, we might have to wait through "cooling off" periods, which are often
followed by union-initiated work stoppages, including strikes. Depending on the
type and duration of such work stoppage, our operating expenses could increase
significantly.

  Fluctuations in Fuel Costs Could Affect our Operating Expenses and Results

     The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including geopolitical developments, supply and
demand for oil & gas, actions by OPEC and other oil & gas producers, war and
unrest in oil producing countries, regional production patterns and
environmental concerns. Because fuel is needed to run our fleet of trucks, price
escalations or reductions in the supply of fuel could increase our operating
expenses and have a negative impact on net income. In the past, we have
implemented a fuel surcharge to off-set fuel increase costs. However, we are not
always able to pass through the increased fuel costs due to the terms of certain
customers' contracts.

  We Face Risks Relating to General Economic Conditions

     We face risks related to general economic and market conditions, including
the potential impact of any economic slowdown, recession, interest rate
fluctuation or other adverse external economic conditions. Negative general
economic conditions could materially adversely affect our financial condition,
results of operation and cash flows.

  We May Encounter Difficulties Deploying Our Enterprise Software

     We are currently in the process of deploying enterprise-wide software
systems that will replace our current financial, human resources and payroll
systems. These systems may initially contain errors or cause other problems that
could adversely affect, or even temporarily disrupt, all or a portion of our
operations or the stability of our accounting systems until resolved. We are
still in the preliminary stages of the financial system conversion, the
completion of which is expected to occur no earlier than the end of 2001.

ITEM 2. PROPERTIES.

     Our principal executive offices are in Houston, Texas, where we lease
approximately 396,000 square feet under leasing arrangements expiring at various
times through 2010. We also have field-based administrative offices in
California, Illinois, Pennsylvania, New Hampshire, Georgia and Ontario, Canada.

     Our principal property and equipment consist of land (primarily landfills,
transfer stations and bases for collection operations), buildings, waste
treatment or processing facilities (other than landfills) and vehicles and
equipment. We own or lease real property in most locations where we have
operations and we have operations in all states and the District of Columbia,
other than Montana and Wyoming.

     At December 31, 2000, of the 305 Company operated landfills, we owned and
operated through lease agreements 259 active sites in North America. These sites
control approximately 121,000 acres of land, including approximately 30,000
permitted acres and approximately 7,000 acres we consider to be probable
expansion acreage for landfill use. Additionally, we operate 46 landfills
through contractual agreements,

                                        13
<PAGE>   16

primarily with municipalities. At December 31, 2000, in North American we
operated approximately 300 transfer stations and over 190 MRFs. We also owned,
or operated through agreements, 16 waste-to-energy facilities in North America
as of December 31, 2000.

     We believe that our vehicles, equipment, and operating properties are
adequately maintained and adequate for our current operations. However, we
expect to continue to make investments in additional equipment and property for
expansion, for replacement of assets, and in connection with future
acquisitions. For more information, see the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section in this
report.

ITEM 3. LEGAL PROCEEDINGS.

     Information regarding our legal proceedings can be found under the
"Litigation" section in Note 19 to the consolidated financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     We did not submit any matters to a vote of our stockholders during the
fourth quarter of 2000.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Our common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "WMI." The following table sets forth the range of the high and low
per share sales prices for our common stock as reported on the NYSE Composite
Tape.

<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
1999
  First Quarter.............................................  $53.50   $41.88
  Second Quarter............................................   60.00    44.75
  Third Quarter.............................................   55.44    18.13
  Fourth Quarter............................................   19.75    14.00
2000
  First Quarter.............................................  $18.50   $13.00
  Second Quarter............................................   20.88    13.31
  Third Quarter.............................................   21.88    17.12
  Fourth Quarter............................................   28.31    17.31
2001
  First Quarter (through March 8, 2001).....................  $28.63   $22.52
</TABLE>

     On March 8, 2001, the closing sale price as reported on the NYSE was $27.15
per share. The number of holders of record of our common stock at March 8, 2001,
was 31,501.

     As of December 31, 2000, due to current credit agreements, our ability to
pay dividends and repurchase capital stock was limited to $369 million, of which
no more than $25 million may be paid for dividends. We declared and paid cash
dividends of $0.01 per share, or approximately $6 million during each of 1999
and 2000. See Note 11 to the consolidated financial statements.

                                        14
<PAGE>   17

ITEM 6. SELECTED FINANCIAL DATA.

     The information below was derived from the audited consolidated financial
statements included in this report and in reports we have previously filed with
the SEC. This information should be read together with those financial
statements and the notes to the financial statements. For more information
regarding this financial data, see the "Management's Discussion and Analysis"
section also included in this report.

<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                            -----------------------------------------------
                                                             2000      1999      1998      1997      1996
                                                            -------   -------   -------   -------   -------
                                                                (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                         <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues........................................  $12,492   $13,127   $12,626   $11,972   $10,999
                                                            -------   -------   -------   -------   -------
Costs and expenses:
  Operating (exclusive of depreciation and amortization
    shown below)..........................................    7,538     8,269     7,283     7,482     6,564
  General and administrative..............................    1,738     1,920     1,333     1,438     1,316
  Depreciation and amortization...........................    1,429     1,614     1,499     1,392     1,264
  Merger and acquisition related costs....................       --        45     1,807       113       127
  Asset impairments and unusual items.....................      749       739       864     1,771       530
Loss from continuing operations held for sale, net of
  minority interest.......................................       --        --        --        10        --
                                                            -------   -------   -------   -------   -------
                                                             11,454    12,587    12,786    12,206     9,801
                                                            -------   -------   -------   -------   -------
Income (loss) from operations.............................    1,038       540      (160)     (234)    1,198
                                                            -------   -------   -------   -------   -------
Other income (expense):
  Interest expense........................................     (748)     (770)     (682)     (556)     (525)
  Interest income.........................................       31        38        27        45        34
  Minority interest.......................................      (23)      (24)      (24)      (45)      (41)
  Other income, net.......................................       23        53       139       127       108
                                                            -------   -------   -------   -------   -------
                                                               (717)     (703)     (540)     (429)     (424)
                                                            -------   -------   -------   -------   -------
Income (loss) from continuing operations before income
  taxes...................................................      321      (163)     (700)     (663)      774
Provision for income taxes................................      418       232        67       363       487
                                                            -------   -------   -------   -------   -------
Income (loss) from continuing operations..................      (97)     (395)     (767)   (1,026)      287
Income (loss) from discontinued operations................       --        --        --        96      (263)
Extraordinary item........................................       --        (3)       (4)       (7)       --
Accounting change.........................................       --        --        --        (2)       --
                                                            -------   -------   -------   -------   -------
Net income (loss).........................................  $   (97)  $  (398)  $  (771)  $  (939)  $    24
                                                            =======   =======   =======   =======   =======
Basic earnings (loss) per common share:
  Continuing operations...................................  $ (0.16)  $ (0.64)  $ (1.31)  $ (1.84)  $  0.54
  Discontinued operations.................................       --        --        --      0.17     (0.49)
  Extraordinary item......................................       --     (0.01)    (0.01)    (0.01)       --
  Accounting change.......................................       --        --        --        --        --
                                                            -------   -------   -------   -------   -------
  Net income (loss).......................................  $ (0.16)  $ (0.65)  $ (1.32)  $ (1.68)  $  0.05
                                                            =======   =======   =======   =======   =======
Diluted earnings (loss) per common share:
  Continuing operations...................................  $ (0.16)  $ (0.64)  $ (1.31)  $ (1.84)  $  0.53
  Discontinued operations.................................       --        --        --      0.17     (0.49)
  Extraordinary item......................................       --     (0.01)    (0.01)    (0.01)       --
  Accounting change.......................................       --        --        --        --        --
                                                            -------   -------   -------   -------   -------
  Net income (loss).......................................  $ (0.16)  $ (0.65)  $ (1.32)  $ (1.68)  $  0.04
                                                            =======   =======   =======   =======   =======
Cash dividends per common share...........................  $  0.01   $  0.01   $  0.16   $  0.56   $  0.57
                                                            =======   =======   =======   =======   =======
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit).................................  $  (480)  $(1,269)  $  (412)  $(1,967)  $  (258)
Intangible assets, net....................................    5,193     5,356     6,250     4,848     4,681
Total assets..............................................   18,565    22,681    22,882    20,156    20,728
Long-term debt, including current maturities..............    8,485    11,498    11,732     9,480     9,065
Stockholders' equity......................................    4,801     4,402     4,372     3,855     5,202
</TABLE>

                                        15
<PAGE>   18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

     Below is a discussion of our operations for the three years ended December
31, 2000. This discussion should be read together with the consolidated
financial statements and the notes to the consolidated financial statements.

     When we use words like "may," "believes," "expects," "anticipates,"
"should," "estimate," "project," "plan," their opposites and similar
expressions, the Company is making forward-looking statements. These expressions
are most often used in statements relating to business plans, strategies,
anticipated benefits or projections about the anticipated revenues, earnings or
other aspects of our operating results. We make these statements in an effort to
keep stockholders and the public informed about our business, and have based
them on our current expectations about future events. You should view such
statements with caution. These statements are not guarantees of future
performance or events. As noted elsewhere in this report, all phases of our
business are subject to uncertainties, risks and other influences, many of which
the Company has no control over. Additionally, any of these factors, either
alone or taken together, could have a material adverse effect on the Company and
could change whether any forward-looking statement ultimately turns out to be
true.

     Outlined below are some of the risks that the Company faces and that could
affect our business and financial statements for 2001 and beyond. However, they
are not the only risks that the Company faces. There may be additional risks
that we do not presently know or that we currently believe are immaterial which
could also impair our business. For more information, see the "Factors
Influencing Future Results and Accuracy of Forward Looking Statements" section
of this report.

     - the outcome of litigation or investigations;

     - possible changes in our estimates of site remediation requirements, final
       closure and post-closure obligations, compliance and other audits and
       regulatory developments;

     - the possible impact of regulations on our business, including the cost to
       comply with regulatory requirements and the potential liabilities
       associated with disposal operations, as well as our ability to obtain and
       maintain permits needed to operate our facilities;

     - the effect of limitations or bans on disposal or transportation of
       out-of-state waste or certain categories of waste;

     - our ability to improve the productivity of acquired operations and use
       our asset base and strategic position to operate more efficiently;

     - our ability to accurately assess all of the pre-existing liabilities of
       companies we have acquired and to successfully integrate the operations
       of acquired companies with our existing operations;

     - possible charges against earnings for certain shut down operations and
       uncompleted acquisitions or development or expansion projects;

     - the effects that trends toward requiring recycling, waste reduction at
       the source and prohibiting the disposal of certain types of wastes could
       have on volumes of waste going to landfills and waste-to-energy
       facilities;

     - the effect the weather has on our quarter to quarter results, as well as
       the effect of extremely harsh weather on our operations;

     - the effect of price fluctuations of recyclable materials processed by the
       Company;

     - the effect competition in our industry could have on our ability to
       maintain margins, including uncertainty relating to competition with
       governmental sources that enjoy competitive advantages from tax-exempt
       financing and tax revenue subsidies;

                                        16
<PAGE>   19

     - possible defaults under our credit agreements if cash flows are less than
       we expect or capital expenditures are more than we expect, and the
       possibility that we can not obtain additional capital on acceptable terms
       if needed;

     - possible diversions of management's attention and increases in operating
       expenses due to efforts by labor unions to organize our employees;

     - possible increases in operating expenses due to fuel price increases or
       fuel supply shortages;

     - the effects of general economic conditions; and

     - our ability to successfully deploy our new enterprise-wide software
       systems.

  Strategic Plan

     In 1999, the Company announced a strategic plan focused on emphasizing
internal growth and focusing on our core business -- North American solid waste
management services. As part of the plan, beginning in 1999 and throughout 2000,
we sold the majority of our international operations and certain of our non-
integrated North American solid waste operations. We also have sold, or
announced agreements to sell, almost all of our non-core operations, including
our: low-level and other radioactive waste operations; organic residuals
operations, industrial services, hazardous waste treatment operations and
independent power plants. The proceeds from the sales were used to repay a
portion of our debt.

     Also as part of the plan, the Company began other initiatives in 1999 that
continued through 2000, including:

     - Linking our information technology initiatives to our business strategy
       and rolling out new software systems that give our employees better tools
       to do their jobs;

     - Developing standard policies and procedures, and increasing the flow of
       communication in an effort to streamline our business and bring more
       discipline and accountability, but at the same time maintain
       decentralized operations, so that authority is still close to the
       customer; and

     - Restoring a capital expenditure policy that focuses on the internal
       growth rather than the external growth of the Company.

  1999 Accounting Charges and Adjustments

     During 1999, the Company initiated a comprehensive internal review of its
accounting records, systems, processes and controls at the direction of its
Board of Directors. As discussed below, and in Note 2 to the consolidated
financial statements, the Company experienced significant difficulty in the
integration and conversion of information and accounting systems subsequent to
the Company, then known as USA Waste Services, Inc., completing its merger with
WM Holdings, which was accounted for as a pooling of interests (the "WM Holdings
Merger"). As a result of these systems and process issues, and other issues
raised during the 1999 accounting review, certain charges and adjustments were
recorded, as discussed below. The review was completed in time such that the
Company was able to record related adjustments in its financial statements for
the quarter ended September 30, 1999. The amounts recorded by the Company as a
result of the review had a material effect on its financial statements for the
year ended December 31, 1999. The

                                        17
<PAGE>   20

following is a summary of charges attributable to this review which were
recorded for the quarter ended September 30, 1999 (in millions):

<TABLE>
<S>                                                           <C>   <C>
Held-for-sale adjustments...................................        $  414
Increase to allowance for doubtful accounts and other
  accounts receivable adjustments...........................           212
Asset impairments (excluding held-for-sale adjustments).....           178
Insurance reserves and other insurance adjustments..........           148
Legal, severance and consulting accruals....................           142
Merger and acquisition related costs........................            32
Other charges and adjustments, including:
  Account reconciliations...................................  348
  Loss contract reserve adjustments.........................   49
  Increase in environmental liabilities.....................   49
  Other.....................................................  191      637
                                                              ---   ------
Impact of charges before income tax benefit.................         1,763
Income tax benefit..........................................          (537)
                                                                    ------
After-tax charges...........................................        $1,226
                                                                    ======
</TABLE>

     The charges described above, which include both recurring and nonrecurring
items that have been aggregated for this presentation, are reflected in the
Company's financial statements for the year ended December 31, 1999, as follows
(in millions):
<TABLE>
<CAPTION>
                                                    ALLOWANCE
                                                       FOR
                                                     DOUBTFUL
                                                     ACCOUNTS                    INSURANCE      LEGAL,
                                                    AND OTHER                    RESERVES     SEVERANCE    MERGER AND
                                      HELD-FOR-      ACCOUNTS                    AND OTHER       AND       ACQUISITION
                                        SALE        RECEIVABLE    OTHER ASSET    INSURANCE    CONSULTING     RELATED
                                     ADJUSTMENTS   ADJUSTMENTS    IMPAIRMENTS   ADJUSTMENTS    ACCRUALS       COSTS
                                     -----------   ------------   -----------   -----------   ----------   -----------
<S>                                  <C>           <C>            <C>           <C>           <C>          <C>
Operating revenues.................   $      --     $     (44)     $      --     $      --    $      --     $     --
                                      ---------     ---------      ---------     ---------    ---------     --------
Costs and expenses:
 Operating (exclusive of
   depreciation and amortization
   shown below)....................          --            --             --           143           --           --
 General and administrative........          --           168             --             5           58           --
 Depreciation and amortization.....          --            --             --            --           --           --
 Merger and acquisition related
   costs...........................          --            --             --            --           --           32
 Asset impairments and unusual
   items...........................         414            --            178            --           84           --
                                      ---------     ---------      ---------     ---------    ---------     --------
                                            414           168            178           148          142           32
                                      ---------     ---------      ---------     ---------    ---------     --------
Loss from operations...............        (414)         (212)          (178)         (148)        (142)         (32)
                                      ---------     ---------      ---------     ---------    ---------     --------
Other income (expense)
 Interest expense..................          --            --             --            --           --           --
 Interest income...................          --            --             --            --           --           --
 Minority interest.................          --            --             --            --           --           --
 Other income (expense)............          --            --             --            --           --           --
                                      ---------     ---------      ---------     ---------    ---------     --------
                                             --            --             --            --           --           --
                                      ---------     ---------      ---------     ---------    ---------     --------
Loss before income taxes and
 extraordinary items...............   $    (414)    $    (212)     $    (178)    $    (148)   $    (142)    $    (32)
                                      =========     =========      =========     =========    =========     ========
Benefit from income taxes..........
Net loss...........................

<CAPTION>

                                                       TOTAL
                                        OTHER        (INCLUDES
                                       CHARGES     RECURRING AND
                                         AND       NON-RECURRING
                                     ADJUSTMENTS      ITEMS)
                                     -----------   -------------
<S>                                  <C>           <C>
Operating revenues.................   $      13     $       (31)
                                      ---------     -----------
Costs and expenses:
 Operating (exclusive of
   depreciation and amortization
   shown below)....................         423             566
 General and administrative........         172             403
 Depreciation and amortization.....          60              60
 Merger and acquisition related
   costs...........................          --              32
 Asset impairments and unusual
   items...........................           3             679
                                      ---------     -----------
                                            658           1,740
                                      ---------     -----------
Loss from operations...............        (645)         (1,771)
                                      ---------     -----------
Other income (expense)
 Interest expense..................           1               1
 Interest income...................          13              13
 Minority interest.................          --              --
 Other income (expense)............          (6)             (6)
                                      ---------     -----------
                                              8               8
                                      ---------     -----------
Loss before income taxes and
 extraordinary items...............   $    (637)         (1,763)
                                      =========
Benefit from income taxes..........                         537
                                                    -----------
Net loss...........................                 $    (1,226)
                                                    ===========
</TABLE>

                                        18
<PAGE>   21

     Subsequent to the completion of the accounting review, and in conjunction
with the process of preparing its monthly financial statements during the fourth
quarter of 1999 and its financial statements at December 31, 1999, additional
adjustments attributable to the reconciliation of intercompany accounts, cash,
accounts receivable, fixed assets, accounts payable and certain other accounts
were recorded.

     The Company recorded significant adjustments in the third and fourth
quarters of 1999, certain of which affect periods prior to these quarters.
Accordingly, the Company, after consultation with its independent public
accountants, concluded that its internal controls for the preparation of interim
financial information did not provide an adequate basis for its independent
public accountants to complete reviews of the quarterly financial data for the
quarters during 1999. The Company believes that certain charges that were
recorded in the third and fourth quarters of 1999 may relate to individual prior
periods; however, the Company does not have sufficient information to identify
all specific charges attributable to prior periods. If identification of all
specific charges attributable to individual prior periods was possible, the
Company believes that the reported results of operations presented in Note 21 to
the consolidated financial statements for the third and fourth quarters of 1999
would have been favorably impacted, and the reported results of operations for
the first and second quarters of 1999 would have been adversely impacted. The
Company concluded, based on its quantitative and qualitative analysis of
available information, after consultation with its independent public
accountants, that it did not have, nor was it able to obtain, sufficient
information to conclude what amount of the charges relate to any individual
prior year, although qualitative analysis indicates that these charges are
principally related to 1999. Accordingly, the Company has concluded that these
charges were appropriately reflected in the 1999 annual financial statements.

     The Company believes that the processes it used for the preparation of its
quarterly 2000 interim financial statements have improved. In addition, the
Company has committed substantial resources to mitigate the previously
identified control weaknesses. Management believes these efforts have enabled
the Company to produce timely and reliable interim financial statements during
2000.

     See Note 2 to the consolidated financial statements included elsewhere
herein for additional discussion.

                                        19
<PAGE>   22

RESULTS OF OPERATIONS

     The following table presents, for the periods indicated, the period to
period change in dollars (in millions) and percentages for the various
statements of operations line items.

<TABLE>
<CAPTION>
                                                                 PERIOD TO PERIOD CHANGE
                                                    --------------------------------------------------
                                                         YEARS ENDED                 YEARS ENDED
                                                    DECEMBER 31, 2000 AND       DECEMBER 31, 1999 AND
                                                             1999                        1998
                                                    ----------------------      ----------------------
<S>                                                 <C>           <C>           <C>            <C>
STATEMENT OF OPERATIONS:
Operating revenues................................   $  (635)        (4.8)%      $   501          4.0%
                                                     -------                     -------
Costs and expenses:
  Operating (exclusive of depreciation and
     amortization shown below)....................      (731)        (8.8)           986         13.5
  General and administrative......................      (182)        (9.5)           587         44.0
  Depreciation and amortization...................      (185)       (11.5)           115          7.7
  Merger and acquisition related costs............       (45)      (100.0)        (1,762)       (97.5)
  Asset impairments and unusual items.............        10          1.4           (125)       (14.5)
                                                     -------                     -------
                                                      (1,133)        (9.0)          (199)        (1.6)
                                                     -------                     -------
Income (loss) from operations.....................       498         92.2            700        437.5
                                                     -------                     -------
Other income (expense):
  Interest expense................................        22          2.9            (88)       (12.9)
  Interest and other income, net..................       (37)       (40.7)           (75)       (45.2)
  Minority interest...............................         1          4.2             --          0.0
                                                     -------                     -------
                                                         (14)        (2.0)          (163)       (30.2)
                                                     -------                     -------
Income (loss) before income taxes and
  extraordinary item..............................       484        296.9            537         76.7
Provision for income taxes........................       186         80.2            165        246.3
                                                     -------                     -------
Loss before extraordinary item....................       298         75.4            372         48.5
Extraordinary item................................         3        100.0              1         25.0
                                                     -------                     -------
Net loss..........................................   $   301         75.6%       $   373         48.4%
                                                     =======                     =======
</TABLE>

                  See Management's Discussion and Analysis --
                    1999 Accounting Charges and Adjustments.

                                        20
<PAGE>   23

     The following table presents, for the periods indicated, the percentage
relationship that the various statements of operations line items bear to
operating revenues:

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                                            --------------------------
                                                            2000       1999      1998
                                                            -----     ------     -----
<S>                                                         <C>       <C>        <C>
STATEMENT OF OPERATIONS:
Operating revenues........................................  100.0%     100.0%    100.0%
                                                            -----     ------     -----
Costs and expenses:
  Operating (exclusive of depreciation and amortization
     shown below).........................................   60.4       63.0      57.7
  General and administrative..............................   13.9       14.6      10.6
  Depreciation and amortization...........................   11.4       12.3      11.9
  Merger and acquisition related costs....................     --        0.4      14.3
  Asset impairments and unusual items.....................    6.0        5.6       6.8
                                                            -----     ------     -----
                                                             91.7       95.9     101.3
                                                            -----     ------     -----
Income (loss) from operations.............................    8.3        4.1      (1.3)
                                                            -----     ------     -----
Other income (expense):
  Interest expense........................................   (6.0)      (5.8)     (5.4)
  Interest and other income, net..........................    0.4        0.7       1.3
  Minority interest.......................................   (0.2)      (0.2)     (0.2)
                                                            -----     ------     -----
                                                             (5.8)      (5.3)     (4.3)
                                                            -----     ------     -----
Income (loss) before income taxes and extraordinary
  item....................................................    2.5       (1.2)     (5.6)
Provision for income taxes................................    3.3        1.8       0.5
                                                            -----     ------     -----
Loss before extraordinary item............................   (0.8)      (3.0)     (6.1)
Extraordinary item........................................     --         --        --
                                                            -----     ------     -----
Net loss..................................................   (0.8)%     (3.0)%    (6.1)%
                                                            =====     ======     =====
</TABLE>

                  See Management's Discussion and Analysis  --
                    1999 Accounting Charges and Adjustments.

                                        21
<PAGE>   24

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2000

  Operating Revenues

     Operating revenues for 2000 were $12.5 billion, compared with $13.1 billion
in 1999 and $12.6 billion in 1998. The higher revenues in 1999 reflect
acquisitions of solid waste businesses in North America. The decrease in
revenues in 2000 is primarily due to the divestitures of WM International and
non-solid waste operations during the year.

     Operating revenues by reportable segment (in millions):

                               OPERATING REVENUES

                              [PERFORMANCE GRAPH]

     NASW operating revenue mix (in millions):

                               OPERATING REVENUES

                              [PERFORMANCE GRAPH]

     NASW operating revenues increased in 2000 from 1999 primarily due to
internal growth of comparable operations of 1.4% (or $150 million) from pricing
increases and 2.5% (or $267 million) from volume increases. During the first
half of 2000, the pricing in the recyclable materials markets favorably impacted

                                        22
<PAGE>   25

overall pricing increases. However, during the second half of 2000 the
recyclable materials market experienced a significant downturn that offset the
improvements experienced earlier in the year. Additionally, the Company
implemented a fuel surcharge in March 2000 to mitigate the significant increase
in the cost of fuel. Excluding the impact of price increases in the commodity
markets for recyclable materials, and the fuel surcharge that was implemented,
there was a price increase of 0.6% in 2000 compared to 1999. Acquisitions of
NASW businesses during 2000 and the full year effect of acquisitions that were
completed in 1999 accounted for an increase in operating revenues of
approximately $286 million for 2000, as compared to 1999. The primary offset to
the increase in operating revenues was the divestiture of certain non-integrated
NASW operations. However, the foreign currency fluctuations with the Canadian
dollar also negatively impacted operating revenues during 2000.

     NASW operating revenues in 1999 were lower than expected due to substantial
difficulties in the integration of operations after the mergers with WM Holdings
on July 16, 1998 and Eastern Environmental Services on December 31, 1998,
including the information systems (particularly the billing systems) and related
work flow. In 1999, the Company experienced significant difficulty in the
conversion from the WM Holdings' information systems to the systems currently in
use, resulting in delays and errors, particularly with the billing systems,
including delays in submitting bills to customers and errors in both computing
and delivering bills. Staffing levels were insufficient to address customer
complaints and disputes and did not support timely follow-up with customers.
Billing system issues initially became evident in the second quarter of 1999 as
receivable aging levels rose. At that time, management believed that the
increase in receivables was a short-term issue, receivables would return to
historical levels once the billing system conversions were complete and there
was not a significant collectability issue with its recorded receivables. In
connection with the 1999 accounting review, it was concluded that certain of
these accounts had deteriorated to the point that they may be uncollectable, and
therefore, a significant increase in the allowance for doubtful accounts was
recorded in the third quarter of 1999. These events also contributed a higher
than usual provision for uncollectable accounts in the fourth quarter of 1999.
Beginning in the third quarter of 1999, resources dedicated to receivable
collection efforts were increased on both a temporary and permanent basis and
the billing systems began to stabilize. In 2000, the Company was successful in
collecting certain accounts that were reserved for in 1999.

     Acquisitions of NASW business during 1999 and the full year effect of
acquisitions which were completed in 1998 accounted for an increase in operating
revenues of approximately $616 million for 1999, as compared to 1998. NASW
operating revenues also increased from internal growth of comparable operations
of 2.6% for 1999, as compared to 1998. The Company believes that its internal
revenue growth in 1999 was detrimentally affected by certain inflexibilities in
its pricing strategy and the lack of responsiveness of that strategy to
localized competitive conditions, resulting in lost customers and volumes.
Offsetting the increase in operating revenues were divestitures of NASW
businesses with revenues of approximately $290 million, as well as other
business factors that comprised the remaining differences, including the foreign
currency fluctuations with the Canadian dollar.

     The operating revenues from the WM International operations increased from
1998 to 1999 by approximately 7.6%. This increase was primarily due to
acquisitions of businesses, primarily in Denmark and Australia. However, in
2000, WM International operating revenue decreased as the Company began selling
its WM International operations on a country by country basis. As of December
31, 2000, the Company had certain operations in Sweden, and also operated
outside of North America in Argentina and Israel.

     Operating revenues for the non-solid waste services decreased from 1998 to
2000 due to divestitures of several non-core businesses. Non-solid waste
operating revenues are expected to decrease in 2001 because the Company is
actively marketing for sale the remaining non-solid waste operations.

  Operating Costs and Expenses (Exclusive of Depreciation and Amortization Shown
  Below)

     Operating costs and expenses decreased $731 million or 8.8% for 2000, as
compared to 1999, and increased $986 million or 13.5% for 1999, as compared to
1998. As a percentage of operating revenues, operating costs and expenses
increased from 57.7% in 1998 to 63.0% in 1999 and were 60.4% in 2000.

                                        23
<PAGE>   26

     From 1998 to 2000, operating costs and expenses as a percentage of
operating revenues fluctuated from period to period, primarily due to the
effects of the Company's integration plan adopted in connection with the WM
Holdings Merger in July 1998. See "Operating Revenues" above.

     In 1998, soon after the merger with WM Holdings, the Company experienced
reductions, both in amount and as a percentage of operating revenues, in its
operating costs and expenses as a result of the reductions in employee headcount
and the elimination of excess operating assets that were either sold or
abandoned pursuant to the merger integration plan. The Company believes that the
reductions in employee headcount and the disposition of excess operating assets
resulted in short-term cost efficiencies in 1998.

     In 1999, the Company continued the implementation of its merger integration
plan. However, due to the breadth and comprehensive nature of the changes the
Company attempted to implement in the first half of 1999, the Company was unable
to sustain the effectiveness of the plan. Operating costs and expenses increased
significantly as a percentage of revenues in second half of 1999 and throughout
2000 because the short-term cost reductions experienced in 1998 could not be
sustained in 1999 due to the operational difficulties encountered by the
Company. However, in the second half of 2000, the Company started reviewing its
procurement practices and started developing more standardized operating
procedures and expects operating costs and expenses as a percentage of operating
revenues to decrease in 2001.

     As part of its ongoing operations, the Company reviews its liability
requirements for remediation and other environmental matters based on an
analysis of, among other things, the regulatory context surrounding landfills,
site-specific environmental issues and remaining airspace capacity in light of
changes to operational efficiencies. Accordingly, revisions to remediation
liability requirements may result in upward or downward adjustments to income
from operations in any given period. Adjustments for final closure and
post-closure estimates are accounted for prospectively over the remaining
capacity of the operating landfill. The impact of revisions to remedial
environmental and other similar liabilities resulted in reductions of operating
costs and expenses as a percentage of revenues in the amount of 0.5% and 0.9% in
1999 and 1998, respectively.

  General and Administrative Expenses

     General and administrative expenses decreased $182 million or 9.5% from
1999 to 2000 and increased $587 million or 44.0% from 1998 to 1999. As a
percentage of operating revenues, the Company's general and administrative
expense was 13.9% for 2000, 14.6% for 1999 and 10.6% for 1998.

     As discussed above, the Company believes it experienced short-term cost
reductions related to the elimination of duplicate corporate administrative
functions from the merger with WM Holdings in 1998 and the first half of 1999.
However, in the second half of 1999 and into early 2000, those cost reductions
were substantially offset by the effect of difficulties encountered by the
Company in integrating the operations of WM Holdings. A major component of the
increased costs was increased administrative costs in field operations to
perform billing, collection and other administrative functions.

     In 2000, particularly the first half, the Company incurred significant
costs in professional accounting and process improvement consulting services
related to process improvement initiatives and accounting assistance that began
as part of the 1999 accounting review. By the second half of 2000, the Company
had stabilized its accounting systems and completed its process improvement
initiatives, significantly reducing the ongoing need for these consulting
services. Additionally, the Company incurred significant consulting costs in
2000 related to the future implementation of new enterprise information systems,
the need for which was identified as part of the Company's 1999 strategic plan
discussed above. In 2000, the Company incurred approximately $196 million
related to professional accounting and process improvement consulting services
and consulting services related to the future implementation of new enterprise
information systems. In 2000, the Company also incurred approximately $51
million related to its efforts to divest operations, to improve its billing
systems and verify its customer base, and for legal fees related to certain
shareholder litigation and other SEC matters. As discussed in "Operating
Revenues" above, the Company was successful in collecting certain accounts that
were reserved for in 1999. Collection of those accounts favorably impacted the
Company's provision for bad debt in 2000. The Company recorded provisions for
bad debts of $14 million and $268 million in 2000 and 1999, respectively. The
Company also experienced permanent staffing increases at the corporate office in
2000
                                        24
<PAGE>   27

particularly in the area of information systems and corporate accounting and
finance. The Company expects that advances in its information systems and
business processes will result in better information for making operational and
strategic decisions as well as permanent reductions in field administrative
costs in future periods.

     General and administrative expenses for 1999 included $403 million in
adjustments resulting from the 1999 accounting review, some of which are
recurring in nature and should be expected in future periods. These significant
adjustments include an increase of $168 million relative to the allowance for
doubtful accounts and include $63 million in costs for insurance adjustments,
accounting, legal and other professional services. These costs are primarily
related to litigation and investigations conducted by the Company in 1999. See
discussion in "Operating Revenues" and "Operating Costs and Expenses" above, of
the Company's substantial difficulties in integrating the operations of WM
Holdings subsequent to the WM Holdings Merger.

  Depreciation and Amortization

     Depreciation and amortization expense decreased $185 million or 11.5% in
2000, and increased $115 million or 7.7% in 1999, as compared to 1998. As a
percentage of operating revenues, depreciation and amortization expense was
11.4% in 2000, 12.3% in 1999 and 11.9% in 1998.

     The decrease in depreciation and amortization expense as a percentage of
operating revenues in 2000 compared to 1999 is primarily due to the suspension
of depreciation in 2000 on fixed assets related to certain operations which were
held-for-sale and the depreciation and amortization expense that was recorded in
1999 related to operations classified as held-for-sale in the fourth quarter of
1999 and divested in 2000. The depreciation suspension for 2000 for these
held-for-sale operations prior to those operations being sold was $99 million,
or 0.8% of operating revenues. The depreciation suspended in 1999 for operations
held-for-sale, which all occurred in the fourth quarter of 1999, was $46
million, or 0.3% of operating revenues. However, these decreases in depreciation
and amortization expense were partially offset by increased landfill airspace
amortization in 2000 due to an increase in disposal volumes at the Company's
landfills. Additionally, for 2000, the Company experienced higher airspace
amortization expense as compared to the prior years, due to higher airspace
amortization rates as a result of its more stringent set of criteria for
evaluating the probability of obtaining airspace expansions which was effective
as of the third quarter of 1999. The increase in depreciation and amortization
expense in 1999 as compared to 1998, after considering the suspension of
depreciation for held-for-sale operations in 1999, is primarily a result of the
Company's acquisition activity in 1999 and the full year impact of acquisitions
in 1998.

  Merger and Acquisition Related Costs, Asset Impairments and Unusual Items

     In 2000, 1999 and 1998, the Company had significant charges related to
merger and acquisition related costs and asset impairments and unusual items. In
1998, these charges primarily related to the Company's merger integration plans
and related business reviews associated with the mergers with WM Holdings and
Eastern Environmental Services. The merger integration plans included
significant employee severance costs, restructuring costs, transaction costs and
changes in certain employee benefit programs, as well as charges for businesses
to be sold and assets to be abandoned. The 1998 business review included charges
for losses on contractual commitments and changes in estimates on the ultimate
losses for certain legal and environmental issues and related costs. In 1999,
these charges were primarily identified in the 1999 accounting review or
resulted from the Company's strategic plan discussed above. In 2000, these costs
were primarily due to the sale of most of the Company's WM International
operations as part of the Company's strategic plan and the termination of the WM
Holding's defined benefit pension plan. See Notes 4, 13 and 16 to the
consolidated financial statements.

  Interest Expense

     The decrease in interest expense in 2000, as compared to 1999, is primarily
due to the net debt reduction in 2000 from proceeds related to the Company's
divestiture program and cash flows from operations. The increase in interest
expense in 1999, as compared to 1998, is due to higher average levels of
outstanding

                                        25
<PAGE>   28

indebtedness during the respective years and also a decline in the Company's
public credit rating, which began in the last six months of 1999 and caused the
Company to increase its use of more costly bank credit facilities instead of the
previously used commercial paper. Also contributing to period to period changes
in interest expense is the offsetting decrease in the amount of interest that
the Company has capitalized during these years. The Company capitalized interest
of $22 million, $34 million and $42 million for 2000, 1999 and 1998,
respectively.

  Provision for Income Taxes

     The Company recorded a provision for income taxes of $418 million, $232
million and $67 million for 2000, 1999 and 1998, respectively, resulting in an
effective income tax rate of 130.2%, 142.3% and 9.6% for each of the three
years, respectively. The difference in federal income taxes computed at the
federal statutory rate and reported income taxes for these years is primarily
due to state and local income taxes, non-deductible costs related to acquired
intangibles, non-deductible costs associated with the impairment and divestiture
of certain businesses and other 1999 charges and adjustments as discussed in
Note 2 to the consolidated financial statements, and the cost associated with
remitting the earnings of certain foreign subsidiaries, which are no longer
permanently reinvested. Excluding non-deductible held-for-sale impairment
charges associated with certain businesses, non-deductible losses on the
divestiture of assets that closed during the period and other unusual items, the
Company's tax provision would have been 40.9% of pre-tax income for 2000.

LIQUIDITY AND CAPITAL RESOURCES

     The Company operates in an industry that requires a high level of capital
investment. The Company's capital requirements primarily stem from (i) its
working capital needs for its ongoing operations, (ii) capital expenditures for
construction and expansion of its landfill sites, as well as new trucks and
equipment for its collection operations, (iii) refurbishments and improvements
at its waste-to-energy facilities and (iv) business acquisitions. The Company's
strategy is to meet these capital needs first from internally generated funds.
Historically, the Company has also obtained financing from various financing
sources available to the Company at the time, including the incurrence of debt
and the issuance of its common stock. In August 1999, the Company announced a
strategic plan that included the sale of its WM International operations, its
non-core operations and selected NASW operations. The proceeds from these
dispositions, which were primarily realized in 2000, were used for debt
repayment. At both December 31, 2000 and March 8, 2001, the Company has unused
and available credit capacity under its bank credit facilities of $1.3 billion.
The Company believes that these levels of credit capacity are sufficient to meet
its ongoing operating requirements.

     The following is a summary of the Company's cash flows statements for the
years ended December 31, 2000, 1999 and 1998 (in millions):

<TABLE>
<CAPTION>
                                                           2000      1999      1998
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Operating activities....................................  $ 2,125   $ 1,689   $ 1,502
Investing activities....................................    1,072    (2,017)   (4,555)
Financing activities....................................   (3,279)      426     2,956
</TABLE>

     In 1999 and 1998, cash flows from operations were negatively impacted by
the implementation of Company's merger integration plans for the mergers with WM
Holdings and Eastern Environmental Services, and the subsequent operational and
administrative difficulties discussed above. In 1998, the Company spent
approximately $3.6 billion on the acquisition of businesses and outstanding
minority interest positions, as well as approximately $1.7 billion on capital
expenditures. These investing activities in 1998 were primarily funded by cash
flows from operations, net debt borrowings of approximately $2.0 billion,
proceeds from sales of assets of approximately $545 million and proceeds from
the sale of common and treasury stock of approximately $945 million. In 1999,
the Company spent approximately $1.3 billion on acquisitions of businesses and
approximately $1.3 billion on capital expenditures. These investing activities
were funded by cash flows from operations, net debt borrowings of approximately
$259 million and proceeds from the sale of assets of approximately $651 million.

                                        26
<PAGE>   29

     In 2000, cash flows from operations were impacted by several factors that
the Company considers to be unusual, including costs for professional accounting
fees and consulting activities associated with stabilizing and improving the
accounting systems and developing new enterprise information systems discussed
above. The following summary of free cash flows has been prepared to highlight
and facilitate understanding of the primary cash flow elements. It is not
intended to replace the consolidated statement of cash flows for 2000, which was
prepared in accordance with generally accepted accounting principles. Adjusted
free cash flow in the table below, which is not a measure of financial
performance in accordance with generally accepted accounting principles, is
defined as cash flows from operations less capital expenditures and then
adjusted for certain cash flow activity that the Company considers as unusual
for the year (in millions).

<TABLE>
<S>                                                           <C>
EBITDA(a)...................................................  $ 3,216
Interest paid...............................................     (750)
Taxes paid..................................................     (135)
Change in assets and liabilities, net of effects of
  acquisitions and divestitures, and other..................     (206)
                                                              -------
Net cash provided by operating activities...................    2,125
Capital expenditures........................................   (1,313)
                                                              -------
Free cash flow..............................................      812
Adjustments:
  Tax refund................................................     (199)
  Payments for terminating the WM Holdings' defined benefit
     pension plan...........................................      153
  Accounting and consulting services........................      196
  Litigation settlements....................................       61
  Reimbursement for late allocation of employee stock
     purchase plan shares...................................        8
  Other.....................................................       52
                                                              -------
Adjusted free cash flow.....................................  $ 1,083
                                                              =======
</TABLE>

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

(a)  EBITDA is defined as income from operations excluding depreciation and
     amortization, merger and acquisition related costs and asset impairments
     and unusual items. EBITDA, which is not a measure of financial performance
     under generally accepted accounting principles, is provided because the
     Company understands that such information is used by certain investors when
     analyzing the financial position and performance of the Company.

     Consistent with the strategic initiative discussed above, in 2000 the
Company had a net debt reduction of approximately $3.3 billion funded through
its divestiture program and cash flows from operations.

     Under the terms of the Company's $1.5 billion syndicated loan facility (the
"Syndicated Facility") and its $1.4 billion senior revolving credit facility
(the "Credit Facility"), the Company is obligated to repay the borrowings under
the facilities with the cash proceeds received from the strategic plan
divestitures. The Company was required to use all of the first $1.5 billion of
net proceeds from the divestitures to repay indebtedness, which it has done.
Additionally, the Company is required to use 50% of the additional cash proceeds
greater than $1.5 billion and up to $2.5 billion from divestitures to repay the
indebtedness under the Syndicated and Credit Facilities. As of December 31,
2000, the Company had received cash proceeds of approximately $2.5 billion from
its divestitures, approximately $175 million of which was used to repay the
Company's Eurocurrency facilities in the second quarter of 2000, approximately
$100 million was used for repayment of divestiture subsidiary debts and the
remainder of which has been used to repay indebtedness under the bank credit
facilities.

     On July 17, 1998, the Company issued $600 million of 6 1/8% mandatorily
tendered senior notes, due July 15, 2011. This debt instrument is subject to
certain mandatory tender features as described in the indenture, which may
require the purchase by the Company of a portion of or all of the outstanding
notes on July 15, 2001. The Company intends to either refinance these notes or
use borrowings available under the Syndicated Facility and/or the Credit
Facility in the event it must purchase the notes on July 15, 2001. Accordingly,
these borrowings have been classified as long-term at December 31, 2000.

                                        27
<PAGE>   30

     In February of 2001 the Company issued $600 million of 7 3/8% senior
unsecured notes due August 1, 2010. Interest is payable semi-annually on
February 1 and August 1. The net proceeds from the sale of the notes are
approximately $593 million, after deducting discounts to the underwriters and
estimated expenses of the offering. The Company intends to use the net proceeds,
together with cash on hand, to repay in full the $200 million principal amount
outstanding under the 6% Senior Notes due May 15, 2001, the $200 million
principal amount outstanding under the 6.70% Senior Notes due May 1, 2001, and
the $200 million principal amount outstanding under the 7 1/8% Senior Notes due
June 15, 2001. Pending application of the proceeds as described, the proceeds
will be invested temporarily in short-term investments or be used to reduce
short-term borrowings.

RECENT DEVELOPMENTS

     The Company has proposed a settlement to resolve a consolidated derivative
action pending in the Chancery Court of the State of Delaware. The derivative
action was brought against several former officers and directors of Waste
Management Holdings and seeks, among other things, reimbursement of those monies
expended by Waste Management Holdings and the Company in resolving all claims
brought against WM Holdings arising out of its February 1998 restatement of
earnings. The terms of the settlement include a payment to the Company of $15
million by certain of WM Holdings' insurance carriers and the complete
resolution of all pending claims for retirement benefits between certain former
officers of WM Holdings and the Company. The resolution of the actions for
retirement benefits involves the release by the former executives who brought
claims against the company for certain amounts otherwise owing under the
retirement plans. The total benefits to the Company from the settlement of the
derivative case is approximately $23 million.

ENVIRONMENTAL MATTERS

     The Company has material financial commitments for the costs associated
with its future obligations for final closure, which is the closure of the
landfills and the capping of the final uncapped areas of the landfills, and for
post-closure of the landfills it operates or for which it is otherwise
responsible. The final closure and post-closure liabilities are charged to
expense as airspace is consumed such that the present value of total estimated
final closure and post-closure cost will be accrued for each landfill at the
time each site discontinues accepting waste and is closed. The Company has also
established procedures to evaluate its potential remedial liabilities at closed
sites which it owns or operated, or to which it transported waste, including 79
sites listed on the EPA's National Priority List ("NPL"). The majority of
situations involving NPL sites relate to allegations that subsidiaries of the
Company (or their predecessors) transported waste to the facilities in question,
often prior to the acquisition of such subsidiaries by the Company. In instances
in which the Company has concluded that it is probable that a liability has been
incurred, an accrual has been recorded in the financial statements.

     Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services business, as well as its
involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. As additional information becomes available,
estimates are adjusted as necessary. While the Company does not anticipate that
any such adjustment would be material to its financial statements, it is
reasonably possible that technological, regulatory or enforcement developments,
the results of environmental studies, the nonexistence or inability of other
potentially responsible third parties to contribute to the settlements of such
liabilities, or other factors could necessitate the recording of additional
liabilities which could have a material adverse impact on the Company's
financial statements.

     While the precise amount of these future costs cannot be determined with
certainty, the Company has estimated that the aggregate cost of environmental
liabilities as of December 31, 2000 is approximately $2.8 billion. As of
December 31, 2000 and 1999, the Company had recorded liabilities of $613 million
and $600 million, respectively, for the present value of final closure and
post-closure costs of disposal facilities. The
                                        28
<PAGE>   31

difference between the final closure and post-closure costs accrued at December
31, 2000, and the total present value of estimated costs represents final
closure and post-closure costs that will be accrued and charged to expense as
airspace is consumed such that the total present value of estimated final
closure and post-closure costs to be incurred will be fully accrued for each
landfill at the time each site discontinues accepting waste and is closed. The
average landfill final closure and post-closure expense, on a per ton basis, for
the 305 landfills operating at December 31, 2000 was $0.30 per ton. As of
December 31, 2000 and 1999, the Company had recorded liabilities of $349 million
and $377 million, respectively, for the present value of remediation costs of
disposal facilities. For fiscal 2001, we expect to spend approximately $153
million for our final closure, post-closure and remediation expenditures.

     As of December 31, 2000, the Company also expects to incur approximately
$6.9 billion related to future construction activities during the remaining
operating lives of the disposal sites, which are capitalized as incurred and
expensed over the useful lives of the disposal sites as airspace is consumed.
The average landfill airspace amortization cost per ton for the 305 landfills
operating at December 31, 2000 was $3.84 per ton.

SEASONALITY AND INFLATION

     The Company's operating revenues tend to be somewhat lower in the winter
months, which corresponds with the Company's first and fourth quarters. This is
primarily attributable to the facts that (i) the volume of waste relating to
construction and demolition activities tends to increase in the spring and
summer months and (ii) the volume of industrial and residential waste in certain
regions where the Company operates tends to decrease during the winter months.

     The Company believes that inflation has not had, and is not expected to
have, any material adverse effect on the results of operations in the near
future.

NEW ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133," and SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- an Amendment of FASB Statement No.
133," which deferred the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000, is effective for the Company as of January 1, 2001. SFAS
No. 133, as amended, establishes accounting and reporting standards requiring
that all derivative instruments, including certain derivative instruments
embedded in other contracts, be recorded as either assets or liabilities
measured at fair value. SFAS 133, as amended, requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the resulting
designation. The Company adopted SFAS 133 on January 1, 2001. As of January 1,
2001, the cumulative effect of such change in accounting for derivative
instruments to fair value is expected to result in a gain, net of taxes of
approximately $2 million in the first quarter of 2001.

     In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB No. 101"). SAB No. 101 provides registrants guidance
on the recognition, presentation and disclosure of revenue in financial
statements and was required to be adopted by the Company in the fourth quarter
of 2000. Since our policies were already compliant with SAB No. 101, no material
changes to revenue recognition occurred.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

     In the normal course of business, the Company is exposed to market risk,
including changes in interest rates, currency exchange rates, certain commodity
prices and certain equity prices. From time to time, the Company and certain of
its subsidiaries use derivatives to manage some portion of these risks. The
derivatives used are simple agreements that provide for payments based on the
notional amount, with no multipliers or leverage. All derivatives are related to
actual or anticipated exposures of transactions of the Company. While
                                        29
<PAGE>   32

the Company is exposed to credit risk in the event of non-performance by
counterparties to derivatives, in all cases such counterparties are highly rated
financial institutions and the Company does not anticipate non-performance. The
Company does not hold or issue derivative financial instruments for trading
purposes. The Company monitors its derivative positions by regularly evaluating
the positions at market and by performing sensitivity analyses.

     The Company has performed sensitivity analyses to determine how market rate
changes will affect the fair value of the Company's market risk sensitive
derivatives and related positions. Such an analysis is inherently limited in
that it represents a singular, hypothetical set of assumptions. Actual market
movements may vary significantly from the Company's assumptions. The effects of
such market movements may also directly or indirectly affect the Company's
assumptions and its rights and obligations not covered by sensitivity analysis.
Fair value sensitivity is not necessarily indicative of the ultimate cash flow
or earnings effect on the Company from the assumed market rate movements.

     Interest Rate Exposure.  The Company's exposure to market risk for changes
in interest rates relates primarily to the Company's debt obligations, which are
mainly denominated in U.S. dollars. In addition, interest rate swaps are
generally used to either lock-in or limit the variability in the interest
expense of certain floating rate debt obligations or to manage the mix of fixed
and floating rate debt obligations. An instantaneous, one percentage point
increase in interest rates across all maturities and applicable yield curves
would increase the fair value of the Company's combined debt and interest rate
swap positions at December 31, 2000 and 1999 by approximately $403 million and
$443 million, respectively. This analysis does not reflect the effect that
declining interest rates would have on other items such as pension liabilities,
nor the favorable impact they would have on interest expense and cash payments
for interest. Since a significant portion of the Company's debt is at fixed
rates, changes in market interest rates would not significantly impact operating
results until and unless such debt would need to be refinanced at maturity.

     Currency Rate Exposure.  The Company incurred exchange rate risk from
borrowings denominated in foreign currencies at December 31, 1999. An
instantaneous, ten percent increase in foreign exchange rates would have
decreased the fair value of the Company's foreign currency borrowings by
approximately $43 million. The Company had no foreign currency borrowings at
December 31, 2000.

     Commodities Price Exposure.  The Company markets recycled paper products
such as old newspaper ("ONP") and old corrugated containers ("OCC"). The Company
started entering into financial swaps in 1999 in an effort to mitigate the risk
of recyclable paper price fluctuations. Under its financial swap agreements, the
Company transfers a floating market price for a fixed price for a fixed period
of time. The two parties agree to use a market index as an indicator of the
market price during the term of the swap. An instantaneous ten percent increase
in this commodity at December 31, 2000 and 1999 creates an exposure risk of
approximately $7 million and $50,000, respectively. The increase in exposure
risk from 1999 to 2000 is attributable to the greater number of financial swap
agreements that were outstanding at the end of the respective periods. All of
the Company's waste paper hedges are cash settled on a monthly basis with the
counterparty.

     Equity Price Exposure.  The Company is also subject to equity price
exposure from Company debt issues that are convertible into the Company's common
stock. These debt issues had an aggregate carrying value of $566 million and
$962 million as of December 2000 and 1999, respectively. An instantaneous, ten
percent decrease in the Company's stock price on December 31, 2000 and 1999,
would increase the fair value of the Company's convertible debt by approximately
$11 million and $12 million, respectively.

     See Notes 3 and 10 to the consolidated financial statements for further
discussion of the use of and accounting for derivative instruments.

                                        30
<PAGE>   33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                                    INDEX TO
                       CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................   32
Consolidated Balance Sheets as of December 31, 2000 and
  1999......................................................   33
Consolidated Statements of Operations for the Years Ended
  December 31, 2000, 1999 and 1998..........................   34
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2000, 1999 and 1998..........................   35
Consolidated Statements of Stockholders' Equity for the
  Years Ended December 31, 2000, 1999 and 1998..............   36
Notes to Consolidated Financial Statements..................   37
</TABLE>

                                        31
<PAGE>   34

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Waste Management, Inc.:

     We have audited the accompanying consolidated balance sheets of Waste
Management, Inc. and subsidiaries (the "Company"), a Delaware corporation, as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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.

     The selected quarterly financial data included in Note 21 contains
information that we did not audit, and, accordingly, we do not express an
opinion on that data. We attempted, but were unable, to review the quarterly
financial data for the interim periods within 1999 in accordance with standards
established by the American Institute of Certified Public Accountants because we
believe that the Company's internal controls for the preparation of interim
financial information did not provide an adequate basis to enable us to complete
such a review.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waste Management, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
March 7, 2001

                                        32
<PAGE>   35

                             WASTE MANAGEMENT, INC.

                          CONSOLIDATED BALANCE SHEETS
               (IN MILLIONS, EXCEPT SHARE AND PAR VALUE AMOUNTS)

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
                                    ASSETS

Current assets:
  Cash and cash equivalents.................................  $    94   $   181
  Accounts receivable, net of allowance for doubtful
     accounts of $128 and $289, respectively................    1,401     1,541
  Notes and other receivables...............................      174       367
  Parts and supplies........................................       75       107
  Deferred income taxes.....................................      312       298
  Prepaid expenses and other................................      112       191
  Operations held-for-sale..................................      289     3,536
                                                              -------   -------
          Total current assets..............................    2,457     6,221
Property and equipment, net.................................   10,126    10,304
Goodwill, net...............................................    5,046     5,186
Other intangible assets, net................................      147       170
Other assets................................................      789       800
                                                              -------   -------
          Total assets......................................  $18,565   $22,681
                                                              =======   =======

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................  $   865   $ 1,063
  Accrued liabilities.......................................    1,419     1,513
  Deferred revenues.........................................      389       407
  Current maturities of long-term debt......................      113     3,099
  Operations held-for-sale..................................      151     1,408
                                                              -------   -------
          Total current liabilities.........................    2,937     7,490
Long-term debt, less current maturities.....................    8,372     8,399
Deferred income taxes.......................................      879       730
Environmental liabilities...................................      809       837
Other liabilities...........................................      752       815
                                                              -------   -------
          Total liabilities.................................   13,749    18,271
                                                              -------   -------
Minority interest in subsidiaries...........................       15         8
                                                              -------   -------
Commitments and contingencies
Stockholders' equity:
  Common stock, $.01 par value; 1,500,000,000 shares
     authorized; 629,621,821 and 627,283,618 shares issued,
     respectively...........................................        6         6
  Additional paid-in capital................................    4,497     4,440
  Retained earnings.........................................      560       663
  Accumulated other comprehensive income (loss).............     (126)     (563)
  Restricted stock unearned compensation....................       (3)       (4)
  Treasury stock at cost, 6,971,560 and 73,709 shares,
     respectively...........................................     (133)       (4)
  Employee stock benefit trust at market, 0 and 7,892,612
     shares, respectively...................................       --      (136)
                                                              -------   -------
          Total stockholders' equity........................    4,801     4,402
                                                              -------   -------
          Total liabilities and stockholders' equity........  $18,565   $22,681
                                                              =======   =======
</TABLE>

                See notes to consolidated financial statements.

                                        33
<PAGE>   36

                             WASTE MANAGEMENT, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2000      1999      1998
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Operating revenues..........................................  $12,492   $13,127   $12,626
                                                              -------   -------   -------
Costs and expenses:
  Operating (exclusive of depreciation and amortization
     shown below)...........................................    7,538     8,269     7,283
  General and administrative................................    1,738     1,920     1,333
  Depreciation and amortization.............................    1,429     1,614     1,499
  Merger and acquisition related costs......................       --        45     1,807
  Asset impairments and unusual items.......................      749       739       864
                                                              -------   -------   -------
                                                               11,454    12,587    12,786
                                                              -------   -------   -------
Income (loss) from operations...............................    1,038       540      (160)
                                                              -------   -------   -------
Other income (expense):
  Interest expense..........................................     (748)     (770)     (682)
  Interest income...........................................       31        38        27
  Minority interest.........................................      (23)      (24)      (24)
  Other income, net.........................................       23        53       139
                                                              -------   -------   -------
                                                                 (717)     (703)     (540)
                                                              -------   -------   -------
Income (loss) before income taxes and extraordinary item....      321      (163)     (700)
Provision for income taxes..................................      418       232        67
                                                              -------   -------   -------
Loss before extraordinary item..............................      (97)     (395)     (767)
Extraordinary loss on refinancing or retirement of debt, net
  of income tax of $2 in 1999 and $3 in 1998................       --        (3)       (4)
                                                              -------   -------   -------
Net loss....................................................  $   (97)  $  (398)  $  (771)
                                                              =======   =======   =======
Basic loss per common share:
  Loss before extraordinary item............................  $ (0.16)  $ (0.64)  $ (1.31)
  Extraordinary item........................................       --     (0.01)    (0.01)
                                                              -------   -------   -------
  Net loss..................................................  $ (0.16)  $ (0.65)  $ (1.32)
                                                              =======   =======   =======
Diluted loss per common share:
  Loss before extraordinary item............................  $ (0.16)  $ (0.64)  $ (1.31)
  Extraordinary item........................................       --     (0.01)    (0.01)
                                                              -------   -------   -------
  Net loss..................................................  $ (0.16)  $ (0.65)  $ (1.32)
                                                              =======   =======   =======
</TABLE>

                See notes to consolidated financial statements.

                                        34
<PAGE>   37

                             WASTE MANAGEMENT, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN MILLIONS)

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2000      1999      1998
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Cash flows from operating activities:
  Net loss..................................................  $   (97)  $  (398)  $  (771)
  Adjustments to reconcile net loss to net cash provided by
    operating activities:
    Provision for bad debts.................................       14       268        71
    Depreciation and amortization...........................    1,429     1,614     1,499
    Deferred income tax provision (benefit).................       65       318      (450)
    Minority interest in subsidiaries.......................       23        24        24
    Net gain on disposal of assets..........................       (4)      (19)      (83)
    Effect of merger costs, asset impairments and unusual
     items..................................................      749       575     1,555
  Change in assets and liabilities, net of effects of
    acquisitions and divestitures:
    Receivables.............................................      283      (169)     (257)
    Prepaid expenses and other current assets...............       21       184       (11)
    Other assets............................................        5        61       132
    Accounts payable and accrued liabilities................     (301)     (492)     (141)
    Deferred revenues and other liabilities.................      (60)     (295)        1
    Other, net..............................................       (2)       18       (67)
                                                              -------   -------   -------
Net cash provided by operating activities...................    2,125     1,689     1,502
                                                              -------   -------   -------
Cash flows from investing activities:
  Short-term investments....................................       54       (41)       57
  Acquisitions of businesses, net of cash acquired..........     (231)   (1,289)   (1,946)
  Capital expenditures......................................   (1,313)   (1,327)   (1,651)
  Proceeds from divestitures of businesses, net of cash
    divested, and other sales of assets.....................    2,552       651       545
  Other investments.........................................       39        10        76
  Acquisition of minority interests.........................       --        --    (1,673)
  Other.....................................................      (29)      (21)       37
                                                              -------   -------   -------
Net cash provided by (used in) investing activities.........    1,072    (2,017)   (4,555)
                                                              -------   -------   -------
Cash flows from financing activities:
  New borrowings............................................      304     4,246     6,402
  Debt repayments...........................................   (3,597)   (3,987)   (4,407)
  Cash dividends............................................       (6)       (6)      (94)
  Common stock issued.......................................       --        --       206
  Sale of treasury stock....................................       --        --       739
  Exercise of common stock options and warrants.............       20       176       133
  Other.....................................................       --        (3)      (23)
                                                              -------   -------   -------
Net cash provided by (used in) financing activities.........   (3,279)      426     2,956
                                                              -------   -------   -------
Effect of exchange rate changes on cash and cash
  equivalents...............................................       (5)       (4)       (6)
                                                              -------   -------   -------
Increase (decrease) in cash and cash equivalents............      (87)       94      (103)
Cash and cash equivalents at beginning of year..............      181        87       190
                                                              -------   -------   -------
Cash and cash equivalents at end of year....................  $    94   $   181   $    87
                                                              =======   =======   =======
Supplemental cash flow information:
  Cash paid during the year for:
    Interest................................................  $   750   $   740   $   610
    Income taxes............................................      135       276       254
  Non-cash investing and financing activities:
    Note receivable from sale of assets.....................       23        --        29
    Conversion of subordinated debt to common stock.........       --       263        10
    Acquisitions of businesses and development projects:
      Liabilities incurred or assumed.......................       --       357       432
      Common stock issued...................................        3        33       180
</TABLE>

                See notes to consolidated financial statements.

                                        35
<PAGE>   38

                             WASTE MANAGEMENT, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   (IN MILLIONS, EXCEPT SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                 ACCUMULATED
                                                                                    OTHER
                                                        ADDITIONAL              COMPREHENSIVE   RESTRICTED STOCK
                                                         PAID-IN     RETAINED      INCOME           UNEARNED
                                       COMMON STOCK      CAPITAL     EARNINGS      (LOSS)         COMPENSATION
                                     ----------------   ----------   --------   -------------   ----------------
                                     SHARES    AMOUNT
                                     -------   ------
<S>                                  <C>       <C>      <C>          <C>        <C>             <C>
BALANCE, JANUARY 1, 1998...........  598,678    $ 6       $3,874      $1,938        $(283)            $(11)
Net loss...........................       --     --           --        (771)          --               --
Cash dividends.....................       --     --           --         (94)          --               --
Dividends paid to employee stock
 benefit trust.....................       --     --            2          (2)          --               --
Common stock issued upon exercise
 of stock options and warrants, and
 grants of restricted stock
 (including tax benefit)...........    4,410     --           95          --           --               --
Earned compensation related to
 restricted stock, net of reversals
 on forfeited shares...............       --     --           --          --           --                1
Reversals of unearned compensation
 upon cancellation of restricted
 stock.............................       --     --           --          --           --                1
Accelerated vesting of restricted
 stock due to WM Holdings Merger...       --     --           --          --           --                9
Common stock issued for
 acquisitions......................    7,611     --          180          (5)          --               --
Common stock issued in public
 offerings.........................    5,204     --          206          --           --               --
Put rights on WM Holdings employee
 stock options, net of taxes.......              --           70          --           --               --
Adjustment of employee stock
 benefit trust to market value.....       --     --           69          --           --               --
Minimum pension liability
 adjustment, net of taxes of $47...       --     --           --          --          (60)              --
Cumulative translation adjustment
 of foreign currency statements....       --     --           --          --          (78)              --
Sale of treasury stock.............       --     --            4          --           --               --
Cancellation of treasury stock.....  (13,300)    --         (566)         --           --               --
Change in Eastern fiscal year......    3,900     --           91           1           --               --
Conversion of WTI stock options....       --     --           20          --           --               --
Other..............................    1,805     --           47          --           --               --
                                     -------    ---       ------      ------        -----             ----
BALANCE, DECEMBER 31, 1998.........  608,308    $ 6       $4,092      $1,067        $(421)            $ --
                                     -------    ---       ------      ------        -----             ----
Net loss...........................       --     --           --        (398)          --               --
Cash dividends.....................       --     --           --          (6)          --               --
Common stock issued upon exercise
 of stock options and warrants, and
 grants of restricted stock
 (including tax benefit)...........    8,431     --          242          --           --               --
Unearned compensation related to
 issuance of restricted stock to
 employees.........................      265     --            4          --           --               (4)
Common stock issued for
 acquisitions......................      458     --           33          --           --               --
Common stock issued for conversion
 of subordinated debt..............    8,984     --          261          --           --               --
Adjustment of employee stock
 benefit trust to market value.....       --     --         (232)         --           --               --
Minimum pension liability
 adjustment, net of taxes of $37...       --     --           --          --          (66)              --
Cumulative translation adjustment
 of foreign currency statements....       --     --           --          --          (76)              --
Other..............................      838     --           40          --           --               --
                                     -------    ---       ------      ------        -----             ----
BALANCE, DECEMBER 31, 1999.........  627,284    $ 6       $4,440      $  663        $(563)            $ (4)
                                     -------    ---       ------      ------        -----             ----
Net loss...........................       --     --           --         (97)          --               --
Cash dividends.....................       --     --           --          (6)          --               --
Common stock issued upon exercise
 of stock options and warrants, and
 grants of restricted stock
 (including tax benefit)...........      166     --            4          --           --               (1)
Earned compensation related to
 restricted stock..................       --     --           --          --           --                2
Common stock issued (purchased) in
 connection with litigation
 settlements.......................    1,364     --           22          --           --               --
Adjustment of employee stock
 benefit trust to market value.....       --     --           14          --           --               --
Minimum pension liability
 adjustment, net of taxes of $92...       --     --           --          --          130               --
Cumulative translation adjustment
 of foreign currency statements
 including effects of
 divestitures......................       --     --           --          --          307               --
Termination of employee stock
 benefit trust.....................       --     --           --          --           --               --
Other..............................      808     --           17          --           --               --
                                     -------    ---       ------      ------        -----             ----
BALANCE, DECEMBER 31, 2000.........  629,622    $ 6       $4,497      $  560        $(126)            $ (3)
                                     =======    ===       ======      ======        =====             ====

<CAPTION>

                                                           EMPLOYEE      COMPREHENSIVE
                                                             STOCK          INCOME
                                      TREASURY STOCK     BENEFIT TRUST      (LOSS)
                                     -----------------   -------------   -------------
                                     SHARES    AMOUNT
                                     -------   -------
<S>                                  <C>       <C>       <C>             <C>
BALANCE, JANUARY 1, 1998...........   34,239   $(1,369)      $(299)
Net loss...........................       --       --           --          $ (771)
Cash dividends.....................       --       --           --
Dividends paid to employee stock
 benefit trust.....................       --       --           --
Common stock issued upon exercise
 of stock options and warrants, and
 grants of restricted stock
 (including tax benefit)...........   (1,695)      75           --
Earned compensation related to
 restricted stock, net of reversals
 on forfeited shares...............       --       --           --
Reversals of unearned compensation
 upon cancellation of restricted
 stock.............................       --       --           --
Accelerated vesting of restricted
 stock due to WM Holdings Merger...       --       --           --
Common stock issued for
 acquisitions......................       --       --           --
Common stock issued in public
 offerings.........................       --       --           --
Put rights on WM Holdings employee
 stock options, net of taxes.......       --       --           --
Adjustment of employee stock
 benefit trust to market value.....       --       --          (69)
Minimum pension liability
 adjustment, net of taxes of $47...       --       --           --             (60)
Cumulative translation adjustment
 of foreign currency statements....       --       --           --             (78)
Sale of treasury stock.............  (19,180)     725           --
Cancellation of treasury stock.....  (13,300)     566           --
Change in Eastern fiscal year......       --       --           --
Conversion of WTI stock options....       --       --           --
Other..............................       --       --           --
                                     -------   -------       -----          ------
BALANCE, DECEMBER 31, 1998.........       64   $   (3)       $(368)         $ (909)
                                     -------   -------       -----          ======
Net loss...........................       --       --           --          $ (398)
Cash dividends.....................       --       --           --
Common stock issued upon exercise
 of stock options and warrants, and
 grants of restricted stock
 (including tax benefit)...........       --       --           --
Unearned compensation related to
 issuance of restricted stock to
 employees.........................       --       --           --
Common stock issued for
 acquisitions......................       --       --           --
Common stock issued for conversion
 of subordinated debt..............       --       --           --
Adjustment of employee stock
 benefit trust to market value.....       --       --          232
Minimum pension liability
 adjustment, net of taxes of $37...       --       --           --             (66)
Cumulative translation adjustment
 of foreign currency statements....       --       --           --             (76)
Other..............................       10       (1)          --
                                     -------   -------       -----          ------
BALANCE, DECEMBER 31, 1999.........       74   $   (4)       $(136)         $ (540)
                                     -------   -------       -----          ======
Net loss...........................       --       --           --          $  (97)
Cash dividends.....................       --       --           --
Common stock issued upon exercise
 of stock options and warrants, and
 grants of restricted stock
 (including tax benefit)...........   (1,078)      22           --
Earned compensation related to
 restricted stock..................       --       --           --
Common stock issued (purchased) in
 connection with litigation
 settlements.......................       83       (1)          --
Adjustment of employee stock
 benefit trust to market value.....       --       --          (14)
Minimum pension liability
 adjustment, net of taxes of $92...       --       --           --             130
Cumulative translation adjustment
 of foreign currency statements
 including effects of
 divestitures......................       --       --           --             307
Termination of employee stock
 benefit trust.....................    7,893     (150)         150
Other..............................       --       --           --
                                     -------   -------       -----          ------
BALANCE, DECEMBER 31, 2000.........    6,972   $ (133)       $  --          $  340
                                     =======   =======       =====          ======
</TABLE>

                See notes to consolidated financial statements.
                                        36
<PAGE>   39

                             WASTE MANAGEMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                  (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)

1. BUSINESS

     Business -- Waste Management, Inc. and Subsidiaries ("Waste Management" or
the "Company") is one of the largest publicly-owned companies providing
integrated waste services in North America. Through its subsidiaries, the
Company provides collection, transfer, recycling and resource recovery, and
disposal services. The Company is also a leading developer, operator and owner
of waste-to-energy facilities in the United States. The Company also had similar
operations internationally ("WM International"). As discussed in Notes 4 and 20,
pursuant to the Company's strategic plan, the Company has divested most of its
WM International operations at December 31, 2000 and is actively marketing to
sell its remaining WM International operations, which are considered to be
held-for-sale. The Company's other reportable segment consists of non-solid
waste management services, which are aggregated as a single segment for this
reporting presentation. The non-solid waste management segment includes
hazardous waste services (other than hazardous waste landfills) such as chemical
waste management services, the Company's independent power projects, and other
non-solid waste services that are provided to commercial, industrial and
government customers. As discussed in Notes 4 and 20, the Company's non-solid
waste management segment includes business lines that have been divested or are
being actively marketed and are considered to be held-for-sale.

     WM Holdings Merger -- On July 16, 1998, the Company, then known as USA
Waste Services, Inc., completed a merger with Waste Management Holdings, Inc.
("WM Holdings"), which was accounted for as a pooling of interests (the "WM
Holdings Merger"). WM Holdings was previously the largest publicly traded solid
waste company in the United States, providing integrated solid waste management
and hazardous waste management services in North America and comprehensive waste
management and related services, including solid and hazardous waste management
services, internationally. At the effective time of the WM Holdings Merger, the
Company changed its name to "Waste Management, Inc."

     Eastern Merger -- On December 31, 1998, the Company completed a merger with
Eastern Environmental Services, Inc. ("Eastern"), which was accounted for as a
pooling of interests (the "Eastern Merger").

                                        37
<PAGE>   40
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. 1999 ACCOUNTING CHARGES AND ADJUSTMENTS

     During 1999, the Company initiated a comprehensive internal review of its
accounting records, systems, processes and controls at the direction of its
Board of Directors. As discussed below, the Company experienced significant
difficulty in the integration and conversion of information and accounting
systems subsequent to the WM Holdings Merger, including certain financial
systems and its billing systems. As a result of these systems and process
issues, and other issues raised during the 1999 accounting review, certain
charges and adjustments were recorded, as discussed below. The review was
completed in time such that the Company was able to record related adjustments
in its financial statements for the quarter ended September 30, 1999. The
amounts recorded by the Company as a result of the review had a material effect
on its financial statements for the year ended December 31, 1999. The following
is a summary of charges attributable to this review which were recorded for the
quarter ended September 30, 1999:

<TABLE>
<S>                                                           <C>   <C>
Held-for-sale adjustments...................................        $  414
Increase to allowance for doubtful accounts and other
  accounts receivable adjustments...........................           212
Asset impairments (excluding held-for-sale adjustments).....           178
Insurance reserves and other insurance adjustments..........           148
Legal, severance and consulting accruals....................           142
Merger and acquisition related costs........................            32
Other charges and adjustments, including:
  Account reconciliations...................................  348
  Loss contract reserve adjustments.........................   49
  Increases in environmental liabilities....................   49
  Other.....................................................  191      637
                                                              ---   ------
Impact of charges before income tax benefit.................         1,763
Income tax benefit..........................................          (537)
                                                                    ------
After-tax charges...........................................        $1,226
                                                                    ======
</TABLE>

     In August 1999, the Company's Board of Directors adopted a strategic plan
that includes the divestiture of its WM International operations and certain
other businesses. (See Note 15, "Segment and Related Information" and Note 20,
"Operations Held-for-Sale" for further discussion of the Company's WM
International operations). Based primarily on preliminary bids from interested
parties, these and certain other assets which were identified as held-for-sale
during the third quarter of 1999 were written down to fair value less cost to
sell in accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, resulting in a pre-tax charge of approximately $414 at
September 30, 1999. These assets were considered to be held-for-use for periods
prior to the third quarter of 1999 and did not meet the criteria for impairment
recognition as a "held-for-use" asset, and therefore, were not considered
impaired for periods prior to the third quarter of 1999. The assets which were
identified as held-for-sale and subject to adjustment include, among others, the
Company's WM International operations, the Company's nuclear services disposal
site operations and certain North American solid waste, or "NASW," operations
that were not essential parts of the Company's network. Revisions to the third
quarter estimates were required due to revisions in estimated proceeds and
certain changes in business plans during the fourth quarter of 1999, as further
discussed in Note 16, "Asset Impairments and Unusual Items". See Note 4 for
discussion on operations that have been divested in the year 2000 or announced
to be divested in the near future.

     In 1999, subsequent to the WM Holdings Merger, the Company experienced
significant difficulty in the conversion from the WM Holdings' information
systems to the systems currently in use, resulting in delays and errors,
particularly with respect to the Company's billing systems, including delays in
submitting bills to

                                        38
<PAGE>   41
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

customers and errors in both computing and delivering bills. Staffing levels
were insufficient to address customer complaints and disputes and did not
support timely follow-up with customers. Billing system issues initially became
evident in the second quarter of 1999 as receivable aging levels continued to
rise. At that time, management believed that the increase in receivables was a
short-term issue, receivables would return to historical levels once the billing
system conversions were complete and there was not a significant collectability
issue with its recorded receivables. In connection with the 1999 accounting
review, the Company concluded that certain of these accounts had deteriorated to
the point that they may be uncollectable, and therefore, recorded an increase in
the allowance for doubtful accounts in the third quarter of 1999. Beginning in
the third quarter of 1999, the Company increased its resources dedicated to
receivable collection efforts. In addition, the Company performed a review of
notes and other receivable-related balances in connection with this review.
Taken together, the Company recorded receivable-related pre-tax charges of $212
in the third quarter of 1999.

     During the review, the Company recorded asset impairments of $178 related
to several landfill sites and certain other operating assets in the third
quarter of 1999. Included in the amount is $76 relating to the abandonment or
closure of facilities resulting from the Company's recent business decisions
regarding optimal operating strategies in specific markets in which the Company
operates, or consideration of other new facts and circumstances during the
review. Also included in the amount is $40, which is primarily the result of
permit denials and other regulatory problems in the third quarter of 1999, which
is one of the many types of facts and circumstances that may from time to time
trigger impairments, and which may occasionally overlap with other triggering
events or result in abandonment or closure. The Company performs a
comprehensive, centrally coordinated review of its North American landfills on
an annual basis. During the third quarter of 1999, that review included an
evaluation of potential landfill expansion projects, with a newly refined and
more stringent set of criteria for evaluating the probability of obtaining
expansions to existing sites, which had the effect of excluding certain
expansions that met the Company's previous criteria. For further discussion on
this criteria, refer to Note 3.

     The exclusion of these expansions due to the more stringent criteria and
related business judgements regarding probable success of obtaining expansions,
increased depreciation and amortization and the provision for final closure and
post-closure costs (included in operating expense). Impairments resulting from
the application of these new stringent criteria and resulting from other facts
and circumstances comprise the remaining $62 of impairments included in the $178
of impairments disclosed above.

     The Company historically estimated its insurance-related liabilities for
its ongoing programs based on an analysis of insurance claims submitted for
reimbursement, plus an estimate for liabilities incurred as of the balance sheet
date, but not yet reported to the Company. This is the estimation method that
had been used by WM Holdings prior to the WM Holdings Merger, and was continued
by the Company for that pool of pre-merger WM Holdings' claims. In connection
with this review, the Company evaluated the adequacy of its self-insurance
liabilities and changed the manner in which it estimates its insurance-related
liabilities for its ongoing property and casualty insurance programs. Both of
these approaches result in acceptable estimates, but during the review the
Company noted that the actuarially determined estimates using a fully-developed
method provided a better estimate of the ultimate costs of the claims than a
claims made plus incurred but not reported method. Accordingly, in the third
quarter of 1999, the Company began estimating all insurance-related liabilities
based on actuarially determined estimates of ultimate losses. This change in
estimate resulted in an increased pre-tax expense of $44 for the third quarter
of 1999. In addition, the Company increased its insurance-related liabilities
based on its assessment of current and expected claims activities and
unfavorable claims experience, resulting in an additional pre-tax charge of $104
in the third quarter of 1999.

     The Company recorded pre-tax charges related to legal, severance and
consulting costs incurred in the third quarter of 1999, including increases in
legal reserves and related charges of $96, principally related to increases in
legal reserves in response to developments in various legal proceedings brought
against

                                        39
<PAGE>   42
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

WM Holdings by former shareholders of that company in connection with its
restatement of earnings in February 1998. These legal developments caused the
Company to evaluate the numerous shareholder cases filed against WM Holdings and
to reassess their range of exposure. Additionally, the charges included $25
related to severance costs, principally for executives who left the Company in
the third quarter of 1999, and $21 of consulting costs related primarily to the
accounting review and related matters.

     The Company recorded $32 of merger and acquisition related costs during the
third quarter of 1999, which consisted of $13 related to a third quarter
purchase business combination and $19 related to the costs incurred by the
Company related to the WM Holdings and the Eastern Mergers which are required to
be expensed as incurred.

     The Company's results of operations for 1999 reflect pre-tax charges of
approximately $348 recorded in the third quarter 1999 attributable to the
reconciliation of intercompany accounts, cash, accounts receivable, fixed asset,
accounts payable and certain other accounts at the Company's operating districts
and other locations resulting from the 1999 accounting review. The Company's
third quarter accounting review included a detailed review of substantially all
of the districts' and other locations' financial and accounting records. That
work necessitated a number of adjustments affecting transactions related to the
current period and to periods prior to the quarter ended September 30, 1999
involving many different accounts. Although some portion of the charges of $348
may relate to a number of periods, the Company does not have sufficient
information to identify all specific charges attributable to individual prior
periods. Furthermore, producing the required information to perform such an
identification of these charges would be cost prohibitive and disruptive to
operations. In connection with the preparation of its third quarter of 1999
financial statements, the Company concluded that, based on its quantitative and
qualitative analysis of available information, and after consultation with its
independent public accountants, it did not have, nor was it able to obtain,
sufficient information to conclude what amount of charges relate to any
individual prior year, although qualitative analysis indicated that these
charges were principally related to 1999. Accordingly, the Company concluded
that these charges are appropriately reflected in the 1999 annual financial
statements.

     The Company evaluated significant contracts under which it provides
services. As a result of that review, the Company recorded a pre-tax provision
of $49 related to contracts which were determined to be in a loss position,
including revisions to previously established reserves based on new facts and
circumstances.

     The Company increased its estimate by $33 of the ultimate costs required
for final closure and post-closure obligations at certain landfills which were
either closed or near final closure. That increase, and provisions related to
various other environmental matters, totaled $49 as a result of the 1999
accounting review.

     In addition to the charges described above, the Company recorded additional
pre-tax charges of $191 as a result of the 1999 accounting review. These
additional charges involved many different issues at all levels of the Company,
including, for example, adjustments to reserves for specific business disputes,
adjustments of over- or under- accruals not described elsewhere herein, and
numerous other items.

                                        40
<PAGE>   43
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The charges described above, which include both recurring and nonrecurring
items that have been aggregated for this presentation, are reflected in the
Company's financial statements for the year ended December 31, 1999, as follows:
<TABLE>
<CAPTION>
                                                ALLOWANCE
                                               FOR DOUBTFUL
                                                 ACCOUNTS                    INSURANCE                      MERGER
                                                AND OTHER                    RESERVES        LEGAL,           AND          OTHER
                                  HELD-FOR-      ACCOUNTS        OTHER       AND OTHER    SEVERANCE AND   ACQUISITION     CHARGES
                                    SALE        RECEIVABLE       ASSET       INSURANCE     CONSULTING       RELATED         AND
                                 ADJUSTMENTS   ADJUSTMENTS    IMPAIRMENTS   ADJUSTMENTS     ACCRUALS         COSTS      ADJUSTMENTS
                                 -----------   ------------   -----------   -----------   -------------   -----------   -----------
<S>                              <C>           <C>            <C>           <C>           <C>             <C>           <C>
Operating revenues.............     $  --         $ (44)         $  --         $  --          $  --          $  --         $  13
                                    -----         -----          -----         -----          -----          -----         -----
Costs and expenses:
 Operating (exclusive of
   depreciation and
   amortization shown below)...        --            --             --           143             --             --           423
 General and administrative....        --           168             --             5             58             --           172
 Depreciation and
   amortization................        --            --             --            --             --             --            60
 Merger and acquisition related
   costs.......................        --            --             --            --             --             32            --
 Asset impairments and unusual
   items.......................       414            --            178            --             84             --             3
                                    -----         -----          -----         -----          -----          -----         -----
                                      414           168            178           148            142             32           658
                                    -----         -----          -----         -----          -----          -----         -----
Loss from operations...........      (414)         (212)          (178)         (148)          (142)           (32)         (645)
                                    -----         -----          -----         -----          -----          -----         -----
Other income (expense)
 Interest expense..............        --            --             --            --             --             --             1
 Interest income...............        --            --             --            --             --             --            13
 Minority interest.............        --            --             --            --             --             --            --
 Other income (expense)........        --            --             --            --             --             --            (6)
                                    -----         -----          -----         -----          -----          -----         -----
                                       --            --             --            --             --             --             8
                                    -----         -----          -----         -----          -----          -----         -----
Loss before income taxes and
 extraordinary items...........     $(414)        $(212)         $(178)        $(148)         $(142)         $ (32)        $(637)
                                    =====         =====          =====         =====          =====          =====         =====
Benefit from income taxes......
Net loss.......................

<CAPTION>

                                     TOTAL
                                   (INCLUDES
                                 RECURRING AND
                                 NON-RECURRING
                                    ITEMS)
                                 -------------
<S>                              <C>
Operating revenues.............     $   (31)
                                    -------
Costs and expenses:
 Operating (exclusive of
   depreciation and
   amortization shown below)...         566
 General and administrative....         403
 Depreciation and
   amortization................          60
 Merger and acquisition related
   costs.......................          32
 Asset impairments and unusual
   items.......................         679
                                    -------
                                      1,740
                                    -------
Loss from operations...........      (1,771)
                                    -------
Other income (expense)
 Interest expense..............           1
 Interest income...............          13
 Minority interest.............          --
 Other income (expense)........          (6)
                                    -------
                                          8
                                    -------
Loss before income taxes and
 extraordinary items...........      (1,763)
Benefit from income taxes......         537
                                    -------
Net loss.......................     $(1,226)
                                    =======
</TABLE>

     Subsequent to the completion of the accounting review, and in conjunction
with the process of preparing its monthly financial statements during the fourth
quarter of 1999 and its financial statements at December 31, 1999, additional
adjustments attributable to the reconciliation of intercompany accounts, cash,
accounts receivable, fixed assets, accounts payable and certain other accounts
were recorded.

     The Company recorded significant adjustments in the third and fourth
quarters of 1999, certain of which affected periods prior to these quarters.
Accordingly, the Company, after consultation with its independent public
accountants, concluded that its internal controls for the preparation of interim
financial information did not provide an adequate basis for its independent
public accountants to complete reviews of the quarterly financial data for the
quarters during 1999. The Company believes that certain charges that were
recorded in the third and fourth quarters of 1999 may relate to individual prior
periods; however, the Company does not have sufficient information to identify
all specific charges attributable to prior periods. If identification of all
specific charges attributable to individual prior periods was possible, the
Company believes that the reported results of operations presented in Note 21 to
the financial statements for the third and fourth quarters of 1999 would have
been favorably impacted, and the reported results of operations for the first
and second quarters of 1999 would have been adversely impacted. In connection
with the preparation of its third quarter financial statements, the Company
concluded, based on its quantitative and qualitative analysis of available
information, after consultation with its independent public accountants, that it
did not have, nor was it able to obtain, sufficient information to conclude what
amount of the charges relate to any individual prior year, although

                                        41
<PAGE>   44
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

qualitative analysis indicates that these charges were principally related to
1999. Accordingly, the Company concluded that these charges were appropriately
reflected in the 1999 annual financial statements.

     The Company believes that the processes it used for the preparation of its
2000 interim financial statements have improved. In addition, the Company has
committed substantial resources to mitigate the previously identified control
weaknesses. Management believes these efforts enabled the Company to produce
timely and reliable interim financial statements for quarters during 2000.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of all material intercompany balances and
transactions. Investments in affiliated companies in which the Company has a
controlling interest are consolidated for financial reporting purposes.
Investments in affiliated entities in which the Company does not have a
controlling interest are accounted for under either the equity method or cost
method of accounting, as appropriate.

     Use of estimates -- The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts for
certain revenues and expenses during the reporting period. Specifically with
regard to landfill accounting, the Company uses engineering and accounting
estimates when projecting future development and final closure and post-closure
costs, forecasting various engineering specifications (including the prediction
of waste settlement), and future operational plans and waste volumes. Actual
results could differ materially from those estimates.

     Reclassifications -- Certain reclassifications have been made to prior year
amounts in the financial statements in order to conform to the current year
presentation.

     Cash and cash equivalents -- Cash and cash equivalents consist primarily of
cash on deposit, certificates of deposit, money market accounts, and investment
grade commercial paper purchased with original maturities of three months or
less.

     Concentrations of credit risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company places its cash and
cash equivalents with high quality financial institutions and limits the amount
of credit exposure with any one institution. Concentrations of credit risk with
respect to accounts receivable are limited because a large number of
geographically diverse customers comprise the Company's customer base, thus
spreading the trade credit risk. At December 31, 2000 and 1999, no single group
or customer represents greater than 10% of total accounts receivable. The
Company controls credit risk through credit evaluations, credit limits, and
monitoring procedures. The Company performs credit evaluations for commercial
and industrial customers and performs ongoing credit evaluations of its
customers, but generally does not require collateral to support accounts
receivable.

     Operations held-for-sale -- It is the Company's policy to classify the
businesses that the Company is marketing for sale and the portfolio of real
estate that the Company considers surplus and is marketing for sale, as
operations held-for-sale. The carrying values of these assets are written down
to fair value, less costs to sell. These charges are based on estimates and
certain contingencies that could materially differ from the actual results and
resolution of any such contingencies. The Company discontinues depreciation on
fixed assets for businesses that are classified as held-for-sale.

     Property and equipment -- Property and equipment are recorded at cost.
Except for the Company's waste-to-energy and independent power facilities,
expenditures for major additions and improvements are

                                        42
<PAGE>   45
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

capitalized, while minor replacements, maintenance and repairs are charged to
expense as incurred. At the Company's waste-to-energy and independent power
facilities, the Company accrues for major maintenance expenditures. Such
accruals are based upon planned maintenance expenditures and are classified as
current or non-current liabilities based on the expected timing of the
expenditures.

     When property and equipment are retired, sold, or otherwise disposed of,
the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations as increases or
offsets to operating expense for the respective period. Depreciation is provided
over the estimated useful lives of the related assets using the straight-line
method. The Company assumes no salvage value for its depreciable North American
fixed assets. The estimated useful lives for significant property and equipment
categories are as follows (in years):

<TABLE>
<CAPTION>
                                                              USEFUL LIVES
                                                              ------------
<S>                                                           <C>
Vehicles....................................................   3 to 10
Machinery and equipment.....................................   3 to 20
Commercial and roll-off containers..........................   8 to 12
Buildings and improvements..................................   10 to 40
Waste-to-energy facilities..................................      50
</TABLE>

     Landfill accounting -- Capitalizable landfill site costs are recorded at
cost. Recorded costs, net of recorded amortization, are added to estimated
projected costs to determine the amount to be amortized over the remaining
estimated useful life of a site. Amortization is recorded on a units of
consumption basis, typically applying cost as a rate per ton. Landfill site
costs are amortized to expected net realizable value upon final closure of a
landfill.

     The difference between the present value of a landfill's estimated total
final closure and post-closure costs and amounts accrued to date is accrued
prospectively on a units of consumption basis, typically by applying a rate per
ton over the remaining capacity of the landfill. The present value of final
closure and post-closure costs are fully accrued for each landfill once the site
discontinues accepting waste.

     The remaining capacity of a landfill is determined by the unutilized
permitted airspace and expansion airspace when the success of obtaining such
expansion permit is considered probable.

     Effective as of the third quarter of 1999, the Company applied a more
stringent set of criteria for evaluating the probability of obtaining an
expansion permit to landfill airspace at existing sites, which is as follows:

     - Personnel are actively working to obtain land use and local and state
       approvals for an expansion of an existing landfill;

     - At the time the expansion is added to the permitted site life, it is
       probable that the approvals will be received within the normal
       application and processing time periods for approvals in the jurisdiction
       in which the landfill is located;

     - The respective landfill owners or the Company have a legal right to use
       or obtain land to be included in the expansion plan;

     - There are no significant known technical, legal, community, business, or
       political restrictions or issues that could impair the success of such
       expansion;

                                        43
<PAGE>   46
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     - Financial analysis has been completed, and the results demonstrate that
       the expansion has a positive financial and operational impact; and

     - Airspace and related costs, including additional final closure and
       post-closure costs, have been estimated based on conceptual design.

     Additionally, to include airspace from an expansion effort, the expansion
permit application must generally be expected to be submitted within one year,
and the expansion permit must be expected to be received within two to five
years. Exceptions to these criteria must be approved through a landfill-specific
approval process that includes an approval from the Company's Chief Financial
Officer and review by the Audit Committee of the Board of Directors. Of the 94
landfill sites with expansions at December 31, 2000, 25 landfill locations
required the Company's Chief Financial Officer to approve the exception to the
criteria. These exceptions were generally due to opposition to expansion efforts
that could impede the expansion project and due to permit application processes
beyond the one-year limit, which in most cases were due to state-specific
permitting procedures. Generally, the Company has been successful in receiving
approvals for expansions pursued; however, there can be no assurance that the
Company will be successful in obtaining landfill expansions in the future.

     As disposal volumes are affected by seasonality and competitive factors,
airspace amortization varies between fiscal quarters due to change in volumes of
waste disposal at the Company's landfills. Airspace amortization is also
affected by changes in engineering costs and estimates.

     Business combinations -- For those business combinations accounted for
under the pooling of interests method, the financial statements are combined
with those of the Company at their historical amounts, and, if material, all
periods presented are restated as if the combination occurred on the first day
of the earliest year presented. For those acquisitions accounted for using the
purchase method of accounting, the Company allocates the cost of the acquired
business to the assets acquired and the liabilities assumed based on estimates
of fair values thereof. These estimates are revised during the allocation period
as necessary if, and when, information regarding contingencies becomes available
to define and quantify assets acquired and liabilities assumed. The allocation
period generally does not exceed one year. To the extent contingencies such as
preacquisition environmental matters, litigation and related legal fees are
resolved or settled during the allocation period, such items are included in the
revised allocation of the purchase price. After the allocation period, the
effect of changes in such contingencies is included in results of operations in
the periods in which the adjustments are determined. The Company does not
believe potential differences between its fair value estimates and actual fair
values are material.

     In certain business combinations, the Company agrees to pay additional
amounts to sellers contingent upon achievement by the acquired businesses of
certain negotiated goals, such as targeted revenue levels, targeted disposal
volumes or the issuance of permits for expanded landfill airspace. Contingent
payments, when incurred, are recorded as purchase price adjustments or
compensation expense, as appropriate, based on the nature of each contingent
payment.

     Goodwill and other intangible assets -- Goodwill is the excess of cost over
net assets of acquired businesses. Goodwill is amortized on a straight-line
basis over a period not greater than 40 years commencing on the dates of the
respective acquisitions. Other intangible assets consist primarily of customer
lists, covenants not-to-compete, licenses and permits. Other intangible assets
are recorded at cost and amortized on a straight-line basis. Customer lists are
generally amortized over five to seven years. Covenants not-to-compete are
amortized over the term of the agreement, which is generally three to five
years. Licenses, permits and contracts are amortized over the shorter of the
definitive terms of the related agreements or 40 years.

                                        44
<PAGE>   47
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Restricted funds held by trustees -- Restricted funds held by trustees of
$275 and $167 at December 31, 2000 and 1999, respectively, are included in other
non-current assets and consist principally of funds deposited in connection with
landfill final closure and post-closure obligations, insurance escrow deposits,
and amounts held for landfill and other construction arising from industrial
revenue financings. These amounts are principally invested in fixed income
securities of federal, state and local governmental entities and financial
institutions.

     Long-lived assets -- Long-lived assets consist primarily of property and
equipment, goodwill and other intangible assets. The recoverability of
long-lived assets is evaluated periodically at the operating unit level by an
analysis of operating results and consideration of other significant events or
changes in the business environment. If an operating unit has indications of
possible impairment, such as current operating losses, the Company will evaluate
whether impairment exists on the basis of undiscounted expected future cash
flows from operations for the remaining amortization period. If an impairment
loss exists, the carrying amount of the related long-lived assets is reduced to
its estimated fair value.

     Income taxes -- Deferred income taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities. Deferred income tax provision represents the change during the
reporting period in the deferred tax assets and deferred tax liabilities, net of
the effect of acquisitions and dispositions. Deferred tax assets include tax
loss and credit carryforwards and are reduced by a valuation allowance if, based
on available evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.

     Foreign currency -- The functional currency of the majority of the
Company's foreign operations is the local currency of the country in which the
Company operates. Adjustments resulting from the translation of financial
information are included in comprehensive income.

     Revenue recognition -- The Company recognizes revenues on service contracts
as services are provided. Amounts billed and collected prior to services being
performed are included in deferred revenues. Results from long-term contracts
involving a substantial construction component are recorded on the
percentage-of-completion basis. Changes in project performance and conditions,
estimated profitability and final contract settlements may result in future
revisions to long-term construction contract costs and income.

     Loss contracts -- The Company reviews its revenue producing contracts in
the ordinary course of business to determine if the direct costs, exclusive of
any non-variable costs, to service the contractual arrangements exceed the
revenues to be produced by the contract. Any resulting net loss over the life of
the contract is expensed at the time of such determination.

     Derivative financial instruments -- From time to time, the Company uses
derivatives to manage interest rate risk. The Company's policy is to use
derivatives for risk management purposes only, which includes maintaining the
ratio between the Company's fixed and floating rate debt obligations that
management deems appropriate, and prohibits entering into such contracts for
trading purposes. The Company enters into derivatives only with counterparties
(primarily financial institutions) which have substantial financial wherewithal
to minimize credit risk. The amount of gains or losses from the use of
derivative financial instruments has not been and is not expected to be material
to the Company's financial statements.

     At December 31, 2000 and 1999, the Company engaged in hedging of recyclable
paper price risk. Instruments accounted for as hedges must be effective at
managing risk associated with the exposure being hedged and must be designated
as a hedge at the inception of the contract. Accordingly, changes in market
values or cash flows of hedge instruments must have a high degree of inverse
correlation with changes in market values or cash flows of the underlying hedged
items. Derivatives that meet the hedge criteria are accounted for under the
deferral or accrual method.

                                        45
<PAGE>   48
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Capitalized interest -- Interest is capitalized on certain projects under
development including landfill projects and probable landfill expansion
projects, and on certain assets under construction, including operating
landfills and waste-to-energy facilities. The capitalization of interest for
operating landfills is based on the costs incurred on discrete cell construction
projects, plus an allocated portion of the common site costs. The common site
costs include the development costs of a landfill project or the purchase price
of an operating landfill, and the ongoing infrastructure costs benefiting the
lifecycle of the landfill. Cell construction costs include the construction of
cell liners and final capping during the operating life of the site. During
2000, 1999 and 1998, total interest costs were $770, $804 and $724,
respectively, of which $22, $34 and $42 were capitalized as landfill costs in
property and equipment, respectively.

4. BUSINESS COMBINATIONS AND DIVESTITURES

  Purchase Acquisitions

     During 2000 and 1999, the Company consummated over 70 and 240 acquisitions,
respectively, that were accounted for under the purchase method of accounting.
The total cost of acquisitions was approximately $234 and $1,372 for 2000 and
1999, respectively, which included cash paid, common stock issued and debt
assumed.

  Pooling of Interests Transactions

     Under the terms of the 1998 Eastern Merger, the Company issued 0.6406 of a
share of its common stock (approximately 24.5 million shares in total) for each
share of Eastern's outstanding common stock. Under the terms of the 1998 WM
Holdings Merger, the Company issued 0.725 of a share of its common stock
(approximately 354.0 million shares in total) for each share of WM Holdings
outstanding common stock.

     In 2000, no merger costs were recorded. In 1999, the Company incurred $45
in merger costs primarily related to the WM Holdings Merger and the Eastern
Merger. The table below reflects merger cost charges in 1998 related to the WM
Holdings Merger and the Eastern Merger.

<TABLE>
<CAPTION>
                                                              WM HOLDINGS   EASTERN
                                                              -----------   -------
<S>                                                           <C>           <C>
Transaction or deal costs, primarily professional fees and
  filing fees...............................................    $  124       $ 14
Employee severance, separation and transitional costs.......       324         26
Restructuring charges relating to the consolidation and
  relocation of operations, and the transition and
  implementation of information systems.....................       167         21
Estimated loss on the sale of:
  Assets to comply with governmental orders.................       255         32
  Duplicate facilities and related leasehold improvements...       189         29
  Duplicate revenue producing assets........................        26         32
Provision for the abandonment of:
  Revenue producing assets..................................       127          3
  Non-revenue producing assets, consisting of landfill
     projects and leasehold improvements which were
     determined to be duplicative assets from the related
     merger.................................................       263          7
  Other assets, consisting primarily of computer hardware
     and software costs which have no future value..........       150          1
                                                                ------       ----
          Total.............................................    $1,625       $165
                                                                ======       ====
</TABLE>

     Merger and acquisition related costs include estimates for anticipated
losses from the sales of assets pursuant to governmental orders and other asset
divestiture plans. These anticipated losses were estimated

                                        46
<PAGE>   49
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

based on the Company's assessment of relevant facts and circumstances, including
consideration of the various provisions of asset sale agreements. During the
second quarter of 1999, the Company resolved an outstanding contingency
regarding its governmentally-ordered sale of assets to Republic Services, Inc.,
which reduced the previously reported loss on that sale by approximately $80.
Offsetting this amount in the same quarter, the Company (i) consummated its sale
of 51% of its non-land disposal hazardous waste operations and on-site
industrial cleaning services to Vivendi S.A. which resulted in losses of
approximately $79 greater than previously estimated; (ii) increased its
anticipated losses by approximately $14 related to the assets required to be
sold pursuant to the Eastern Merger; and (iii) decreased other anticipated
losses by approximately $13.

     Furthermore, the Company recorded certain unusual charges of $864 in 1998
that were primarily, yet indirectly, related to the WM Holdings Merger. See Note
16.

  Divestitures

     The Company's 1999 strategic plan included marketing for sale its WM
International operations, its domestic non-solid waste operations and selected
NASW operations. Note 20 discusses the remaining operations held-for-sale which
the Company believes will be divested prior to December 31, 2001.

     The following is a summary of the significant divestitures the Company has
completed as of December 31, 2000 by segment:

<TABLE>
<CAPTION>
SEGMENT                                                       APPROXIMATE SALE PRICE
-------                                                       ----------------------
<S>                                                           <C>
WM International............................................          $1,910(a)
Non-solid waste.............................................          $  439(a)
NASW........................................................          $  310(b)
</TABLE>

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

(a) Approximate sales price includes cash proceeds and assumed debt.
(b) Approximate sales price includes cash proceeds, notes receivables and a
    long-term prepaid disposal agreement.

5. PROPERTY AND EQUIPMENT

     Property and equipment at December 31, consisted of the following:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
Land........................................................  $   729   $   704
Landfills...................................................    7,548     7,305
Vehicles....................................................    3,019     2,762
Machinery and equipment.....................................    2,118     2,254
Containers..................................................    2,043     1,871
Buildings and improvements..................................    1,337     1,383
Furniture and fixtures......................................      191       190
                                                              -------   -------
                                                               16,985    16,469
Less accumulated landfill airspace amortization.............   (2,698)   (2,239)
Less accumulated depreciation on other property and
  equipment.................................................   (4,161)   (3,926)
                                                              -------   -------
                                                              $10,126   $10,304
                                                              =======   =======
</TABLE>

     Depreciation and amortization expense for property and equipment for 2000,
1999 and 1998 was $1,210, $1,344 and $1,337, respectively.

     The exclusion of certain landfill expansions from the airspace amortization
estimates due to more stringent criteria (see Note 3) and related business
judgements regarding probable success increased depreciation and amortization
expense and the provision for final closure and post-closure (included in

                                        47
<PAGE>   50
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operating expenses) in the second half of 1999 and in 2000. The exclusions of
these expansions also resulted in the Company recognizing $33 in landfill
impairments in the third quarter of 1999 (see Note 2).

     Rental expense for leased properties was $186, $189 and $195 during 2000,
1999 and 1998, respectively. These amounts primarily include rents under
long-term leases and rents charged as a percentage of revenue, but are exclusive
of financing leases which are capitalized for accounting purposes. Payments due
during the next five years and thereafter on long-term rental obligations are as
follows:

<TABLE>
<CAPTION>
                         2001   2002   2003   2004   2005   THEREAFTER
                         ----   ----   ----   ----   ----   ----------
<S>                      <C>    <C>    <C>    <C>    <C>    <C>          <C>
                         $124   $115   $104   $106   $106      $317
</TABLE>

6. GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill at December 31, consisted of the following:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              ------    ------
<S>                                                           <C>       <C>
Goodwill....................................................  $5,795    $5,813
Less accumulated amortization...............................    (749)     (627)
                                                              ------    ------
                                                              $5,046    $5,186
                                                              ======    ======
Other intangible assets.....................................  $  273    $  306
Less accumulated amortization...............................    (126)     (136)
                                                              ------    ------
                                                              $  147    $  170
                                                              ======    ======
</TABLE>

     Amortization expense for goodwill and other intangible assets was $219,
$270 and $162 for 2000, 1999 and 1998, respectively.

7. LONG-TERM DEBT

     Long-term debt at December 31, consisted of the following:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              ------    -------
<S>                                                           <C>       <C>
Bank credit facilities......................................  $  120    $ 2,250
Commercial paper, average interest of 5.5% in 1999..........      --         22
Senior notes and debentures, interest of 6% to 8 3/4%
  through 2029..............................................   6,307      6,750
4% Convertible subordinated notes due 2002..................     535        535
5.75% Convertible subordinated notes due 2005...............      31        427
Tax-exempt and project bonds, principal payable in periodic
  installments, maturing through 2029, fixed and variable
  interest rates ranging from 4.38% to 9.38% at December 31,
  2000......................................................   1,260      1,235
Installment loans, notes payable, and other, interest to
  14.25%, maturing through 2015.............................     232        279
                                                              ------    -------
                                                              $8,485    $11,498
                                                              ======    =======
</TABLE>

     Maturities of long-term debt for the next five years are as follows:

<TABLE>
<CAPTION>
                              2001    2002    2003   2004   2005
                              ----   ------   ----   ----   ----
<S>                           <C>    <C>      <C>    <C>    <C>    <C>
                              $113   $2,289   $592   $730   $221
</TABLE>

     The Company has a $1,500 syndicated loan facility (the "Syndicated
Facility") which expires July 10, 2001 with a one-year extension option and a
$1,400 senior revolving credit facility (the "Credit Facility"),

                                        48
<PAGE>   51
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

which matures August 2002. The Syndicated Facility requires annual renewal by
the lender and provides for a one-year term option at the Company's request in
the event of non-renewal. The Syndicated Facility and Credit Facility are
available for borrowings, including letters of credit, and for supporting the
issuance of commercial paper. The covenant restrictions for the Syndicated
Facility and Credit Facility include, among others, interest coverage and debt
capitalization ratios, limitations on dividends, additional indebtedness and
liens. The Syndicated Facility and Credit Facility are used to refinance
existing debt and letters of credit, to fund acquisitions, and for working
capital purposes.

     At December 31, 2000, the Company had borrowings of $120, which are
classified as long-term, under the Syndicated Facility at an average interest
rate of 7.74%. No borrowings were outstanding under the Credit Facility at
December 31, 2000. The facility fees were 0.20% and 0.25% per annum under the
Syndicated Facility and Credit Facility, respectively, at December 31, 2000. The
Company had issued letters of credit of approximately $1,500 in the aggregate
under the Syndicated Facility and Credit Facility, leaving unused and available
aggregate credit capacity of approximately $1,300 at December 31, 2000.

     Under the terms of the Syndicated Facility and the Credit Facility, the
Company is obligated to repay the borrowings under the facilities with the cash
proceeds received from the strategic plan divestitures. The Company was required
to use all of the first $1,500 of net proceeds from the divestitures to repay
indebtedness, which it has done. Additionally, the Company is required to use
50% of the additional cash proceeds greater than $1,500 and up to $2,500 from
divestitures to repay the indebtedness under the Syndicated and Credit
Facilities. As of December 31, 2000, the Company had received cash proceeds of
approximately $2,500 from its divestitures, approximately $175 of which was used
to repay the Company's Eurocurrency facilities in the second quarter of 2000,
approximately $100 was used for repayment of divestiture subsidiary debts and
the remainder has been used to repay indebtedness under the bank credit
facilities.

     On May 21, 1999, the Company completed a private placement of $1,150 of its
senior notes. The Company issued $200 of 6% senior notes, due 2001; $200 of
6 1/2% senior notes due 2004; $500 of 6 7/8% senior notes due 2009; and $250 of
7 3/8% senior notes due 2029. The senior notes constitute senior and unsecured
obligations of the Company ranking equal in right of payment with all other
senior and unsecured obligations of the Company, as defined in the indenture.
The 6% senior notes are not redeemable by the Company. The 6 1/2% senior notes,
the 6 7/8% senior notes, and 7 3/8% senior notes are redeemable, in whole or in
part, at the option of the Company at any time, or from time to time, at a
redemption price defined in the indenture. Interest is payable semi-annually on
May 15 and November 15. All proceeds from the private placement notes were used
to repay outstanding debt under the Credit Facility and to reduce the amount of
commercial paper outstanding.

     On July 17, 1998, the Company issued $600 of 7% senior notes, due on July
15, 2028 (the "7% Notes") and $600 of 6 1/8% mandatorily tendered senior notes,
due on July 15, 2011 (the "6 1/8% Notes"). The 7% Notes are redeemable, in whole
or in part, at the option of the Company at any time and from time to time at
the redemption price, as defined in the indenture. The 6 1/8% Notes are subject
to certain mandatory tender features as described in the indenture, which may
require the purchase by the Company of a portion of or all of the outstanding
notes on July 15, 2001. The Company intends to either refinance these notes or
use borrowings available under the Syndicated Facility and/or the Credit
Facility in the event it must purchase the notes on July 15, 2001. Accordingly,
these borrowings have been classified as long-term at December 31, 2000. The
proceeds from the 7% Notes and 6 1/8% Notes were used to repay outstanding
indebtedness under the Company's credit facilities. Interest on the 7% Notes and
6 1/8% Notes is payable semi-annually on January 15 and July 15.

     The Company's 4% convertible subordinated notes, due on February 1, 2002
have interest which is payable semi-annually in February and August. The notes
are convertible by the holders into shares of the Company's common stock at any
time at a conversion price of forty-three dollars and fifty-six cents per share.
The notes are subordinated in right of payment to all existing and future senior
indebtedness, as defined in the
                                        49
<PAGE>   52
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

indenture. The notes have been redeemable since February 1, 2000 at the option
of the Company at 101.6% of the principal amount, and decline to 100.8% of the
principal amount on February 1, 2001 and thereafter until maturity, at which
time the notes will be redeemed at par, plus accrued interest.

     The 5.75% convertible subordinated notes due 2005 are subordinated to all
existing and future senior indebtedness of the Company. Each note bears cash
interest at the rate of two percent per annum of the one thousand dollar
principal amount at maturity, payable semi-annually. The stated discount is two
hundred eighty-two dollars and twenty cents. At the option of the holder, each
note was redeemable for cash by the Company on March 15, 2000, at eight hundred
forty-three dollars and three cents along with the related accrued unpaid
interest. The notes have been callable by the Company since March 15, 2000, for
cash, at the stated issue price plus accrued stated discount and accrued but
unpaid interest through the date of redemption. In addition, each note is
convertible at any time prior to maturity into approximately 18.9 shares of the
Company's common stock, subject to adjustment upon the occurrence of certain
events. Upon any such conversion, the Company will have the option of paying
cash equal to the market value of the shares which would otherwise be issuable.
In December of 1999, the Company began repurchasing its 5.75% convertible notes.
During 2000, the Company had repurchased approximately $397 of the remaining
outstanding notes.

     The Company had a public debt offering during the first quarter of 2001.
The net proceeds from the offering of the notes will be utilized to repay $600
of senior notes which have been classified as long-term at December 31, 2000.
See Note 24 for further discussion.

8. ENVIRONMENTAL LIABILITIES

     The Company has material financial commitments for the costs associated
with its future obligations for final closure and post-closure obligations with
respect to the landfills it owns or operates. Estimates for final closure and
post-closure costs are developed using input from the Company's engineers and
accountants and are reviewed by management, typically at least once per year.
The estimates are based on the Company's interpretation of current requirements
and proposed regulatory changes. For landfills, the present value of final
closure and post-closure liabilities is accrued using the calculated rate per
ton and charged to expense as airspace is consumed. The present value of total
estimated final closure and post-closure cost will be fully accrued for each
landfill at the time the site discontinues accepting waste and is closed. Final
closure and post-closure accruals consider estimates for the final cap and cover
for the site, methane gas control, leachate management and groundwater
monitoring, and other operational and maintenance costs to be incurred after the
site discontinues accepting waste, which is generally expected to be for a
period of up to thirty years after final site closure. For purchased disposal
sites, the Company assesses and records a present value-based final closure and
post-closure liability at the time the Company assumes closure responsibility.
This liability is based on the estimated final closure and post-closure costs
and the percentage of airspace used as of the date the Company has assumed the
closure responsibility. Thereafter, the difference between the final closure and
post-closure liability recorded at the time of acquisition and the present value
of total estimated final closure and post-closure costs to be incurred is
accrued using the calculated rate and charged to expense as airspace is
consumed.

     In the United States, the final closure and post-closure requirements are
established by the EPA's Subtitles C and D regulation, as implemented and
applied on a state-by-state basis. The costs to comply with these requirements
could increase in the future as a result of legislation or regulation.

     The Company routinely reviews and evaluates sites that require remediation,
including sites listed on the EPA's National Priority List ("NPL sites"). The
Company considers whether the Company was an owner, operator, transporter, or
generator at the site, the amount and type of waste hauled to the site, the
number of years the Company was connected with the site, as well as reviewing
the same information with respect to other named and unnamed potentially
responsible parties ("PRPs"). The Company then reviews the estimated cost for
the likely remedy, which is based on management's judgment and experience in
                                        50
<PAGE>   53
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

remediating such sites for the Company as well as for unrelated parties,
information available from regulatory agencies as to costs of remediation, and
the number, financial resources and relative degree of responsibility of other
PRPs who may be liable for remediation of a specific site, as well as the
typical allocation of costs among PRPs. These estimates are sometimes a range of
possible outcomes. In those cases, the Company provides for the amount within
the range which constitutes its best estimate. If no amount within the range
appears to be a better estimate than any other amount, the Company provides for
the minimum amount within the range in accordance with SFAS No. 5, Accounting
for Contingencies. The Company believes that it is "reasonably possible," as
that term is defined in SFAS No. 5 ("more than remote but less than likely"),
that its potential liability, at the high end of such ranges, would be
approximately $249 higher on a discounted basis in the aggregate than the
estimate that has been recorded in the consolidated financial statements as of
December 31, 2000.

     Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services business, as well as its
involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. As additional information becomes available,
estimates are adjusted as necessary. While the Company does not anticipate that
any such adjustment would be material to its financial statements, it is
reasonably possible that technological, regulatory or enforcement developments,
the results of environmental studies, the non-existence or inability of other
PRPs to contribute to the settlements of such liabilities, or other factors
could necessitate the recording of additional liabilities which could be
material.

     As part of its ongoing operations, the Company reviews its reserve
requirements for remediation and other environmental matters based on an
analysis of, among other things, the regulatory context surrounding landfills
and remaining airspace capacity in light of changes to operational efficiencies.
Accordingly, revisions to remediation reserve requirements may result in upward
or downward adjustments to income from operations in any given period.
Adjustments for final closure and post-closure estimates are accounted for
prospectively over the remaining capacity of the landfill.

     Where the Company believes that both the amount of a particular
environmental liability and the timing of the payments are reliably
determinable, the cost in current dollars is inflated (at 2.5% and 2% at
December 31, 2000 and 1999, respectively) until expected time of payment and
then discounted to present value (at 6.0% and 5.5% at December 31, 2000 and
1999, respectively). The accretion of the interest related to the discounted
environmental liabilities is included in the annual calculation of the
landfill's final closure and post-closure cost per ton and is charged to
operating expense as landfill airspace is consumed. The portion of the Company's
recorded environmental liabilities that has never been subject to inflation or
discounting was approximately $136 and $140 at December 31, 2000 and 1999,
respectively. Had the Company not discounted any portion of its liability, the
amount recorded would have been increased by approximately $415 at December 31,
2000.

                                        51
<PAGE>   54
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Liabilities for final closure, post-closure and environmental remediation
costs at December 31, consisted of the following:

<TABLE>
<CAPTION>
                                                               2000    1999
                                                              ------   ----
<S>                                                           <C>      <C>
Current portion, included in accrued liabilities:
  Closure/Post-closure......................................  $   54   $ 44
  Remediation...............................................      99     96
                                                              ------   ----
                                                                 153    140
                                                              ------   ----
Non-current portion:
  Closure/Post-closure......................................     559    556
  Remediation...............................................     250    281
                                                              ------   ----
                                                                 809    837
                                                              ------   ----
Total recorded..............................................     962   $977
                                                                       ====
Amount to be provided including discount of $415 related to
  recorded amounts..........................................   1,850
                                                              ------
Expected aggregate environmental liabilities based on
  current cost..............................................  $2,812
                                                              ======
</TABLE>

     Anticipated payments (based on current costs) of currently identified
environmental liabilities for the next five years are as follows:

<TABLE>
<CAPTION>
                                2001   2002   2003   2004   2005
                                ----   ----   ----   ----   ----
<S>                             <C>    <C>    <C>    <C>    <C>    <C>
                                $153   $66    $73    $50    $40
</TABLE>

     In addition to the amounts above, the Company has perpetual care
obligations at a site of approximately $2 per year.

     The Company has filed suit against numerous insurance carriers seeking
reimbursement for past and future environmentally related remedial, defense and
tort claim costs at a number of sites. Carriers involved in these matters have
typically denied coverage and are defending against the Company's claims. While
the Company is vigorously pursuing such claims, it regularly considers
settlement opportunities when appropriate terms are offered. Settlements, which
were $2 in 2000, $7 in 1999 and $47 in 1998, have been included in operating
costs and expenses as an offset to environmental expenses.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value amounts of the Company's financial instruments
have been determined by the Company using available market information and
commonly accepted valuation methodologies. However, considerable judgement is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company or holders of the instruments could realize in a
current market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair values. The fair
value estimates presented herein are based on information available to
management as of December 31, 2000 and 1999. Such amounts have not been revalued
since those dates, and current estimates of fair value may differ significantly
from the amounts presented herein.

     The carrying values of cash and cash equivalents, short-term investments,
trade accounts receivable, trade accounts payable, financial instruments
included in notes and other receivables and financial instruments included in
other assets or other liabilities are estimated to approximate their fair values
principally because of the short-term maturities of these instruments. As of
December 31, 2000 and 1999, the carrying amount of

                                        52
<PAGE>   55
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

debt was $8,485 and $11,498, respectively, and the fair value of debt was
estimated at $8,281 and $10,777, respectively.

10. DERIVATIVE FINANCIAL INSTRUMENTS

     Interest rate agreements -- The Company has entered into interest rate swap
agreements to balance fixed and floating rate debt interest risk in accordance
with management's criteria (see Note 3). The agreements are contracts to
exchange fixed and floating interest rate payments periodically over a specified
term without the exchange of the underlying notional amounts. The agreements
provide only for the exchange of interest on the notional amounts at the stated
rates, with no multipliers or leverage. Differences paid or received over the
life of the agreements are recorded in the consolidated financial statements as
a part of interest expense on the underlying debt, and the swap is not recorded
on the balance sheet. As of December 31, 2000, interest rate agreements in
notional amounts and with terms as set forth in the following table were
outstanding:

<TABLE>
<CAPTION>
                             NOTIONAL
                              AMOUNT
CURRENCY                 (IN U.S. DOLLARS)   RECEIVE      PAY            MATURITY DATE
--------                 -----------------   --------   --------   -------------------------
<S>                      <C>                 <C>        <C>        <C>
U.S. Dollar............       $   21         Floating   Fixed      Through December 31, 2012
U.S. Dollar............       $1,052         Fixed      Floating   Through April 1, 2010
</TABLE>

     Commodity agreements -- The Company has entered into recycled paper swap
agreements to help mitigate the price volatility of recycled paper. The
agreements are contracts to exchange fixed and floating commodity prices over a
fixed period of time. All of the Company's recyclable paper hedges are
cash-settled on a monthly basis with the counterparty and are recorded as a
component of operating expense. At December 31, 2000 the Company had recycled
paper swap agreements for a total notional amount of 48,722 tons per month
expiring at various dates through November 2007. These swap agreements are not
recorded on the balance sheet.

     Fair values -- The fair values of the interest rate swaps and recycled
paper swaps represent the amounts at which the agreements could be settled based
on estimated market rates. At December 31, 2000, the Company would have had to
pay approximately $5 and would receive $11 to settle the interest rate swap
agreements and recycled paper swap agreements, respectively.

11. CAPITAL STOCK

     The Board of Directors is authorized to issue preferred stock in series,
and with respect to each series, to fix its designation, relative rights
(including voting, dividend, conversion, sinking fund, and redemption rights),
preferences (including dividends and liquidation), and limitations. The Company
has ten million shares of authorized $.01 par value preferred stock, none of
which is currently outstanding.

     The Company declared cash dividends of approximately $6 during both 2000
and 1999 and $94 during 1998. Based on the Company's weighted average common
shares outstanding, the cash dividends per common share were $0.01, $0.01 and
$0.16 for 2000, 1999 and 1998, respectively. As of December 31, 2000, due to
current credit agreements, the Company's ability to pay dividends and repurchase
capital stock was limited to $369, of which no more than $25 may be paid for
dividends.

12. COMMON STOCK OPTIONS AND WARRANTS

     The Company accounts for its stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," as amended, under which no
compensation cost for stock options is recognized when granted with an exercise
price at least equal to fair market value. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value-based method of accounting which are shown below.
                                        53
<PAGE>   56
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Under the Company's 1993 Stock Option Incentive Plan and the Company's 2000
Stock Option Incentive Plan, options to purchase 26.5 million and 29.0 million
shares, respectively, of the Company's common stock may be granted to officers,
directors, and key employees. Options are granted under these plans at exercise
prices at least equal to the fair market value on the date of grant. The option
plans have various vesting periods, and expire up to ten years from the date of
grant. The Company also has a 2000 Broad-Based Employee Plan under which options
to purchase 3 million shares can be granted to any non-officer employees. The
exercise prices for options under the Broad-Based Plan are at least equal to the
fair market value on the date of grant, may vest over various periods, and
expire up to ten years from the date of grant.

     Under the 1996 Stock Option Plan for Non-Employee Directors, the Company's
outside directors receive an annual grant of 10,000 options on each January 1.
In accordance with the plan, options to purchase up to 2,400,000 shares of the
Company's common stock may be granted, with one-year vesting periods and
expiration dates ten years from the date of grant. The options are granted at
exercise prices equal to the fair market value of the common stock on the date
of grant.

     Stock options granted by the Company in 2000, 1999 and 1998 generally have
ten year terms and vest over four or five years. Stock options granted by WM
Holdings prior to March 10, 1998, became fully vested upon consummation of the
WM Holdings Merger. WM Holdings' options granted after March 10, 1998 generally
continue to vest in accordance with their original vesting schedule of 3 years.
Generally, all other stock options granted by merged entities continue to vest
under varying vesting periods ranging from immediate vesting to five years
following the date of the grant.

     The Company also has outstanding options and warrants related to various
predecessor plans acquired through merger and acquisition activity.

     The following table summarizes common stock option and warrant transactions
under the aforementioned plans and various predecessor plans for 2000, 1999 and
1998 (shares in thousands):

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                     ----------------------------------------------------------
                                           2000                 1999                1998
                                     -----------------   ------------------   -----------------
                                              WEIGHTED             WEIGHTED            WEIGHTED
                                              AVERAGE              AVERAGE             AVERAGE
                                              EXERCISE             EXERCISE            EXERCISE
                                     SHARES    PRICE     SHARES     PRICE     SHARES    PRICE
                                     ------   --------   -------   --------   ------   --------
<S>                                  <C>      <C>        <C>       <C>        <C>      <C>
Outstanding at beginning of year...  36,733    $34.53     40,810    $32.72    37,631    $30.46
Granted............................   8,069     15.46      8,206     33.86    10,645     43.92
Assumed in acquisitions............      --        --         --        --     1,986     36.77
Exercised..........................  (1,288)    18.95    (11,685)    26.88    (8,593)    34.17
Canceled or expired................  (4,331)    41.36       (598)    51.54      (859)    45.33
                                     ------              -------              ------
Outstanding at end of year.........  39,183    $30.36     36,733    $34.53    40,810    $32.72
                                     ======              =======              ======
Exercisable at end of year.........  23,523    $33.43     22,055    $33.93    23,994    $29.25
                                     ======              =======              ======
</TABLE>

     In addition to the amounts in the table above, at December 31, 2000 and
1999, the Company had approximately 1.0 million warrants outstanding at a
weighted average exercise price of $20.96 per share. The warrants were issued by
a previously acquired company to non-employees in connection with services
provided to that company.

                                        54
<PAGE>   57
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Outstanding and exercisable stock options and warrants at December 31,
2000, were as follows (shares in thousands):

<TABLE>
<CAPTION>
                                        OUTSTANDING                           EXERCISABLE
                        --------------------------------------------   -------------------------
RANGE OF                         WEIGHTED AVERAGE   WEIGHTED AVERAGE            WEIGHTED AVERAGE
EXERCISE PRICES         SHARES    EXERCISE PRICE    REMAINING YEARS    SHARES    EXERCISE PRICE
---------------         ------   ----------------   ----------------   ------   ----------------
<S>                     <C>      <C>                <C>                <C>      <C>
$2.25 to $10.00.......     111        $ 7.21              3.37            111        $ 7.21
$10.01 to $20.00......  13,111         14.78              7.73          4,081         13.45
$20.01 to $30.00......   7,992         24.23              5.97          6,188         24.79
$30.01 to $40.00......   6,676         35.53              6.30          5,058         35.64
$40.01 to $50.00......   5,172         45.47              5.09          4,747         45.35
$50.01 to $140.16.....   6,121         53.72              6.66          3,338         54.39
                        ------                                         ------
                        39,183         30.36              6.60         23,523         33.43
                        ======                                         ======
</TABLE>

     The weighted average fair value per share of common stock options and
warrants granted during 2000, 1999 and 1998 were $6.78, $16.17 and $18.61,
respectively. The fair value of each common stock option or warrant granted to
employees or directors during 2000, 1999 and 1998 is estimated utilizing the
Black-Scholes option-pricing model. The following weighted average assumptions
were used: dividend yield of 0% to 2%, risk-free interest rates which vary for
each grant and range from 4.63% to 7.67%, expected life of three to seven years
for all grants, and stock price volatility primarily ranging from 23.74% to
50.04% for all three to seven year grants.

     If the Company applied the recognition provisions of SFAS No. 123, the
Company's net loss and loss per common share for 2000, 1999 and 1998 would
approximate the pro forma amounts shown below:

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              -------------------------
                                                               2000      1999     1998
                                                              -------   ------   ------
<S>                                                           <C>       <C>      <C>
Net loss:
  As reported..............................................   $  (97)   $(398)   $(771)
  Pro forma................................................     (172)    (479)    (833)
Basic loss per common share:
  As reported..............................................    (0.16)   (0.65)   (1.32)
  Pro forma................................................    (0.28)   (0.78)   (1.43)
Diluted loss per common share:
  As reported..............................................    (0.16)   (0.65)   (1.32)
  Pro forma................................................    (0.28)   (0.78)   (1.43)
</TABLE>

     The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future results or performance.

     In November 1999, the Company's President, CEO and Chairman of the Board
was granted 650,000 stock options upon joining the Company. The options, which
are included in the above tables, vest according to certain performance goals in
lieu of the normal vesting schedules. Notwithstanding these performance goals,
all of these options will vest no later than five years from the date of grant.

13. EMPLOYEE BENEFIT PLANS

     Effective January 1, 1999, the Waste Management Retirement Savings Plan and
the Wheelabrator-Rust Savings and Retirement Plan were merged into the USA Waste
Services, Inc. Employee Savings Plan, which was then renamed the Waste
Management Retirement Savings Plan ("Savings Plan"). The Savings Plan covers
employees (except those working subject to collective bargaining agreements
which do not provide for
                                        55
<PAGE>   58
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

coverage under such plans) following a 90 day waiting period after hire, and
allows eligible employees to contribute up to 15% of their annual compensation,
as limited by IRS regulations. Under the Savings Plan, the Company matches
employee contributions up to 3% of their eligible compensation and matches 50%
of employee contributions in excess of 3% but no more than 6% of eligible
compensation. Both employee and Company contributions vest immediately. Charges
to operations for the Company's defined contribution plans were $38, $49 and
$70, during 2000, 1999 and 1998, respectively.

     During 2000, the Company sold its foreign subsidiaries that participated in
both defined benefit and defined contribution retirement plans. The annual
activity of these plans is not included in the tables below primarily due to
their insignificance and sale of the related operating companies in 2000. In
addition to the pension plan for certain employees under collective bargaining
agreements established in 1998 (see below), other Company subsidiaries
participate in various multi-employer pension plans and in two instances, site
or contract specific plans, covering certain employees not covered under the
Company's pension plans. These multi-employer plans are generally defined
benefit plans; however, in many cases, specific benefit levels are not
negotiated with or known by the employer contributors. The projected benefit
obligation, plan assets and unfunded liability of the site or contract specific
plans are not material and are not included in the tables below. Contributions
of $28, $31 and $26 for subsidiaries' defined benefit plans were charged to
operations in 2000, 1999 and 1998, respectively.

     The Company had a qualified defined benefit pension plan (the "Plan") for
all eligible non-union domestic employees of WM Holdings which, as discussed
below, was terminated as of October 31, 1999 in connection with the WM Holdings
Merger. Throughout the life of the Plan, benefits were based on the employee's
years of service and compensation during the highest five consecutive years out
of the last ten years of employment. The Company's funding policy was to
contribute annually an amount determined in consultation with its actuaries,
approximately equal to pension expense, except as may be limited by the
requirements of the Employee Retirement Income Security Act ("ERISA"). An
actuarial valuation report was prepared for the Plan as of September 30 each
year and used for the year-end disclosures.

     In connection with the WM Holdings Merger, the Company ceased benefit
accruals for the Plan as of December 31, 1998. The Company planned to liquidate
the Plan's assets and settle its obligations to participants, except as related
to certain employees participating under collective bargaining agreements, whose
benefits were transferred to a newly created plan effective October 1, 1998.
This decision resulted in a curtailment expense charge in asset impairments and
unusual items of $35 in 1998. The Plan was officially terminated as of October
31, 1999. The Company contributed approximately $145 to the Plan's trusts during
2000 and expects contributions of approximately $20 to be made in early 2001
relating to the final liquidation of the Plan. The expense recorded for this
Plan during 2000 was approximately $197. During the fourth quarter of 2000, the
Company adjusted accumulated other comprehensive income to reflect the final
anticipated settlement expense of $3, net of taxes of $2, which will be expensed
as the final settlements occur in 2001.

     Also in conjunction with the WM Holdings Merger, the Company has terminated
certain non-qualified supplemental benefit plans for certain officers and
non-officer managers, the most significant plan being the WM Holdings'
Supplemental Executive Retirement Plan ("SERP") (collectively the "Supplemental
Plans"). The curtailment and settlement loss related to these plans of $62 was
recorded in asset impairments and unusual items in 1998. The Company has a
pension liability as of December 31, 2000 equal to the expected payment amounts.
The Plan and Supplemental Plans are combined under the caption "Pension
Benefits" in the tables that follow.

     WM Holdings and certain of its subsidiaries provided post-retirement health
care and other benefits to eligible employees. In conjunction with the WM
Holdings Merger, the Company limited participation in these plans to
participating retired employees as of December 31, 1998. The remaining benefits
under the Supplemental Plans are expected to be paid in 2001. The Company has a
pension liability as of December 31,
                                        56
<PAGE>   59
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2000 equal to the expected payment amounts. These plans are combined under the
caption "Other Benefits" in the tables that follow.

     The following tables provide a reconciliation of the changes in the plans'
benefit obligations and the fair value of plan assets over the two-year period
ending December 31, 2000, and a statement of the funded status for both years:

<TABLE>
<CAPTION>
                                                              PENSION BENEFITS    OTHER BENEFITS
                                                              -----------------   ---------------
                                                               2000      1999      2000     1999
                                                              -------   -------   ------   ------
<S>                                                           <C>       <C>       <C>      <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year.....................   $ 561     $ 472     $ 55     $ 54
Service cost................................................       1         1       --       --
Interest cost...............................................      21        23        4        3
Actuarial (gain)/loss.......................................     (21)       73       (4)       2
Benefits paid...............................................     (10)       (8)      (4)      (4)
Curtailments................................................       1        --       --       --
Settlements.................................................    (478)       --       --       --
                                                               -----     -----     ----     ----
Benefit obligation at end of year...........................   $  75     $ 561     $ 51     $ 55
                                                               =====     =====     ====     ====
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year..............   $ 336     $ 319     $ --     $ --
Actual return on plan assets................................      19       (18)      --       --
Employer contributions......................................     149        43        4        4
Benefits paid...............................................     (10)       (8)      (4)      (4)
Settlements.................................................    (478)       --       --       --
                                                               -----     -----     ----     ----
Fair value of plan assets at end of year....................   $  16     $ 336     $ --     $ --
                                                               =====     =====     ====     ====
FUNDED STATUS:
Funded status at December 31................................   $ (59)    $(225)    $(51)    $(55)
Unrecognized (gain)/loss....................................       5       223       (1)       2
Unrecognized prior service cost.............................      --        --      (18)     (19)
                                                               -----     -----     ----     ----
Net amount recognized.......................................   $ (54)    $  (2)    $(70)    $(72)
                                                               =====     =====     ====     ====
</TABLE>

     The following table provides the amounts recognized in the consolidated
balance sheets as of December 31 of both years:

<TABLE>
<CAPTION>
                                                              PENSION BENEFITS    OTHER BENEFITS
                                                              -----------------   ---------------
                                                               2000      1999      2000     1999
                                                              -------   -------   ------   ------
<S>                                                           <C>       <C>       <C>      <C>
Prepaid benefit cost........................................   $  --     $  37     $ --     $ --
Accrued benefit liability...................................     (54)      (39)     (70)     (72)
Minimum pension liability...................................      (5)     (222)      --       --
Accumulated other comprehensive income before tax benefit...       5       222       --       --
                                                               -----     -----     ----     ----
Net amount recognized.......................................   $ (54)    $  (2)    $(70)    $(72)
                                                               =====     =====     ====     ====
</TABLE>

                                        57
<PAGE>   60
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table provides the components of net periodic benefit cost
for 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                        PENSION BENEFITS      OTHER BENEFITS
                                                       ------------------   ------------------
                                                       2000   1999   1998   2000   1999   1998
                                                       ----   ----   ----   ----   ----   ----
<S>                                                    <C>    <C>    <C>    <C>    <C>    <C>
Components of net periodic benefit cost:
  Service cost.......................................  $  1   $  1   $ 18   $--    $--    $ 2
  Interest cost......................................    21     23     24     4      3      4
  Expected return on plan assets.....................   (11)   (17)   (21)   --     --     --
  Recognized (asset)/obligation......................    --     (1)    (1)   --     --     --
  Amortization of prior service cost.................    --     --     --    (2)    (1)    --
  Recognized (gain)/loss.............................    13      9      8    --     --     --
                                                       ----   ----   ----   ---    ---    ---
  Net periodic benefit cost..........................    24     15     28     2      2      6
  Curtailment loss (included in asset impairments and
     unusual items)..................................     1     --     53    --     --     --
  Settlement loss (included in asset impairments and
     unusual items)..................................   174     --     44    --     --     --
                                                       ----   ----   ----   ---    ---    ---
  Net periodic benefit cost after curtailments and
     settlements.....................................  $199   $ 15   $125   $ 2    $ 2    $ 6
                                                       ====   ====   ====   ===    ===    ===
</TABLE>

     The assumptions used in the measurement of the Company's benefit
obligations are shown in the following table (weighted average assumptions as of
December 31):

<TABLE>
<CAPTION>
                                                         PENSION BENEFITS      OTHER BENEFITS
                                                         -----------------     ---------------
                                                          2000       1999       2000     1999
                                                         ------     ------     ------   ------
<S>                                                      <C>        <C>        <C>      <C>
Discount rate..........................................   5.53%      5.83%      7.50%    7.50%
Expected return on plan assets.........................   6.30%      6.11%       n/a      n/a
Rate of compensation...................................   3.50%      3.50%       n/a      n/a
</TABLE>

     The assumptions used for discount rate and expected long-term rate of
return on assets in the 2000 disclosure reflect the weighted average assumptions
for the terminated and ongoing plans. Since the Plan and Supplemental Plans
being terminated are larger than the ongoing union plan, the assumptions
applicable to those plans are the main factors in these weighted average
assumptions. The assumptions for the Plan and the Supplemental Plans reflect the
assumptions used in settling these plan obligations (lump sum interest rates and
annuity purchase rates) and the return on the immunized assets for the plan. A
discount rate of 7.5% and an expected long-term rate of return of 9.0% are used
for the ongoing union plan.

     The principal element of the "other benefits" referred to above is the
post-retirement health care plan. Participants in the WM Holdings
post-retirement plan (one of two plans that comprise the "other benefits"
information) contribute to the cost of the benefit, and for retirees since
January 1, 1992, the Company's contribution is capped at between $0 and $600 per
month per retiree, based on years of service. For measurement purposes, a 9.0%
annual rate of increase in the per capita cost of covered health care claims was
assumed for 2000 (being an average of the rate used by all plans); the rate was
assumed to decrease to 6.0% in 2004 and remain at that level thereafter.

     A 1% change in assumed health care cost trend rates would have the
following effects:

<TABLE>
<CAPTION>
                                                              1% INCREASE   1% DECREASE
                                                              -----------   -----------
<S>                                                           <C>           <C>
Effect on total service and interest cost components of net
  periodic post-retirement health care costs................      $--           $--
Effect on accumulated post-retirement benefit obligation....      $ 4           $(3)
</TABLE>

                                        58
<PAGE>   61
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On July 1, 2000, WM Holdings terminated the Waste Management Benefits Stock
Trust (the "Trust"). In 1994, the Trust (which was created by WM Holdings)
purchased, in exchange for a promissory note, all of the outstanding treasury
shares of WM Holdings to fund various of its benefit plans. Pursuant to the WM
Holdings Merger, all of the shares held by the Trust were converted into shares
of the Company's common stock. In accordance with the termination of the Trust,
the shares previously owned by it were returned to the Company as payment for
the outstanding amount of the promissory note. The 7,892,612 shares returned to
the Company were recorded as treasury shares.

14. INCOME TAXES

     For financial reporting purposes, income (loss) before income taxes and
extraordinary item, showing domestic and international sources, was as follows:

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Domestic....................................................  $ 491    $ (42)   $(897)
International...............................................   (170)    (121)     197
                                                              -----    -----    -----
Income (loss) before income taxes and extraordinary item....  $ 321    $(163)   $(700)
                                                              =====    =====    =====
</TABLE>

     The provision for income taxes before extraordinary item consisted of the
following:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                               2000     1999      1998
                                                              ------   -------   -------
<S>                                                           <C>      <C>       <C>
Current:
  Federal...................................................   $238     $(150)    $ 356
  State.....................................................     74       (19)       88
  Foreign...................................................     41        83        73
                                                               ----     -----     -----
                                                                353       (86)      517
                                                               ----     -----     -----
Deferred:
  Federal...................................................     50       270      (463)
  State.....................................................      6        40       (52)
  Foreign...................................................      9         8        65
                                                               ----     -----     -----
                                                                 65       318      (450)
                                                               ----     -----     -----
          Provision for income taxes........................   $418     $ 232     $  67
                                                               ====     =====     =====
</TABLE>

                                        59
<PAGE>   62
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The federal statutory rate is reconciled to the effective rate as follows:

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                                             ------------------------
                                                              2000     1999     1998
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Income tax expense (benefit) at federal statutory rate.....   35.00%  (35.00)% (35.00)%
State and local income taxes, net of federal income tax
  benefit..................................................   16.17    19.31     3.23
Nondeductible costs relating to acquired intangibles.......   48.40    22.01    16.85
Nondeductible merger costs.................................      --       --     8.22
Writedown of investments in subsidiaries...................   12.81    74.85       --
Minority interest..........................................    2.54     5.20     0.82
Sale of foreign subsidiaries...............................   23.53       --       --
Deferred tax valuation and other tax reserves..............    1.21    25.24     8.79
Federal tax on foreign income, net of U.S. benefit.........    3.13    30.30     4.35
Nonconventional fuel tax credit............................   (8.30)      --    (3.61)
Other......................................................   (4.27)    0.42     5.92
                                                             ------   ------   ------
          Provision for income taxes.......................  130.22%  142.33%    9.57%
                                                             ======   ======   ======
</TABLE>

     The components of the net deferred tax assets (liabilities) at December 31
are as follows:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
Deferred tax assets:
  Net operating loss, capital loss and tax credit
     carryforwards..........................................  $   334   $   244
  Environmental and other reserves..........................    1,032     1,021
  Reserves not deductible until paid........................      138       205
                                                              -------   -------
          Subtotal..........................................    1,504     1,470
                                                              -------   -------
Deferred tax liabilities:
  Property, equipment, intangible assets, and other.........   (1,627)   (1,574)
Valuation allowance.........................................     (444)     (328)
                                                              -------   -------
          Net deferred tax liabilities......................  $  (567)  $  (432)
                                                              =======   =======
</TABLE>

     At December 31, 2000 the Company's subsidiaries have approximately $64 of
federal net operating loss ("NOL") carryforwards, $3,700 of state NOL
carryforwards, and $116 of foreign NOL carryforwards. The NOL carryforwards have
expiration dates through the year 2019. The Company's subsidiaries have $2 of
alternative minimum tax credit carryforwards that may be used indefinitely;
state tax credit carryforwards of $11; and foreign tax credit carryforwards of
$33.

     Valuation allowances have been established for uncertainties in realizing
the benefit of tax loss and credit carryforwards. While the Company expects to
realize the deferred tax assets, net of the valuation allowances, changes in
estimates of future taxable income or in tax laws may alter this expectation.
The valuation allowance increased approximately $116 and $121 in 2000 and 1999,
respectively, primarily due to the uncertainty of realizing foreign and state
NOL carryforwards and the expiration of foreign tax credits.

     Prior to the Company's August 1999 decision to divest its WM International
operations, the Company did not provide for United States income taxes on
unremitted earnings of foreign subsidiaries as it was the intention of
management to reinvest the unremitted earnings in its foreign operations. Since
the adoption of the strategic plan in August 1999, the Company has provided for
United States income taxes on unremitted foreign earnings on its international
operations other than in Canada. The amount of United States income tax provided
for the repatriation of the Company's international operations other than in
Canada was approximately $13 for 1999. For 2000, with respect to its Canadian
operations, the Company provided $9 for the

                                        60
<PAGE>   63
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

repatriation of $58 of capital. Unremitted earnings in Canada were approximately
$62 at December 31, 2000, which the Company intends to reinvest. It is not
practicable to determine the amount of United States based income taxes that
would be payable upon remittance of the assets that represent those earnings.

15. SEGMENT AND RELATED INFORMATION

     The Company's North American solid waste management operations is the
Company's principal reportable segment and is comprised of six geographical
operating Areas with similar economic characteristics. This segment provides
integrated waste management services consisting of collection, transfer,
disposal (solid waste landfill, hazardous waste landfill and waste-to-energy
facilities), recycling, and other miscellaneous services to commercial,
industrial, municipal and residential customers in North America, including the
United States and Puerto Rico, Mexico and Canada. Similar operations in
international markets outside of North America are disclosed as a separate
segment under WM International. As discussed in Notes 4 and 20, pursuant to the
Company's strategic plan, the Company has divested or is actively marketing to
sell its remaining WM International operations and considers them to be
held-for-sale. The remaining operations outside of North America included
certain operations in Sweden and operations in Argentina and Israel. The
Company's other reportable segment consists of non-solid waste management
services, aggregated as a single segment for this reporting presentation. The
non-solid waste management segment includes other hazardous waste services such
as chemical waste management services, the Company's independent power projects,
and other non-solid waste management services to commercial, industrial and
government customers. As discussed in Notes 4 and 20, the Company's non-solid
waste management segment includes business lines that have been divested or are
being actively marketed and considered to be held-for-sale.

     Summarized financial information concerning the Company's reportable
segments for the respective years ended December 31, is shown in the following
table. Prior period information has been restated to conform to the segments
described above, which are based on the structure and internal organization of
the Company as of December 31, 2000.

<TABLE>
<CAPTION>
                                     NORTH AMERICAN        WM         NON-SOLID    CORPORATE
                                      SOLID WASTE     INTERNATIONAL     WASTE     FUNCTIONS(A)    TOTAL
                                     --------------   -------------   ---------   ------------   -------
<S>                                  <C>              <C>             <C>         <C>            <C>
2000
Net operating revenues(b)..........     $11,218          $  809        $  465        $   --      $12,492
Earnings before interest and taxes
  (EBIT)(c),(d)....................       2,166             151            77          (607)       1,787
Depreciation and amortization......       1,352              20            16            41        1,429
Capital expenditures...............       1,163              74             6            70        1,313
Total assets(d)....................      16,587              80            97         1,801       18,565
1999
Net operating revenues(b)..........     $10,685          $1,651        $  791        $   --      $13,127
Earnings before interest and taxes
  (EBIT)(c),(d)....................       1,633             212            38          (559)       1,324
Depreciation and amortization......       1,364             148            23            79        1,614
Capital expenditures...............       1,086             206            17            18        1,327
Total assets(d)....................      17,178           2,915           971         1,617       22,681
1998
Net operating revenues(b)..........     $10,144          $1,534        $  948        $   --      $12,626
Earnings before interest and taxes
  (EBIT)(c),(d)....................       2,509             134           112          (244)       2,511
Depreciation and amortization......       1,215             168            44            72        1,499
Capital expenditures...............       1,438             166            35            12        1,651
Total assets(d)....................      17,005           2,956         1,000         1,921       22,882
</TABLE>

                                        61
<PAGE>   64
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(a)   Corporate functions include the corporate treasury function (except for
      limited amounts of locally negotiated and managed project debt), legal
      function, information technology function, administration of corporate tax
      function, the corporate insurance function and management of closed
      landfill and related insurance recovery functions, along with other
      typical administrative functions.

(b)   Non-solid waste revenues are net of inter-segment revenue with North
      American solid waste of $37, $46 and $122 in 2000, 1999 and 1998,
      respectively. There are no other significant sales between segments.

(c)   For those items included in the determination of EBIT (the earnings
      measurement used by management to evaluate operating performance), the
      accounting policies of the segments are generally the same as those
      described in the summary of significant accounting policies.

(d)   There are no material asymmetrical allocations of EBIT versus assets
      between segments or corporate. Certain asset impairments and unusual items
      reported in the reconciliation of EBIT to reported net loss below,
      however, have resulted in adjustments to assets ultimately reflected on
      segment balance sheets. Assets are net of inter-segment receivables and
      investments.

     The reconciliation of total EBIT reported above to net loss is as follows:

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                                             ------------------------
                                                              2000     1999     1998
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
EBIT, as reported above....................................  $1,787   $1,324   $2,511
  (Plus) less:
     Merger and acquisition related costs..................      --       45    1,807
     Asset impairments and unusual items...................     749      739      864
                                                             ------   ------   ------
Income (loss) from operations..............................   1,038      540     (160)
Interest expense...........................................    (748)    (770)    (682)
Interest income............................................      31       38       27
Minority interest..........................................     (23)     (24)     (24)
Other income, net..........................................      23       53      139
                                                             ------   ------   ------
Income (loss) before income taxes and extraordinary item...     321     (163)    (700)
Provision for income taxes.................................     418      232       67
                                                             ------   ------   ------
Loss before extraordinary item.............................     (97)    (395)    (767)
Extraordinary loss.........................................      --       (3)      (4)
                                                             ------   ------   ------
          Net loss.........................................  $  (97)  $ (398)  $ (771)
                                                             ======   ======   ======
</TABLE>

     The table below shows the total revenues contributed by the Company's
principal lines of business within the NASW segment.

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2000      1999      1998
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
North American Solid Waste:
  Collection................................................  $ 7,675   $ 7,553   $ 6,964
  Disposal..................................................    3,366     3,267     3,169
  Transfer..................................................    1,394     1,195     1,054
  Recycling and other.......................................      805       664       653
  Intercompany..............................................   (2,022)   (1,994)   (1,696)
                                                              -------   -------   -------
          Operating revenues................................  $11,218   $10,685   $10,144
                                                              =======   =======   =======
</TABLE>

                                        62
<PAGE>   65
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Revenues decreased from 1999 to 2000 due to the Company selling its WM
International operations on a country by country basis throughout 2000. As of
December 31, 2000, the Company's operations outside of North America included
certain operations in Sweden, and operations in Argentina and Israel. The
Company's WM International operations, as well as certain of the Company's
operations in Mexico (which is considered NASW), had their property and
equipment reflected in current operations held-for-sale at December 31, 2000 and
1999. Operating revenues and property and equipment (net) relating to operations
in the United States and Puerto Rico, Europe, Canada and all other geographic
areas ("other foreign") are as follows.

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      1999      1998
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Operating revenues:
  United States and Puerto Rico.........................  $11,134   $11,015   $10,604
  Europe................................................      600     1,355     1,264
  Canada................................................      493       409       426
  Other foreign.........................................      265       348       332
                                                          -------   -------   -------
          Total.........................................  $12,492   $13,127   $12,626
                                                          =======   =======   =======
</TABLE>

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      1999      1998
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Property and equipment, net:
  United States and Puerto Rico.........................  $ 9,295   $ 9,468   $ 9,774
  Europe................................................       --        --       841
  Canada................................................      831       836       841
  Other foreign.........................................       --        --       170
                                                          -------   -------   -------
          Total.........................................  $10,126   $10,304   $11,626
                                                          =======   =======   =======
</TABLE>

16. ASSET IMPAIRMENTS AND UNUSUAL ITEMS

     In 2000, 1999 and 1998, the Company recorded certain charges for asset
impairments and unusual items as follows:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                               2000      1999      1998
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Losses on businesses sold and held-for-sale adjustments for
  businesses to be sold.....................................   $543      $443      $195
Asset impairments (excluding held-for-sale adjustments).....     --       194        --
Changes in estimates on the ultimate losses for certain
  legal and environmental issues and related costs..........     17        92       332
Pension related costs for the WM Holdings' defined benefit
  plan......................................................    197        13        35
Provision or adjustment to provision for losses on
  contractual commitments...................................     --        (3)      115
Compensation charges for the liquidation of WM Holdings'
  SERP (Note 13) and other supplemental plans...............      4        --        72
Put provisions of certain WM Holdings' stock options as a
  result of change in control provisions....................     --        --       115
Other.......................................................    (12)       --        --
                                                               ----      ----      ----
                                                               $749      $739      $864
                                                               ====      ====      ====
</TABLE>

                                        63
<PAGE>   66
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The loss on businesses sold and held-for-sale adjustments for businesses to
be sold of $543 incurred in 2000 consisted of (i) a net gain of $127 on
divestitures of international operations, (ii) losses of $524 resulting from the
recognition of currency translation adjustment upon the divestitures of
international operations, and (iii) a net loss of $146 on the impairment of
domestic operations, offset by certain domestic gains and other items.

     Fair values for asset impairment losses were determined for landfills,
hazardous waste facilities, recycling investments and other facilities,
primarily based on discounted future cash flow projections or offers from
interested third parties. For surplus real estate, third party bids, market
opinions and appraisals were used to determine fair value. In determining fair
values for abandoned projects and vehicles to be sold, recoverable salvage
values were determined using market estimates. The Company provides for losses
in connection with long-term waste service contracts where an obligation exists
to perform services and when it becomes evident the projected direct and
incremental contract costs will exceed the related contract revenues. In 1998,
the Company recorded loss contract provisions that were identified through
reviews related to the WM Holdings and Eastern Mergers as asset impairments and
unusual items. In general, these losses relate to contracts with remaining
average duration of five years. Loss contract provisions identified through
routine business reviews in 1999 and 2000 were recorded as a component of costs
of operations.

     Based primarily on preliminary bids from interested parties, the Company's
WM International operations and certain other assets that were identified as
"held-for-sale" during the third quarter of 1999 were written down to fair value
less cost to sell, resulting in a pre-tax charge of approximately $414 at
September 30, 1999. These assets were considered to be held for use for periods
prior to the third quarter of 1999 and did not meet the criteria for impairment
recognition as a held for use asset, and therefore, were not considered impaired
for periods prior to the third quarter of 1999. The assets that were identified
as held for sale for September 30, 1999 and subject to adjustment include, among
others, the Company's WM International operations, the Company's nuclear
services disposal site operations and certain NASW operations that are not
essential parts of the Company's network. Revisions to the third quarter
estimates were required due to revisions in estimated proceeds and certain
changes in business plans during the fourth quarter. These revisions resulted in
a net increase to the charge of $19. That amount includes a reduction of $30
relating to assets in a single market that have been reclassified from
held-for-sale assets to operating assets, based on new facts and business
judgements, that have developed through February 2000. Based on these new facts
and business judgements the Company has decided not to divest those assets, and
those assets are not impaired as operating assets. Accordingly, the impairment
recorded in the third quarter of 1999 was reversed, with no net effect for 1999.
The remaining $10 of held-for-sale adjustments primarily resulted from revisions
of estimated proceeds related to surplus real estate. See Note 20 for further
analysis of operations held-for-sale.

     The Company recorded asset impairments of $194 during 1999 (see Note 2
"1999 Accounting Charges and Adjustments") related to several landfill sites and
certain other operating assets. Included in this amount is $76 related to the
abandonment or closure of facilities resulting from the Company's recent
business decisions regarding optimal operating strategies in specific markets in
which the Company operates, or consideration of new facts or circumstances
during 1999. Also included in the amount is $40, which is primarily the result
of permit denials and other regulatory problems during the third quarter of
1999, which is one of the many types of facts and circumstances that may from
time to time trigger impairments and which may occasionally overlap with other
triggering events or result in abandonment or closure.

     In 1999, the Company recorded $92 related to the reassessment of ultimate
losses for certain legal issues related to the WM Holdings Merger, which
primarily included increases to its legal reserves in response to developments
in connection with WM Holdings' restatement of earnings in February 1998. These
legal developments caused the Company to evaluate the numerous shareholder cases
filed against WM Holdings and to reassess the range of exposure.

                                        64
<PAGE>   67
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In 1998, the Company increased its reserves for certain legal and
environmental remediation issues as a result of management's emphasis to resolve
and settle certain issues relating primarily to WM Holdings, including the class
action securities litigation against WM Holdings related to its February 1998
earnings restatement.

     The Company is in the process of settling its obligations under the WM
Holdings' defined benefit plan which was terminated as of October 31, 1999 (see
Note 13).

     Certain WM Holdings' employee stock option plans included change of control
provisions that were activated as a result of the WM Holdings Merger whereby the
option holder received certain put rights. The charge to pre-tax earnings as a
result of these put rights was $115 in the third quarter of 1998.

17. EARNING PER SHARE

     The following reconciles the number of common shares outstanding at
December 31 of each year to the weighted average number of common shares
outstanding for the purposes of calculating basic and dilutive earnings per
common share(shares in thousands):

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      1999      1998
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Common shares outstanding at year-end...................  622,650   619,317   600,351
Effect of using weighted average common shares
  outstanding...........................................   (1,393)   (6,385)  (16,050)
                                                          -------   -------   -------
Basic and diluted common shares outstanding.............  621,257   612,932   584,301
                                                          =======   =======   =======
</TABLE>

     For all periods presented, the effect of the Company's common stock options
and warrants and the effect of the Company's convertible subordinated notes and
debentures are excluded from the dilutive earnings per share calculation since
inclusion of such items would be antidilutive.

     At December 31, 2000, there were approximately 53 million shares of common
stock potentially issuable with respect to stock options, warrants, and
convertible debt, which could dilute basic earnings per share in the future.

18. COMPREHENSIVE INCOME (LOSS)

     Comprehensive income (loss) represents the change in the Company's equity
from transactions and other events and circumstances from nonowner sources and
includes all changes in equity except those resulting from investments by owners
and distributions to owners. The components of accumulated other comprehensive
income (loss) were as follows:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                              2000    1999    1998
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Foreign currency translation adjustment.....................  $(123)  $(430)  $(354)
Minimum pension liability adjustment (net of tax)...........     (3)   (133)    (67)
                                                              -----   -----   -----
                                                              $(126)  $(563)  $(421)
                                                              =====   =====   =====
</TABLE>

     The change in minimum pension liability adjustment relates to the Company's
efforts to settle its obligations under the Plan. The Company expects to
complete this effort in early 2001.

     Of the $123 of foreign currency translation adjustment within accumulated
other comprehensive income (loss) at December 31, 2000, approximately $5 relates
to the Company's WM International operations. Upon the divestiture of the
Company's remaining WM International operations, the foreign currency
translation losses that are included in accumulated other comprehensive income
(loss) will be recognized in the
                                        65
<PAGE>   68
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's statement of operations as a component of such operations (decreasing
any gain, or increasing any loss).

19. COMMITMENTS AND CONTINGENCIES

     Financial instruments -- Letters of credit, performance bonds and insurance
policies have been provided by the Company to support tax-exempt bonds,
contracts, performance of landfill final closure and post-closure requirements,
insurance contracts, and other obligations. Total letters of credit, performance
bonds and insurance policies at December 31, 2000 aggregated approximately
$5,400. The insurance policies are issued by a wholly-owned insurance company
subsidiary, the sole business of which is to issue such policies to customers of
the Company and its subsidiaries. Approximately $87 (at fair market value at
December 31, 2000) of the Company's assets have been contributed to this
subsidiary to meet regulatory minimum capital requirements. In those instances
where the use of captive insurance is not acceptable, the Company has available
alternative bonding mechanisms. The Company has not experienced difficulty in
obtaining performance bonds or letters of credit for its current operations.
Because virtually no claims have been made against these financial instruments
in the past, management does not expect these instruments will have a material
adverse effect on the Company's consolidated financial statements.

     Environmental matters -- The continuing business in which the Company is
engaged is intrinsically connected with the protection of the environment. As
such, a significant portion of the Company's operating costs and capital
expenditures could be characterized as costs of environmental protection. Such
costs may increase in the future as a result of legislation or regulation,
however, the Company believes that in general it tends to benefit when
environmental regulation increases, which may increase the demand for its
services, and that it has the resources and experience to manage environmental
risk.

     As part of its ongoing operations, the Company provides for the present
value of estimated final closure and post-closure monitoring costs over the
estimated operating life of disposal sites as airspace is consumed. The Company
has also established procedures to evaluate potential remedial liabilities at
closed sites which it owns or operated, or to which it transported waste,
including 79 sites listed on the EPA's National Priority List ("NPL") as of
December 31, 2000. Where the Company concludes that it is probable that a
liability has been incurred, provision is made in the financial statements.

     Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services industry, as well as its
involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. As additional information becomes available,
estimates are adjusted as necessary. While the Company does not anticipate that
any such adjustment would be material to its financial statements, it is
reasonably possible that technological, regulatory or enforcement developments,
the results of environmental studies, the nonexistence or inability of other
potentially responsible third parties to contribute to the settlements of such
liabilities, or other factors could necessitate the recording of additional
liabilities which could be material.

     The Company or certain of its subsidiaries have been identified as
potentially responsible parties in a number of governmental investigations and
actions relating to waste disposal facilities which may be subject to remedial
action under the Comprehensive Environmental Response, Compensation and
Liabilities Act of 1980, as amended ("CERCLA" or "Superfund"), or similar state
laws. The majority of these proceedings involve allegations that certain
subsidiaries of the Company (or their predecessors) transported hazardous
substances to the sites in question, often prior to acquisition of such
subsidiaries by the Company. CERCLA generally provides for liability for those
parties owning, operating, transporting to or disposing at the sites. Such
proceedings arising under Superfund typically involve numerous waste generators
and other waste transportation and disposal companies and seek to allocate or
recover costs associated with site investigation
                                        66
<PAGE>   69
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and cleanup, which costs could be substantial and could have a material adverse
effect on the Company's financial statements.

     As of December 31, 2000, the Company or its subsidiaries had been notified
that they are potentially responsible parties in connection with 79 locations
listed on the NPL. Of the 79 NPL sites at which claims have been made against
the Company, 17 are sites which the Company has come to own over time. All of
the NPL sites owned by the Company were initially developed by others as land
disposal facilities. At each of the 17 owned facilities, the Company is working
in conjunction with the government to characterize or remediate identified site
problems. In addition, at these 17 facilities, the Company has either agreed
with other legally liable parties on an arrangement for sharing the costs of
remediation or is pursuing resolution of an allocation formula. The 62 NPL sites
at which claims have been made against the Company and which are not owned by
the Company are at different procedural stages under Superfund. At some of these
sites, the Company's liability is well defined as a consequence of a
governmental decision as to the appropriate remedy and an agreement among liable
parties as to the share each will pay for implementing that remedy. At others
where no remedy has been selected or the liable parties have been unable to
agree on an appropriate allocation, the Company's future costs are uncertain.
Any of these matters could have a material adverse effect on the Company's
financial statements.

     From time to time, the Company and certain of its subsidiaries are named as
defendants in personal injury and property damage lawsuits, including purported
class actions, on the basis of a Company's subsidiary having owned, operated or
transported waste to a disposal facility which is alleged to have contaminated
the environment or, in certain cases, conducted environmental remediation
activities at sites. Some of the lawsuits may seek to have the Company or its
subsidiaries pay the costs of groundwater monitoring and health care
examinations of allegedly affected persons for a substantial period of time even
where no actual damage is proven. While the Company believes it has meritorious
defenses to these lawsuits, their ultimate resolution is often substantially
uncertain due to the difficulty of determining the cause, extent and impact of
alleged contamination (which may have occurred over a long period of time), the
potential for successive groups of complainants to emerge, the diversity of the
individual plaintiffs' circumstances, and the potential contribution or
indemnification obligations of co-defendants or other third parties, among other
factors. Accordingly, it is possible such matters could have a material adverse
impact on the Company's financial statements.

     For more information regarding commitments and contingencies with respect
to environmental matters, see Note 8.

     Litigation -- In February 1998, WM Holdings announced a restatement of
prior-period earnings for 1991 and earlier as well as for 1992 through 1996 and
the first three quarters of 1997. As a result, many claims were made against WM
Holdings, several of which have been resolved, as set forth in earlier quarterly
and year-end reports made by the Company.

     The following actions with respect to WM Holdings, however, are still
outstanding.

     In July 1998, a seller of a business to WM Holdings in exchange for WM
Holdings common stock filed a class action alleging breach of warranty. In
October 1999, the court certified a class consisting of all sellers of business
assets to WM Holdings between January 1, 1990 and February 24, 1998 whose
agreements contained express warranties regarding the accuracy of WM Holdings'
financial statements. In March 2000, the certification order was upheld by the
court of appeals and the trial court granted summary judgment on the breach of
warranty claim in favor of all but certain members of the class whose claims may
have expired under applicable statutes of limitations. The extent of damages in
this class action has not yet been determined.

     In March 2000, a group of companies that sold assets to WM Holdings in
exchange for common stock in March 1996 brought a separate action against the
Company for breach of contract and fraud, among other things. The plaintiffs
dismissed their suit without prejudice pending a decision of whether their
claims must be

                                        67
<PAGE>   70
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

submitted to arbitration. A court determined that plaintiffs must arbitrate
their claims and plaintiffs have appealed that decision. The extent of damages
in the underlying dispute has not yet been determined.

     In December 1999, an individual brought an action against the Company, five
former officers of WM Holdings, and WM Holdings' auditors in Illinois state
court on behalf of a proposed class of individuals who purchased WM Holdings
common stock before November 3, 1994, and who held that stock through February
24, 1998, for alleged acts of common law fraud, negligence, and breach of
fiduciary duty. The defendants have filed motions to dismiss this case. This
action is in its early stages and the extent of possible damages, if any, has
not yet been determined.

     The Company has proposed a settlement to resolve a consolidated derivative
action pending in the Chancery Court of the State of Delaware. The derivative
action was brought against several former officers and directors of WM Holdings
and seeks, among other things, reimbursement of those monies expended by WM
Holdings and the Company in resolving all claims brought against WM Holdings
arising out of its February 1998 restatement of earnings. The terms of the
settlement include a payment to the Company of $15 by certain of WM Holdings'
insurance carriers and the complete resolution of all pending claims for
retirement benefits between certain former officers of WM Holdings and the
Company. The resolution of the actions for retirement benefits involves the
release by the former executives who brought claims against the Company for
certain amounts otherwise owing under the retirement plans. The total benefits
to the Company from the settlement of the derivative case is approximately $23.

     The Company is also aware that the SEC has commenced a formal investigation
with respect to WM Holdings' previously filed financial statements (which were
subsequently restated) and related accounting policies, procedures and system of
internal controls. The Company intends to cooperate with such investigation. The
Company is unable to predict the outcome or impact of this investigation at this
time.

     In addition to the actions with respect to WM Holdings, the following
actions with respect to the Company or its other subsidiaries have also been
brought.

     On July 6 and July 29, 1999, the Company announced that it had lowered its
expected earnings per share for the three months ended June 30, 1999. On August
3, 1999, the Company announced another reduction in its expected earnings for
that period and that its reported operating income for the three months ended
March 31, 1999, might have included certain unusual pretax income items. More
than 30 lawsuits based on one or more of these announcements were filed against
the Company and certain of its current and former officers and directors in the
United States District Court for the Southern District of Texas. These actions
have been consolidated into a single action. On September 7, 1999, another
lawsuit was filed against the Company and certain of its current and former
officers and directors in the United States District Court for the Eastern
District of Texas, which was transferred and consolidated with the consolidated
action pending in the Southern District of Texas. On May 8, 2000, the court
entered an order appointing the Connecticut Retirement Plan and Trust Funds as
lead plaintiff and appointing the law firm of Goodkind Labaton Rudoff & Suchrow
LLP as lead plaintiff's counsel.

     The lead plaintiff filed its Amended Consolidated Class Action Complaint
(the "Complaint") on July 14, 2000. The Complaint pleads claims on behalf of a
putative class consisting of all purchasers of Company securities (including
common stock, debentures and call options), and all sellers of put options, from
June 11, 1998 through November 9, 1999. The Complaint also pleads additional
claims on behalf of two putative subclasses: (i) the "Merger Subclass,"
consisting of all WM Holdings stockholders who received Company common stock
pursuant to the WM Holdings Merger, and (ii) the "Eastern Merger Subclass,"
consisting of all Eastern stockholders who received Company common stock
pursuant to the Eastern Merger.

     Among other things, the plaintiff alleges that the Company and certain of
its current and former officers and directors (i) made misrepresentations in the
registration statement and prospectus filed with the SEC in connection with the
WM Holdings Merger, (ii) made knowingly false earnings projections for the three
                                        68
<PAGE>   71
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

months ended June 30, 1999, (iii) failed to adequately disclose facts relating
to its earnings projections that the plaintiff claims would have been material
to purchasers of the Company's common stock and (iv) made separate and distinct
misrepresentations about the Company's operations and finances on and after July
29, 1999, culminating in the Company's pre-tax charge of $1,763 in the third
quarter of 1999. The plaintiff also alleges that certain of the Company's
current and former officers and directors sold common stock between May 10, 1999
and June 9, 1999 at prices known to have been inflated by material misstatements
and omissions. The plaintiff in this action seeks damages with interest, costs
and such other relief as the court deems proper. Defendants filed a motion to
dismiss on October 3, 2000, which is pending. The case is at an early stage and
the extent of possible damages, if any, cannot yet be determined.

     On June 29, 2000, a putative class action was filed against the Company in
Delaware state court by a class of former Eastern stockholders falling within
the scope of the Eastern Merger Subclass described above. The plaintiffs allege
that the Company stock they received in exchange for their Eastern shares was
overvalued for the same reasons alleged in the consolidated class actions in
Texas. On August 4, 2000, the Company removed the case from the state court to
federal court and asked to have the case transferred to the Texas federal court
where the consolidated Texas class action is pending. On September 1, 2000, the
plaintiffs asked to remand the case to the Delaware state court, which the
Company opposed. The plaintiffs also asked the Delaware federal court not to
consider the Company's motion to transfer the case to Texas until it rules on
the motion to remand. All motions currently are pending. The case is at an early
stage, and the extent of possible damages, if any, cannot yet be determined.

     The Company has been sued in several lawsuits by individuals who received
common stock in the sales of their businesses to the Company or to a company
later acquired by the Company. For reasons similar to those alleged in the class
actions described above, the sellers of the businesses allege that the stock
they received was overvalued. All of these matters are at early stages and the
extent of possible damages, if any, cannot yet be determined.

     In addition, three derivative lawsuits have been filed against certain
current and former officers and directors of the Company alleging derivative
claims on behalf of the Company against these individuals for breaches of
fiduciary duty resulting from their common stock sales during the three months
ended June 30, 1999 and/or their oversight of the Company's affairs. Two of the
lawsuits, filed in the Delaware Court of Chancery on July 16, 1999 and August
18, 1999, were consolidated into a single action. The third suit was filed in
the United States District Court for the Southern District of Texas on July 27,
1999. Both of the lawsuits name Waste Management, Inc. as a nominal defendant
and seek compensatory and punitive damages with interest, equitable and/or
injunctive relief, costs and such other relief as the courts deem proper. On
December 1, 2000, the Company moved to dismiss the consolidated derivative suit
in Delaware. The same day, the Company asked the court in Texas to stay the
Texas derivative suit until the Delaware court acts on the motion to dismiss.
The Company is now in preliminary settlement discussions with the plaintiffs in
both cases. The Company is unable to predict the outcome of these discussions at
this time, nor can it predict the outcome of the litigation if the discussions
are unsuccessful.

     Several related shareholders have filed a lawsuit in state court in Texas
against the Company and three of its former officers. The petition alleges that
the plaintiffs are substantial shareholders of the Company's common stock who
intended to sell their stock in 1999, but that the individual defendants made
false and misleading statements regarding the Company's prospects that induced
the plaintiffs to retain their stock. Plaintiffs assert that the value of their
retained stock declined dramatically. Plaintiffs asserted claims for fraud,
negligent misrepresentation, and conspiracy. The case is in an early stage and
the extent of damages, if any, cannot yet be determined.

     The New York Stock Exchange has notified the Company that its Market
Trading Analysis Department is reviewing transactions in the common stock of the
Company prior to the July 6, 1999 earnings forecast announcement.
                                        69
<PAGE>   72
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment and the potential for the
unintended or unpermitted discharge of materials into the environment. From time
to time, the Company pays fines or penalties in environmental proceedings
relating primarily to waste treatment, storage or disposal facilities. As of
December 31, 2000, there were four proceedings involving Company subsidiaries
where the sanctions involved could potentially exceed one hundred thousand
dollars. The matters involve allegations that subsidiaries (i) operated a
hazardous waste incinerator in such a way that its air emissions exceeded permit
limits, (ii) engaged in the importation and disposal of hazardous waste in
contravention of applicable federal regulations, (iii) failed to comply with
certain provisions of an administrative order directing the remediation of a
non-operating waste disposal site, and (iv) disposed of waste outside of the
disposal area designated by the applicable permit.

     The Company believes that these matters will not have a material adverse
effect on its results of operations or financial condition. However, the outcome
of any particular proceeding cannot be predicted with certainty, and the
possibility remains that technological, regulatory or enforcement developments,
the results of environmental studies or other factors could materially alter
this expectation at any time.

     On July 29, 1998, the EPA inspected one of the Company's 100% owned
subsidiaries' operations, and notified the Company of alleged violations
relating to the disposal of chlorofluorocarbons ("CFCs"). In January 1999, the
EPA issued an Administrative Order requiring the Company's subsidiary to comply
with the CFC regulations. In June 1999, the Company was notified that the EPA is
conducting a civil investigation relating to the alleged CFC disposal violations
to determine whether further enforcement measures are warranted. The Company and
its subsidiary are cooperating with the investigation and the Company believes
that the ultimate outcome of this matter will not have a material adverse effect
on the Company's financial statements.

     The Company has brought suit against a substantial number of insurance
carriers in an action entitled Waste Management, Inc. et al. v. The Admiral
Insurance Company, et al. pending in the Superior Court in Hudson County, New
Jersey. The Company is seeking (i) a declaratory judgment that past and future
environmental liabilities asserted against the Company or its subsidiaries are
covered by its insurance policies and (ii) to recover defense costs and other
damages incurred as a result of the defendant insurance carriers' denial of
coverage of environmental liabilities over the last 25 years. The Company has
reached settlements with some of the carriers. However, the remaining defendants
have denied liability to the Company, asserting various defenses, and are
contesting the claims vigorously. Discovery has been completed as to 12 of the
contested sites, but the remaining discovery in this case is expected to
continue for several years. Summary judgment motions were filed by both parties
with respect to the 12 sites where discovery is complete and in August 2000, the
court denied four of the defendants' motions, granted one of defendants' motions
and granted the Company's motions with respect to the seven other sites. The
Company is unable at this time to predict the outcome of this proceeding. No
amounts have been recognized in the Company's financial statements for potential
recoveries.

     It is not possible at this time to predict the impact that the above
lawsuits, proceedings, investigations and inquiries may have on the Company, nor
is it possible to predict whether any other suits or claims may arise out of
these matters in the future. The Company and each of its subsidiaries intend to
defend themselves vigorously in all the above matters. However, it is reasonably
possible that the outcome of any present or future litigation, proceedings,
investigations or inquiries may have a material adverse impact on their
respective financial conditions or results of operations in one or more future
periods.

     The Company and certain of its subsidiaries are also currently involved in
other routine civil litigation and governmental proceedings relating to the
conduct of their business. The outcome of any particular lawsuit or governmental
investigation cannot be predicted with certainty and these matters could have a
material adverse impact on the Company's financial statements.

                                        70
<PAGE>   73
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Insurance -- The Company carries a broad range of insurance coverages for
protection of its assets and operations from certain risks including pollution
legal liability insurance for certain of its disposal sites, transfer stations,
recycling and other facilities. Through the date of the WM Holdings Merger,
certain of WM Holdings' auto, general liability, environmental impairment
liability and workers' compensation risks were self-insured up to $5 per
accident. For such programs, a provision was made in each accounting period for
estimated losses, including losses incurred but not reported, and the related
reserves are adjusted as additional claims information becomes available. The
Company's ongoing programs carry self-insurance exposures of up to two hundred
and fifty thousand dollars and twenty thousand dollars per incident with regards
to workers' compensation and auto, respectively. Claims reserves related to WM
Holdings were discounted at 5.5% at December 31, 2000 and 1999. The
insurance-related liability for the ongoing program and the WM Holdings'
self-insurance runoff program included in the accompanying balance sheet in
other long-term liabilities approximates $350 and $362 at December 31, 2000 and
1999, respectively.

20. OPERATIONS HELD-FOR-SALE

     As discussed in Note 16, the Company has recorded charges to write down
certain of the operations the Company has marketed for sale pursuant to its
strategic plan. These charges reflect the excess of the Company's carrying
amounts of the assets over their fair market value. In determining fair value,
the Company considered, among other things the range of preliminary purchase
prices being discussed with potential buyers. These businesses' results of
operations were included in revenues and expenses through the date of
disposition in the accompanying statement of operations. Note 4 discusses
operations that were divested in 2000.

     As of December 31, 2000, the primary components remaining within operations
held-for-sale consisted of the Company's remaining WM International operations,
which included certain operations in Sweden and operations in Argentina and
Israel, certain other non-core and NASW operations and the Company's surplus
real estate portfolio. For operations classified as held-for-sale, the Company
suspends depreciation and amortization on the underlying assets. Depreciation
suspension for 2000 and 1999 for held-for-sale operations was $99 and $46,
respectively.

     Operational information included in the statements of operations regarding
the businesses classified as operations held-for-sale at December 31, 2000, is
as follows:

<TABLE>
<CAPTION>
                                               NORTH AMERICAN        WM         NON-SOLID
                                                SOLID WASTE     INTERNATIONAL     WASTE     TOTAL
                                               --------------   -------------   ---------   -----
<S>                                            <C>              <C>             <C>         <C>
YEAR ENDED:
December 31, 2000
  Operating revenues.........................       $ 1              $24          $316      $341
  Earnings before interest and taxes
     EBIT(a).................................        --                3            20        23
December 31, 1999
  Operating revenues.........................       $ 1              $ 6          $255      $262
  Earnings before interest and taxes
     EBIT(a).................................        (2)               1           (24)      (25)
December 31, 1998
  Operating revenues.........................       $ 3              $--          $228      $231
  Earnings before interest and taxes
     EBIT(a).................................        --               --           (20)      (20)
</TABLE>

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

(a)  For those items included in the determination of EBIT (the earnings
     measurement used by management to evaluate operating performance), the
     accounting policies of the segments are generally the same as those
     described in the summary of significant accounting policies. (See Note 3.)
     EBIT is defined as income (loss) from operations excluding merger and
     acquisition related costs, asset impairments and unusual items.

                                        71
<PAGE>   74
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In its consolidated balance sheets, the Company has classified as current
operations held-for-sale its remaining WM International operations, its
remaining non-core operations and select NASW operations, which management
believes will be divested prior to December 31, 2001. The Company has classified
its surplus real estate portfolio as non-current operations held-for-sale.

<TABLE>
<CAPTION>
                                                   NORTH AMERICAN        WM         NON-SOLID
                                                    SOLID WASTE     INTERNATIONAL     WASTE     TOTAL
                                                   --------------   -------------   ---------   -----
<S>                                                <C>              <C>             <C>         <C>
AS OF DECEMBER 31, 2000:
Accounts receivable, net.........................       $--             $ 10          $ 74      $  84
Other current assets.............................        --                2            69         71
Property and equipment and other non-current
  assets.........................................        53               46            77        176
Other current liabilities........................        --              (45)          (55)      (100)
Other noncurrent liabilities.....................        (3)              (6)          (44)       (53)
Minority interest................................        --               (1)            3          2
                                                        ---             ----          ----      -----
          Net operations held-for-sale...........       $50             $  6          $124      $ 180
                                                        ===             ====          ====      =====
Current assets:
  Operations held-for-sale.......................       $11             $ 58          $220      $ 289
Long-term assets:
  Operations held-for-sale (included in other
     assets).....................................        42               --            --         42
Current liabilities:
  Operations held-for-sale.......................        (3)             (52)          (96)      (151)
                                                        ---             ----          ----      -----
          Net operations held-for-sale...........       $50             $  6          $124      $ 180
                                                        ===             ====          ====      =====
</TABLE>

     Operational information included in the statement of operations regarding
the businesses classified as operations held-for-sale at December 31, 1999, is
as follows:

<TABLE>
<CAPTION>
                                                  NORTH AMERICAN        WM         NON-SOLID
                                                   SOLID WASTE     INTERNATIONAL     WASTE     TOTAL
                                                  --------------   -------------   ---------   ------
<S>                                               <C>              <C>             <C>         <C>
YEAR ENDED:
December 31, 1999
  Operating revenues............................       $541           $1,651         $288      $2,480
  Earnings before interest and taxes(a).........        (22)             212           52         242
December 31, 1998
  Operating revenues............................       $522           $1,534         $305      $2,361
  Earnings before interest and taxes(a).........         21              133           48         202
</TABLE>

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

(a)  For those items included in the determination of EBIT (the earnings
     measurement used by management to evaluate operating performance), the
     accounting policies of the segments are generally the same as those
     described in the summary of significant accounting policies. (See Note 3.)
     EBIT is defined as income (loss) from operations excluding merger and
     acquisition related costs, asset impairments and unusual items.

                                        72
<PAGE>   75
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     At December 31, 1999, the Company classified as current operations held for
sale its WM International operations and certain domestic operations, which
management believed would be divested prior to December 31, 2000. The Company
classified as non-current operations held-for-sale certain NASW operations which
the Company had committed to sell to Allied Waste Industries, Inc. ("Allied") in
connection with the Company's purchase of certain of Allied's operations, as
well as the Company's surplus real estate portfolio.

<TABLE>
<CAPTION>
                                                      NORTH AMERICAN        WM         NON-SOLID
                                                       SOLID WASTE     INTERNATIONAL     WASTE      TOTAL
                                                      --------------   -------------   ---------   -------
<S>                                                   <C>              <C>             <C>         <C>
AS OF DECEMBER 31, 1999:
Receivables, net....................................      $  37           $   364        $ 33      $   434
Other current assets................................         14               209          15          238
Property and equipment and other non-current
  assets............................................        737             2,272         108        3,117
Current maturities of long-term debt................         (2)              (52)         --          (54)
Other current liabilities...........................        (24)             (482)        (62)        (568)
Long-term debt, less current maturities.............        (58)             (213)         --         (271)
Other noncurrent liabilities........................        (38)             (347)        (13)        (398)
Minority interest...................................         --              (117)         (4)        (121)
                                                          -----           -------        ----      -------
          Net operations held-for-sale..............      $ 666           $ 1,634        $ 77      $ 2,377
                                                          =====           =======        ====      =======
Current assets:
  Operations held-for-sale..........................      $ 535           $ 2,845        $156      $ 3,536
Long-term assets:
  Operations held-for-sale (included in other
     assets)........................................        253                --          --          253
Current liabilities:
  Operations held-for-sale..........................       (118)           (1,211)        (79)      (1,408)
Long-term liabilities:
  Operations held-for-sale (included in other
     liabilities)...................................         (4)               --          --           (4)
                                                          -----           -------        ----      -------
          Net operations held-for-sale..............      $ 666           $ 1,634        $ 77      $ 2,377
                                                          =====           =======        ====      =======
</TABLE>

     At December 31, 1998, the Company planned to dispose of certain assets to
comply with governmental orders related to the WM Holdings Merger and Eastern
Merger and certain other assets as a result of implementing the business
strategy related to the WM Holdings Merger and thus, classified these assets as
current assets held-for-sale. These businesses' results of operations are fully
included in revenues and expenses in the 1998 statement of operations and
generated third-party operating revenues of approximately $373 and earnings
before interest and taxes of approximately $21 in 1998. As discussed in Notes 4
and 16, the Company recorded charges to write these assets down to fair value,
less costs to sell.

21. QUARTERLY FINANCIAL DATA (UNAUDITED)

     The independent public accountants' report on these financial statements
indicates that in 1999 they did not believe that the Company's internal controls
for the preparation of interim financial information were sufficient to provide
them an adequate basis to complete a review in accordance with standards
established by the American Institute of Certified Public Accountants of the
selected 1999 quarterly financial data, set forth below. See Note 2.

     The Company believes that the processes it used for the preparation of its
quarterly 2000 interim financial statements have improved. In addition, the
Company has committed substantial resources to mitigate the previously
identified control weaknesses. Management believes these efforts enabled the
Company to produce timely and reliable interim financial statements for quarters
during 2000.

                                        73
<PAGE>   76
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes the unaudited quarterly results of
operations for 2000 and 1999:

<TABLE>
<CAPTION>
                                                      FIRST    SECOND     THIRD    FOURTH
                                                     QUARTER   QUARTER   QUARTER   QUARTER
                                                     -------   -------   -------   -------
<S>                                                  <C>       <C>       <C>       <C>
2000
Operating revenues.................................  $3,217    $3,266    $3,125    $2,884
Income from operations.............................     325       293       113       307
Net income (loss)..................................      55        --      (191)       39
Income (loss) per common share:
  Basic............................................    0.09      0.00     (0.31)     0.06
  Diluted..........................................    0.09      0.00     (0.31)     0.06
1999
Operating revenues.................................  $3,071    $3,325    $3,395    $3,336
Income (loss) from operations......................     760       715    (1,119)      184
Income (loss) before extraordinary item............     347       318      (948)     (112)
Net income (loss)..................................     347       318      (948)     (115)
Income (loss) before extraordinary item per common
  share:
  Basic............................................    0.57      0.52     (1.53)    (0.18)
  Diluted..........................................    0.55      0.50     (1.53)    (0.18)
Net income (loss) per common share:
  Basic............................................    0.57      0.52     (1.53)    (0.19)
  Diluted..........................................    0.55      0.50     (1.53)    (0.19)
</TABLE>

     Basic and diluted earnings per common share for each of the quarters
presented above is based on the respective weighted average number of common and
dilutive potential common shares outstanding for each period and the sum of the
quarters may not necessarily be equal to the full year basic and diluted
earnings per common share amounts. For certain periods presented, the effect of
the Company's common stock options and warrants and the effect of the Company's
convertible subordinated notes and debentures are excluded from the diluted
earnings per share calculations since inclusion of such items would be
antidilutive for that period.

22. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

     WM Holdings ("Guarantor"), which is 100% owned by Waste Management, Inc.
("Parent"), has fully and unconditionally guaranteed all of the senior
indebtedness of the Parent, as well as the Parent's 4% convertible subordinated
notes due 2002. The Parent has fully and unconditionally guaranteed all of the
senior indebtedness of WM Holdings, as well as WM Holdings' 5.75% convertible
subordinated debentures due 2005. However, none of the Company's, nor WM
Holdings', debt is guaranteed by any of the Parent's indirect subsidiaries or WM
Holdings' subsidiaries ("Non-Guarantor"). Accordingly, the following condensed
consolidating balance sheets as of December 31, 2000 and 1999 and the related
condensed consolidating statements of operations for 2000, 1999 and 1998, along
with the related statements of cash flows, have been provided below.

                                        74
<PAGE>   77
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                     CONDENSED CONSOLIDATING BALANCE SHEETS
                               DECEMBER 31, 2000

                                     ASSETS

<TABLE>
<CAPTION>
                                                 PARENT   GUARANTOR   NON-GUARANTOR   ELIMINATIONS   CONSOLIDATION
                                                 ------   ---------   -------------   ------------   -------------
<S>                                              <C>      <C>         <C>             <C>            <C>
Current assets:
  Cash and cash equivalents....................  $   72    $   14        $    8         $    --         $    94
  Other current assets.........................      --        --         2,363              --           2,363
                                                 ------    ------        ------         -------         -------
                                                     72        14         2,371              --           2,457
Property and equipment, net....................      --        --        10,126              --          10,126
Intercompany and investment in subsidiaries....   8,893     5,210        (9,716)         (4,387)             --
Other assets...................................       6         7         5,969              --           5,982
                                                 ------    ------        ------         -------         -------
         Total assets..........................  $8,971    $5,231        $8,750         $(4,387)        $18,565
                                                 ======    ======        ======         =======         =======

                                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current maturities of long-term debt.........  $   --    $   --        $  113         $    --         $   113
  Accounts payable and other accrued
    liabilities................................      93       114         2,617              --           2,824
                                                 ------    ------        ------         -------         -------
                                                     93       114         2,730              --           2,937
Long-term debt, less current maturities........   4,077     2,916         1,379              --           8,372
Other liabilities..............................      --        --         2,440              --           2,440
                                                 ------    ------        ------         -------         -------
         Total liabilities.....................   4,170     3,030         6,549              --          13,749
Minority interest in subsidiaries..............      --        --            15              --              15
Stockholders' equity...........................   4,801     2,201         2,186          (4,387)          4,801
                                                 ------    ------        ------         -------         -------
         Total liabilities and stockholders'
           equity..............................  $8,971    $5,231        $8,750         $(4,387)        $18,565
                                                 ======    ======        ======         =======         =======
</TABLE>

                               DECEMBER 31, 1999

                                     ASSETS

<TABLE>
<CAPTION>
                                                PARENT    GUARANTOR   NON-GUARANTOR   ELIMINATIONS   CONSOLIDATION
                                                -------   ---------   -------------   ------------   -------------
<S>                                             <C>       <C>         <C>             <C>            <C>
Current assets:
  Cash and cash equivalents...................  $    34    $    4       $    143        $    --         $   181
  Other current assets........................       --        37          6,003             --           6,040
                                                -------    ------       --------        -------         -------
                                                     34        41          6,146             --           6,221
Property and equipment, net...................       --        --         10,304             --          10,304
Intercompany and investment in subsidiaries...   10,668     5,940        (13,140)        (3,468)             --
Other assets..................................       27         9          6,120             --           6,156
                                                -------    ------       --------        -------         -------
         Total assets.........................  $10,729    $5,990       $  9,430        $(3,468)        $22,681
                                                =======    ======       ========        =======         =======

                                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current maturities of long-term debt........  $ 2,272    $  250       $    577        $    --         $ 3,099
  Accounts payable and other accrued
    liabilities...............................      101       326          3,964             --           4,391
                                                -------    ------       --------        -------         -------
                                                  2,373       576          4,541             --           7,490
Long-term debt, less current maturities.......    3,954     3,508            937             --           8,399
Other liabilities.............................       --        --          2,382             --           2,382
                                                -------    ------       --------        -------         -------
         Total liabilities....................    6,327     4,084          7,860             --          18,271
Minority interest in subsidiaries.............       --        --              8             --               8
Stockholders' equity..........................    4,402     1,906          1,562         (3,468)          4,402
                                                -------    ------       --------        -------         -------
         Total liabilities and stockholders'
           equity.............................  $10,729    $5,990       $  9,430        $(3,468)        $22,681
                                                =======    ======       ========        =======         =======
</TABLE>

                                        75
<PAGE>   78
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        PARENT   GUARANTOR   NON-GUARANTOR   ELIMINATIONS   CONSOLIDATION
                                                        ------   ---------   -------------   ------------   -------------
<S>                                                     <C>      <C>         <C>             <C>            <C>
                          YEAR ENDED DECEMBER 31, 2000
Operating revenues....................................  $  --      $  --        $12,492         $  --          $12,492
Costs and expenses....................................     --         --         11,454            --           11,454
                                                        -----      -----        -------         -----          -------
Income from operations................................     --         --          1,038            --            1,038
                                                        -----      -----        -------         -----          -------
Other income (expense):
  Interest income (expense), net......................   (430)      (232)           (55)           --             (717)
  Equity in subsidiaries, net of taxes................    172        317             --          (489)              --
  Minority interest...................................     --         --            (23)           --              (23)
  Other, net..........................................     --         --             23            --               23
                                                        -----      -----        -------         -----          -------
                                                         (258)        85            (55)         (489)            (717)
                                                        -----      -----        -------         -----          -------
Income (loss) before income taxes.....................   (258)        85            983          (489)             321
Provision for (benefit from) income taxes.............   (161)       (87)           666            --              418
                                                        -----      -----        -------         -----          -------
Net income (loss).....................................  $ (97)     $ 172        $   317         $(489)         $   (97)
                                                        =====      =====        =======         =====          =======
</TABLE>

<TABLE>
<S>                                                     <C>      <C>         <C>             <C>            <C>
                          YEAR ENDED DECEMBER 31, 1999
Operating revenues....................................  $  --      $  --        $13,127          $ --          $13,127
Costs and expenses....................................     --         --         12,587            --           12,587
                                                        -----      -----        -------          ----          -------
Income from operations................................     --         --            540            --              540
                                                        -----      -----        -------          ----          -------
Other income (expense):
  Interest income (expense), net......................   (417)      (269)           (46)           --             (732)
  Equity in subsidiaries, net of taxes................   (137)        31             --           106               --
  Minority interest...................................     --         --            (24)           --              (24)
  Other, net..........................................     --         --             53            --               53
                                                        -----      -----        -------          ----          -------
                                                         (554)      (238)           (17)          106             (703)
                                                        -----      -----        -------          ----          -------
Income (loss) before income taxes and extraordinary
  item................................................   (554)      (238)           523           106             (163)
Provision for (benefit from) income taxes.............   (156)      (101)           489            --              232
                                                        -----      -----        -------          ----          -------
Income (loss) before extraordinary item...............   (398)      (137)            34           106             (395)
Extraordinary item....................................     --         --             (3)           --               (3)
                                                        -----      -----        -------          ----          -------
Net income (loss).....................................  $(398)     $(137)       $    31          $106          $  (398)
                                                        =====      =====        =======          ====          =======
</TABLE>

<TABLE>
<S>                                                     <C>      <C>         <C>             <C>            <C>
                          YEAR ENDED DECEMBER 31, 1998
Operating revenues....................................  $  --      $  --        $12,626         $   --         $12,626
Costs and expenses....................................     --         --         12,786             --          12,786
                                                        -----      -----        -------         ------         -------
Loss from operations..................................     --         --           (160)            --            (160)
                                                        -----      -----        -------         ------         -------
Other income (expense):
  Interest income (expense), net......................   (231)      (308)          (116)            --            (655)
  Equity in subsidiaries, net of taxes................   (626)      (434)            --          1,060              --
  Minority interest...................................     --         --            (24)            --             (24)
  Other, net..........................................     --         --            139             --             139
                                                        -----      -----        -------         ------         -------
                                                         (857)      (742)            (1)         1,060            (540)
                                                        -----      -----        -------         ------         -------
Loss before income taxes and extraordinary item.......   (857)      (742)          (161)         1,060            (700)
Provision for (benefit from) income taxes.............    (86)      (116)           269             --              67
                                                        -----      -----        -------         ------         -------
Loss before extraordinary item........................   (771)      (626)          (430)         1,060            (767)
Extraordinary item....................................     --         --             (4)            --              (4)
                                                        -----      -----        -------         ------         -------
Net loss..............................................  $(771)     $(626)       $  (434)        $1,060         $  (771)
                                                        =====      =====        =======         ======         =======
</TABLE>

                                        76
<PAGE>   79
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              PARENT   GUARANTOR   NON-GUARANTOR   ELIMINATIONS   CONSOLIDATION
                                                              ------   ---------   -------------   ------------   -------------
<S>                                                           <C>      <C>         <C>             <C>            <C>
                                                 YEAR ENDED DECEMBER 31, 2000
Cash flows from operating activities:
 Net income (loss)..........................................  $ (97)    $  172        $  317         $  (489)        $   (97)
 Equity in earnings of subsidiaries.........................   (172)      (317)           --             489              --
 Other adjustments and changes..............................     32          5         2,185              --           2,222
                                                              ------    ------        ------         -------         -------
Net cash provided by (used in) operations...................   (237)      (140)        2,502              --           2,125
                                                              ------    ------        ------         -------         -------
Cash flows from investing activities:
 Short-term investments.....................................     --         --            54              --              54
 Acquisitions of businesses, net of cash acquired...........     --         --          (231)             --            (231)
 Capital expenditures.......................................     --         --        (1,313)             --          (1,313)
 Proceeds from divestitures of businesses, net of cash
   divested, and other sales of assets......................     --         --         2,552              --           2,552
 Other, net.................................................     --         --            10              --              10
                                                              ------    ------        ------         -------         -------
Net cash provided by investing activities...................     --         --         1,072              --           1,072
                                                              ------    ------        ------         -------         -------
Cash flows from financing activities:
 New borrowings.............................................    270         --            34              --             304
 Debt repayments............................................  (2,422)     (844)         (331)             --          (3,597)
 Exercise of common stock options and warrants..............     20         --            --              --              20
 Cash dividends.............................................     (6)        --            --              --              (6)
 (Increase) decrease in intercompany and intercompany
   investments, net.........................................  2,413        994        (3,407)             --              --
                                                              ------    ------        ------         -------         -------
 Net cash provided by (used in) financing activities........    275        150        (3,704)             --          (3,279)
                                                              ------    ------        ------         -------         -------
 Effect of exchange rate changes on cash and cash
   equivalents..............................................     --         --            (5)             --              (5)
                                                              ------    ------        ------         -------         -------
 Increase (decrease) in cash and cash equivalents...........     38         10          (135)             --             (87)
 Cash and cash equivalents at beginning of period...........     34          4           143              --             181
                                                              ------    ------        ------         -------         -------
 Cash and cash equivalents at end of period.................  $  72     $   14        $    8         $    --         $    94
                                                              ======    ======        ======         =======         =======
                                                 YEAR ENDED DECEMBER 31, 1999
Cash flows from operating activities:
 Net income (loss)..........................................  $(398)    $ (137)       $   31         $   106         $  (398)
 Equity in earnings of subsidiaries.........................    137        (31)           --            (106)             --
 Other adjustments and changes..............................     69        (10)        2,028              --           2,087
                                                              ------    ------        ------         -------         -------
Net cash provided by (used in) operations...................   (192)      (178)        2,059              --           1,689
                                                              ------    ------        ------         -------         -------
Cash flows from investing activities:
 Short-term investments.....................................     --         --           (41)             --             (41)
 Acquisitions of businesses, net of cash acquired...........     --         --        (1,289)             --          (1,289)
 Capital expenditures.......................................     --         --        (1,327)             --          (1,327)
 Proceeds from divestitures of businesses, net of cash
   divested, and other sales of assets......................     --         --           651              --             651
 Other, net.................................................     --         --           (11)             --             (11)
                                                              ------    ------        ------         -------         -------
Net cash used in investing activities.......................     --         --        (2,017)             --          (2,017)
                                                              ------    ------        ------         -------         -------
Cash flows from financing activities:
 New borrowings.............................................  4,057         --           189              --           4,246
 Debt repayments............................................  (3,030)     (381)         (576)             --          (3,987)
 Exercise of common stock options and warrants..............    176         --            --              --             176
 Cash dividends.............................................     (6)        --            --              --              (6)
 Other......................................................     --         --            (3)             --              (3)
 (Increase) decrease in intercompany and intercompany
   investments, net.........................................   (999)       612           387              --              --
                                                              ------    ------        ------         -------         -------
 Net cash provided by (used in) financing activities........    198        231            (3)             --             426
                                                              ------    ------        ------         -------         -------
 Effect of exchange rate changes on cash and cash
   equivalents..............................................     --         --            (4)             --              (4)
                                                              ------    ------        ------         -------         -------
 Increase in cash and cash equivalents......................      6         53            35              --              94
 Cash and cash equivalents at beginning of period...........     28        (49)          108              --              87
                                                              ------    ------        ------         -------         -------
 Cash and cash equivalents at end of period.................  $  34     $    4        $  143         $    --         $   181
                                                              ======    ======        ======         =======         =======
                                                 YEAR ENDED DECEMBER 31, 1998
Cash flows from operating activities:
 Net loss...................................................  $(771)    $ (626)       $ (434)        $ 1,060         $  (771)
 Equity in earnings of subsidiaries.........................    626        434            --          (1,060)             --
 Other adjustments and changes..............................     36        (19)        2,256              --           2,273
                                                              ------    ------        ------         -------         -------
Net cash provided by (used in) operations...................   (109)      (211)        1,822              --           1,502
                                                              ------    ------        ------         -------         -------
Cash flows from investing activities:
 Short-term investments.....................................     --         --            57              --              57
 Acquisitions of businesses, net of cash acquired...........     --         --        (1,946)             --          (1,946)
 Capital expenditures.......................................     --         --        (1,651)             --          (1,651)
 Proceeds from divestitures of businesses, net of cash
   divested, and other sales of assets......................     --         --           621              --             621
 Acquisition of minority interests..........................     --         --        (1,673)             --          (1,673)
 Other, net.................................................     --         --            37              --              37
                                                              ------    ------        ------         -------         -------
Net cash used in investing activities.......................     --         --        (4,555)             --          (4,555)
                                                              ------    ------        ------         -------         -------
Cash flows from financing activities:
 New borrowings.............................................  5,547         --           855              --           6,402
 Debt repayments............................................  (2,395)     (786)       (1,226)             --          (4,407)
 Issuance of common stock...................................    206         --            --              --             206
 Sale of treasury stock.....................................     --        739            --              --             739
 Exercise of common stock options and warrants..............    133         --            --              --             133
 Cash dividends.............................................    (12)       (82)           --              --             (94)
 (Increase) decrease in intercompany and intercompany
   investments, net.........................................  (3,357)      249         3,108              --              --
 Other, net.................................................     --         --           (23)             --             (23)
                                                              ------    ------        ------         -------         -------
Net cash provided by financing activities...................    122        120         2,714              --           2,956
                                                              ------    ------        ------         -------         -------
Effect of exchange rate changes on cash and cash
 equivalents................................................     --         --            (6)             --              (6)
                                                              ------    ------        ------         -------         -------
Increase (decrease) in cash and cash equivalents............     13        (91)          (25)             --            (103)
Cash and cash equivalents at beginning of period............     15         42           133              --             190
                                                              ------    ------        ------         -------         -------
Cash and cash equivalents at end of period..................  $  28     $  (49)       $  108         $    --         $    87
                                                              ======    ======        ======         =======         =======
</TABLE>

                                        77
<PAGE>   80
                             WASTE MANAGEMENT, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

23. NEW ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133," and SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- an Amendment of FASB Statement No.
133," which deferred the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000, is effective for the Company as of January 1, 2001. SFAS
No. 133, as amended, establishes accounting and reporting standards requiring
that all derivative instruments, including certain derivative instruments
embedded in other contracts, be recorded as either assets or liabilities
measured at fair value. SFAS 133, as amended, requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the resulting
designation. The Company adopted SFAS 133 on January 1, 2001. As of January 1,
2001, the cumulative effect of such change in accounting for derivative
instruments to fair value is expected to result in a gain, net of taxes of
approximately $2 million in the first quarter of 2001.

     In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB No. 101"). SAB No. 101 provides registrants guidance
on the recognition, presentation and disclosure of revenue in financial
statements and was required to be adopted by the Company in the fourth quarter
of 2000. Since the Company's policies were already compliant with SAB No. 101,
no material changes to revenue recognition occurred.

24. SUBSEQUENT EVENTS

     The Company has proposed a settlement to resolve a consolidated derivative
action pending in the Chancery Court of the State of Delaware. The derivative
action was brought against several former officers and directors of WM Holdings
and seeks, among other things, reimbursement of those monies expended by WM
Holdings and the Company in resolving all claims brought against WM Holdings
arising out of its February 1998 restatement of earnings. The terms of the
settlement include a payment to the Company of $15 by certain of WM Holdings'
insurance carriers and the complete resolution of all pending claims for
retirement benefits between certain former officers of WM Holdings and the
Company. The resolution of the actions for retirement benefits involves the
release by the former executives who brought claims against the Company for
certain amounts otherwise owing under the retirement plans. The total benefits
to the Company from the settlement of the derivative case is approximately $23.

     In February of 2001, the Company made a public offering of $600 of 7 3/8%
senior unsecured notes due August 1, 2010. Interest is payable semi-annually on
February 1 and August 1. The net proceeds from the offering of the notes are
approximately $593, after deducting discounts to the underwriters and estimated
expenses of the offering. The Company intends to use the net proceeds, together
with cash on hand, to repay in full the $200 principal amount outstanding under
the 6% Senior Notes due May 15, 2001, the $200 principal amount outstanding
under the 6.70% Senior Notes due May 1, 2001, and the $200 principal amount
outstanding under the 7 1/8% Senior Notes due June 15, 2001. Pending application
of the proceeds as described, the proceeds will be invested temporarily in
short-term investments or be used to reduce short-term borrowings.

                                        78
<PAGE>   81

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by this Item concerning directors of the Company
is set forth under the caption "Election of Directors" in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, and is incorporated herein by reference.

EXECUTIVE OFFICERS OF THE REGISTRANT

     Below are the names and ages, as of December 31, 2000, of the Company's
executive officers and summaries of their business experience for the past 5
years.

<TABLE>
<CAPTION>
NAME                          AGE    POSITIONS HELD AND BUSINESS EXPERIENCE FOR PAST FIVE YEARS
----                          ---    ----------------------------------------------------------
<S>                           <C>   <C>
A. Maurice Myers............  60    - Chairman of the Board, President and CEO since November
                                      1999.
                                    - Chairman of the Board, President and CEO of Yellow
                                      Corporation April 1996 -- November 1999.
Robert P. Damico............  52    - Senior Vice President -- Midwest Area since July 1998.
                                    - District Manager, Division Manager and then Region Manager
                                      of the Mountain Region for WM Holdings from 1980 -- July
                                      1998.
Robert E. Dees, Jr..........  50    - Senior Vice President -- People since May 2000.
                                    - Senior Vice President -- Human Resources of AutoNation,
                                      Inc. 1997 -- 2000.
                                    - Senior Vice President -- Human Resources of TRIARC, Inc.
                                      1994 -- 1996.
Richard T. Felago...........  53    - President of Wheelabrator Technologies Inc. since May
                                      1999.
                                    - Vice President -- Marketing and Business Development of
                                      Wheelabrator 1996 -- May 1999.
Jeff M. Harris..............  46    - President of Canadian Waste Services, Inc. since November
                                      1999.
                                    - Division Vice President -- NYC of the Company August
                                      1999 -- October 1999
                                    - Market Area Vice President of Browning-Ferris Industries
                                      1996 -- August 1999.
David R. Hopkins............  57    - Senior Vice President -- Southern Area since March 2000.
                                    - Senior Vice President -- International Operations of the
                                      Company and CEO of Waste Management International, Inc.
                                      November 1998 -- March 2000.
                                    - Vice President, Controller and Chief Accounting Officer of
                                      Browning-Ferris Industries, Inc. 1987 -- November 1998.
Ronald H. Jones.............  50    - Vice President and Treasurer since 1995.
Lawrence O'Donnell, III.....  43    - Senior Vice President, General Counsel and Secretary since
                                      February 2000.
                                    - Vice President and General Counsel of Baker Hughes
                                      Incorporated 1995 -- February 2000.
Thomas L. Smith.............  61    - Senior Vice President -- Information Systems since
                                      November 1999.
                                    - Vice President of Information Systems of Yellow Services,
                                      Inc. February 1997 --  November 1999.
                                    - Vice President of Information Systems of America West
                                      Airlines November 1989 -- February 1997.
Bruce E. Snyder.............  45    - Vice President and Chief Accounting Officer since July
                                      1992.
Douglas G. Sobey............  49    - Senior Vice President -- Western Area since July 1998.
                                    - Region Vice President -- Northwest Region of the Company
                                      1996 -- July 1998.
James E. Trevathan..........  47    - Senior Vice President -- Sales and Marketing since June
                                      2000.
                                    - Vice President -- Sales of the Company July 1998 -- June
                                      2000.
                                    - Regional Vice President -- Industrial of WM Holdings
                                      1997 -- July 1998.
                                    - Southern Area Sales Vice President of WM Holdings
                                      1994 -- 1997.
William L. Trubeck..........  54    - Senior Vice President and CFO since March 2000.
                                    - Senior Vice President -- Finance and CFO of International
                                      Multifoods, Inc. 1997 -- March 2000.
                                    - President, Latin American Operation of International
                                      Multifoods, Inc. 1998 -- March 2000.
                                    - Senior Vice President -- Finance and CFO of SPX
                                      Corporation 1994-1997.
Charles A. Wilcox...........  48    - Senior Vice President -- Eastern Area since July 1998.
                                    - Region Vice President -- Central Region of the Company
                                      August 1996 -- July 1998.
                                    - Executive Vice President of the Company December
                                      1994 -- August 1996.
Charles E. Williams.........  51    - Senior Vice President -- Operations since June 2000.
                                    - Vice President Environmental Compliance/Engineering of the
                                      Company 1996 -- June 2000.
</TABLE>

                                        79
<PAGE>   82

ITEM 11. EXECUTIVE COMPENSATION.

     The information required by this Item is set forth under the caption
"Executive Compensation" in the 2001 Proxy Statement and is incorporated herein
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by this Item is set forth under the caption
"Director and Officer Stock Ownership" in the 2001 Proxy Statement and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by this Item is set forth under the caption
"Related Party Transactions" in the 2001 Proxy Statement and is incorporated
herein by reference.

                                    PART IV

ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K.

     (a)(1) Consolidated Financial Statements:

              Report of Independent Public Accountants

              Consolidated Balance Sheets as of December 31, 2000 and 1999

              Consolidated Statements of Operations for the years ended December
31, 2000, 1999 and 1998

              Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 and 1998

              Consolidated Statements of Stockholders' Equity for the years
              ended December 31, 2000, 1999 and 1998

              Notes to Consolidated Financial Statements

     (a)(2) Consolidated Financial Statement Schedules:

              Schedule II -- Valuation and Qualifying Accounts

    All other schedules have been omitted because the required information is
not significant or is included in the financial statements or notes thereto, or
is not applicable.

    (a)(3) Exhibits:

<TABLE>
<CAPTION>
  EXHIBIT NO.*                            DESCRIPTION
  ------------                            -----------
<C>               <S>
       2.1        -- Agreement and Plan of Merger, dated March 10, 1998, by
                    and among the Registrant, Dome Merger Subsidiary, Inc. and
                    Waste Management, Inc. [Incorporated by reference to
                    Exhibit 99.1 to Form 8-K dated March 10, 1998].
       2.2        -- Agreement and Plan of Merger, dated as of August 16,
                    1998, by and among the Registrant, Ocho Acquisition
                    Corporation and Eastern Environmental Services, Inc.
                    [Incorporated by reference to Annex A to Form S-4, File
                    No. 333-64239].
       3.1        -- Restated Certificate of Incorporation, as amended
                    [Incorporated by reference to Exhibit 3.2 to Form 8-K
                    dated July 16, 1998].
       3.2        -- Bylaws [Incorporated by reference to Exhibit 3 to Form
                    10-Q for the quarter ended June 30, 2000].
       4.1        -- Specimen Stock Certificate [Incorporated by reference to
                    Exhibit 4.1 to Form 10-K for the year ended December 31,
                    1998].
       4.2        -- Indenture for Subordinated Debt Securities dated February
                    1, 1997, among the Registrant and Texas Commerce Bank
                    National Association, as trustee [Incorporated by
                    reference to Exhibit 4.1 to Form 8-K dated February 7,
                    1997] .
       4.3        -- Indenture for Senior Debt Securities dated September 10,
                    1997, among the Registrant and Texas Commerce Bank
                    National Association, as trustee [Incorporated by
                    reference to Exhibit 4.1 to Form 8-K dated September 10,
                    1997].
      10.1        -- 1993 Stock Incentive Plan [Incorporated by reference to
                    Exhibit 10.2 to Form 10-K for the year ended December 31,
                    1998].
      10.2        -- 1996 Stock Option Plan for Non-Employee Directors
                    [Incorporated by reference to Appendix A to the Proxy
                    Statement for the 2000 Annual Meeting of Stockholders].
      10.3        -- 1997 Employee Stock Purchase Plan [Incorporated by
                    reference to Appendix C to the Proxy Statement for the
                    2000 Annual Meeting of Stockholders].
</TABLE>

                                        80
<PAGE>   83

<TABLE>
<CAPTION>
  EXHIBIT NO.*                            DESCRIPTION
  ------------                            -----------
<C>               <S>
      10.4        -- 401(k) Restoration Plan [Incorporated by reference to
                    Exhibit 10.11 to Form 10-K for the year ended December 31,
                    1997].
      10.5        -- Third Amended and Restated Revolving Credit Agreement,
                    dated as of December 15, 1999 among the Registrant, the
                    Guarantors, Bank of America, N.A., Morgan Guaranty Trust
                    Company of New York and other financial institutions
                    [Incorporated by reference to Exhibit 10.32 to Form S-4,
                    Reg. No. 333-87319].
      10.6        -- Amended and Restated Loan Agreement dated as of December
                    15, 1999, among the Registrant, the Guarantors, Bank
                    Boston, N.A. Bank of America National Trust and Savings
                    Association, Chase Bank of Texas, N.A., Deutsche Bank AG,
                    New York Branch, Morgan Guaranty Trust Company of New York
                    and other financial institutions [Incorporated by
                    reference to Exhibit 10.33 to Form S-4, Reg. No.
                    333-87319].
      10.7        -- 1998 Waste Management, Inc. Directors' Deferred
                    Compensation Plan [Incorporated by reference to Exhibit
                    10.1 to Form 10-Q for the quarter ended March 31, 1999].
      10.8        -- 1999 Waste Management, Inc. Directors Deferred
                    Compensation Plan [Incorporated by reference to Exhibit
                    10.2 to Form 10-Q for the quarter ended March 31, 1999].
      10.9        -- Employment Agreement between the Company and A. Maurice
                    Myers, dated November 8, 1999 [Incorporated by reference
                    to Exhibit 10.35 to Form 10-K for the year ended December
                    31, 1999].
      10.10       -- Employment Agreement between the Company and Lawrence
                    O'Donnell III, dated January 21, 2000 [Incorporated by
                    reference to Exhibit 10.1 to Form 10-Q for the quarter
                    ended June 30, 2000].
      10.11       -- Employment Agreement between the Company and William L.
                    Trubeck, dated February 16, 2000 [Incorporated by
                    reference to Exhibit 10.37 to Form 10-K for the year ended
                    December 31, 1999].
      10.12       -- Employment Agreement between the Company and Thomas L.
                    Smith, dated November 18, 1999 [Incorporated by reference
                    to Exhibit 10.3 to Form 10-Q for the quarter ended June
                    30, 2000].
      10.13       -- Employment Agreement between the Company and Robert A.
                    Damico, dated December 17, 1998 [Incorporated by reference
                    to Exhibit 10.39 to Form 10-K for the year ended December
                    31, 1999].
      10.14       -- Employment Agreement between the Company and Charles A.
                    Wilcox, dated February 3, 1998 [Incorporated by reference
                    to Exhibit 10.40 to Form 10-K for the year ended December
                    31, 1999].
      10.15       -- Employment Agreement between the Company and Douglas G.
                    Sobey, dated May 7, 1997 [Incorporated by reference to
                    Exhibit 10.41 to Form 10-K for the year ended December 31,
                    1999].
      10.16       -- Employment Agreement between the Company and David R.
                    Hopkins, dated March 30, 2000 [Incorporated by reference
                    to Exhibit 10.2 to Form 10-Q for the quarter ended March
                    31, 2000].
      10.17       -- Employment Agreement between the Company and Ronald H.
                    Jones, dated as of August 27, 1997 and December 7, 1997
                    [Incorporated by reference to Exhibits 10.22 and 10.25 to
                    Form 10-K for the year ended December 31, 1997].
      10.18       -- Employment Agreement and Amendment to Employment
                    Agreement between the Company and Bruce E. Snyder, dated
                    as of June 1, 1997 and December 1, 1997 [Incorporated by
                    reference to Exhibits 10.26 and 10.27 to Form 10-K for the
                    year ended December 31, 1997].
      10.19       -- Employment Agreement between the Company and Robert E.
                    Dees, Jr., dated as of May 10, 2000 [Incorporated by
                    reference to Exhibit 10.4 to the Form 10-Q for the quarter
                    ended March 31, 2000].
      10.20       -- Employment Agreement between the Company and James E.
                    Trevathan dated as of June 1, 2000.
      10.21       -- Employment Agreement between the Company and Charles E.
                    Williams dated as of June 1, 2000.
      10.22       -- Employment Agreement between Wheelabrator Technologies,
                    Inc. an Richard T. Felago dated as of May 25, 1999.
      10.23       -- Employment Agreement between Canadian Waste Services,
                    Inc. and Jeff M. Harris dated as of November 3, 1999.
      10.24       -- 2000 Broad-Based Employee Plan [Incorporated by reference
                    to Exhibit 10.49 to Form 10-K for the year ended December
                    31, 1999].
      12.1        -- Computation of Ratio of Earnings to Fixed Charges.
      21.1        -- Subsidiaries of the Registrant.
      23.1        -- Consent of Arthur Andersen LLP.
      27          -- Financial Data Schedule.
</TABLE>

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

* In the case of incorporation by reference to documents filed under the
  Securities Exchange Act of 1934, the Company's file number under that Act is
  1-12154.

     (b) Reports on Form 8-K:

     None.

                                        81
<PAGE>   84

                                   SIGNATURES

     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.

                                            WASTE MANAGEMENT, INC.

                                            By:    /s/ A. MAURICE MYERS
                                              ----------------------------------
                                                       A. Maurice Myers
                                              President, Chief Executive Officer
                                                              and
                                                    Chairman of the Board
Date: March 13, 2001

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                     DATE
                      ---------                                   -----                     ----
<C>                                                    <S>                            <C>

                /s/ A. MAURICE MYERS                   President, Chief Executive      March 13, 2001
-----------------------------------------------------    Officer, Chairman of the
                  A. Maurice Myers                       Board, and Director
                                                         (Principal Executive
                                                         Officer)

               /s/ WILLIAM L. TRUBECK                  Senior Vice President and       March 13, 2001
-----------------------------------------------------    Chief Financial Officer
                 William L. Trubeck                      (Principal Financial
                                                         Officer)

                 /s/ BRUCE E. SNYDER                   Vice President and Chief        March 13, 2001
-----------------------------------------------------    Accounting Officer
                   Bruce E. Snyder                       (Principal Accounting
                                                         Officer)

                /s/ H. JESSE ARNELLE                   Director                        March 13, 2001
-----------------------------------------------------
                  H. Jesse Arnelle

            /s/ PASTORA SAN JUAN CAFFERTY              Director                        March 13, 2001
-----------------------------------------------------
              Pastora San Juan Cafferty

                  /s/ RALPH F. COX                     Director                        March 13, 2001
-----------------------------------------------------
                    Ralph F. Cox

                /s/ ROBERT S. MILLER                   Director                        March 13, 2001
-----------------------------------------------------
                  Robert S. Miller

                /s/ PAUL M. MONTRONE                   Director                        March 13, 2001
-----------------------------------------------------
                  Paul M. Montrone

                  /s/ JOHN C. POPE                     Director                        March 13, 2001
-----------------------------------------------------
                    John C. Pope

               /s/ STEVEN G. ROTHMEIER                 Director                        March 13, 2001
-----------------------------------------------------
                 Steven G. Rothmeier

               /s/ RALPH V. WHITWORTH                  Director                        March 13, 2001
-----------------------------------------------------
                 Ralph V. Whitworth
</TABLE>

                                        82
<PAGE>   85

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Waste Management, Inc.:

We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Waste Management, Inc.
and subsidiaries included in this Annual Report on Form 10-K, and have issued
our report thereon dated March 7, 2001, in which we expressed an unqualified
opinion based upon our audits. Our report contained an explanatory paragraph
indicating that we attempted, but were unable, to review the quarterly financial
data for the interim periods within 1999 included in Note 21 to the Company's
consolidated financial statements. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. Schedule
II is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. Schedule II has been subjected to
the auditing procedures applied in the audits of the basic financial statements,
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Houston, Texas
March 7, 2001

                                       S-1
<PAGE>   86

                             WASTE MANAGEMENT, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN MILLIONS)

<TABLE>
<CAPTION>
                                                             ACCOUNTS                EFFECT OF
                                    BALANCE     CHARGED      WRITTEN                  FOREIGN     BALANCE
                                   BEGINNING   (CREDITED)   OFF/USE OF               CURRENCY     END OF
                                    OF YEAR    TO INCOME     RESERVE     OTHER(A)   TRANSLATION    YEAR
                                   ---------   ----------   ----------   --------   -----------   -------
<S>                                <C>         <C>          <C>          <C>        <C>           <C>
1998 -- Reserve for doubtful
  accounts(B)....................    $ 94         $ 71        $ (51)       $  4         $ 1        $119
1999 -- Reserve for doubtful
  accounts(B)....................    $119         $268        $ (96)       $  7         $(3)       $295
2000 -- Reserve for doubtful
  accounts(B)....................    $295         $ 14        $(170)       $ 12         $--        $151
1998 -- Merger and restructuring
  accruals(C)....................    $121         $675        $(536)       $ --         $ 1        $261
1999 -- Merger and restructuring
  accruals(C)....................    $261         $ (8)       $(141)       $ --         $(3)       $109
2000 -- Merger and restructuring
  accruals(C)....................    $109         $ --        $ (27)       $(53)        $--        $ 29
1998 -- Reserve for major
  maintenance expenditures(D)....    $ 65         $  4        $ (10)       $ --         $--        $ 59
1999 -- Reserve for major
  maintenance expenditures(D)....    $ 59         $  9        $ (15)       $ --         $--        $ 53
2000 -- Reserve for major
  maintenance expenditures(D)....    $ 53         $  9        $ (14)       $ --         $--        $ 48
</TABLE>

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

(A)  Reserves for doubtful accounts relative to purchase of business
     combinations, reserves associated with dispositions of businesses, reserves
     reclassified to operations held for sale, and reclass among reserve
     accounts.

(B)  Includes reserves for doubtful long-term notes receivable.

(C)  Accruals are included in accrued liabilities and other liabilities. These
     accruals represent transaction or deal costs, employee severance,
     separation, and transitional costs and restructuring charges.

(D)  For major maintenance expenditures at the Company's waste-to-energy and
     independent power facilities.

                                       S-2
<PAGE>   87

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
  EXHIBIT NO.*                            DESCRIPTION
  ------------                            -----------
<C>               <S>
       2.1        -- Agreement and Plan of Merger, dated March 10, 1998, by
                    and among the Registrant, Dome Merger Subsidiary, Inc. and
                    Waste Management, Inc. [Incorporated by reference to
                    Exhibit 99.1 to Form 8-K dated March 10, 1998].
       2.2        -- Agreement and Plan of Merger, dated as of August 16,
                    1998, by and among the Registrant, Ocho Acquisition
                    Corporation and Eastern Environmental Services, Inc.
                    [Incorporated by reference to Annex A to Form S-4, File
                    No. 333-64239].
       3.1        -- Restated Certificate of Incorporation, as amended
                    [Incorporated by reference to Exhibit 3.2 to Form 8-K
                    dated July 16, 1998].
       3.2        -- Bylaws [Incorporated by reference to Exhibit 3 to Form
                    10-Q for the quarter ended June 30, 2000].
       4.1        -- Specimen Stock Certificate [Incorporated by reference to
                    Exhibit 4.1 to Form 10-K for the year ended December 31,
                    1998].
       4.2        -- Indenture for Subordinated Debt Securities dated February
                    1, 1997, among the Registrant and Texas Commerce Bank
                    National Association, as trustee [Incorporated by
                    reference to Exhibit 4.1 to Form 8-K dated February 7,
                    1997] .
       4.3        -- Indenture for Senior Debt Securities dated September 10,
                    1997, among the Registrant and Texas Commerce Bank
                    National Association, as trustee [Incorporated by
                    reference to Exhibit 4.1 to Form 8-K dated September 10,
                    1997].
      10.1        -- 1993 Stock Incentive Plan [Incorporated by reference to
                    Exhibit 10.2 to Form 10-K for the year ended December 31,
                    1998].
      10.2        -- 1996 Stock Option Plan for Non-Employee Directors
                    [Incorporated by reference to Appendix A to the Proxy
                    Statement for the 2000 Annual Meeting of Stockholders].
      10.3        -- 1997 Employee Stock Purchase Plan [Incorporated by
                    reference to Appendix C to the Proxy Statement for the
                    2000 Annual Meeting of Stockholders].
      10.4        -- 401(k) Restoration Plan [Incorporated by reference to
                    Exhibit 10.11 to Form 10-K for the year ended December 31,
                    1997].
      10.5        -- Third Amended and Restated Revolving Credit Agreement,
                    dated as of December 15, 1999 among the Registrant, the
                    Guarantors, Bank of America, N.A., Morgan Guaranty Trust
                    Company of New York and other financial institutions
                    [Incorporated by reference to Exhibit 10.32 to Form S-4,
                    Reg. No. 333-87319].
      10.6        -- Amended and Restated Loan Agreement dated as of December
                    15, 1999, among the Registrant, the Guarantors, Bank
                    Boston, N.A. Bank of America National Trust and Savings
                    Association, Chase Bank of Texas, N.A., Deutsche Bank AG,
                    New York Branch, Morgan Guaranty Trust Company of New York
                    and other financial institutions [Incorporated by
                    reference to Exhibit 10.33 to Form S-4, Reg. No.
                    333-87319].
      10.7        -- 1998 Waste Management, Inc. Directors' Deferred
                    Compensation Plan [Incorporated by reference to Exhibit
                    10.1 to Form 10-Q for the quarter ended March 31, 1999].
      10.8        -- 1999 Waste Management, Inc. Directors Deferred
                    Compensation Plan [Incorporated by reference to Exhibit
                    10.2 to Form 10-Q for the quarter ended March 31, 1999].
      10.9        -- Employment Agreement between the Company and A. Maurice
                    Myers, dated November 8, 1999 [Incorporated by reference
                    to Exhibit 10.35 to Form 10-K for the year ended December
                    31, 1999].
      10.10       -- Employment Agreement between the Company and Lawrence
                    O'Donnell III, dated January 21, 2000 [Incorporated by
                    reference to Exhibit 10.1 to Form 10-Q for the quarter
                    ended June 30, 2000].
      10.11       -- Employment Agreement between the Company and William L.
                    Trubeck, dated February 16, 2000 [Incorporated by
                    reference to Exhibit 10.37 to Form 10-K for the year ended
                    December 31, 1999].
      10.12       -- Employment Agreement between the Company and Thomas L.
                    Smith, dated November 18, 1999 [Incorporated by reference
                    to Exhibit 10.3 to Form 10-Q for the quarter ended June
                    30, 2000].
      10.13       -- Employment Agreement between the Company and Robert A.
                    Damico, dated December 17, 1998 [Incorporated by reference
                    to Exhibit 10.39 to Form 10-K for the year ended December
                    31, 1999].
      10.14       -- Employment Agreement between the Company and Charles A.
                    Wilcox, dated February 3, 1998 [Incorporated by reference
                    to Exhibit 10.40 to Form 10-K for the year ended December
                    31, 1999].
      10.15       -- Employment Agreement between the Company and Douglas G.
                    Sobey, dated May 7, 1997 [Incorporated by reference to
                    Exhibit 10.41 to Form 10-K for the year ended December 31,
                    1999].
      10.16       -- Employment Agreement between the Company and David R.
                    Hopkins, dated March 30, 2000 [Incorporated by reference
                    to Exhibit 10.2 to Form 10-Q for the quarter ended March
                    31, 2000].
      10.17       -- Employment Agreement between the Company and Ronald H.
                    Jones, dated as of August 27, 1997 and December 7, 1997
                    [Incorporated by reference to Exhibits 10.22 and 10.25 to
                    Form 10-K for the year ended December 31, 1997].
      10.18       -- Employment Agreement and Amendment to Employment
                    Agreement between the Company and Bruce E. Snyder, dated
                    as of June 1, 1997 and December 1, 1997 [Incorporated by
                    reference to Exhibits 10.26 and 10.27 to Form 10-K for the
                    year ended December 31, 1997].
      10.19       -- Employment Agreement between the Company and Robert E.
                    Dees, Jr., dated as of May 10, 2000 [Incorporated by
                    reference to Exhibit 10.4 to the Form 10-Q for the quarter
                    ended March 31, 2000].
      10.20       -- Employment Agreement between the Company and James E.
                    Trevathan dated as of June 1, 2000.
      10.21       -- Employment Agreement between the Company and Charles E.
                    Williams dated as of June 1, 2000.
      10.22       -- Employment Agreement between Wheelabrator Technologies,
                    Inc. an Richard T. Felago dated as of May 25, 1999.
</TABLE>
<PAGE>   88

<TABLE>
<CAPTION>
  EXHIBIT NO.*                            DESCRIPTION
  ------------                            -----------
<C>               <S>
      10.23       -- Employment Agreement between Canadian Waste Services,
                    Inc. and Jeff M. Harris dated as of November 3, 1999.
      10.24       -- 2000 Broad-Based Employee Plan [Incorporated by reference
                    to Exhibit 10.49 to Form 10-K for the year ended December
                    31, 1999].
      12.1        -- Computation of Ratio of Earnings to Fixed Charges.
      21.1        -- Subsidiaries of the Registrant.
      23.1        -- Consent of Arthur Andersen LLP.
      27          -- Financial Data Schedule.
</TABLE>

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

* In the case of incorporation by reference to documents filed under the
  Securities Exchange Act of 1934, the Company's file number under that Act is
  1-12154.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.20
<SEQUENCE>2
<FILENAME>h84376ex10-20.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - JAMES E TREVATHAN
<TEXT>

<PAGE>   1
                                                                   EXHIBIT 10.20


                              EMPLOYMENT AGREEMENT

WASTE MANAGEMENT, INC. (the "Company"), and JIM TREVETHAN (the "Executive")
hereby enter into this EMPLOYMENT AGREEMENT ("Agreement") dated as of June 1,
2000 (the "Effective Date"), as follows:

1.       EMPLOYMENT.

The Company shall employ Executive, and Executive shall be employed by the
Company upon the terms and subject to the conditions set forth in this
Agreement.

2.       TERM OF EMPLOYMENT.

The period of Executive's employment under this Agreement shall commence on June
1, 2000, and be for a continuously renewing (on a daily basis) three (3) year
term, without any further action by either the Company or Executive, unless
Executive's employment is terminated in accordance with Section 5 below. The
date on which Executive commences employment with the Company shall be referred
to as the "Commencement Date" and the period during which Executive is employed
hereunder shall be referred to as the "Employment Period".

3.       DUTIES AND RESPONSIBILITIES.

(a)      Executive shall serve as Senior Vice President-Sales & Marketing. In
         such capacity, Executive shall perform such duties and have the power,
         authority and functions commensurate with such positions in similarly
         sized public companies and such other authority and functions
         consistent with such positions as may be assigned to Executive from
         time to time by the Chief Executive Officer, President, Executive Vice
         President, or the Board of Directors.

(b)      Executive shall devote substantially all of his working time, attention
         and energies to the business of the Company, and affiliated entities.
         Executive may make and manage his personal investments (provided such
         investments in other activities do not violate, in any material
         respect, the provisions of Section 8 of this Agreement), be involved in
         charitable and professional activities and, with the consent of the
         Board, serve on boards of other for profit entities, provided such
         activities do not materially interfere with the performance of his
         duties hereunder.

4.       COMPENSATION AND BENEFITS.

(a)      BASE SALARY. During the Employment Period, the Company shall pay
         Executive a base salary at the annual rate of TWO HUNDRED FIFTY
         THOUSAND DOLLARS ($250,000.00) per year or such higher rate as may be
         determined from time to time by the Company ("Base Salary"). Such Base
         Salary shall be paid in accordance with the Company's standard payroll
         practice for its executive officers. Once increased, Base Salary shall
         not be reduced.

                                  Page 1 of 19
<PAGE>   2



(b)      ANNUAL BONUS. During the Employment Period, Executive will be entitled
         to participate in an annual incentive compensation plan of the Company.
         The Executive's target annual bonus will be seventy-five percent (75%)
         of his Base Salary as in effect for such year (the "Target Bonus"), and
         his actual annual bonus may range from 0% to 150% (2 times Target
         Bonus), and will be determined based upon achievement of performance
         goals (initially seventy percent [70%] financial [return on capital
         invested and EBITDA] and thirty percent [30%] personal, but may be tied
         to other metrics as may be established from time to time by the
         Compensation Committee of the Board) as approved by the Compensation
         Committee of the Board, from time to time.

(c)      STOCK OPTIONS. Executive shall be eligible to be considered for stock
         option grants under the Company's annual stock option award program as
         administered by, and at the discretion of, the Compensation Committee
         of the Board of Directors, beginning in 2001.

(d)      BENEFIT PLANS AND VACATION. Executive shall be eligible to participate
         in or receive benefits under any pension plan, profit sharing plan,
         medical and dental benefits plan, life insurance plan, short-term and
         long-term disability plans, or any other health, welfare or fringe
         benefit plan, generally made available by the Company to its executive
         officers at a level commensurate with his position. During the
         Employment Period, Executive shall be entitled to vacation each year in
         accordance with the Company's policies in effect from time to time, but
         in no event less than four (4) weeks paid vacation per calendar year.
         The Executive shall also be entitled to such periods of sick leave as
         is customarily provided by the Company for its senior executive
         employees. Executive shall be eligible to participate in the Company's
         401(k) Plan.

(e)      EXPENSE REIMBURSEMENT. The Company shall promptly reimburse Executive
         for the ordinary and necessary business expenses incurred by Executive
         in the performance of the duties hereunder in accordance with the
         Company's customary practices applicable to its executive officers.

(f)      EXECUTIVE DEFERRAL PLAN. Executive shall be entitled to participate in
         the Company's "Executive Deferral Plan", and any replacement plan or
         arrangement, all to the extent maintained or instituted by the Company,
         and covering its principal executive officers, at a level commensurate
         with his position.

(g)      OTHER PERQUISITES. Executive shall be entitled to all perquisites
         provided to Senior Vice Presidents of the Company as approved by the
         Compensation Committee of the Board of Directors, and as they may exist
         from time to time.

5.       TERMINATION OF EMPLOYMENT.

Executive's employment hereunder may be terminated under the following
circumstances:

(a)      DEATH. Executive's employment hereunder shall terminate upon
         Executive's death.



                                  Page 2 of 19
<PAGE>   3

(b)      TOTAL DISABILITY. The Company may terminate Executive's employment
         hereunder upon Executive becoming "Totally Disabled". For purposes of
         this Agreement, Executive shall be "Totally Disabled" if Executive has
         been physically or mentally incapacitated so as to render Executive
         incapable of performing Executive's material usual and customary duties
         under this Agreement for six (6) consecutive months (such consecutive
         absence not being deemed interrupted by Executive's return to service
         for less than 10 consecutive business days if absent thereafter for the
         same illness or disability). Any such termination shall be upon thirty
         (30) days written notice given at any time thereafter while Executive
         remains Totally Disabled, provided that a termination for Total
         Disability hereunder shall not be effective if Executive returns to
         full performance of his duties within such thirty (30) day period.

(c)      TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
         Executive's employment hereunder for "Cause" at any time within ninety
         (90) days after the Chairman of the Audit or Governance Committee of
         the Board has knowledge thereof.

         (i)      For purposes of this Agreement, the term "Cause" shall be
                  limited to (1) willful misconduct by Executive with regard to
                  the Company which has a material adverse effect on the
                  Company; (2) the willful refusal of Executive to attempt to
                  follow the proper written direction of the Chief Executive
                  Officer, the President, an Executive Vice President, or the
                  Board of Directors, provided that the foregoing refusal shall
                  not be "Cause" if Executive in good faith believes that such
                  direction is illegal, unethical or immoral and promptly so
                  notifies the Board; (3) substantial and continuing willful
                  refusal by the Executive to attempt to perform the duties
                  required of him hereunder (other than any such failure
                  resulting from incapacity due to physical or mental illness)
                  after a written demand for substantial performance is
                  delivered to the Executive by the Chief Executive Officer, the
                  President, an Executive Vice President, or the Board of
                  Directors, which specifically identifies the manner in which
                  it is believed that the Executive has substantially and
                  continually refused to attempt to perform his duties
                  hereunder; or (4) the Executive being convicted of a felony
                  (other than a felony involving a traffic violation or as a
                  result of vicarious liability). For purposes of this
                  paragraph, no act, or failure to act, on Executive's part
                  shall be considered "willful" unless done or omitted to be
                  done, by him not in good faith and without reasonable belief
                  that his action or omission was in the best interests of the
                  Company.

         (ii)     A Notice of Termination for Cause shall mean a notice that
                  shall indicate the specific termination provision in Section
                  5(c)(i) relied upon and shall set forth in reasonable detail
                  the facts and circumstances which provide for a basis for
                  termination for Cause. Further, a Notification for Cause shall
                  be required to include a copy of a resolution duly adopted by
                  at least two-thirds (2/3rds) of the entire membership of the
                  Board at a meeting of the Board which was called for the
                  purpose of considering such termination and which Executive
                  and his representative had the right to attend and address the
                  Board, finding that, in the


                                  Page 3 of 19
<PAGE>   4

                  good faith of the Board, Executive engaged in conduct set
                  forth in the definition of Cause herein and specifying the
                  particulars thereof in reasonable detail. The date of
                  termination for a termination for Cause shall be the date
                  indicated in the Notice of Termination. Any purported
                  termination for Cause which is held by a court or arbitrator
                  not to have been based on the grounds set forth in this
                  Agreement or not to have followed the procedures set forth in
                  this Agreement shall be deemed a termination by the Company
                  without Cause.

(d)      VOLUNTARY TERMINATION BY EXECUTIVE. Executive may terminate employment
         hereunder with or without Good Reason at any time upon written notice
         to the Company.

         (i)      A Termination for Good Reason means a termination by Executive
                  by written notice given within ninety (90) days after the
                  occurrence of the Good Reason event, unless such circumstances
                  are fully corrected prior to the date of termination specified
                  in the Notice of Termination for Good Reason. For purposes of
                  this Agreement, "Good Reason" shall mean the occurrence or
                  failure to cause the occurrence, as the case may be, without
                  Executive's express written consent, of any of the following
                  circumstances: (1) any material diminution of Executive's
                  positions, duties or responsibilities hereunder (except in
                  each case in connection with the termination of Executive's
                  employment for Cause or Total Disability or as a result of
                  Executive's death, or temporarily as a result of Executive's
                  illness or other absence), provided that a change in reporting
                  structure shall not constitute Good Reason under any
                  circumstances as long as Executive reports to the Chief
                  Executive Officer, the President, the Chief Operating Officer,
                  or an Executive Vice President; further provided that if the
                  Company becomes a fifty percent or more subsidiary of any
                  other entity, Executive shall be deemed to have a material
                  diminution of his position unless he is also a Senior Vice
                  President of the ultimate parent entity; (2) removal of, or
                  the non-re-election of, the Executive from officer positions
                  with the Company specified herein or removal of the Executive
                  from any of his then officer positions with the Company; (3)
                  requiring Executive's principal place of business to be
                  located other than in Houston, Texas; (4) a failure by the
                  Company (I) to continue any bonus plan, program or arrangement
                  in which Executive is entitled to participate (the "Bonus
                  Plans"), provided that any such Bonus Plans may be modified at
                  the Company's discretion from time to time but shall be deemed
                  terminated if (x) any such plan does not remain substantially
                  in the form in effect prior to such modification and (y) if
                  plans providing Executive with substantially similar benefits
                  are not substituted therefor ("Substitute Plans"), or (II) to
                  continue Executive as a participant in the Bonus Plans and
                  Substitute Plans on at least the same basis as to potential
                  amount of the bonus as Executive participated in prior to any
                  change in such plans or awards, in accordance with the Bonus
                  Plans and the Substitute Plans; (5) any material breach by the
                  Company of any provision of this Agreement, including without
                  limitation Section 10 hereof; or (6) failure of any successor
                  to the Company (whether direct or indirect and whether by
                  merger, acquisition, consolidation or otherwise) to assume in
                  a writing



                                  Page 4 of 19
<PAGE>   5
                  delivered to Executive upon the assignee becoming such, the
                  obligations of the Company hereunder.

         (ii)     A Notice of Termination for Good Reason shall mean a notice
                  that shall indicate the specific termination provision relied
                  upon and shall set forth in reasonable detail the facts and
                  circumstances claimed to provide a basis for Termination for
                  Good Reason. The failure by Executive to set forth in the
                  Notice of Termination for Good Reason any facts or
                  circumstances which contribute to the showing of Good Reason
                  shall not waive any right of Executive hereunder or preclude
                  Executive from asserting such fact or circumstance in
                  enforcing his rights hereunder. The Notice of Termination for
                  Good Reason shall provide for a date of termination not less
                  than ten (10) nor more than sixty (60) days after the date
                  such Notice of Termination for Good Reason is given, provided
                  that in the case of the events set forth in Sections
                  5(d)(i)(1) or (2) the date may be five (5) days after the
                  giving of such notice.

(e)      TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate
         Executive's employment hereunder without Cause at any time upon written
         notice to Executive.

(f)      EFFECT OF TERMINATION. Upon any termination of employment, Executive
         shall immediately resign from all Board memberships and other positions
         with the Company or any of its subsidiaries held by him at such time.

6.       COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT.

In the event that Executive's employment hereunder is terminated, Executive
shall be entitled to the following compensation and benefits upon such
termination:

(a)      TERMINATION BY REASON OF DEATH. In the event that Executive's
         employment is terminated by reason of Executive's death, the Company
         shall pay the following amounts to Executive's beneficiary or estate:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of death, any accrued but unpaid expenses required to
                  be reimbursed under this Agreement, any vacation accrued to
                  the date of termination, any earned but unpaid bonuses for any
                  prior period, and, to the extent not otherwise paid, a
                  pro-rata "bonus" or incentive compensation payment to the
                  extent payments are awarded to senior executives of the
                  Company and paid at the same time as senior executives are
                  paid.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements (including those referred
                  to in Section 4(d) hereof), as determined and paid in
                  accordance with the terms of such plans, policies and
                  arrangements.

                                  Page 5 of 19
<PAGE>   6

         (iii)    An amount equal to the Base Salary (at the rate in effect as
                  of the date of Executive's death) which would have been
                  payable to Executive if Executive had continued in employment
                  for two additional years. Said payments will be paid to
                  Executive's estate or beneficiary at the same time and in the
                  same manner as such compensation would have been paid if
                  Executive had remained in active employment.

         (iv)     As of the date of termination by reason of Executive's death,
                  stock options awarded to Executive shall be fully vested and
                  Executive's estate or beneficiary shall have up to one (1)
                  year from the date of death to exercise all such options,
                  provided that in no event will any option be exercisable
                  beyond its term.

         (v)      As otherwise specifically provided herein.

(b)      TERMINATION BY REASON OF TOTAL DISABILITY. In the event that
         Executive's employment is terminated by reason of Executive's Total
         Disability as determined in accordance with Section 5(b), the Company
         shall pay the following amounts to Executive:


         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination and any earned but unpaid
                  bonuses for any prior period. Executive shall also be eligible
                  for a pro-rata bonus or incentive compensation payment to the
                  extent such awards are made to senior executives of the
                  Company for the year in which Executive is terminated, and to
                  the extent not otherwise paid to the Executive.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements (including those referred
                  to in Section 4(d) hereof) shall be determined and paid in
                  accordance with the terms of such plans, policies and
                  arrangements.

         (iii)    An amount equal to the Base Salary (at the rate in effect as
                  of the date of Executive's Total Disability) which would have
                  been payable to Executive if Executive had continued in active
                  employment for two years following termination of employment,
                  less any payments under any long-term disability plan or
                  arrangement paid for by the Company. Payment shall be made at
                  the same time and in the same manner as such compensation
                  would have been paid if Executive had remained in active
                  employment until the end of such period.

         (iv)     As of the date of termination by reason of Executive's Total
                  Disability, Executive shall be fully vested in all stock
                  option awards, and Executive shall have up to one (1) year
                  from the date of termination by reason of Total Disability to
                  exercise all such options; provided that in no event will any
                  option be exercisable beyond its term.

                                  Page 6 of 19
<PAGE>   7

         (v)      As otherwise specifically provided herein.

(c)      TERMINATION FOR CAUSE. In the event that Executive's employment is
         terminated by the Company for Cause, the Company shall pay the
         following amounts to Executive:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination and any earned but unpaid
                  bonuses for any prior period.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements (including those referred
                  to in Section 4(d) hereof up to the date of termination) shall
                  be determined and paid in accordance with the terms of such
                  plans, policies and arrangements.

         (iii)    As otherwise specifically provided herein.

         Any options, restricted stock or other awards that have not vested
         prior to the date of such termination of employment shall be cancelled
         to the extent not then vested, and any options held by Executive shall
         be cancelled, whether or not then vested.

(d)      VOLUNTARY TERMINATION BY EXECUTIVE. In the event that Executive
         voluntarily terminates employment other than for Good Reason, the
         Company shall pay the following amounts to Executive:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination and any earned but unpaid
                  bonuses for any prior period.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements (including those referred
                  to in Section 4(d) hereof up to the date of termination) shall
                  be determined and paid in accordance with the terms of such
                  plans, policies and arrangements.

         (iii)    As otherwise specifically provided herein.

         Any options, restricted stock or other awards that have not vested
         prior to the date of such termination of employment shall be cancelled
         to the extent not then vested, and Executive shall have 90 days
         following termination of employment to exercise any previously vested
         options; provided that in no event will any option be exercisable
         beyond its term.

(e)      TERMINATION BY THE COMPANY WITHOUT CAUSE; TERMINATION BY EXECUTIVE FOR
         GOOD REASON. In the event that Executive's employment is terminated by
         the Company for


                                  Page 7 of 19
<PAGE>   8

         reasons other than death, Total Disability or Cause, or Executive
         terminates his employment for Good Reason, the Company shall pay the
         following amounts to Executive:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination and any earned but unpaid
                  bonuses for any prior period.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements referred to in Section
                  4(d) hereof shall be determined and paid in accordance with
                  the terms of such plans, policies and arrangements.

         (iii)    An amount equal to two times the sum of Executive's Base
                  Salary plus his Target Annual Bonus (in each case as then in
                  effect), of which one-half shall be paid in a lump sum within
                  ten (10) days after such termination and one-half shall be
                  paid during the two (2) year period beginning on the date of
                  Executive's termination and shall be paid at the same time and
                  in the same manner as Base Salary would have been paid if
                  Executive had remained in active employment until the end of
                  such period.

         (iv)     The Company at its expense will continue for Executive and
                  Executive's spouse and dependents, all health benefit plans,
                  programs or arrangements, whether group or individual, and
                  also including deferred compensation, disability, automobile,
                  and other benefit plans, in which Executive was entitled to
                  participate at any time during the twelve-month period prior
                  to the date of termination, until the earliest to occur of (A)
                  two years after the date of termination; (B) Executive's death
                  (provided that benefits payable to Executive's beneficiaries
                  shall not terminate upon Executive's death); or (C) with
                  respect to any particular plan, program or arrangement, the
                  date Executive becomes covered by a comparable benefit by a
                  subsequent employer. In the event that Executive's continued
                  participation in any such plan, program, or arrangement of the
                  Company is prohibited, the Company will arrange to provide
                  Executive with benefits substantially similar to those which
                  Executive would have been entitled to receive under such plan,
                  program, or arrangement, for such period on a basis which
                  provides Executive with no additional after tax cost.

         (v)      Except to the extent prohibited by law, and except as
                  otherwise provided herein, Executive will be 100% vested in
                  all benefits, awards, and grants accrued but unpaid as of the
                  date of termination under any pension plan, profit sharing
                  plan, supplemental and/or incentive compensation plans in
                  which Executive was a participant as of the date of
                  termination. Executive shall also be eligible for a bonus or
                  incentive compensation payment, at the same time, on the same
                  basis, and to the same extent payments are made to senior
                  executives of the Company, pro-rated for the fiscal year in
                  which the Executive is terminated.



                                  Page 8 of 19
<PAGE>   9

         (vi)     Executive shall continue to vest in all stock option awards or
                  restricted stock awards over the two (2) year period
                  commencing on the date of such termination. Executive shall
                  have two (2) years and six (6) months after the date of
                  termination to exercise all options to the extent then vested,
                  provided that in no event will any option be exercisable
                  beyond its term.

         (vii)    As otherwise specifically provided herein.

(f)      NO OTHER BENEFITS OR COMPENSATION. Except as may be provided under this
         Agreement, under the terms of any incentive compensation, employee
         benefit, or fringe benefit plan applicable to Executive at the time of
         Executive's termination or resignation of employment, Executive shall
         have no right to receive any other compensation, or to participate in
         any other plan, arrangement or benefit, with respect to future periods
         after such termination or resignation.

(g)      NO MITIGATION; NO SET-OFF. In the event of any termination of
         employment hereunder, Executive shall be under no obligation to seek
         other employment and there shall be no offset against any amounts due
         Executive under this Agreement on account of any remuneration
         attributable to any subsequent employment that Executive may obtain.
         The amounts payable hereunder shall not be subject to setoff,
         counterclaim, recoupment, defense or other right which the Company may
         have against the Executive or others, except upon obtaining by the
         Company of a final unappealable judgment against Executive.

7.       RESIGNATION BY EXECUTIVE FOR GOOD REASON AND COMPENSATION PAYABLE
         FOLLOWING CHANGE IN CONTROL.

(a)      RESIGNATION FOR GOOD REASON FOLLOWING CHANGE IN CONTROL. In the event a
         "Change in Control" occurs and Executive terminates his employment for
         Good Reason thereafter, or the Company terminates Executive's
         employment other than for Cause or such termination for Good Reason or
         without Cause occurs in contemplation of such Change in Control (any
         termination within six (6) months prior to such Change in Control being
         presumed to be in contemplation unless rebutted by clear and
         demonstrable evidence to the contrary), the Company shall pay the
         following amounts to Executive:

         (i)      The payments and benefits provided for in Section 6(e), except
                  that the amount calculated pursuant to Section 6(e)(iii) shall
                  be paid in a lump-sum.

         (ii)     Executive will be 100% vested in all benefits, awards, and
                  grants (including stock option grants and stock awards; all of
                  such stock options exercisable for two (2) years following
                  Termination, provided that in no event will any option be
                  exercisable beyond its term) accrued but unpaid as of the date
                  of termination under any non-qualified pension plan,
                  supplemental and/or incentive compensation or bonus plans, in
                  which Executive was a participant as of the date


                                  Page 9 of 19
<PAGE>   10

                  of termination. Executive shall also receive a bonus or
                  incentive compensation payment (the "bonus payment"), payable
                  at 100% of the maximum bonus available to Executive, pro-rated
                  as of the effective date of the termination. The bonus payment
                  shall be payable within five (5) days after the effective date
                  of Employee's termination. Except as may be provided under
                  this Section 7 or under the terms of any incentive
                  compensation, employee benefit, or fringe benefit plan
                  applicable to Executive at the time of Executive's resignation
                  from employment, Executive shall have no right to receive any
                  other compensation, or to participate in any other plan,
                  arrangement or benefit, with respect to future periods after
                  such resignation or termination.

(b)      CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.

         (i)      In the event that the Executive shall become entitled to
                  payments and/or benefits provided by this Agreement or any
                  other amounts in the "nature of compensation" (whether
                  pursuant to the terms of this Agreement or any other plan,
                  arrangement or agreement with the Company, any person whose
                  actions result in a change of ownership or effective control
                  covered by Section 280G(b)(2) of the Code or any person
                  affiliated with the Company or such person) as a result of
                  such change in ownership or effective control (collectively
                  the "Company Payments"), and such Company Payments will be
                  subject to the tax (the "Excise Tax") imposed by Section 4999
                  of the Code (and any similar tax that may hereafter be imposed
                  by any taxing authority) the Company shall pay to the
                  Executive at the time specified in subsection (iv) below an
                  additional amount (the "Gross-up Payment") such that the net
                  amount retained by the Executive, after deduction of any
                  Excise Tax on the Company Payments and any U.S. federal,
                  state, and for local income or payroll tax upon the Gross-up
                  Payment provided for by this Section 7(b), but before
                  deduction for any U.S. federal, state, and local income or
                  payroll tax on the Company Payments, shall be equal to the
                  Company Payments.

         (ii)     For purposes of determining whether any of the Company
                  Payments and Gross-up Payments (collectively the "Total
                  Payments") will be subject to the Excise Tax and the amount of
                  such Excise Tax, (x) the Total Payments shall be treated as
                  "parachute payments" within the meaning of Section 280G(b)(2)
                  of the Code, and all "parachute payments" in excess of the
                  "base amount" (as defined under Code Section 280G[b][3] of the
                  Code) shall be treated as subject to the Excise Tax, unless
                  and except to the extent that, in the opinion of the Company's
                  independent certified public accountants appointed prior to
                  any change in ownership (as defined under Code Section
                  280G[b][2]) or tax counsel selected by such accountants (the
                  "Accountants") such Total Payments (in whole or in part)
                  either do not constitute "parachute payments," represent
                  reasonable compensation for services actually rendered within
                  the meaning of Section 280G(b)(4) of the Code in excess of the
                  "base amount" or are otherwise not subject to the Excise Tax,
                  and (y) the value of any non-cash benefits or any deferred
                  payment or benefit shall be

                                  Page 10 of 19
<PAGE>   11

                  determined by the Accountants in accordance with the
                  principles of Section 280G of the Code.

         (iii)    For purposes of determining the amount of the Gross-up
                  Payment, the Executive shall be deemed to pay U.S. federal
                  income taxes at the highest marginal rate of U.S. federal
                  income taxation in the calendar year in which the Gross-up
                  Payment is to be made and state and local income taxes at the
                  highest marginal rate of taxation in the state and locality of
                  the Executive's residence for the calendar year in which the
                  Company Payment is to be made, net of the maximum reduction in
                  U.S. federal income taxes which could be obtained from
                  deduction of such state and local taxes if paid in such year.
                  In the event that the Excise Tax is subsequently determined by
                  the Accountants to be less than the amount taken into account
                  hereunder at the time the Gross-up Payment is made, the
                  Executive shall repay to the Company, at the time that the
                  amount of such reduction in Excise Tax is finally determined,
                  the portion of the prior Gross-up Payment attributable to such
                  reduction (plus the portion of the Gross-up Payment
                  attributable to the Excise Tax and U.S. federal, state and
                  local income tax imposed on the portion of the Gross-up
                  Payment being repaid by the Executive if such repayment
                  results in a reduction in Excise Tax or a U.S. federal, state
                  and local income tax deduction), plus interest on the amount
                  of such repayment at the rate provided in Section
                  1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in
                  the event any portion of the Gross-up Payment to be refunded
                  to the Company has been paid to any U.S. federal, state and
                  local tax authority, repayment thereof (and related amounts)
                  shall not be required until actual refund or credit of such
                  portion has been made to the Executive, and interest payable
                  to the Company shall not exceed the interest received or
                  credited to the Executive by such tax authority for the period
                  it held such portion. The Executive and the Company shall
                  mutually agree upon the course of action to be pursued (and
                  the method of allocating the expense thereof) if the
                  Executive's claim for refund or credit is denied.

                  In the event that the Excise Tax is later determined by the
                  Accountant or the Internal Revenue Service to exceed the
                  amount taken into account hereunder at the time the Gross-up
                  Payment is made (including by reason of any payment the
                  existence or amount of which cannot be determined at the time
                  of the Gross-up Payment), the Company shall make an additional
                  Gross-up Payment in respect of such excess (plus any interest
                  or penalties payable with respect to such excess) at the time
                  that the amount of such excess is finally determined.

         (iv)     The Gross-up Payment or portion thereof provided for in
                  subsection (iii) above shall be paid not later than the
                  thirtieth (30th) day following an event occurring which
                  subjects the Executive to the Excise Tax; provided, however,
                  that if the amount of such Gross-up Payment or portion thereof
                  cannot be finally determined on or before such day, the
                  Company shall pay to the Executive on such day an estimate, as
                  determined in good faith by the Accountant, of the minimum
                  amount of such payments and shall pay the remainder of such
                  payments (together with


                                  Page 11 of 19
<PAGE>   12

                  interest at the rate provided in Section 1274(b)(2)(B) of the
                  Code), subject to further payments pursuant to subsection
                  (iii) hereof, as soon as the amount thereof can reasonably be
                  determined, but in no event later than the ninetieth day after
                  the occurrence of the event subjecting the Executive to the
                  Excise Tax. In the event that the amount of the estimated
                  payments exceeds the amount subsequently determined to have
                  been due, such excess shall constitute a loan by the Company
                  to the Executive, payable on the fifth day after demand by the
                  Company (together with interest at the rate provided in
                  Section 1274(b)(2)(B) of the Code).

         (v)      In the event of any controversy with the Internal Revenue
                  Service (or other taxing authority) with regard to the Excise
                  Tax, the Executive shall permit the Company to control issues
                  related to the Excise Tax (at its expense), provided that such
                  issues do not potentially materially adversely affect the
                  Executive, but the Executive shall control any other issues.
                  In the event the issues are interrelated, the Executive and
                  the Company shall in good faith cooperate so as not to
                  jeopardize resolution of either issue, but if the parties
                  cannot agree the Executive shall make the final determination
                  with regard to the issues. In the event of any conference with
                  any taxing authority as to the Excise Tax or associated income
                  taxes, the Executive shall permit the representative of the
                  Company to accompany the Executive, and the Executive and the
                  Executive's representative shall cooperate with the Company
                  and its representative.

         (vi)     The Company shall be responsible for all charges of the
                  Accountant.

         (vii)    The Company and the Executive shall promptly deliver to each
                  other copies of any written communications, and summaries of
                  any verbal communications, with any taxing authority regarding
                  the Excise Tax covered by this Section 7(b).

(c)      CHANGE IN CONTROL. For purposes of this Agreement, "Change in Control"
         means the occurrence of any of the following events:

         (i)      any Person is or becomes the Beneficial Owner, directly or
                  indirectly, of securities of the Company (not including in the
                  securities beneficially owned by such person any securities
                  acquired directly from the Company or its Affiliates)
                  representing twenty-five percent (25%) or more of the combined
                  voting power of the Company's then outstanding voting
                  securities;

         (ii)     the following individuals cease for any reason to constitute a
                  majority of the number of directors then serving: individuals
                  who, on the Commencement Date, constitute the Board and any
                  new director (other than a director whose initial assumption
                  of office is in connection with an actual or threatened
                  election contest, including but not limited to a consent
                  solicitation, relating to the election of directors of the
                  Company) whose appointment or election by the Board or
                  nomination for election by the Company's stockholders was
                  approved or recommended by a vote of the at least two-thirds
                  (2/3rds) of the directors then still in office who either were
                  directors on the Commencement Date or whose


                                  Page 12 of 19
<PAGE>   13

                  appointment, election or nomination for election was
                  previously so approved or recommended;

         (iii)    there is a consummated merger or consolidation of the Company
                  or any direct or indirect subsidiary of the Company with any
                  other corporation, other than (A) a merger or consolidation
                  which would result in the voting securities of the Company
                  outstanding immediately prior thereto continuing to represent
                  (either by remaining outstanding or by being converted into
                  voting securities of the surviving or parent entity) more than
                  fifty percent (50%) of the combined voting power of the voting
                  securities of the Company or such surviving or parent equity
                  outstanding immediately after such merger or consolidation or
                  (B) a merger or consolidation effected to implement a
                  recapitalization of the Company (or similar transaction) in
                  which no Person, directly or indirectly, acquired twenty-five
                  percent (25%) or more of the combined voting power of the
                  Company's then outstanding securities (not including in the
                  securities beneficially owned by such person any securities
                  acquired directly from the Company or its Affiliates); or

         (iv)     the stock holders of the Company approve a plan of complete
                  liquidation of the Company or there is consummated an
                  agreement for the sale or disposition by the Company of all or
                  substantially all of the Company's assets (or any transaction
                  having a similar effect), other than a sale or disposition by
                  the Company of all or substantially all of the Company's
                  assets to an entity, at least fifty percent (50%) of the
                  combined voting power of the voting securities of which are
                  owned by stockholders of the Company in substantially the same
                  proportions as their ownership of the Company immediately
                  prior to such sale.

         For purposes of this Section 7(c), the following terms shall have the
         following meanings:

         (i)      "Affiliate" shall mean an affiliate of the Company, as defined
                  in Rule 12b-2 promulgated under Section 12 of the Securities
                  Exchange Act of 1934, as amended from time to time (the
                  "Exchange Act");

         (ii)     "Beneficial Owner" shall have the meaning set forth in Rule
                  13d-3 under the Exchange Act;

         (iii)    "Person" shall have the meaning set forth in Section 3(a)(9)
                  of the Exchange Act, as modified and used in Sections 13(d)
                  and 14(d) thereof, except that such term shall not include (1)
                  the Company, (2) a trustee or other fiduciary holding
                  securities under an employee benefit plan of the Company, (3)
                  an underwriter temporarily holding securities pursuant to an
                  offering of such securities or (4) a corporation owned,
                  directly or indirectly, by the stockholders of the Company in
                  substantially the same proportions as their ownership of
                  shares of Common Stock of the Company.


                                  Page 13 of 19
<PAGE>   14

8.       RESTRICTIVE COVENANTS.

(a)      COMPETITIVE ACTIVITY. Executive covenants and agrees that at all times
         during Executive's period of employment with the Company, and for two
         (2) years thereafter, Executive will not engage in, assist, or have any
         active interest or involvement, whether as an employee, agent,
         consultant, creditor, advisor, officer, director, stockholder
         (excluding holding of less than 3% of the stock of a public company),
         partner, proprietor or any type of principal whatsoever in any person,
         firm, or business entity which, directly or indirectly, is materially
         engaged in the waste management business competitive with that
         conducted and carried on by the Company, without the Company's specific
         written consent to do so. "Material" shall mean more than five (5%)
         percent of their revenue is generated from the waste management
         business; provided that the revenues within Executive's area of
         responsibility or authority are more than 10% composed of revenues from
         the waste disposal business.

(b)      NON-SOLICITATION. Executive covenants and agrees that at all times
         during Executive's period of employment with the Company, and for a
         period of two (2) years after the Termination thereof, whether such
         termination is voluntary or involuntary by wrongful discharge, or
         otherwise, Executive will not directly and personally knowingly (i)
         induce any customers of the Company or corporations affiliated with the
         Company to patronize any similar business which competes with any
         material business of the Company; (ii) after his termination of
         employment, request or advise any customers of the Company or
         corporations affiliated with the Company to withdraw, curtail or cancel
         such customer's business with the Company; or (iii) after his
         termination of employment, individually or through any person, firm,
         association or corporation with which he is now, or may hereafter
         become associated, solicit, entice or induce any then employee of the
         Company, or any subsidiary of the Company, to leave the employ of the
         Company, or such other corporation, to accept employment with, or
         compensation from the Executive, or any person, firm, association or
         corporation with which Executive is affiliated without prior written
         consent of the Company. The foregoing shall not prevent Executive from
         serving as a reference for employees.

(c)      PROTECTED INFORMATION. Executive recognizes and acknowledges that
         Executive has had and will continue to have access to various
         confidential or proprietary information concerning the Company and
         corporations affiliated with the Company of a special and unique value
         which may include, without limitation, (i) books and records relating
         to operation, finance, accounting, sales, personnel and management,
         (ii) policies and matters relating particularly to operations such as
         customer service requirements, costs of providing service and
         equipment, operating costs and pricing matters, and (iii) various trade
         or business secrets, including customer lists, route sheets, business
         opportunities, marketing or business diversification plans, business
         development and bidding techniques, methods and processes, financial
         data and the like, to the extent not generally known in the industry
         (collectively, the "Protected Information"). Executive therefore
         covenants and agrees that Executive will not at any time, either while
         employed by the Company or afterwards, knowingly make any independent
         use of, or knowingly disclose


                                  Page 14 of 19
<PAGE>   15

         to any other person or organization (except as authorized by the
         Company) any of the Protected Information, provided that (i) while
         employed by the Company, Executive may in good faith make disclosures
         he believes desirable, provided that are authorized by the Company or
         otherwise in accordance with Company policy, and (ii) Executive may
         comply with legal process.

9.       ENFORCEMENT OF COVENANTS.

(a)      RIGHT TO INJUNCTION. Executive acknowledges that a breach of the
         covenants set forth in Section 8 hereof will cause irreparable damage
         to the Company with respect to which the Company's remedy at law for
         damages may be inadequate. Therefore, in the event of breach or
         threatened breach of the covenants set forth in this section by
         Executive, Executive and the Company agree that the Company shall be
         entitled to the following particular forms of relief, in addition to
         remedies otherwise available to it at law or equity; injunctions, both
         preliminary and permanent, enjoining or restraining such breach or
         threatened breach and Executive hereby consents to the issuance thereof
         forthwith and without bond by any court of competent jurisdiction.

(b)      SEPARABILITY OF COVENANTS. The covenants contained in Section 8 hereof
         constitute a series of separate covenants, one for each applicable
         State in the United States and the District of Columbia, and one for
         each applicable foreign country. If in any judicial proceeding, a court
         shall hold that any of the covenants set forth in Section 8 exceed the
         time, geographic, or occupational limitations permitted by applicable
         laws, Executive and the Company agree that such provisions shall and
         are hereby reformed to the maximum time, geographic, or occupational
         limitations permitted by such laws. Further, in the event a court shall
         hold unenforceable any of the separate covenants deemed included
         herein, then such unenforceable covenant or covenants shall be deemed
         eliminated from the provisions of this Agreement for the purpose of
         such proceeding to the extent necessary to permit the remaining
         separate covenants to be enforced in such proceeding.

         Executive and the Company further agree that the covenants in Section 8
         shall each be construed as a separate agreement independent of any
         other provisions of this Agreement, and the existence of any claim or
         cause of action by Executive against the Company whether predicated on
         this Agreement or otherwise, shall not constitute a defense to the
         enforcement by the Company of any of the covenants of Section 8.

10.      INDEMNIFICATION.

The Company shall indemnify and hold harmless Executive to the fullest extent
permitted by Delaware law for any action or inaction of Executive while serving
as an officer and director of the Company or, at the Company's request, as an
officer or director of any other entity or as a fiduciary of any benefit plan.
This provision includes the obligation and undertaking of the Executive to
reimburse the Company for any fees advanced by the Company on behalf of the
Executive should it later be determined that Executive was not entitled to have
such fees advanced by the Company under Delaware law. The Company shall cover
the Executive under


                                  Page 15 of 19
<PAGE>   16

directors and officers liability insurance both during and, while potential
liability exists, after the Employment Term in the same amount and to the same
extent as the Company covers its other officers and directors.

11.      DISPUTES AND PAYMENT OF ATTORNEY'S FEES.

If at any time during the term of this Agreement or afterwards there should
arise any dispute as to the validity, interpretation or application of any term
or condition of this Agreement, the Company agrees, upon written demand by
Executive (and Executive shall be entitled upon application to any court of
competent jurisdiction, to the entry of a mandatory injunction, without the
necessity of posting any bond with respect thereto, compelling the Company) to
promptly provide sums sufficient to pay on a current basis (either directly or
by reimbursing Executive) Executive's costs and reasonable attorney's fees
(including expenses of investigation and disbursements for the fees and expenses
of experts, etc.) incurred by Executive in connection with any such dispute or
any litigation, provided that Executive shall repay any such amounts paid or
advanced if Executive is not the prevailing party with respect to at least one
material claim or issue in such dispute or litigation. The provisions of this
Section 11, without implication as to any other section hereof, shall survive
the expiration or termination of this Agreement and of Executive's employment
hereunder.

12.      WITHHOLDING OF TAXES.

The Company may withhold from any compensation and benefits payable under this
Agreement all applicable federal, state, local, or other taxes.

13.      SOURCE OF PAYMENTS.

All payments provided under this Agreement, other than payments made pursuant to
a plan which provides otherwise, shall be paid from the general funds of the
Company, and no special or separate fund shall be established, and no other
segregation of assets made, to assure payment. Executive shall have no right,
title or interest whatever in or to any investments which the Company may make
to aid the Company in meeting its obligations hereunder. To the extent that any
person acquires a right to receive payments from the Company hereunder, such
right shall be no greater than the right of an unsecured creditor of the
Company.

14.      ASSIGNMENT.

Except as otherwise provided in this Agreement, this Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, representatives, successors and assigns. This Agreement shall not be
assignable by Executive (but any payments due hereunder which would be payable
at a time after Executive's death shall be paid to Executive's designated
beneficiary or, if none, his estate) and shall be assignable by the Company only
to any financially solvent corporation or other entity resulting from the
reorganization, merger or consolidation of the Company with any other
corporation or entity or any corporation or entity to or with which

                                  Page 16 of 19
<PAGE>   17

the Company's business or substantially all of its business or assets may be
sold, exchanged or transferred, and it must be so assigned by the Company to,
and accepted as binding upon it by, such other corporation or entity in
connection with any such reorganization, merger, consolidation, sale, exchange
or transfer in a writing delivered to Executive in a form reasonably acceptable
to Executive (the provisions of this sentence also being applicable to any
successive such transaction).

15.      ENTIRE AGREEMENT; AMENDMENT.

This Agreement shall supersede any and all existing oral or written agreements,
representations, or warranties between Executive and the Company or any of its
subsidiaries or affiliated entities relating to the terms of Executive's
employment by the Company, including without limitation, that certain Employment
Agreement dated January 5, 1999 by and between Executive and the Company. It may
not be amended except by a written agreement signed by both parties.

16.      GOVERNING LAW.

This Agreement shall be governed by and construed in accordance with the laws of
the State of Texas applicable to agreements made and to be performed in that
State, without regard to its conflict of laws provisions.

17.      REQUIREMENT OF TIMELY PAYMENTS.

If any amounts which are required, or determined to be paid or payable, or
reimbursed or reimbursable, to Executive under this Agreement (or any other
plan, agreement, policy or arrangement with the Company) are not so paid
promptly at the times provided herein or therein, such amounts shall accrue
interest, compounded daily, at an 8% annual percentage rate, from the date such
amounts were required or determined to have been paid or payable, reimbursed or
reimbursable to Executive, until such amounts and any interest accrued thereon
are finally and fully paid, provided, however, that in no event shall the amount
of interest contracted for, charged or received hereunder, exceed the maximum
non-usurious amount of interest allowed by applicable law.

18.      NOTICES.

Any notice, consent, request or other communication made or given in connection
with this Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by registered or certified mail, return receipt
requested, or by facsimile or by hand delivery, to those listed below at their
following respective addresses or at such other address as each may specify by
notice to the others:

                         To the Company:    Waste Management, Inc.
                                            1001 Fannin, Suite 4000
                                            Houston, Texas 77002
                                            Attention: Corporate Secretary

                         To Executive:      At the address for Executive set
                                            forth below.



                                  Page 17 of 19
<PAGE>   18

19.      MISCELLANEOUS.

(a)      WAIVER. The failure of a party to insist upon strict adherence to any
         term of this Agreement on any occasion shall not be considered a waiver
         thereof or deprive that party of the right thereafter to insist upon
         strict adherence to that term or any other term of this Agreement.

(b)      SEPARABILITY. Subject to Section 9 hereof, if any term or provision of
         this Agreement is declared illegal or unenforceable by any court of
         competent jurisdiction and cannot be modified to be enforceable, such
         term or provision shall immediately become null and void, leaving the
         remainder of this Agreement in full force and effect.

(c)      HEADINGS. Section headings are used herein for convenience of reference
         only and shall not affect the meaning of any provision of this
         Agreement.

(d)      RULES OF CONSTRUCTION. Whenever the context so requires, the use of the
         singular shall be deemed to include the plural and vice versa.

(e)      COUNTERPARTS. This Agreement may be executed in any number of
         counterparts, each of which so executed shall be deemed to be an
         original, and such counterparts will together constitute but one
         Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.


WASTE MANAGEMENT, INC.


By: /s/ A. Maurice Myers
    -------------------------------
Name:  A. Maurice Myers
Title: Chairman, Chief Executive
       Officer & President

Date:  1/26/01
      -----------------------------





                                  Page 18 of 19

<PAGE>   19

EXECUTIVE:


 /s/ Jim Trevethan
----------------------------
JIM TREVETHAN

Date: 1/26/01
----------------------------

Address:
        --------------------

                                 Page 19 of 19
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.21
<SEQUENCE>3
<FILENAME>h84376ex10-21.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - CHARLES E. WILLIAMS
<TEXT>

<PAGE>   1
                                                                   EXHIBIT 10.21




                              EMPLOYMENT AGREEMENT

WASTE MANAGEMENT, INC. (the "Company"), and CHARLES E. WILLIAMS (the
"Executive") hereby enter into this EMPLOYMENT AGREEMENT ("Agreement") dated as
of June 1, 2000 (the "Effective Date"), as follows:

1.       EMPLOYMENT.

The Company shall employ Executive, and Executive shall be employed by the
Company upon the terms and subject to the conditions set forth in this
Agreement.

2.       TERM OF EMPLOYMENT.

The period of Executive's employment under this Agreement shall commence on June
1, 2000, and be for a continuously renewing (on a daily basis) three (3) year
term, without any further action by either the Company or Executive, unless
Executive's employment is terminated in accordance with Section 5 below. The
date on which Executive commences employment with the Company shall be referred
to as the "Commencement Date" and the period during which Executive is employed
hereunder shall be referred to as the "Employment Period".

3.       DUTIES AND RESPONSIBILITIES.

(a)      Executive shall serve as Senior Vice President-Operations. In such
         capacity, Executive shall perform such duties and have the power,
         authority and functions commensurate with such positions in similarly
         sized public companies and such other authority and functions
         consistent with such positions as may be assigned to Executive from
         time to time by the Chief Executive Officer, President, Executive Vice
         President, or the Board of Directors.

(b)      Executive shall devote substantially all of his working time, attention
         and energies to the business of the Company, and affiliated entities.
         Executive may make and manage his personal investments (provided such
         investments in other activities do not violate, in any material
         respect, the provisions of Section 8 of this Agreement), be involved in
         charitable and professional activities and, with the consent of the
         Board, serve on boards of other for profit entities, provided such
         activities do not materially interfere with the performance of his
         duties hereunder.

4.       COMPENSATION AND BENEFITS.

(a)      BASE SALARY. During the Employment Period, the Company shall pay
         Executive a base salary at the annual rate of THREE HUNDRED THOUSAND
         DOLLARS ($300,000.00) per year or such higher rate as may be determined
         from time to time by the Company ("Base Salary"). Such Base Salary
         shall be paid in accordance with the Company's standard payroll
         practice for its executive officers. Once increased, Base Salary shall
         not be reduced.



                                  Page 1 of 19
<PAGE>   2



(b)      ANNUAL BONUS. During the Employment Period, Executive will be entitled
         to participate in an annual incentive compensation plan of the Company.
         The Executive's target annual bonus will be seventy-five percent (75%)
         of his Base Salary as in effect for such year (the "Target Bonus"), and
         his actual annual bonus may range from 0% to 150% (2 times Target
         Bonus), and will be determined based upon achievement of performance
         goals (initially seventy percent [70%] financial [return on capital
         invested and EBITDA] and thirty percent [30%] personal, but may be tied
         to other metrics as may be established from time to time by the
         Compensation Committee of the Board) as approved by the Compensation
         Committee of the Board, from time to time.

(c)      STOCK OPTIONS. Executive shall be eligible to be considered for stock
         option grants under the Company's annual stock option award program as
         administered by, and at the discretion of, the Compensation Committee
         of the Board of Directors, beginning in 2001.

(d)      BENEFIT PLANS AND VACATION. Executive shall be eligible to participate
         in or receive benefits under any pension plan, profit sharing plan,
         medical and dental benefits plan, life insurance plan, short-term and
         long-term disability plans, or any other health, welfare or fringe
         benefit plan, generally made available by the Company to its executive
         officers at a level commensurate with his position. During the
         Employment Period, Executive shall be entitled to vacation each year in
         accordance with the Company's policies in effect from time to time, but
         in no event less than four (4) weeks paid vacation per calendar year.
         The Executive shall also be entitled to such periods of sick leave as
         is customarily provided by the Company for its senior executive
         employees. Executive shall be eligible to participate in the Company's
         401(k) Plan.

(e)      EXPENSE REIMBURSEMENT. The Company shall promptly reimburse Executive
         for the ordinary and necessary business expenses incurred by Executive
         in the performance of the duties hereunder in accordance with the
         Company's customary practices applicable to its executive officers.

(f)      EXECUTIVE DEFERRAL PLAN. Executive shall be entitled to participate in
         the Company's "Executive Deferral Plan", and any replacement plan or
         arrangement, all to the extent maintained or instituted by the Company,
         and covering its principal executive officers, at a level commensurate
         with his position.

(g)      OTHER PERQUISITES. Executive shall be entitled to all perquisites
         provided to Senior Vice Presidents of the Company as approved by the
         Compensation Committee of the Board of Directors, and as they may exist
         from time to time.


5.       TERMINATION OF EMPLOYMENT.

Executive's employment hereunder may be terminated under the following
circumstances:

(a)      DEATH. Executive's employment hereunder shall terminate upon
         Executive's death.

                                  Page 2 of 19
<PAGE>   3

(b)      TOTAL DISABILITY. The Company may terminate Executive's employment
         hereunder upon Executive becoming "Totally Disabled". For purposes of
         this Agreement, Executive shall be "Totally Disabled" if Executive has
         been physically or mentally incapacitated so as to render Executive
         incapable of performing Executive's material usual and customary duties
         under this Agreement for six (6) consecutive months (such consecutive
         absence not being deemed interrupted by Executive's return to service
         for less than 10 consecutive business days if absent thereafter for the
         same illness or disability). Any such termination shall be upon thirty
         (30) days written notice given at any time thereafter while Executive
         remains Totally Disabled, provided that a termination for Total
         Disability hereunder shall not be effective if Executive returns to
         full performance of his duties within such thirty (30) day period.

(c)      TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
         Executive's employment hereunder for "Cause" at any time within ninety
         (90) days after the Chairman of the Audit or Governance Committee of
         the Board has knowledge thereof.

         (i)      For purposes of this Agreement, the term "Cause" shall be
                  limited to (1) willful misconduct by Executive with regard to
                  the Company which has a material adverse effect on the
                  Company; (2) the willful refusal of Executive to attempt to
                  follow the proper written direction of the Chief Executive
                  Officer, the President, an Executive Vice President, or the
                  Board of Directors, provided that the foregoing refusal shall
                  not be "Cause" if Executive in good faith believes that such
                  direction is illegal, unethical or immoral and promptly so
                  notifies the Board; (3) substantial and continuing willful
                  refusal by the Executive to attempt to perform the duties
                  required of him hereunder (other than any such failure
                  resulting from incapacity due to physical or mental illness)
                  after a written demand for substantial performance is
                  delivered to the Executive by the Chief Executive Officer, the
                  President, an Executive Vice President, or the Board of
                  Directors, which specifically identifies the manner in which
                  it is believed that the Executive has substantially and
                  continually refused to attempt to perform his duties
                  hereunder; or (4) the Executive being convicted of a felony
                  (other than a felony involving a traffic violation or as a
                  result of vicarious liability). For purposes of this
                  paragraph, no act, or failure to act, on Executive's part
                  shall be considered "willful" unless done or omitted to be
                  done, by him not in good faith and without reasonable belief
                  that his action or omission was in the best interests of the
                  Company.

         (ii)     A Notice of Termination for Cause shall mean a notice that
                  shall indicate the specific termination provision in Section
                  5(c)(i) relied upon and shall set forth in reasonable detail
                  the facts and circumstances which provide for a basis for
                  termination for Cause. Further, a Notification for Cause shall
                  be required to include a copy of a resolution duly adopted by
                  at least two-thirds (2/3rds) of the entire membership of the
                  Board at a meeting of the Board which was called for the
                  purpose of considering such termination and which Executive
                  and his representative had the right to attend and address the
                  Board, finding that, in the


                                  Page 3 of 19
<PAGE>   4

                  good faith of the Board, Executive engaged in conduct set
                  forth in the definition of Cause herein and specifying the
                  particulars thereof in reasonable detail. The date of
                  termination for a termination for Cause shall be the date
                  indicated in the Notice of Termination. Any purported
                  termination for Cause which is held by a court or arbitrator
                  not to have been based on the grounds set forth in this
                  Agreement or not to have followed the procedures set forth in
                  this Agreement shall be deemed a termination by the Company
                  without Cause.

(d)      VOLUNTARY TERMINATION BY EXECUTIVE. Executive may terminate employment
         hereunder with or without Good Reason at any time upon written notice
         to the Company.

         (i)      A Termination for Good Reason means a termination by Executive
                  by written notice given within ninety (90) days after the
                  occurrence of the Good Reason event, unless such circumstances
                  are fully corrected prior to the date of termination specified
                  in the Notice of Termination for Good Reason. For purposes of
                  this Agreement, "Good Reason" shall mean the occurrence or
                  failure to cause the occurrence, as the case may be, without
                  Executive's express written consent, of any of the following
                  circumstances: (1) any material diminution of Executive's
                  positions, duties or responsibilities hereunder (except in
                  each case in connection with the termination of Executive's
                  employment for Cause or Total Disability or as a result of
                  Executive's death, or temporarily as a result of Executive's
                  illness or other absence), provided that a change in reporting
                  structure shall not constitute Good Reason under any
                  circumstances as long as Executive reports to the Chief
                  Executive Officer, the President, the Chief Operating Officer,
                  or an Executive Vice President; further provided that if the
                  Company becomes a fifty percent or more subsidiary of any
                  other entity, Executive shall be deemed to have a material
                  diminution of his position unless he is also a Senior Vice
                  President of the ultimate parent entity; (2) removal of, or
                  the non-re-election of, the Executive from officer positions
                  with the Company specified herein or removal of the Executive
                  from any of his then officer positions with the Company; (3)
                  requiring Executive's principal place of business to be
                  located other than in Houston, Texas; (4) a failure by the
                  Company (I) to continue any bonus plan, program or arrangement
                  in which Executive is entitled to participate (the "Bonus
                  Plans"), provided that any such Bonus Plans may be modified at
                  the Company's discretion from time to time but shall be deemed
                  terminated if (x) any such plan does not remain substantially
                  in the form in effect prior to such modification and (y) if
                  plans providing Executive with substantially similar benefits
                  are not substituted therefor ("Substitute Plans"), or (II) to
                  continue Executive as a participant in the Bonus Plans and
                  Substitute Plans on at least the same basis as to potential
                  amount of the bonus as Executive participated in prior to any
                  change in such plans or awards, in accordance with the Bonus
                  Plans and the Substitute Plans; (5) any material breach by the
                  Company of any provision of this Agreement, including without
                  limitation Section 10 hereof; or (6) failure of any successor
                  to the Company (whether direct or indirect and whether by
                  merger, acquisition, consolidation or otherwise) to assume in
                  a writing


                                  Page 4 of 19
<PAGE>   5

                  delivered to Executive upon the assignee becoming such, the
                  obligations of the Company hereunder.

         (ii)     A Notice of Termination for Good Reason shall mean a notice
                  that shall indicate the specific termination provision relied
                  upon and shall set forth in reasonable detail the facts and
                  circumstances claimed to provide a basis for Termination for
                  Good Reason. The failure by Executive to set forth in the
                  Notice of Termination for Good Reason any facts or
                  circumstances which contribute to the showing of Good Reason
                  shall not waive any right of Executive hereunder or preclude
                  Executive from asserting such fact or circumstance in
                  enforcing his rights hereunder. The Notice of Termination for
                  Good Reason shall provide for a date of termination not less
                  than ten (10) nor more than sixty (60) days after the date
                  such Notice of Termination for Good Reason is given, provided
                  that in the case of the events set forth in Sections
                  5(d)(i)(1) or (2) the date may be five (5) days after the
                  giving of such notice.

(e)      TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate
         Executive's employment hereunder without Cause at any time upon written
         notice to Executive.

(f)      EFFECT OF TERMINATION. Upon any termination of employment, Executive
         shall immediately resign from all Board memberships and other positions
         with the Company or any of its subsidiaries held by him at such time.

6.       COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT.

In the event that Executive's employment hereunder is terminated, Executive
shall be entitled to the following compensation and benefits upon such
termination:

(a)      TERMINATION BY REASON OF DEATH. In the event that Executive's
         employment is terminated by reason of Executive's death, the Company
         shall pay the following amounts to Executive's beneficiary or estate:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of death, any accrued but unpaid expenses required to
                  be reimbursed under this Agreement, any vacation accrued to
                  the date of termination, any earned but unpaid bonuses for any
                  prior period, and, to the extent not otherwise paid, a
                  pro-rata "bonus" or incentive compensation payment to the
                  extent payments are awarded to senior executives of the
                  Company and paid at the same time as senior executives are
                  paid.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements (including those referred
                  to in Section 4(d) hereof), as determined and paid in
                  accordance with the terms of such plans, policies and
                  arrangements.



                                  Page 5 of 19
<PAGE>   6

         (iii)    An amount equal to the Base Salary (at the rate in effect as
                  of the date of Executive's death) which would have been
                  payable to Executive if Executive had continued in employment
                  for two additional years. Said payments will be paid to
                  Executive's estate or beneficiary at the same time and in the
                  same manner as such compensation would have been paid if
                  Executive had remained in active employment.

         (iv)     As of the date of termination by reason of Executive's death,
                  stock options awarded to Executive shall be fully vested and
                  Executive's estate or beneficiary shall have up to one (1)
                  year from the date of death to exercise all such options,
                  provided that in no event will any option be exercisable
                  beyond its term.

         (v)      As otherwise specifically provided herein.

(b)      TERMINATION BY REASON OF TOTAL DISABILITY. In the event that
         Executive's employment is terminated by reason of Executive's Total
         Disability as determined in accordance with Section 5(b), the Company
         shall pay the following amounts to Executive:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination and any earned but unpaid
                  bonuses for any prior period. Executive shall also be eligible
                  for a pro-rata bonus or incentive compensation payment to the
                  extent such awards are made to senior executives of the
                  Company for the year in which Executive is terminated, and to
                  the extent not otherwise paid to the Executive.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements (including those referred
                  to in Section 4(d) hereof) shall be determined and paid in
                  accordance with the terms of such plans, policies and
                  arrangements.

         (iii)    An amount equal to the Base Salary (at the rate in effect as
                  of the date of Executive's Total Disability) which would have
                  been payable to Executive if Executive had continued in active
                  employment for two years following termination of employment,
                  less any payments under any long-term disability plan or
                  arrangement paid for by the Company. Payment shall be made at
                  the same time and in the same manner as such compensation
                  would have been paid if Executive had remained in active
                  employment until the end of such period.

         (iv)     As of the date of termination by reason of Executive's Total
                  Disability, Executive shall be fully vested in all stock
                  option awards, and Executive shall have up to one (1) year
                  from the date of termination by reason of Total Disability to
                  exercise all such options; provided that in no event will any
                  option be exercisable beyond its term.


                                  Page 6 of 19
<PAGE>   7

         (v)      As otherwise specifically provided herein.

(c)      TERMINATION FOR CAUSE. In the event that Executive's employment is
         terminated by the Company for Cause, the Company shall pay the
         following amounts to Executive:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination and any earned but unpaid
                  bonuses for any prior period.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements (including those referred
                  to in Section 4(d) hereof up to the date of termination) shall
                  be determined and paid in accordance with the terms of such
                  plans, policies and arrangements.

         (iii)    As otherwise specifically provided herein.

         Any options, restricted stock or other awards that have not vested
         prior to the date of such termination of employment shall be cancelled
         to the extent not then vested, and any options held by Executive shall
         be cancelled, whether or not then vested.

(d)      VOLUNTARY TERMINATION BY EXECUTIVE. In the event that Executive
         voluntarily terminates employment other than for Good Reason, the
         Company shall pay the following amounts to Executive:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination and any earned but unpaid
                  bonuses for any prior period.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements (including those referred
                  to in Section 4(d) hereof up to the date of termination) shall
                  be determined and paid in accordance with the terms of such
                  plans, policies and arrangements.

         (iii)    As otherwise specifically provided herein.

         Any options, restricted stock or other awards that have not vested
         prior to the date of such termination of employment shall be cancelled
         to the extent not then vested, and Executive shall have 90 days
         following termination of employment to exercise any previously vested
         options; provided that in no event will any option be exercisable
         beyond its term.

(e)      TERMINATION BY THE COMPANY WITHOUT CAUSE; TERMINATION BY EXECUTIVE FOR
         GOOD REASON. In the event that Executive's employment is terminated by
         the Company for


                                  Page 7 of 19
<PAGE>   8

         reasons other than death, Total Disability or Cause, or Executive
         terminates his employment for Good Reason, the Company shall pay the
         following amounts to Executive:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination and any earned but unpaid
                  bonuses for any prior period.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements referred to in Section
                  4(d) hereof shall be determined and paid in accordance with
                  the terms of such plans, policies and arrangements.

         (iii)    An amount equal to two times the sum of Executive's Base
                  Salary plus his Target Annual Bonus (in each case as then in
                  effect), of which one-half shall be paid in a lump sum within
                  ten (10) days after such termination and one-half shall be
                  paid during the two (2) year period beginning on the date of
                  Executive's termination and shall be paid at the same time and
                  in the same manner as Base Salary would have been paid if
                  Executive had remained in active employment until the end of
                  such period.

         (iv)     The Company at its expense will continue for Executive and
                  Executive's spouse and dependents, all health benefit plans,
                  programs or arrangements, whether group or individual, and
                  also including deferred compensation, disability, automobile,
                  and other benefit plans, in which Executive was entitled to
                  participate at any time during the twelve-month period prior
                  to the date of termination, until the earliest to occur of (A)
                  two years after the date of termination; (B) Executive's death
                  (provided that benefits payable to Executive's beneficiaries
                  shall not terminate upon Executive's death); or (C) with
                  respect to any particular plan, program or arrangement, the
                  date Executive becomes covered by a comparable benefit by a
                  subsequent employer. In the event that Executive's continued
                  participation in any such plan, program, or arrangement of the
                  Company is prohibited, the Company will arrange to provide
                  Executive with benefits substantially similar to those which
                  Executive would have been entitled to receive under such plan,
                  program, or arrangement, for such period on a basis which
                  provides Executive with no additional after tax cost.

         (v)      Except to the extent prohibited by law, and except as
                  otherwise provided herein, Executive will be 100% vested in
                  all benefits, awards, and grants accrued but unpaid as of the
                  date of termination under any pension plan, profit sharing
                  plan, supplemental and/or incentive compensation plans in
                  which Executive was a participant as of the date of
                  termination. Executive shall also be eligible for a bonus or
                  incentive compensation payment, at the same time, on the same
                  basis, and to the same extent payments are made to senior
                  executives of the Company, pro-rated for the fiscal year in
                  which the Executive is terminated.


                                  Page 8 of 19
<PAGE>   9

         (vi)     Executive shall continue to vest in all stock option awards or
                  restricted stock awards over the two (2) year period
                  commencing on the date of such termination. Executive shall
                  have two (2) years and six (6) months after the date of
                  termination to exercise all options to the extent then vested,
                  provided that in no event will any option be exercisable
                  beyond its term.

         (vii)    As otherwise specifically provided herein.

(f)      NO OTHER BENEFITS OR COMPENSATION. Except as may be provided under this
         Agreement, under the terms of any incentive compensation, employee
         benefit, or fringe benefit plan applicable to Executive at the time of
         Executive's termination or resignation of employment, Executive shall
         have no right to receive any other compensation, or to participate in
         any other plan, arrangement or benefit, with respect to future periods
         after such termination or resignation.

(g)      NO MITIGATION; NO SET-OFF. In the event of any termination of
         employment hereunder, Executive shall be under no obligation to seek
         other employment and there shall be no offset against any amounts due
         Executive under this Agreement on account of any remuneration
         attributable to any subsequent employment that Executive may obtain.
         The amounts payable hereunder shall not be subject to setoff,
         counterclaim, recoupment, defense or other right which the Company may
         have against the Executive or others, except upon obtaining by the
         Company of a final unappealable judgment against Executive.

7.       RESIGNATION BY EXECUTIVE FOR GOOD REASON AND COMPENSATION PAYABLE
         FOLLOWING CHANGE IN CONTROL.

(a)      RESIGNATION FOR GOOD REASON FOLLOWING CHANGE IN CONTROL. In the event a
         "Change in Control" occurs and Executive terminates his employment for
         Good Reason thereafter, or the Company terminates Executive's
         employment other than for Cause or such termination for Good Reason or
         without Cause occurs in contemplation of such Change in Control (any
         termination within six (6) months prior to such Change in Control being
         presumed to be in contemplation unless rebutted by clear and
         demonstrable evidence to the contrary), the Company shall pay the
         following amounts to Executive:

         (i)      The payments and benefits provided for in Section 6(e), except
                  that the amount calculated pursuant to Section 6(e)(iii) shall
                  be paid in a lump-sum.

         (ii)     Executive will be 100% vested in all benefits, awards, and
                  grants (including stock option grants and stock awards; all of
                  such stock options exercisable for two (2) years following
                  Termination, provided that in no event will any option be
                  exercisable beyond its term) accrued but unpaid as of the date
                  of termination under any non-qualified pension plan,
                  supplemental and/or incentive compensation or bonus plans, in
                  which Executive was a participant as of the date


                                  Page 9 of 19
<PAGE>   10

                  of termination. Executive shall also receive a bonus or
                  incentive compensation payment (the "bonus payment"), payable
                  at 100% of the maximum bonus available to Executive, pro-rated
                  as of the effective date of the termination. The bonus payment
                  shall be payable within five (5) days after the effective date
                  of Employee's termination. Except as may be provided under
                  this Section 7 or under the terms of any incentive
                  compensation, employee benefit, or fringe benefit plan
                  applicable to Executive at the time of Executive's resignation
                  from employment, Executive shall have no right to receive any
                  other compensation, or to participate in any other plan,
                  arrangement or benefit, with respect to future periods after
                  such resignation or termination.

(b)      CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.

         (i)      In the event that the Executive shall become entitled to
                  payments and/or benefits provided by this Agreement or any
                  other amounts in the "nature of compensation" (whether
                  pursuant to the terms of this Agreement or any other plan,
                  arrangement or agreement with the Company, any person whose
                  actions result in a change of ownership or effective control
                  covered by Section 280G(b)(2) of the Code or any person
                  affiliated with the Company or such person) as a result of
                  such change in ownership or effective control (collectively
                  the "Company Payments"), and such Company Payments will be
                  subject to the tax (the "Excise Tax") imposed by Section 4999
                  of the Code (and any similar tax that may hereafter be imposed
                  by any taxing authority) the Company shall pay to the
                  Executive at the time specified in subsection (iv) below an
                  additional amount (the "Gross-up Payment") such that the net
                  amount retained by the Executive, after deduction of any
                  Excise Tax on the Company Payments and any U.S. federal,
                  state, and for local income or payroll tax upon the Gross-up
                  Payment provided for by this Section 7(b), but before
                  deduction for any U.S. federal, state, and local income or
                  payroll tax on the Company Payments, shall be equal to the
                  Company Payments.

         (ii)     For purposes of determining whether any of the Company
                  Payments and Gross-up Payments (collectively the "Total
                  Payments") will be subject to the Excise Tax and the amount of
                  such Excise Tax, (x) the Total Payments shall be treated as
                  "parachute payments" within the meaning of Section 280G(b)(2)
                  of the Code, and all "parachute payments" in excess of the
                  "base amount" (as defined under Code Section 280G[b][3] of the
                  Code) shall be treated as subject to the Excise Tax, unless
                  and except to the extent that, in the opinion of the Company's
                  independent certified public accountants appointed prior to
                  any change in ownership (as defined under Code Section
                  280G[b][2]) or tax counsel selected by such accountants (the
                  "Accountants") such Total Payments (in whole or in part)
                  either do not constitute "parachute payments," represent
                  reasonable compensation for services actually rendered within
                  the meaning of Section 280G(b)(4) of the Code in excess of the
                  "base amount" or are otherwise not subject to the Excise Tax,
                  and (y) the value of any non-cash benefits or any deferred
                  payment or benefit shall be



                                  Page 10 of 19
<PAGE>   11

                  determined by the Accountants in accordance with the
                  principles of Section 280G of the Code.

         (iii)    For purposes of determining the amount of the Gross-up
                  Payment, the Executive shall be deemed to pay U.S. federal
                  income taxes at the highest marginal rate of U.S. federal
                  income taxation in the calendar year in which the Gross-up
                  Payment is to be made and state and local income taxes at the
                  highest marginal rate of taxation in the state and locality of
                  the Executive's residence for the calendar year in which the
                  Company Payment is to be made, net of the maximum reduction in
                  U.S. federal income taxes which could be obtained from
                  deduction of such state and local taxes if paid in such year.
                  In the event that the Excise Tax is subsequently determined by
                  the Accountants to be less than the amount taken into account
                  hereunder at the time the Gross-up Payment is made, the
                  Executive shall repay to the Company, at the time that the
                  amount of such reduction in Excise Tax is finally determined,
                  the portion of the prior Gross-up Payment attributable to such
                  reduction (plus the portion of the Gross-up Payment
                  attributable to the Excise Tax and U.S. federal, state and
                  local income tax imposed on the portion of the Gross-up
                  Payment being repaid by the Executive if such repayment
                  results in a reduction in Excise Tax or a U.S. federal, state
                  and local income tax deduction), plus interest on the amount
                  of such repayment at the rate provided in Section
                  1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in
                  the event any portion of the Gross-up Payment to be refunded
                  to the Company has been paid to any U.S. federal, state and
                  local tax authority, repayment thereof (and related amounts)
                  shall not be required until actual refund or credit of such
                  portion has been made to the Executive, and interest payable
                  to the Company shall not exceed the interest received or
                  credited to the Executive by such tax authority for the period
                  it held such portion. The Executive and the Company shall
                  mutually agree upon the course of action to be pursued (and
                  the method of allocating the expense thereof) if the
                  Executive's claim for refund or credit is denied.

                  In the event that the Excise Tax is later determined by the
                  Accountant or the Internal Revenue Service to exceed the
                  amount taken into account hereunder at the time the Gross-up
                  Payment is made (including by reason of any payment the
                  existence or amount of which cannot be determined at the time
                  of the Gross-up Payment), the Company shall make an additional
                  Gross-up Payment in respect of such excess (plus any interest
                  or penalties payable with respect to such excess) at the time
                  that the amount of such excess is finally determined.

         (iv)     The Gross-up Payment or portion thereof provided for in
                  subsection (iii) above shall be paid not later than the
                  thirtieth (30th) day following an event occurring which
                  subjects the Executive to the Excise Tax; provided, however,
                  that if the amount of such Gross-up Payment or portion thereof
                  cannot be finally determined on or before such day, the
                  Company shall pay to the Executive on such day an estimate, as
                  determined in good faith by the Accountant, of the minimum
                  amount of such payments and shall pay the remainder of such
                  payments (together with


                                  Page 11 of 19
<PAGE>   12

                  interest at the rate provided in Section 1274(b)(2)(B) of the
                  Code), subject to further payments pursuant to subsection
                  (iii) hereof, as soon as the amount thereof can reasonably be
                  determined, but in no event later than the ninetieth day after
                  the occurrence of the event subjecting the Executive to the
                  Excise Tax. In the event that the amount of the estimated
                  payments exceeds the amount subsequently determined to have
                  been due, such excess shall constitute a loan by the Company
                  to the Executive, payable on the fifth day after demand by the
                  Company (together with interest at the rate provided in
                  Section 1274(b)(2)(B) of the Code).

         (v)      In the event of any controversy with the Internal Revenue
                  Service (or other taxing authority) with regard to the Excise
                  Tax, the Executive shall permit the Company to control issues
                  related to the Excise Tax (at its expense), provided that such
                  issues do not potentially materially adversely affect the
                  Executive, but the Executive shall control any other issues.
                  In the event the issues are interrelated, the Executive and
                  the Company shall in good faith cooperate so as not to
                  jeopardize resolution of either issue, but if the parties
                  cannot agree the Executive shall make the final determination
                  with regard to the issues. In the event of any conference with
                  any taxing authority as to the Excise Tax or associated income
                  taxes, the Executive shall permit the representative of the
                  Company to accompany the Executive, and the Executive and the
                  Executive's representative shall cooperate with the Company
                  and its representative.

         (vi)     The Company shall be responsible for all charges of the
                  Accountant.

         (vii)    The Company and the Executive shall promptly deliver to each
                  other copies of any written communications, and summaries of
                  any verbal communications, with any taxing authority regarding
                  the Excise Tax covered by this Section 7(b).

(c)      CHANGE IN CONTROL. For purposes of this Agreement, "Change in Control"
         means the occurrence of any of the following events:

         (i)      any Person is or becomes the Beneficial Owner, directly or
                  indirectly, of securities of the Company (not including in the
                  securities beneficially owned by such person any securities
                  acquired directly from the Company or its Affiliates)
                  representing twenty-five percent (25%) or more of the combined
                  voting power of the Company's then outstanding voting
                  securities;

         (ii)     the following individuals cease for any reason to constitute a
                  majority of the number of directors then serving: individuals
                  who, on the Commencement Date, constitute the Board and any
                  new director (other than a director whose initial assumption
                  of office is in connection with an actual or threatened
                  election contest, including but not limited to a consent
                  solicitation, relating to the election of directors of the
                  Company) whose appointment or election by the Board or
                  nomination for election by the Company's stockholders was
                  approved or recommended by a vote of the at least two-thirds
                  (2/3rds) of the directors then still in office who either were
                  directors on the Commencement Date or whose


                                  Page 12 of 19
<PAGE>   13

                  appointment, election or nomination for election was
                  previously so approved or recommended;

         (iii)    there is a consummated merger or consolidation of the Company
                  or any direct or indirect subsidiary of the Company with any
                  other corporation, other than (A) a merger or consolidation
                  which would result in the voting securities of the Company
                  outstanding immediately prior thereto continuing to represent
                  (either by remaining outstanding or by being converted into
                  voting securities of the surviving or parent entity) more than
                  fifty percent (50%) of the combined voting power of the voting
                  securities of the Company or such surviving or parent equity
                  outstanding immediately after such merger or consolidation or
                  (B) a merger or consolidation effected to implement a
                  recapitalization of the Company (or similar transaction) in
                  which no Person, directly or indirectly, acquired twenty-five
                  percent (25%) or more of the combined voting power of the
                  Company's then outstanding securities (not including in the
                  securities beneficially owned by such person any securities
                  acquired directly from the Company or its Affiliates); or

         (iv)     the stock holders of the Company approve a plan of complete
                  liquidation of the Company or there is consummated an
                  agreement for the sale or disposition by the Company of all or
                  substantially all of the Company's assets (or any transaction
                  having a similar effect), other than a sale or disposition by
                  the Company of all or substantially all of the Company's
                  assets to an entity, at least fifty percent (50%) of the
                  combined voting power of the voting securities of which are
                  owned by stockholders of the Company in substantially the same
                  proportions as their ownership of the Company immediately
                  prior to such sale.

         For purposes of this Section 7(c), the following terms shall have the
         following meanings:

                  (i) "Affiliate" shall mean an affiliate of the Company, as
                  defined in Rule 12b-2 promulgated under Section 12 of the
                  Securities Exchange Act of 1934, as amended from time to time
                  (the "Exchange Act");

                  (ii) "Beneficial Owner" shall have the meaning set forth in
                  Rule 13d-3 under the Exchange Act;

                  (iii) "Person" shall have the meaning set forth in Section
                  3(a)(9) of the Exchange Act, as modified and used in Sections
                  13(d) and 14(d) thereof, except that such term shall not
                  include (1) the Company, (2) a trustee or other fiduciary
                  holding securities under an employee benefit plan of the
                  Company, (3) an underwriter temporarily holding securities
                  pursuant to an offering of such securities or (4) a
                  corporation owned, directly or indirectly, by the stockholders
                  of the Company in substantially the same proportions as their
                  ownership of shares of Common Stock of the Company.

                                  Page 13 of 19
<PAGE>   14

8.       RESTRICTIVE COVENANTS.

(a)      COMPETITIVE ACTIVITY. Executive covenants and agrees that at all times
         during Executive's period of employment with the Company, and for two
         (2) years thereafter, Executive will not engage in, assist, or have any
         active interest or involvement, whether as an employee, agent,
         consultant, creditor, advisor, officer, director, stockholder
         (excluding holding of less than 3% of the stock of a public company),
         partner, proprietor or any type of principal whatsoever in any person,
         firm, or business entity which, directly or indirectly, is materially
         engaged in the waste management business competitive with that
         conducted and carried on by the Company, without the Company's specific
         written consent to do so. "Material" shall mean more than five (5%)
         percent of their revenue is generated from the waste management
         business; provided that the revenues within Executive's area of
         responsibility or authority are more than 10% composed of revenues from
         the waste disposal business.

(b)      NON-SOLICITATION. Executive covenants and agrees that at all times
         during Executive's period of employment with the Company, and for a
         period of two (2) years after the Termination thereof, whether such
         termination is voluntary or involuntary by wrongful discharge, or
         otherwise, Executive will not directly and personally knowingly (i)
         induce any customers of the Company or corporations affiliated with the
         Company to patronize any similar business which competes with any
         material business of the Company; (ii) after his termination of
         employment, request or advise any customers of the Company or
         corporations affiliated with the Company to withdraw, curtail or cancel
         such customer's business with the Company; or (iii) after his
         termination of employment, individually or through any person, firm,
         association or corporation with which he is now, or may hereafter
         become associated, solicit, entice or induce any then employee of the
         Company, or any subsidiary of the Company, to leave the employ of the
         Company, or such other corporation, to accept employment with, or
         compensation from the Executive, or any person, firm, association or
         corporation with which Executive is affiliated without prior written
         consent of the Company. The foregoing shall not prevent Executive from
         serving as a reference for employees.

(c)      PROTECTED INFORMATION. Executive recognizes and acknowledges that
         Executive has had and will continue to have access to various
         confidential or proprietary information concerning the Company and
         corporations affiliated with the Company of a special and unique value
         which may include, without limitation, (i) books and records relating
         to operation, finance, accounting, sales, personnel and management,
         (ii) policies and matters relating particularly to operations such as
         customer service requirements, costs of providing service and
         equipment, operating costs and pricing matters, and (iii) various trade
         or business secrets, including customer lists, route sheets, business
         opportunities, marketing or business diversification plans, business
         development and bidding techniques, methods and processes, financial
         data and the like, to the extent not generally known in the industry
         (collectively, the "Protected Information"). Executive therefore
         covenants and agrees that Executive will not at any time, either while
         employed by the Company or afterwards, knowingly make any independent
         use of, or knowingly disclose


                                  Page 14 of 19
<PAGE>   15

         to any other person or organization (except as authorized by the
         Company) any of the Protected Information, provided that (i) while
         employed by the Company, Executive may in good faith make disclosures
         he believes desirable, provided that are authorized by the Company or
         otherwise in accordance with Company policy, and (ii) Executive may
         comply with legal process.

9.       ENFORCEMENT OF COVENANTS.

(a)      RIGHT TO INJUNCTION. Executive acknowledges that a breach of the
         covenants set forth in Section 8 hereof will cause irreparable damage
         to the Company with respect to which the Company's remedy at law for
         damages may be inadequate. Therefore, in the event of breach or
         threatened breach of the covenants set forth in this section by
         Executive, Executive and the Company agree that the Company shall be
         entitled to the following particular forms of relief, in addition to
         remedies otherwise available to it at law or equity; injunctions, both
         preliminary and permanent, enjoining or restraining such breach or
         threatened breach and Executive hereby consents to the issuance thereof
         forthwith and without bond by any court of competent jurisdiction.

(b)      SEPARABILITY OF COVENANTS. The covenants contained in Section 8 hereof
         constitute a series of separate covenants, one for each applicable
         State in the United States and the District of Columbia, and one for
         each applicable foreign country. If in any judicial proceeding, a court
         shall hold that any of the covenants set forth in Section 8 exceed the
         time, geographic, or occupational limitations permitted by applicable
         laws, Executive and the Company agree that such provisions shall and
         are hereby reformed to the maximum time, geographic, or occupational
         limitations permitted by such laws. Further, in the event a court shall
         hold unenforceable any of the separate covenants deemed included
         herein, then such unenforceable covenant or covenants shall be deemed
         eliminated from the provisions of this Agreement for the purpose of
         such proceeding to the extent necessary to permit the remaining
         separate covenants to be enforced in such proceeding.

         Executive and the Company further agree that the covenants in Section 8
         shall each be construed as a separate agreement independent of any
         other provisions of this Agreement, and the existence of any claim or
         cause of action by Executive against the Company whether predicated on
         this Agreement or otherwise, shall not constitute a defense to the
         enforcement by the Company of any of the covenants of Section 8.

10.      INDEMNIFICATION.

The Company shall indemnify and hold harmless Executive to the fullest extent
permitted by Delaware law for any action or inaction of Executive while serving
as an officer and director of the Company or, at the Company's request, as an
officer or director of any other entity or as a fiduciary of any benefit plan.
This provision includes the obligation and undertaking of the Executive to
reimburse the Company for any fees advanced by the Company on behalf of the
Executive should it later be determined that Executive was not entitled to have
such fees advanced by the Company under Delaware law. The Company shall cover
the Executive under

                                  Page 15 of 19
<PAGE>   16

directors and officers liability insurance both during and, while potential
liability exists, after the Employment Term in the same amount and to the same
extent as the Company covers its other officers and directors.

11.      DISPUTES AND PAYMENT OF ATTORNEY'S FEES.

If at any time during the term of this Agreement or afterwards there should
arise any dispute as to the validity, interpretation or application of any term
or condition of this Agreement, the Company agrees, upon written demand by
Executive (and Executive shall be entitled upon application to any court of
competent jurisdiction, to the entry of a mandatory injunction, without the
necessity of posting any bond with respect thereto, compelling the Company) to
promptly provide sums sufficient to pay on a current basis (either directly or
by reimbursing Executive) Executive's costs and reasonable attorney's fees
(including expenses of investigation and disbursements for the fees and expenses
of experts, etc.) incurred by Executive in connection with any such dispute or
any litigation, provided that Executive shall repay any such amounts paid or
advanced if Executive is not the prevailing party with respect to at least one
material claim or issue in such dispute or litigation. The provisions of this
Section 11, without implication as to any other section hereof, shall survive
the expiration or termination of this Agreement and of Executive's employment
hereunder.

12.      WITHHOLDING OF TAXES.

The Company may withhold from any compensation and benefits payable under this
Agreement all applicable federal, state, local, or other taxes.

13.      SOURCE OF PAYMENTS.

All payments provided under this Agreement, other than payments made pursuant to
a plan which provides otherwise, shall be paid from the general funds of the
Company, and no special or separate fund shall be established, and no other
segregation of assets made, to assure payment. Executive shall have no right,
title or interest whatever in or to any investments which the Company may make
to aid the Company in meeting its obligations hereunder. To the extent that any
person acquires a right to receive payments from the Company hereunder, such
right shall be no greater than the right of an unsecured creditor of the
Company.

14.      ASSIGNMENT.

Except as otherwise provided in this Agreement, this Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, representatives, successors and assigns. This Agreement shall not be
assignable by Executive (but any payments due hereunder which would be payable
at a time after Executive's death shall be paid to Executive's designated
beneficiary or, if none, his estate) and shall be assignable by the Company only
to any financially solvent corporation or other entity resulting from the
reorganization, merger or consolidation of the Company with any other
corporation or entity or any corporation or entity to or with which


                                  Page 16 of 19
<PAGE>   17

the Company's business or substantially all of its business or assets may be
sold, exchanged or transferred, and it must be so assigned by the Company to,
and accepted as binding upon it by, such other corporation or entity in
connection with any such reorganization, merger, consolidation, sale, exchange
or transfer in a writing delivered to Executive in a form reasonably acceptable
to Executive (the provisions of this sentence also being applicable to any
successive such transaction).

15.      ENTIRE AGREEMENT; AMENDMENT.

This Agreement shall supersede any and all existing oral or written agreements,
representations, or warranties between Executive and the Company or any of its
subsidiaries or affiliated entities relating to the terms of Executive's
employment by the Company, including without limitation, that certain Employment
Agreement dated May 23, 1997 by and between Executive and USA Waste Services,
Inc. It may not be amended except by a written agreement signed by both parties.

16.      GOVERNING LAW.

This Agreement shall be governed by and construed in accordance with the laws of
the State of Texas applicable to agreements made and to be performed in that
State, without regard to its conflict of laws provisions.

17.      REQUIREMENT OF TIMELY PAYMENTS.

If any amounts which are required, or determined to be paid or payable, or
reimbursed or reimbursable, to Executive under this Agreement (or any other
plan, agreement, policy or arrangement with the Company) are not so paid
promptly at the times provided herein or therein, such amounts shall accrue
interest, compounded daily, at an 8% annual percentage rate, from the date such
amounts were required or determined to have been paid or payable, reimbursed or
reimbursable to Executive, until such amounts and any interest accrued thereon
are finally and fully paid, provided, however, that in no event shall the amount
of interest contracted for, charged or received hereunder, exceed the maximum
non-usurious amount of interest allowed by applicable law.

18.      NOTICES.

Any notice, consent, request or other communication made or given in connection
with this Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by registered or certified mail, return receipt
requested, or by facsimile or by hand delivery, to those listed below at their
following respective addresses or at such other address as each may specify by
notice to the others:

                         To the Company:    Waste Management , Inc.
                                            1001 Fannin, Suite 4000
                                            Houston, Texas 77002
                                            Attention: Corporate Secretary

                         To Executive:      At the address for Executive set
                                            forth below.


                                 Page 17 of 19
<PAGE>   18

19.      MISCELLANEOUS.

(a)      WAIVER. The failure of a party to insist upon strict adherence to any
         term of this Agreement on any occasion shall not be considered a waiver
         thereof or deprive that party of the right thereafter to insist upon
         strict adherence to that term or any other term of this Agreement.

(b)      SEPARABILITY. Subject to Section 9 hereof, if any term or provision of
         this Agreement is declared illegal or unenforceable by any court of
         competent jurisdiction and cannot be modified to be enforceable, such
         term or provision shall immediately become null and void, leaving the
         remainder of this Agreement in full force and effect.

(c)      HEADINGS. Section headings are used herein for convenience of reference
         only and shall not affect the meaning of any provision of this
         Agreement.

(d)      RULES OF CONSTRUCTION. Whenever the context so requires, the use of the
         singular shall be deemed to include the plural and vice versa.

(e)      COUNTERPARTS. This Agreement may be executed in any number of
         counterparts, each of which so executed shall be deemed to be an
         original, and such counterparts will together constitute but one
         Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.


WASTE MANAGEMENT, INC.


By: /s/ A. Maurice Myers
   -----------------------------
Name:  A. Maurice Myers
Title: Chairman, Chief Executive
       Officer & President

Date:  6/14/00
       -------------------------



                                 Page 18 of 19




<PAGE>   19

EXECUTIVE:


/s/ Charles E. Williams
---------------------------------
CHARLES E. WILLIAMS

Date: 6/6/00
     ----------------------------

Address:
        -------------------------


                                 Page 19 of 19
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>4
<FILENAME>h84376ex10-22.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - WHEELABRATOR & R T FELAGO
<TEXT>

<PAGE>   1
                                                                   EXHIBIT 10.22


                              EMPLOYMENT AGREEMENT

WHEELABRATOR TECHNOLOGIES, INC., for and on behalf of its affiliated
corporations (collectively referred to as the "Company") and RICHARD FELAGO (the
"Employee") hereby enter into this EMPLOYMENT AGREEMENT ("Agreement") dated as
of May 25, 1999, as follows:

1. EMPLOYMENT.

The Company shall employ Employee, and Employee shall be employed by the Company
upon the terms and subject to the conditions set forth in this Agreement.

2. TERM OF EMPLOYMENT.

The period of Employee's employment under this Agreement shall begin as of May
25, 1999, and shall continue for a period of three (3) years thereafter (the
"Initial Term") and shall be automatically renewed for successive one (1) year
periods thereafter, unless Employee's employment is terminated in accordance
with Section 6 below.

3. DUTIES AND RESPONSIBILITIES.

(a)      Employee shall serve as President, Wheelabrator Technologies, Inc. In
         such capacity, Employee shall perform such duties as may be assigned to
         Employee from time to time by the Company.

(b)      Employee shall faithfully serve the Company and/or its affiliated
         corporations, devote Employee's full working time, attention and
         energies to the business of the Company and/or its affiliated
         corporations, and perform the duties under this Agreement to the best
         of Employee's abilities.

(c)      Employee shall (i) comply with all applicable laws, rules and
         regulations, and all requirements of all applicable regulatory,
         self-regulatory, and administrative bodies; (ii) comply with the
         Company's rules, procedures, policies, requirements, and directions;
         and (iii) not engage in any other business or employment without the
         written consent of the Company, except as otherwise specifically
         provided herein.

4. COMPENSATION AND BENEFITS.

(a)      BASE SALARY. During the Employment Term, the Company shall pay Employee
         a base salary at the annual rate of Two Hundred Fifty Thousand
         ($250,000) Dollars per year, or such higher rate as may be determined
         from time to time by the Company ("Base Salary"). Such Base Salary
         shall be paid in accordance with the Company's standard payroll
         practice for employees.

(b)      EXPENSE REIMBURSEMENT. The Company shall promptly reimburse Employee
         for the ordinary and necessary business expenses incurred by Employee
         in the performance of Employee's duties hereunder in accordance with
         the Company's


                                  Page 1 of 11
<PAGE>   2


         customary practices applicable to employees, provided that such
         expenses are incurred and accounted for in accordance with the
         Company's policy.

(c)      BENEFIT PLANS. Employee shall be eligible to participate in or receive
         benefits under any pension plan, profit sharing plan, medical and
         dental benefits plan, life insurance plan, short-term and long-term
         disability plans, supplemental and/or incentive compensation plans, or
         any other benefit plan or arrangement generally made available by the
         Company to employees of similar status and responsibilities
         (hereinafter referred to as "similarly situated employees").

(d)      INCENTIVE/BONUS. Employee shall be eligible for a bonus or incentive
         compensation payment ("bonus"). Qualification for the bonus shall be
         pursuant to the applicable Bonus Plan in effect for the year in which
         the bonus is earned.

(e)      STOCK OPTIONS. Employee shall be awarded Twenty-Five Thousand (25,000)
         WM stock options, subject to the approval of the Compensation Committee
         of the Board of Directors. The award, vesting and exercise of all
         options shall be subject to the provisions of the Waste Management,
         Inc. Stock Incentive Plan.

5. TERMINATION OF EMPLOYMENT.

Employee's employment hereunder may be terminated under the following
circumstances:

(a)      DEATH. Employee's employment hereunder shall terminate upon Employee's
         death.

(b)      TOTAL DISABILITY. The Company may terminate Employee's employment
         hereunder upon Employee's becoming "Totally Disabled". For purposes of
         this Agreement, Employee shall be "Totally Disabled" if Employee is
         physically or mentally incapacitated so as to render Employee incapable
         of performing Employee's usual and customary duties under this
         Agreement. Employee's receipt of disability benefits under the
         Company's long-term disability plan, or receipt of Social Security
         disability benefits, shall be deemed conclusive evidence of Total
         Disability for purpose of this Agreement; provided, however, that in
         the absence of Employee's receipt of such long-term disability benefits
         or Social Security benefits, the Company may, in its reasonable
         discretion (but based upon appropriate medical evidence), determine
         that Employee is Totally Disabled.

(c)      TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
         Employee's employment hereunder for "Cause" at any time after providing
         written notice to Employee.

         (i)      For purposes of this Agreement, the term "Cause" shall mean
                  any of the following: (a) conviction of a crime (including
                  conviction on a nolo contendere plea) involving a felony or,
                  in the good faith judgment of the Company, fraud, dishonesty,
                  or moral turpitude; (b) deliberate and continual refusal to
                  perform employment duties reasonably requested by the Company
                  or an affiliate after thirty (30) days' written notice by
                  certified mail of such


                                  Page 2 of 11
<PAGE>   3


                  failure to perform, specifying that the failure constitutes
                  cause (other than as a result of vacation, sickness, illness
                  or injury); (c) fraud or embezzlement determined in accordance
                  with the Company's normal, internal investigative procedures
                  consistently applied in comparable circumstances; (d) gross
                  misconduct or gross negligence in connection with the business
                  of the Company or an affiliate which has substantial effect on
                  the Company or the affiliate; or (e) breach of any of the
                  covenants set forth in Section 8 hereof.

         (ii)     An individual will be considered to have been terminated for
                  Cause if the Company determines that the individual engaged in
                  an act constituting Cause at any time prior to a payment date
                  for an award, regardless of whether the individual terminates
                  employment voluntarily or is terminated involuntarily, and
                  regardless of whether the individual's termination initially
                  was considered to have been for Cause.

         (iii)    Any determination of Cause under this Agreement shall be made
                  by the Company after giving Employee a reasonable opportunity
                  to be heard.

(d)      VOLUNTARY TERMINATION BY EMPLOYEE. Employee may terminate employment
         hereunder at any time after providing ninety (90) days' written notice
         to the Company.

(e)      TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate
         Employee's employment hereunder without Cause at any time after
         providing written notice to Employee.

6. COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT.

In the event that Employee's employment hereunder is terminated, Employee shall
be entitled to the following compensation and benefits upon such termination:

(a)      TERMINATION BY REASON OF DEATH. In the event that Employee's employment
         is terminated by reason of Employee's death, the Company shall pay the
         following amounts to Employee's beneficiary or estate:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of death, any accrued but unpaid expenses required to
                  be reimbursed under this Agreement, and any vacation accrued
                  to the date of death.

         (ii)     Any benefits to which Employee may be entitled pursuant to the
                  plans, policies and arrangements referred to in Section 4(c)
                  hereof as determined and paid in accordance with the terms of
                  such plans, policies and arrangements.

         (iii)    An amount equal to the Base Salary (at the rate in effect as
                  of the date of Employee's death) which would have been payable
                  to Employee if Employee had continued in employment until the
                  end of the 30 day period beginning on


                                  Page 3 of 11
<PAGE>   4


                  the date of Employee's death. Such amount shall be paid in a
                  single lump sum cash payment within thirty (30) days after
                  Employee's death.

(b)      TERMINATION BY REASON OF TOTAL DISABILITY. In the event that Employee's
         employment is terminated by reason of Employee's Total Disability as
         determined in accordance with Section 5(b), the Company shall pay the
         following amounts to Employee:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination. Employee shall also be
                  entitled to a bonus or incentive compensation payment to the
                  extent such awards are made to similarly situated executives,
                  pro-rated for the year in which Executive is terminated and
                  paid at the same time as similarly situated executives are
                  paid.

         (ii)     Any benefits to which Employee may be entitled pursuant to the
                  plans, policies and arrangements referred to in Section 4(c)
                  hereof shall be determined and paid in accordance with the
                  terms of such plans, policies and arrangements.

         (iii)    An amount equal to

                  (a)      the Base Salary (at the rate in effect as of the date
                           of Employee's Total Disability) which would have been
                           payable to Employee if Employee had continued in
                           active employment until the end of the 12-month
                           period beginning on the date of Employee's
                           termination; reduced by

                  (b)      the maximum annual amount of the long term disability
                           benefits payable to Employee under the Company's
                           long-term disability plan as determined prior to the
                           reduction of such benefits under the terms of the
                           plan for other disability income.

                  Payment shall be made at the same time and in the same manner
                  as such compensation would have been paid if Employee had
                  remained in active employment until the end of such period.

(c)      TERMINATION FOR CAUSE OR VOLUNTARY TERMINATION BY EMPLOYEE. In the
         event that Employee's employment is terminated by the Company for Cause
         pursuant to Section 5(c), or Employee terminates employment pursuant to
         Section 5(d), the Company shall pay the following amounts to Employee:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination.


                                  Page 4 of 11
<PAGE>   5


         (ii)     Any benefits to which Employee may be entitled pursuant to the
                  plans, policies and arrangements referred to in Section 4(c)
                  hereof shall be determined and paid in accordance with the
                  terms of such plans, policies and arrangements.

(d)      TERMINATION BY THE COMPANY WITHOUT CAUSE. In the event that Employee's
         employment is terminated by the Company pursuant to Section 5(e) for
         reasons other than death, Total Disability or Cause, the Company shall
         pay the following amounts to Employee:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination.

         (ii)     Any benefits to which Employee may be entitled pursuant to the
                  plans, policies and arrangements referred to in Section 4(c)
                  hereof shall be determined and paid in accordance with the
                  terms of such plans, policies and arrangements.

         (iii)    The Base Salary (at the rate in effect as of the date of
                  Employee's termination) which would have been payable to
                  Employee if Employee had continued in active employment until
                  the later of: (a) the period ending on the last day of the
                  Initial Term; or (b) the end of the 12-month period beginning
                  on the date of Employee's termination. Payment shall be made
                  at the same time and in the same manner as such compensation
                  would have been paid if Employee had remained in active
                  employment until the end of such period. The Employee shall
                  also be eligible for a bonus or incentive compensation
                  payment, to the extent bonuses are paid to similarly situated
                  employees, pro-rated for the year in which the Employee is
                  terminated, and paid at the same time as similarly situated
                  employees are paid.

         (iv)     The Company, completely at its expense, will continue for
                  Employee and Employee's spouse and dependents, group health
                  plans, programs or arrangements, in which Employee was
                  entitled to participate at any time during the twelve-month
                  period prior to the date of termination, until the earlier of:
                  (a) last day of period during which Employee receives payment
                  in accordance with clause (iii) above; (b) Employee's death
                  (provided that benefits payable to Employee's beneficiaries
                  shall not terminate upon Employee's death); or (c) with
                  respect to any particular plan, program or arrangement, the
                  date Employee becomes covered by a comparable benefit provided
                  by a subsequent employer.

(e)      NO OTHER BENEFITS OR COMPENSATION. Except as may be provided under this
         Agreement, under the terms of any incentive compensation, employee
         benefit, or fringe benefit plan applicable to Employee at the time of
         Employee's termination or resignation of employment, Employee shall
         have no right to receive any other


                                  Page 5 of 11
<PAGE>   6


         compensation, or to participate in any other plan, arrangement or
         benefit, with respect to future periods after such termination or
         resignation.

(F)      SUSPENSION OR TERMINATION OF BENEFITS AND COMPENSATION. In the event
         that the Company, in its sole discretion determines that, without the
         Company's express written consent, Employee has

         (i)      directly or indirectly engaged in, assisted or have any active
                  interest or involvement whether as an employee, agent,
                  consultant, creditor, advisor, officer, director, stockholder
                  (excluding holding of less than 1% of the stock of a public
                  company), partner, proprietor, or any type of principal
                  whatsoever, in any person, firm, or business entity which is
                  directly or indirectly competitive with the Company or any of
                  its affiliates, or

         (ii)     directly or indirectly, for or on behalf of any person, firm,
                  or business entity which is directly or indirectly competitive
                  with the Company or any of its affiliates (a) solicited or
                  accepted from any person or entity who is or was a client of
                  the Company during the term of Employee's employment hereunder
                  or during any of the twelve calendar months preceding or
                  following the termination of Employee's employment any
                  business for services similar to those rendered by the
                  Company, (b) requested or advised any present or future
                  customer of the Company to withdraw, curtail or cancel its
                  business dealings with the Company, or (c) requested or
                  advised any employee of the Company to terminate his or her
                  employment with the Company;

         the Company shall have the right to suspend or terminate any or all
         remaining benefits payable pursuant to Section 6 of this Agreement.
         Such suspension or termination of benefits shall be in addition to and
         shall not limit any and all other rights and remedies that the Company
         may have against Employee.

7. RESTRICTIVE COVENANTS

(a)      COMPETITIVE ACTIVITY. Employee covenants and agrees that at all times
         during Employee's period of employment with the Company, and while
         Employee is receiving payments pursuant to Section 6 of this Agreement,
         Employee will not, directly or indirectly, engage in, assist, or have
         any active interest or involvement, whether as an employee, agent,
         consultant, creditor, advisor, officer, director, stockholder
         (excluding holding of less than 1% of the stock of a public company),
         partner, proprietor or any type of principal whatsoever in any person,
         firm, or business entity which, directly or indirectly, is engaged in
         the same business as that conducted and carried on by the Company,
         without the Company's specific written consent to do so. Furthermore,
         for a period of one (1) year after the date of termination of
         Employee's employment, whether such termination is voluntary or
         involuntary, by wrongful discharge, or otherwise, or one (1) year
         following the cessation of payments made pursuant to Section 6 of this
         Agreement, or for a period of one (1) year following the date of
         termination, whichever date is later, Employee will not directly or
         indirectly, within 75 miles of the principal place of


                                  Page 6 of 11
<PAGE>   7


         business of the Company, the principal place of business of any
         corporation or other entity owned, controlled by (or otherwise
         affiliated with) the Company by which Employee may also be employed or
         served by Employee, or any other geographic location in which Employee
         has specifically represented the interests of the Company or such other
         affiliated entity, during the twelve (12) months prior to the
         termination of Employee's employment, engage in, assist, or have any
         active interest or involvement, whether as an employee, agent,
         consultant, creditor, advisor, officer, director, stockholder
         (excluding holding of less than 1% of the stock of a public company),
         partner, proprietor or any type of principal whatsoever in any person,
         firm, or business entity which, directly or indirectly, is engaged in
         the same business as that conducted and carried on by the Company,
         without the Company's specific written consent to do so.

(b)      NON-SOLICITATION. Employee covenants and agrees that at all times
         during Employee's period of employment with the Company, and for a
         period of one (1) year after the date of termination of Employee's
         employment, whether such termination is voluntary or involuntary by
         wrongful discharge, or otherwise, or the date of the cessation of
         payments made to the Employee pursuant to Section 6 of this Agreement,
         whichever date is later. Employee will not directly or indirectly (i)
         induce any customers of the Company or corporations affiliated with the
         Company to patronize any similar business which competes with any
         material business of the Company; (ii) canvass, solicit or accept any
         similar business from any customer of the Company or corporations
         affiliated with the Company; (iii) directly or indirectly request or
         advise any customers of the Company or corporations affiliated with the
         Company to withdraw, curtail or cancel such customer's business with
         the Company; (iv) directly or indirectly disclose to any other person,
         firm or corporation the names or addresses of any of the customers of
         the Company or corporations affiliated with the Company; or (v)
         individually of through any person, firm, association or corporation
         with which Employee is now or may hereafter become associated, cause,
         solicit, entice, or induce any present or future employee of the
         Company, or any corporation affiliated with the Company to leave the
         employ of the Company, or such other corporation to accept employment
         with, or compensation from, the Employee or any such person, firm,
         association or corporation without the prior written consent of the
         Company.

(c)      NON-DISPARAGEMENT. Employee covenants and agrees that Employee shall
         not engage in any pattern of conduct that involves the making or
         publishing of written or oral statements or remarks (including, without
         limitation, the repetition or distribution of derogatory rumors,
         allegations, negative reports or comments) which are disparaging,
         deleterious or damaging to the integrity, reputation or good will of
         the Company, its management, or of management of corporations
         affiliated with the Company.

(c)      PROTECTED INFORMATION. Employee recognizes and acknowledges that
         Employee has had and will continue to have access to various
         confidential or proprietary information concerning the Company and
         corporations affiliated with the Company, of a special and unique value
         which may include, without limitation, (i) books and


                                  Page 7 of 11
<PAGE>   8


         records relating to operation, finance, accounting, sales, personnel
         and management, (ii) policies and matters relating particularly to
         operations such as customer service requirements, costs of providing
         service and equipment, operating costs and pricing matters, and (iii)
         various trade or business secrets, including business opportunities,
         marketing or business diversification plans, business development and
         bidding techniques, methods and processes, financial data and the like
         (collectively, the "Protected Information"). Employee therefore
         covenants and agrees that Employee will not at any time, either while
         employed by the Company or afterwards, knowingly make any independent
         use of, or knowingly disclose to any other person or organization
         (except as authorized by the Company) any of the Protected Information.

8. ENFORCEMENT OF COVENANTS.

(a)      TERMINATION OF EMPLOYMENT AND FORFEITURE OF COMPENSATION. Employee
         agrees that any breach by Employee of any of the covenants set forth in
         Section 7 hereof during Employee's employment by the Company, shall be
         grounds for immediate dismissal of Employee and forfeiture of any
         accrued and unpaid salary, bonus, commissions or other compensation of
         such Employee as liquidated damages, which shall be in addition to and
         not exclusive of any and all other rights and remedies the Company may
         have against Employee.

(b)      RIGHT TO INJUNCTION. Employee acknowledges that a breach of the
         covenants set forth in Section 7 hereof will cause irreparable damage
         to the Company with respect to which the Company's remedy at law for
         damages will be inadequate. Therefore, in the event of breach of
         anticipatory breach of the covenants set forth in this section by
         Employee, Employee and the Company agree that the Company shall be
         entitled to the following particular forms of relief, in addition to
         remedies otherwise available to it at law or equity; (i) injunctions,
         both preliminary and permanent, enjoining or restraining such breach or
         anticipatory breach and Employee hereby consents to the issuance
         thereof forthwith and without bond by any court of competent
         jurisdiction; and (ii) recovery of all reasonable sums expended and
         costs, including reasonable attorney's fees, incurred by the Company to
         enforce the covenants set forth in this section.

(c)      SEPARABILITY OF COVENANTS. The covenants contained in Section 7 hereof
         constitute a series of separate covenants, one for each applicable
         State in the United States and the District of Columbia, and one for
         each applicable foreign country. If in any judicial proceeding, a court
         shall hold that any of the covenants set forth in Section 7 exceed the
         time, geographic, or occupational limitations permitted by applicable
         laws, Employee and the Company agree that such provisions shall and are
         hereby reformed to the maximum time, geographic, or occupational
         limitations permitted by such laws. Further, in the event a court shall
         hold unenforceable any of the separate covenants deemed included
         herein, then such unenforceable covenant or covenants shall be deemed
         eliminated from the provisions of this Agreement for the purpose of
         such proceeding to the extent necessary to permit the remaining
         separate covenants to be enforced in such


                                  Page 8 of 11
<PAGE>   9


         proceeding. Employee and the Company further agree that the covenants
         in Section 7 shall each be construed as a separate agreement
         independent of any other provisions of this Agreement, and the
         existence of any claim or cause of action by Employee against the
         Company whether predicated on this Agreement or otherwise, shall not
         constitute a defense to the enforcement by the Company of any of the
         covenants of Section 7.

9. WITHHOLDING OF TAXES.

The Company may withhold from any compensation and benefits payable under this
Agreement all applicable federal, state, local, or other taxes.

10. NON-DISCLOSURE OF AGREEMENT TERMS.

Employee agrees that Employee will not disclose the terms of this Agreement to
any third party other than Employee's immediate family, attorney, accountants,
or other consultants or advisors or except as may be required by any
governmental authority.

11. SOURCE OF PAYMENTS.

All payments provided under this Agreement, other than payments made pursuant to
a plan which provides otherwise, shall be paid from the general funds of the
Company, and no special or separate fund shall be established, and no other
segregation of assets made, to assure payment. Employee shall have no right,
title or interest whatever in or to any investments which the Company may make
to aid the Company in meeting its obligations hereunder. To the extent that any
person acquires a right to receive payments from the Company hereunder, such
right shall be no greater than the right of an unsecured creditor of the
Company.

12. ASSIGNMENT.

Except as otherwise provided in this Agreement, this Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, representatives, successors and assigns. This Agreement shall not be
assignable by Employee.

13. ENTIRE AGREEMENT; AMENDMENT.

This Agreement shall supersede any and all existing oral or written agreements,
representations, or warranties between Employee and the Company or any of its
subsidiaries or affiliated entities relating to the terms of Employee's
employment by the Company. It may not be amended except by a written agreement
signed by both parties.

14. GOVERNING LAW.

This Agreement shall be governed by and construed in accordance with the laws of
the State of New Hampshire, applicable to agreements made and to be performed in
that State, without regard to its conflict of laws provisions.


                                  Page 9 of 11
<PAGE>   10


15. NOTICES.

Any notice, consent, request or other communication made or given in connection
with this Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by registered or certified mail, return receipt
requested, or by facsimile or by hand delivery, to those listed below at their
following respective addresses or at such other address as each may specify by
notice to the others:

         To the Company:       Waste Management, Inc.
                               1001 Fannin, Suite 4000
                               Houston, Texas 77002
                               Attention: Corporate Secretary

         To Employee:          At the address for Employee set forth below.

16. MISCELLANEOUS.

(a)      WAIVER. The failure of a party to insist upon strict adherence to any
         term of this Agreement on any occasion shall not be considered a waiver
         thereof or deprive that party of the right thereafter to insist upon
         strict adherence to that term or any other term of this Agreement.

(b)      SEPARABILITY. Subject to Section 8 hereof, if any term or provision of
         this Agreement is declared illegal or unenforceable by any court of
         competent jurisdiction and cannot be modified to be enforceable, such
         term or provision shall immediately become null and void, leaving the
         remainder of this Agreement in full force and effect.

(c)      HEADINGS. Section headings are used herein for convenience of reference
         only and shall not affect the meaning of any provision of this
         Agreement.

(d)      RULES OF CONSTRUCTION. Whenever the context so requires, the use of the
         singular shall be deemed to include the plural and vice versa.

(e)      COUNTERPARTS. This Agreement may be executed in any number of
         counterparts, each of which so executed shall be deemed to be an
         original, and such counterparts will together constitute but one
         Agreement.


                                 Page 10 of 11
<PAGE>   11
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.


WHEELABRATOR TECHNOLOGIES, INC.


By:  /s/ Rodney R. Proto
    ---------------------------

Name:
      -------------------------

Title:  President/COO
       ------------------------

Date:
      -------------------------



EMPLOYEE


     /s/ Richard T. Felago
-------------------------------

Date:
      -------------------------

Address:
         ----------------------


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

                                 Page 11 of 11

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>5
<FILENAME>h84376ex10-23.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - CANADIAN WASTE & J M HARRIS
<TEXT>

<PAGE>   1
                                                                   EXHIBIT 10.23


                              EMPLOYMENT AGREEMENT

CANADIAN WASTE SERVICES, INC., for and on behalf of its affiliated corporations
(collectively referred to as the "Company"), and JEFF M. HARRIS (the "Employee")
agree to enter into this EMPLOYMENT AGREEMENT (the "Agreement") dated as of
November 3, 1999 as follows:

1. EMPLOYMENT.

The Company shall employ Employee, and Employee shall be employed by the Company
upon the terms and subject to the conditions set forth in this Agreement.

2. TERM OF EMPLOYMENT.

The period of Employee's employment under this Agreement shall begin as of
November 3, 1999, and shall continue for a period of two (2) years thereafter
(the "Initial Term") and shall be automatically renewed for successive one (1)
year periods thereafter, unless Employee's employment is terminated in
accordance with Section 6 below.

3. DUTIES AND RESPONSIBILITIES.

(a)      Employee shall serve as President, Canadian Waste Services, Inc. In
         such capacity, Employee shall perform such duties as may be assigned to
         Employee from time to time by the Company.

(b)      Employee shall faithfully serve the Company, devote Employee's full
         working time, attention and energies to the business of the Company and
         perform the duties under this Agreement to the best of Employee's
         abilities.

(c)      Employee shall (i) comply with all applicable laws, rules and
         regulations, and all requirements of all applicable regulatory,
         self-regulatory, and administrative bodies; (ii) comply with the
         Company's rules, procedures, policies, requirements, and directions;
         and (iii) not engage in any other business or employment without the
         written consent of the Company except as otherwise specifically
         provided herein.

4. COMPENSATION AND BENEFITS.

(a)      BASE SALARY. During the Employment Term, the Company shall pay Employee
         a base salary at the annual rate of Three Hundred Thousand (US$300,000)
         United States Dollars per year, or such higher rate as may be
         determined from time to time by the Company ("Base Salary"). Such Base
         Salary shall be paid in accordance with the Company's standard payroll
         practice for employees.

(b)      TAX EQUALIZATION. Your annual income tax will be equalized as per the
         Waste Management Equalization Policy. According to this policy, Waste
         Management will take the benefit of the foreign earned income
         exclusion, but equalize you for income other than your base
         compensation, bonus, foreign service premium, stock options exercise
         and any personal income you have. In accordance with the expatriate tax
         equalization policy, the Company will provide you with assistance in
         the preparation of U.S. and foreign tax returns.

(c)      EXPENSE REIMBURSEMENT. The Company shall promptly reimburse Employee
         for the ordinary and necessary business expenses incurred by Employee
         in the performance of Employee's duties hereunder in accordance with
         the Company's customary practices applicable to employees, provided
         that such expenses are incurred and accounted for in accordance with
         the Company's policy.


                                  Page 1 of 11
<PAGE>   2


(d)      BENEFIT PLANS. Employee shall be eligible to participate in or receive
         benefits under any pension plan, profit sharing plan, medical and
         dental benefits plan, life insurance plan, short-term and long-term
         disability plans, supplemental and/or incentive compensation plans,
         practices or arrangements, or any other benefit plan or arrangement,
         generally made available by the Company to employees of similar status
         and responsibilities.

(e)      VACATION. Employee shall receive four (4) weeks vacation annually.

(F)      STOCK OPTIONS. Employee shall be awarded Fifty-five Thousand (55,000)
         Waste Management stock options, subject to the approval of the
         Compensation Committee of the Board of Directors. The award, vesting
         and exercising of all options shall be subject to the provisions of the
         Waste Management, Inc. Stock Incentive Plan.

(G)      AUTOMOBILE. Company shall provide a vehicle (make and model to be
         determined by Company for the term of the contract) or a monthly auto
         allowance. Company's obligation to provide a vehicle or allowance will
         cease upon commencement of severance or termination of this Agreement.

(H)      OTHER. Company will provide an apartment in Toronto and pay for
         reasonable living expenses including utilities, telephone (except for
         personal calls) and parking. Company will pay reasonable travel
         expenses to and from Detroit, one round trip per week, coach fare.

5. TERMINATION OF EMPLOYMENT.

Employee's employment hereunder may be terminated under the following
circumstances:

(a)      DEATH. Employee's employment hereunder shall terminate upon Employee's
         death.

(b)      TOTAL DISABILITY. The Company may terminate Employee's employment
         hereunder upon Employee's becoming "Totally Disabled". For purposes of
         this Agreement, Employee shall be "Totally Disabled" if Employee is
         physically or mentally incapacitated so as to render Employee incapable
         of performing the usual and customary duties under this Agreement.
         Employee's receipt of disability benefits under the Company's long-term
         disability plan or receipt of Social Security disability benefits shall
         be deemed conclusive evidence of Total Disability for purpose of this
         Agreement; provided, however, that in the absence of Employee's receipt
         of such long-term disability benefits or Social Security benefits, the
         Company may, in its reasonable discretion (but based upon appropriate
         medical evidence), determine that Employee is Totally Disabled.

(c)      TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
         Employee's employment hereunder for "Cause" at any time after providing
         written notice to Employee.

         (i)      For purposes of this Agreement, the term "Cause" shall mean
                  any of the following: (a) conviction of a crime (including
                  conviction on a nolo contendere plea) involving a felony or,
                  in the good faith judgment of the Company, fraud, dishonesty,
                  or moral turpitude; (b) deliberate and continual refusal to
                  perform employment duties reasonably requested by the Company
                  or an affiliate after thirty (30) days' written notice by
                  certified mail of such failure to perform, specifying that the
                  failure constitutes cause (other than as a result of vacation,
                  sickness, illness or injury); (c) fraud or embezzlement
                  determined in accordance with the Company's normal, internal
                  investigative procedures consistently applied in comparable
                  circumstances; (d) gross misconduct or gross negligence in
                  connection with the business of the Company or an affiliate
                  which has substantial effect on the Company or the affiliate;
                  or (e) breach of any of the covenants set forth in Section 7
                  hereof.


                                  Page 2 of 11
<PAGE>   3


         (ii)     An individual will be considered to have been terminated for
                  Cause if the Company determines that the individual engaged in
                  an act constituting Cause at any time prior to a payment date
                  for an award, regardless of whether the individual terminates
                  employment voluntarily or is terminated involuntarily, and
                  regardless of whether the individual's termination initially
                  was considered to have been for Cause.

         (iii)    Any determination of Cause under this Agreement shall be made
                  by the Company after giving Employee a reasonable opportunity
                  to be heard.

(d)      VOLUNTARY TERMINATION BY EMPLOYEE. Employee may terminate employment
         hereunder at any time after providing ninety (90) days' written notice
         to the Company.

(e)      TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate
         Employee's employment hereunder without Cause at any time after
         providing written notice to Employee.

6. COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT.

In the event that Employee's employment hereunder is terminated, Employee shall
be entitled to the following compensation and benefits upon such termination:

(a)      TERMINATION BY REASON OF DEATH. In the event that Employee's employment
         is terminated by reason of Employee's death, the Company shall pay the
         following amounts to Employee's beneficiary or estate:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of death, any accrued but unpaid expenses required to
                  be reimbursed under this Agreement, and any vacation accrued
                  to the date of death.

         (ii)     Any benefits to which Employee may be entitled pursuant to the
                  plans, policies and arrangements referred to in Section 4(c)
                  hereof as determined and paid in accordance with the terms of
                  such plans, policies and arrangements.

         (iii)    An amount equal to the Base Salary (at the rate in effect as
                  of the date of Employee's death) which would have been payable
                  to Employee if Employee had continued in employment until the
                  end of the 30 day term beginning on the date of Employee's
                  death. Such amount shall be paid in a single lump sum cash
                  payment within thirty (30) days after Employee's death.

(b)      TERMINATION BY REASON OF TOTAL DISABILITY. In the event that Employee's
         employment is terminated by reason of Employee's Total Disability as
         determined in accordance with Section 5(b), the Company shall pay the
         following amounts to Employee:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination.

         (ii)     Any benefits to which Employee may be entitled pursuant to the
                  plans, policies and arrangements referred to in Section 4(c)
                  hereof shall be determined and paid in accordance with the
                  terms of such plans, policies and arrangements.

         (iii)    An amount equal to

                  (a)      the Base Salary (at the rate in effect as of the date
                           of Employee's Total Disability) which would have been
                           payable to Employee if Employee had continued in
                           active employment


                                  Page 3 of 11
<PAGE>   4


                           until the end of the 6-month period beginning on the
                           date of Employee's termination; reduced by

                  (b)      the maximum annual amount of the long term disability
                           benefits payable to Employee under the Company's
                           long-term disability plan as determined prior to the
                           reduction of such benefits under the terms of the
                           plan for other disability income.

                  Payment shall be made at the same time and in the same manner
                  as such compensation would have been paid if Employee had
                  remained in active employment until the end of such period.

(c)      TERMINATION FOR CAUSE OR VOLUNTARY TERMINATION BY EMPLOYEE. In the
         event that Employee's employment is terminated by the Company for Cause
         pursuant to Section 5(c), or Employee terminates employment pursuant to
         Section 5(d), the Company shall pay the following amounts to Employee:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination.

         (ii)     Any benefits to which Employee may be entitled pursuant to the
                  plans, policies and arrangements referred to in Section 4(c)
                  hereof shall be determined and paid in accordance with the
                  terms of such plans, policies and arrangements.

(d)      TERMINATION BY THE COMPANY WITHOUT CAUSE. In the event that Employee's
         employment is terminated by the Company pursuant to Section 5(e) for
         reasons other than death, Total Disability or Cause, the Company shall
         pay the following amounts to Employee:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination.

         (ii)     Any benefits to which Employee may be entitled pursuant to the
                  plans, policies and arrangements referred to in Section 4(c)
                  hereof shall be determined and paid in accordance with the
                  terms of such plans, policies and arrangements.

         (iii)    The Base Salary (at the rate in effect as of the date of
                  Employee's termination) which would have been payable to
                  Employee if Employee had continued in active employment until
                  the later of: (a) the period ending on the last day of the
                  current term; or (b) the end of the twelve (12) month period
                  beginning on the date of Employee's termination. Payment shall
                  be made at the same time and in the same manner as such
                  compensation would have been paid if Employee had remained in
                  active employment until the end of such period. The Employee
                  shall also be eligible for a bonus or incentive compensation
                  payment to the extent bonuses are paid to similarly situated
                  employees, pro-rated for the year in which the Employee is
                  terminated, and paid when similarly situated employees are
                  paid.

         (iv)     The Company completely at its expense will continue for
                  Employee and Employee's spouse and dependents, group health
                  plans, programs or arrangements, in which Employee was
                  entitled to participate at any time during the twelve-month
                  period prior to the date of termination, until the earlier of:
                  (a) last day of period during which Employee receives payment
                  in accordance with clause (iii) above; (b) Employee's death
                  (provided that benefits payable to Employee's beneficiaries
                  shall not terminate upon Employee's death); or (c) with
                  respect to any particular plan, program or arrangement, the
                  date Employee becomes covered by a comparable benefit provided
                  by a subsequent employer.


                                  Page 4 of 11
<PAGE>   5


(e)      NO OTHER BENEFITS OR COMPENSATION. Except as may be provided under this
         Agreement, under the terms of any incentive compensation, employee
         benefit, or fringe benefit plan applicable to Employee at the time of
         Employee's termination or resignation of employment, Employee shall
         have no right to receive any other compensation, or to participate in
         any other plan, arrangement or benefit, with respect to future periods
         after such termination or resignation.

(F)      SUSPENSION OR TERMINATION OF BENEFITS AND COMPENSATION. In the event
         that the Company, in its sole discretion determines that, without the
         Company's express written consent, Employee has

         (i)      directly or indirectly engaged in, assisted or have any active
                  interest or involvement whether as an employee, agent,
                  consultant, creditor, advisor, officer, director, stockholder
                  (excluding holding of less than 1% of the stock of a public
                  company), partner, proprietor, or any type of principal
                  whatsoever, in any person, firm, or business entity which is
                  directly or indirectly competitive with the Company or any of
                  its affiliates, or

         (ii)     directly or indirectly, for or on behalf of any person, firm,
                  or business entity which is directly or indirectly competitive
                  with the Company or any of its affiliates (a) solicited or
                  accepted from any person or entity who is or was a client of
                  the Company during the term of Employee's employment hereunder
                  or during any of the twelve calendar months preceding or
                  following the termination of Employee's employment any
                  business for services similar to those rendered by the
                  Company, (b) requested or advised any present or future
                  customer of the Company to withdraw, curtail or cancel its
                  business dealings with the Company, or (c) requested or
                  advised any employee of the Company to terminate his or her
                  employment with the Company;

         the Company shall have the right to suspend or terminate any or all
         remaining benefits payable pursuant to Section 6 of this Agreement.
         Such suspension or termination of benefits shall be in addition to and
         shall not limit any and all other rights and remedies that the Company
         may have against Employee.

7. RESIGNATION BY EXECUTIVE FOR GOOD REASON AND COMPENSATION PAYABLE FOLLOWING
CHANGE IN CONTROL.

(a)      RESIGNATION FOR GOOD REASON FOLLOWING CHANGE IN CONTROL. In the event a
         "Change in Control" occurs, Executive will be paid the compensation
         described in this Section 7 if Executive resigns or is terminated (both
         a "resignation" and "termination" being referred to as "termination"
         for the purposes of this Section 7) from employment with the Company at
         any time prior to the six (6) month anniversary of the date of the
         Change in Control following the occurrence of any of the following
         events:

         (i)      the removal of Executive as President of Canadian Waste
                  Services, Inc., except in connection with the termination of
                  Executive's employment as a result of death, or by the Company
                  for Disability or Cause, or by Executive other than for the
                  reasons described in this Section 7(a);

         (ii)     a reduction by the Company in Executive's Base Salary as in
                  effect immediately before a Change in Control plus all
                  increases therein subsequent thereto;

         (iii)    the failure of the Company substantially to maintain and to
                  continue Executive's participation in the Company's benefit
                  plans as in effect immediately before a Change in Control and
                  with all improvements therein subsequent thereto (other than
                  those plans or improvements that have expired thereafter in
                  accordance with their original terms), or the taking of any
                  action which would materially reduce Executive's benefits
                  under any of such plans or deprive Executive of any material
                  fringe benefit enjoyed by Executive immediately before a
                  Change in Control, unless such reduction or termination is
                  required by law;

         (iv)     the failure of the Company to provide Executive with an
                  appropriate adjustment to compensation


                                  Page 5 of 11
<PAGE>   6


                  such as a lump sum relocation bonus, salary adjustment and/or
                  housing allowance so that Executive can purchase comparable
                  primary housing if required to relocate (it being the
                  intention of this Section 7[a][iv] to keep the Executive
                  "whole" if required to relocate). In this regard, comparable
                  housing shall be determined by comparing factors such as
                  location (taking into account, by way of example, items such
                  as the value of the surrounding neighborhood, reputation of
                  the public school district, if applicable, security and
                  proximity to Executive's place of work), quality of
                  construction, design, age, size of the housing and the ratio
                  of the monthly payments including principle, interest, taxes
                  and insurance to the Executive's take home pay, to housing
                  most recently owned by Executive prior to, or as of the
                  effective date of the change of control;

         (v)      the failure by the Company to pay Executive any portion of
                  Executive's current compensation, or any portion of
                  Executive's compensation deferred under any plan, agreement or
                  arrangement of or with the Company, within seven (7) days of
                  the date such compensation is due; or

         (vi)     the failure by the Company to obtain an assumption of, and
                  agreement to perform the obligations of the Company under this
                  Agreement by any successor to the Company.

(b)      COMPENSATION PAYABLE. In the event that Executive terminates employment
         pursuant to Section 7(a), the Company shall pay the following amounts
         to Executive:

         (i)      Any accrued but unpaid Base Salary for services rendered to
                  the date of termination, any accrued but unpaid expenses
                  required to be reimbursed under this Agreement, any vacation
                  accrued to the date of termination.

         (ii)     Any benefits to which Executive may be entitled pursuant to
                  the plans, policies and arrangements referred to in Section 4c
                  hereof, shall be determined and paid in accordance with the
                  terms of such plans, policies and arrangements.

         (iii)    The payments and benefits provided for in Section 6(d) except
                  that the period with respect to which severance is calculated
                  pursuant to Section 6 (d) (iii) will be three years and the
                  benefit continuation period in Section (d) (iv) will be three
                  years.

         (iv)     Executive will be 100% vested in all benefits, awards, and
                  grants (including stock options) accrued but unpaid as of the
                  date of termination under any non-qualified pension plan,
                  supplemental and/or incentive compensation or bonus plans, in
                  which Executive was a participant as of the date of
                  termination. Executive shall also be eligible for a bonus or
                  incentive compensation payment (the "bonus payment"), payable
                  at 100% of the maximum bonus available to Executive. The bonus
                  payment shall be payable within five (5) days after the
                  effective date of Employee's termination. Employee shall have
                  until the expiration date shown on the stock option award in
                  which to exercise the options which have vested pursuant to
                  this section.

         Except as may be provided under this Section 7 or under the terms of
         any incentive compensation, employee benefit, or fringe benefit plan
         applicable to Executive at the time of Executive's resignation from
         employment, Executive shall have no right to receive any other
         compensation, or to participate in any other plan, arrangement or
         benefit, with respect to future periods after such resignation or
         termination.

(c)      CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. In the event that any
         portion of the benefits payable under this Agreement, and any other
         payments and benefits under any other agreement with, or plan of the
         Company to or for the benefit of the Executive (in aggregate, "Total
         Payments") constitute an "excess parachute payment" within the meaning
         of Section 280G of the Internal Revenue Code (the "Code"), then the
         Company shall pay the Executive as promptly as practicable following
         such determination an additional amount (the "Gross-up Payment")
         calculated as described below to reimburse the Executive on an
         after-tax basis for any excise tax imposed on such payments under
         Section 4999 of the Code. The Gross-up Payment shall equal the amount,
         if any, needed to ensure that the net parachute payments


                                  Page 6 of 11
<PAGE>   7


         (including the Gross-up Payment) actually received by the Executive
         after the imposition of federal and state income, employment and excise
         taxes (including any interest or penalties imposed by the Internal
         Revenue Service), are equal to the amount that the Executive would have
         netted after the imposition of federal and state income and employment
         taxes, had the Total Payments not been subject to the taxes imposed by
         Section 4999. For purposes of this calculation, it shall be assumed
         that the Executive's tax rate will be the maximum federal rate to be
         computed with regard to Section 1(g) of the Code.

         In the event that the Executive and the Company are unable to agree as
         to the amount of the Gross-up Payment, if any, the Company shall select
         a law firm or accounting firm from among those regularly consulted
         (during the twelve-month period immediately prior to a
         Change-in-Control) by the Company regarding federal income tax matters
         and such law firm or accounting firm shall determine the amount of
         Gross-up Payment and such determination shall be final and binding upon
         the Executive and the Company.

(d)      CHANGE IN CONTROL. For purposes of this Agreement, "Change in Control"
         means the occurrence of any of the following events:

         (i)      Any transfer to, assignment to, or any acquisition by any
                  person, corporation or other entity, or group thereof, of the
                  beneficial ownership, within the meaning of Section 13(d) of
                  the Securities Exchange Act of 1934, of any securities of the
                  Company, which transfer, assignment or acquisition results in
                  such person, corporation, entity, or group thereof, becoming
                  the beneficial owner, directly or indirectly, of securities of
                  the Company representing 25 percent (25%) or more of the
                  combined voting power of the Company's then outstanding
                  securities; or

         (ii)     As a result of a tender offer, merger, consolidation, sale of
                  assets, or contested election, or any combination of such
                  transactions, the persons who were directors immediately
                  before the transaction shall cease to constitute a majority of
                  the Board of Directors of the Company or any successor to the
                  Company.

8. RESTRICTIVE COVENANTS

(a)      COMPETITIVE ACTIVITY. Employee covenants and agrees that at all times
         during Employee's period of employment with the Company, and while
         Employee is receiving payments pursuant to Section 6 of this Agreement,
         Employee will not, directly or indirectly, engage in, assist, or have
         any active interest or involvement, whether as an employee, agent,
         consultant, creditor, advisor, officer, director, stockholder
         (excluding holding of less than 1% of the stock of a public company),
         partner, proprietor or any type of principal whatsoever in any person,
         firm, or business entity which, directly or indirectly, is engaged in
         the same business as that conducted and carried on by the Company,
         without the Company's specific written consent to do so. Furthermore,
         in consideration of the specialized training and access to confidential
         information, for a period of one (1) year after the date of termination
         of Employee's employment, or one (1) year following the cessation of
         payments made pursuant to Section 6 of this Agreement, whether such
         termination is voluntary or involuntary, by wrongful discharge, or
         otherwise, whichever date is later, Employee will not directly or
         indirectly, engage in a competitive activity in any of the geographic
         markets in which the Employee has worked for the twelve (12) months
         preceding his termination, or within 75 miles of the principal place of
         business of the Company, the principal place of business of any
         corporation or other entity owned, controlled by (or otherwise
         affiliated with) the Company by which Employee may also be employed or
         served by Employee, or any other geographic location in which Employee
         has specifically represented the interests of the Company or such other
         affiliated entity, during the twelve (12) months prior to the
         termination of Employee's employment, engage in, assist, or have any
         active interest or involvement, whether as an employee, agent,
         consultant, creditor, advisor, officer, director, stockholder
         (excluding holding of less than 1% of the stock of a public company),
         partner, proprietor or any type of principal whatsoever in any person,
         firm, or business entity


                                  Page 7 of 11
<PAGE>   8


         which, directly or indirectly, is engaged in the same business as that
         conducted and carried on by the Company, without the Company's specific
         written consent to do so.

(b)      NON-SOLICITATION. Employee covenants and agrees that at all times
         during Employee's period of employment with the Company, and for a
         period of one (1) year after the date of termination of Employee's
         employment, or the date of the cessation of payments made to the
         Employee pursuant to Section 6 of this Agreement, whichever is later,
         whether such termination is voluntary or involuntary by wrongful
         discharge, or otherwise, Employee will not directly or indirectly (i)
         induce any customers of the Company or corporations affiliated with the
         Company to patronize any similar business which competes with any
         material business of the Company; (ii) canvass, solicit or accept any
         similar business from any customer of the Company or corporations
         affiliated with the Company; (iii) directly or indirectly request or
         advise any customers of the Company or corporations affiliated with the
         Company to withdraw, curtail or cancel such customer's business with
         the Company; (iv) directly or indirectly disclose to any other person,
         firm or corporation the names or addresses of any of the customers of
         the Company or corporations affiliated with the Company; or (v)
         individually of through any person, firm, association or corporation
         with which Employee is now or may hereafter become associated, cause,
         solicit, entice, or induce any present or future employee of the
         Company, or any corporation affiliated with the Company to leave the
         employ of the Company, or such other corporation to accept employment
         with, or compensation from, the Employee or any such person, firm,
         association or corporation without the prior written consent of the
         Company.

(c)      NON-DISPARAGEMENT. Employee covenants and agrees that Employee shall
         not engage in any pattern of conduct that involves the making or
         publishing of written or oral statements or remarks (including, without
         limitation, the repetition or distribution of derogatory rumors,
         allegations, negative reports or comments) which are disparaging,
         deleterious or damaging to the integrity, reputation or good will of
         the Company, its management, or of management of corporations
         affiliated with the Company.

(d)      PROTECTED INFORMATION. Employee recognizes and acknowledges that
         Employee has had and will continue to have access to various
         confidential or proprietary information concerning the Company and
         corporations affiliated with the Company of a special and unique value
         which may include, without limitation, (i) books and records relating
         to operation, finance, accounting, sales, personnel and management,
         (ii) policies and matters relating particularly to operations such as
         customer service requirements, costs of providing service and
         equipment, operating costs and pricing matters, and (iii) various trade
         or business secrets, including business opportunities, marketing or
         business diversification plans, business development and bidding
         techniques, methods and processes, financial data and the like
         (collectively, the "Protected Information"). Employee therefore
         covenants and agrees that Employee will not at any time, either while
         employed by the Company or afterwards, knowingly make any independent
         use of, or knowingly disclose to any other person or organization
         (except as authorized by the Company) any of the Protected Information.

9. ENFORCEMENT OF COVENANTS.

(a)      TERMINATION OF EMPLOYMENT AND FORFEITURE OF COMPENSATION. Employee
         agrees that any breach by Employee of any of the covenants set forth in
         Section 7 hereof during Employee's employment by the Company, shall be
         grounds for immediate dismissal of Employee and forfeiture of any
         accrued and unpaid salary, bonus, commissions or other compensation of
         such Employee as liquidated damages, which shall be in addition to and
         not exclusive of any and all other rights and remedies the Company may
         have against Employee.

(b)      RIGHT TO INJUNCTION. Employee acknowledges that a breach of the
         covenants set forth in Section 7 hereof will cause irreparable damage
         to the Company with respect to which the Company's remedy at law for
         damages will be inadequate. Therefore, in the event of breach of
         anticipatory breach of the covenants set


                                  Page 8 of 11
<PAGE>   9


         forth in this section by Employee, Employee and the Company agree that
         the Company shall be entitled to the following particular forms of
         relief, in addition to remedies otherwise available to it at law or
         equity; (i) injunctions, both preliminary and permanent, enjoining or
         retraining such breach or anticipatory breach and Employee hereby
         consents to the issuance thereof forthwith and without bond by any
         court of competent jurisdiction; and (ii) recovery of all reasonable
         sums expended and costs, including reasonable attorney's fees, incurred
         by the Company to enforce the covenants set forth in this section.

(c)      SEPARABILITY OF COVENANTS. The covenants contained in Section 7 hereof
         constitute a series of separate covenants, one for each applicable
         State in the United States and the District of Columbia, and one for
         each applicable foreign country. If in any judicial proceeding, a court
         shall hold that any of the covenants set forth in Section 7 exceed the
         time, geographic, or occupational limitations permitted by applicable
         laws, Employee and the Company agree that such provisions shall and are
         hereby reformed to the maximum time, geographic, or occupational
         limitations permitted by such laws. Further, in the event a court shall
         hold unenforceable any of the separate covenants deemed included
         herein, then such unenforceable covenant or covenants shall be deemed
         eliminated from the provisions of this Agreement for the purpose of
         such proceeding to the extent necessary to permit the remaining
         separate covenants to be enforced in such proceeding. Employee and the
         Company further agree that the covenants in Section 7 shall each be
         construed as a separate agreement independent of any other provisions
         of this Agreement, and the existence of any claim or cause of action by
         Employee against the Company whether predicated on this Agreement or
         otherwise, shall not constitute a defense to the enforcement by the
         Company of any of the covenants of Section 7.

10. WITHHOLDING OF TAXES.

The Company may withhold from any compensation and benefits payable under this
Agreement all applicable federal, state, local, or other taxes.


                                  Page 9 of 11
<PAGE>   10


11. NON-DISCLOSURE OF AGREEMENT TERMS.

Employee agrees that Employee will not disclose the terms of this Agreement to
any third party other than Employee's immediate family, attorney, accountants,
or other consultants or advisors or except as may be required by any
governmental authority.

12. SOURCE OF PAYMENTS.

All payments provided under this Agreement, other than payments made pursuant to
a plan which provides otherwise, shall be paid from the general funds of the
Company, and no special or separate fund shall be established, and no other
segregation of assets made, to assure payment. Employee shall have no right,
title or interest whatever in or to any investments which the Company may make
to aid the Company in meeting its obligations hereunder. To the extent that any
person acquires a right to receive payments from the Company hereunder, such
right shall be no greater than the right of an unsecured creditor of the
Company.

13. ASSIGNMENT.

Except as otherwise provided in this Agreement, this Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, representatives, successors and assigns. This Agreement shall not be
assignable by Employee.

14. ENTIRE AGREEMENT; AMENDMENT.

This Agreement shall supersede any and all existing oral or written agreements,
representations, or warranties between Employee and the Company or any of its
subsidiaries or affiliated entities relating to the terms of Employee's
employment by the Company. It may not be amended except by a written agreement
signed by both parties.

15. GOVERNING LAW.

This Agreement shall be governed by and construed in accordance with the laws of
the State of Texas, applicable to agreements made and to be performed in that
State, without regard to its conflict of laws provisions.

16. NOTICES.

Any notice, consent, request or other communication made or given in connection
with this Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by registered or certified mail, return receipt
requested, or by facsimile or by hand delivery, to those listed below at their
following respective addresses or at such other address as each may specify by
notice to the others:

         To the Company:         Waste Management, Inc.
                                 1001 Fannin, Suite 4000
                                 Houston, Texas 77002
                                 Attention: Corporate Secretary

         To Employee:            At the address for Employee set forth below.


                                  Page 10 of 11
<PAGE>   11


17. MISCELLANEOUS.

(a)      WAIVER. The failure of a party to insist upon strict adherence to any
         term of this Agreement on any occasion shall not be considered a waiver
         thereof or deprive that party of the right thereafter to insist upon
         strict adherence to that term or any other term of this Agreement.

(b)      SEPARABILITY. Subject to Section 8 hereof, if any term or provision of
         this Agreement is declared illegal or unenforceable by any court of
         competent jurisdiction and cannot be modified to be enforceable, such
         term or provision shall immediately become null and void, leaving the
         remainder of this Agreement in full force and effect.

(c)      HEADINGS. Section headings are used herein for convenience of reference
         only and shall not affect the meaning of any provision of this
         Agreement.

(d)      RULES OF CONSTRUCTION. Whenever the context so requires, the use of the
         singular shall be deemed to include the plural and vice versa.

(e)      COUNTERPARTS. This Agreement may be executed in any number of
         counterparts, each of which so executed shall be deemed to be an
         original, and such counterparts will together constitute but one
         Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.

CANADIAN WASTE SERVICES, INC.

By:  /s/ Susan Piller
    -----------------------------------------------

Name:  Susan Piller
      ---------------------------------------------

Title:  Senior Vice President of Employee Relations
       --------------------------------------------

Date:  1/25/00
      ---------------------------------------------


EMPLOYEE

     Jeff M. Harris
    -----------------------------------------------

Date:  1/20/00
      ---------------------------------------------

Address:
         ------------------------------------------

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


                                 Page 11 of 11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.1
<SEQUENCE>6
<FILENAME>h84376ex12-1.txt
<DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>

<PAGE>   1
                                                                    EXHIBIT 12.1

                             Waste Management, Inc.

                 Computation of Ratio Earnings to Fixed Charges
                          (In Millions, Except Ratios)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                                              -------------------------------------
                                                                 2000         1999          1998
                                                              ----------   ----------    ----------
<S>                                                           <C>          <C>           <C>
Income (loss) from continuing operations before income
   taxes, undistributed earnings from affiliated companies,
   and minority interest                                      $      344   $     (139)   $     (679)
                                                              ----------   ----------    ----------
Fixed charges deducted from income:
   Interest expense                                                  748          770           682
   Implicit interest in rents                                         74           75            79
                                                              ----------   ----------    ----------
                                                                     822          845           761
                                                              ----------   ----------    ----------
           Earnings available for fixed charges               $    1,166   $      706    $       82
                                                              ==========   ==========    ==========
Interest expense                                              $      748   $      770    $      682
Capitalized interest                                                  22           34            41
Implicit interest in rents                                            74           75            79
                                                              ----------   ----------    ----------
           Total fixed charges                                $      844   $      879    $      802
                                                              ==========   ==========    ==========
Ratio of earnings to fixed charges                                   1.4x         n/a(1)        n/a(2)
                                                              ==========   ==========    ==========
</TABLE>

----------

(1)      The ratio of earnings to fixed charges for 1999 was less than a
         one-to-one ratio. Additional earnings available for fixed charges of
         $173 were needed to have a one-to-one ratio. The earnings available for
         fixed charges were negatively impacted by merger cost of $45 primarily
         related to the merger between Waste Management, Inc. and Waste
         Management Holdings, Inc. during July 1998 and asset impairments and
         unusual items of $739 (see Note 16 to the financial statements).

(2)      The ratio of earnings to fixed charges for 1998 was less than a
         one-to-one ratio. Additional earnings available for fixed charges of
         $720 were needed to have a one-to-one ratio. The earnings available for
         fixed charges were negatively impacted by merger and acquisition
         related costs of $1,807 and unusual items of $864 related primarily to
         the mergers between Waste Management, Inc. and Waste Management
         Holdings, Inc. during July 1998, and Waste Management, Inc. and Eastern
         Environmental Services, Inc. during December 1998.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>7
<FILENAME>h84376ex21-1.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>

<PAGE>   1


                                                                    EXHIBIT 21.1
<TABLE>
<CAPTION>
SUBSIDIARY                                                   STATE OF INCORPORATION
----------                                                   ----------------------
<S>                                                           <C>
1329409 Ontario Inc.                                                 Ontario
3368084 Canada Inc.                                                  Ontario
635952 Ontario Inc.                                                  Ontario
709292 Alberta Ltd.                                                  Alberta
730810 Alberta Ltd.                                                  Alberta
740922 Alberta Ltd.                                                  Alberta
762570 Alberta Ltd.                                                  Alberta
A-1 Compaction, Inc.                                                 New York
Advanced Environmental Technical Services, L.L.C.                    Delaware
Akron Regional Landfill, Inc.                                        Delaware
Alabama Waste Disposal Solutions LLC                                 Arizona
Alliance Sanitary Landfill, Inc.                                     Pennsylvania
All-Waste Systems, Inc.                                              New York
American Canyon Disposal Service, Inc.                               California
American Fiber Supply of Philadelphia, Inc.                          Pennsylvania
American Landfill Gas Co.                                            Ohio
American Landfill, Inc.                                              Ohio
American Waste Control of New York, Inc.                             New York
Anchorage Refuse, Inc.                                               Alaska
Andersen, Incorporated                                               Alaska
Anderson Landfill, Inc.                                              Delaware
Anderson-Cottonwood Disposal Services, Inc.                          California
Antelope Valley Recycling and Disposal Facility, Inc.                California
Arden Landfill, Inc.                                                 Pennsylvania
Arrow Refuse, Inc.                                                   Alaska
Atascadero Waste Alternatives, Inc.                                  California
Atlantic Waste Disposal, Inc.                                        Delaware
Automated Salvage Transport, Inc.                                    Connecticut
Avenal Waste Alternatives, Inc.                                      California
AW Disposal, Inc.                                                    Minnesota
Azusa Land Reclamation, Inc.                                         California
B&B Landfill, Inc.                                                   Delaware
B&C Refuse, Inc.                                                     Colorado
B&E Cartage, Inc.                                                    West Virginia
B&L Disposal Co.                                                     Nevada
Baltimore Environmental Recovery Group, Inc.                         Maryland
Baltimore Refuse Energy Systems Company, Limited Partnership         Maryland
Bayside of Marion, Inc.                                              Florida
Bestan, Inc.                                                         Quebec
Best Recycling & Disposal, Inc.                                      Minnesota
Big Dipper Enterprises, Inc.                                         North Dakota
Big Valley Transport Inc.                                            West Virginia
Bisig Disposal Service, Inc.                                         New York
Bluegrass Containment, L.L.C.                                        Delaware
Bolton Road Landfill, Inc.                                           Delaware
Boone Waste Industries, Inc.                                         Florida
Boothscreek Sanitation, Inc.                                         West Virginia
Borsage & Edmonds Contractors, Inc.                                  Mississippi
Boudin's Waste & Recycling, Inc.                                     Mississippi

</TABLE>
<PAGE>   2
<TABLE>
<S>                                                           <C>
Braddon Enterprises, Inc.                                            West Virginia
Brazoria County Recycling Center, Inc.                               Texas
Brem-Air Disposal, Inc.                                              Oregon
Bridgeport Resco Company, L.P.                                       Delaware
Burnsville Sanitary Landfill, Inc.                                   Minnesota
C&L Disposal Company, Inc.                                           California
C.D.M. Sanitation, Inc.                                              Minnesota
C.I.D. Landfill, Inc.                                                New York
C.I.D. Refuse Service, Inc.                                          New York
Cal Sierra Disposal                                                  California
Cal Sierra Transfer, Inc.                                            California
California Asbestos Monofil, Inc.                                    California
Campbell Wells NORM Corporation                                      Louisiana
Canadian Waste Services Holdings Inc.                                Ontario
Canadian Waste Services Inc.                                         Ontario
Capital City Disposal, L.L.C.                                        Minnesota
Capital Sanitation Company                                           Nevada
Capitol Disposal, Inc.                                               Alaska
Caramella-Ballardini, Ltd.                                           Nevada
Cardinal Ridge Development, Inc.                                     Ohio
Carefree Disposal, Inc.                                              Arizona
Carleton Farms Landfill, Inc.                                        Delaware
Carmel Marina Corporation                                            California
Carolina Grading, Inc.                                               South Carolina
Carver Transfer & Processing, Inc.                                   Minnesota
Cedar Hammock Refuse Disposal Corporation                            Florida
Cedar Ridge Landfill, Inc.                                           Delaware
Central Disposal Systems, Inc.                                       Iowa
Central Missouri Landfill, Inc.                                      Missouri
Central Valley Waste Services, Inc.                                  California
Chadwick Road Landfill, Inc.                                         Georgia
Chambers Clearview Environmental Landfill, Inc.                      Mississippi
Chambers Development Company, Inc.                                   Delaware
Chambers Development of Ohio, Inc.                                   Ohio
Chambers of Mississippi, Inc.                                        Mississippi
Chambers of West Virginia, Inc.                                      West Virginia
Chambers Services, Inc.                                              Delaware
Charlotte Landscaping and Sanitation Services Inc.                   Florida
Chastang Landfill, Inc.                                              Delaware
Chemical Waste Management de Mexico, S.A. de C.V.                    Mexico
Chemical Waste Management of Indiana L.L.C.                          Delaware
Chemical Waste Management of the Northwest, Inc.                     Washington
Chemical Waste Management, Inc.                                      Delaware
Chesser Island Road Landfill, Inc.                                   Georgia
Chiquita Canyon Landfill, Inc.                                       California
CID MRRF, Inc.                                                       Delaware
City Disposal Systems, Inc.                                          Delaware
City Environmental Services Landfill, Inc. of Florida                Florida
City Environmental Services Landfill, Inc. of Hastings               Michigan
City Environmental Services Landfill, Inc. of Lapeer                 Michigan
City Environmental Services Landfill, Inc. of Panama City            Michigan
City Environmental Services Landfill, Inc. of Saginaw                Michigan
City Environmental Services, Inc. of Waters                          Michigan
City Management Corporation                                          Michigan
Clayton-Ward Company, Inc.                                           California
Cleburne Landfill Company Corp.                                      Alabama

</TABLE>
<PAGE>   3
<TABLE>
<S>                                                           <C>
Cleburne Landfill Corporation                                        Michigan
Cloverdale Disposal, Inc.                                            California
CNS Holdings, Inc.                                                   Delaware
CNSI Sub, Inc.                                                       Delaware
Coast Waste Management, Inc.                                         California
Cocopah Landfill, Inc.                                               California
Colorado Landfill, Inc.                                              Delaware
Columbia Regional Transportation, Inc.                               Washington
Commercial Disposal Service, Inc.                                    West Virginia
Connecticut Valley Sanitary Waste Disposal, Inc.                     Massachusetts
Conservation Services, Inc.                                          Colorado
Container Recycling Alliance, L.P.                                   Delaware
Continental Waste Industries Arizona, Inc.                           New Jersey
Copper Mountain Landfill, Inc.                                       Arizona
Coshocton Landfill, Inc.                                             Ohio
Cougar Landfill, Inc.                                                Texas
Countryside Landfill, Inc.                                           Illinois
CWM Chemical Services, L.L.C.                                        Delaware
CWM Resource Recovery, Inc.                                          Delaware
Dafter Sanitary Landfill, Inc.                                       Michigan
Dakota Resource Recovery, Inc.                                       Minnesota
Dauphin Meadows Landfill, Inc.                                       Pennsylvania
Deep Valley Landfill, Inc.                                           Delaware
Deer Track Park Landfill, Inc.                                       Delaware
Deland Landfill, Inc.                                                Delaware
Delaware Recyclable Products, Inc.                                   Delaware
Desert Waste Systems, Inc.                                           California
Dickinson Landfill, Inc.                                             Iowa
Disposal Service, Inc.                                               West Virginia
Disposal Services, Inc.                                              Nevada
Dollar Trucking, Inc.                                                Louisiana
Don's Garbage Service, Inc.                                          Oregon
Donno Company, Inc.                                                  New York
Drake's Sanitation, Inc.                                             Alaska
Duluth Waste Marketing, Inc.                                         Minnesota
Eagle River Refuse, Inc.                                             Alaska
Earthcorp, L.L.C.                                                    Delaware
Earthmovers Landfill, L.L.C.                                         Delaware
East Liverpool Landfill, Inc.                                        Ohio
Eastern Development Services, Inc.                                   Delaware
Eastern Environmental Services of Florida, Inc.                      Florida
Eastern Transfer of New York, Inc.                                   Delaware
Eastern Waste of New York, Inc.                                      Delaware
Eastern Waste of West Virginia, Inc.                                 Delaware
EC Waste, Inc.                                                       Puerto Rico
El Coqui de San Juan                                                 Puerto Rico
El Coqui Landfill Company, Inc.                                      Puerto Rico
El Coqui Waste Disposal, Inc.                                        Puerto Rico
ELDA Landfill, Inc.                                                  Delaware
Elk River Landfill, Inc.                                             Minnesota
Envirofil of Illinois, Inc.                                          Illinois
Envirofil, Inc.                                                      Delaware
Environmental Control, Inc.                                          New Mexico
Equipment Credit Corporation                                         Delaware
Evergreen Landfill, Inc.                                             Delaware
Evergreen Recycling & Disposal Facility, Inc.                        Delaware

</TABLE>
<PAGE>   4
<TABLE>
<S>                                                           <C>

Farmer's Landfill, Inc.                                              Missouri
Feather River Disposal, Inc.                                         California
Fernley Disposal, Inc.                                               Nevada
FFF, Inc.                                                            Minnesota
Front Range Landfill, Inc.                                           Delaware
Frontier Environmental, Inc.                                         Florida
Future-Tech Environmental Services, Inc.                             California
G.C. Environmental, Inc.                                             Texas
GA Landfill, Inc.                                                    Delaware
Gallia Landfill, Inc.                                                Delaware
Garnet of Maryland, Inc.                                             Maryland
Georgia Waste Systems, Inc.                                          Georgia
Gestion Des Rebuts D.M.P. Inc.                                       Quebec
GI Industries, Inc.                                                  Utah
Glen's Sanitary Landfill, Inc.                                       Michigan
Graham Road Recycling and Disposal Facility, Inc.                    Washington
Grand Central Sanitary Landfill, Inc.                                Pennsylvania
Green Valley Disposal Company, Inc.                                  California
Grupo WMX, S.A. de C.V.                                              Mexico
Guadalupe Rubbish Disposal Co., Inc.                                 California
Gulf Disposal, Inc.                                                  Florida
Guyan Transfer and Sanitation Services, Inc.                         West Virginia
Harris Disposal Service, Inc.                                        Florida
Harwood Landfill, Inc.                                               Maryland
Hedco, Ltd.                                                          United Kingdom
Hillsboro Landfill, Inc.                                             Oregon
Hite Construction, Inc.                                              Alaska
Hollister Disposal, Inc.                                             California
Holyoke Sanitary Landfill, Inc.                                      Massachusetts
IN Landfill, L.L.C.                                                  Delaware
Independent Sanitation Company                                       Nevada
Intersan Inc.                                                        Canada
J Bar J Land, Inc.                                                   Nebraska
Jahner Sanitation, Inc.                                              North Dakota
Jay County Landfill, L.L.C.                                          Delaware
John Smith Landfill, Inc.                                            California
Johnson Canyon Road Disposal Site, Inc.                              California
Jones Sanitation, L.L.C.                                             Delaware
Junker Sanitation Services, Inc.                                     Minnesota
K and W Landfill, Inc.                                               Michigan
Kahle Landfill, Inc.                                                 Missouri
Keene Road Landfill, Inc.                                            Florida
Kelly Run Sanitation, Inc.                                           Pennsylvania
Ken's Pickup Service, Inc.                                           Michigan
Key Disposal Ltd.                                                    British Columbia
Kimmins Recycling Corporation                                        Florida
King George Landfill, Inc.                                           Virginia
Klamath Disposal, Inc.                                              Oregon
KN Industrial Services, Inc.                                         Colorado
Knutson Material Recovery Facility, Inc.                             Minnesota
Knutson Services, Inc.                                               Minnesota
L&M Landfill, Inc.                                                   Delaware
Land Reclamation Company, Inc.                                       Delaware
Landfill of Pine Ridge, Inc.                                         Delaware
Landfill Services of Charleston, Inc.                                West Virginia
Landfill Systems, Inc.                                               New Mexico

</TABLE>
<PAGE>   5
<TABLE>
<S>                                                           <C>

Larry's Sanitary Service, Inc.                                       California
Laurel Highlands Landfill, Inc.                                      Pennsylvania
Laurel Ridge Landfill, L.L.C.                                        Delaware
LCS Services, Inc.                                                   West Virginia
Lewis Road Disposal Site, Inc.                                       California
LFG Production, L.P.                                                 Delaware
LG - Garnet of Maryland JV                                           District of Columbia
Liberty Landfill, L.L.C.                                             Delaware
Liberty Lane West Owner's Association                                New Hampshire
Liquid Waste Management, Inc.                                        California
Local Sanitation of Rowan County, L.L.C.                             Delaware
Madison Lane Properties, Inc.                                        California
Mahoning Landfill, Inc.                                              Ohio
Maplewood Landfill, Inc.                                             Virginia
Marangi Brothers, Inc.                                               New Jersey
Massachusetts Refusetech, Inc.                                       Delaware
McDaniel Landfill, Inc.                                              North Dakota
McGill Landfill, Inc.                                                Michigan
McGinnes Industrial Maintenance Corporation                          Texas
Meadowfill Landfill, Inc.                                            Delaware
Michigan Environs, Inc.                                              Michigan
Middle Island Enterprises, Inc.                                      West Virginia
Midwest Transport, Inc.                                              Wisconsin
M-L Commercial Garbage Service, Inc.                                 West Virginia
Modesto Garbage Co., Inc.                                            California
Moor Refuse, Inc.                                                    California
Mountain Indemnity Insurance Company                                 Vermont
Mountain Waste, Inc.                                                 Arizona
Mountainview Landfill, Inc.                                          Maryland
Mountainview Landfill, Inc.                                          Utah
Napa Garbage Service, Inc.                                           California
Napa Valley Disposal Service, Inc.                                   California
National Guaranty Insurance Company                                  Vermont
Neal Road Landfill Corporation                                       California
New England CR, Inc.                                                 Massachusetts
New Milford Landfill, L.L.C.                                         Delaware
NH/VT Energy Recovery Corporation                                    New Hampshire
Nichols Sanitation, Inc.                                             Florida
North Hennepin Recycling and Transfer Corporation, Inc.              Minnesota
Northern Recycling, Inc.                                             New York
Northwestern Landfill, Inc.                                          Delaware
Nu-Way Live Oak Landfill, Inc.                                       Delaware
Oakridge Landfill, Inc.                                              South Carolina
Oakwood Landfill, Inc.                                               South Carolina
Oil & Solvent Process Company                                        California
Okeechobee Landfill, Inc.                                            Florida
Olympic View Sanitary Landfill, Inc.                                 Washington
Orange County Landfill, Inc.                                         Florida
Orange Resource Recovery Systems, Inc.                               California
P&R Environmental Industries, Inc.                                   North Carolina
Pacific Waste Alternatives, Inc.                                     California
Pacific Waste Management, L.L.C.                                     Delaware
Palo Alto Sanitation Company                                         California
Pappy, Inc.                                                          Maryland
Pecan Grove Landfill, Inc.                                           Delaware
Peerless Landfill Company                                            Florida

</TABLE>
<PAGE>   6
<TABLE>
<S>                                                           <C>

Peninsula Sanitation Co., Inc.                                       Alaska
Penn-Warner Club, Inc.                                               Delaware
Pen-Rob, Inc.                                                        Arizona
Penuelas Valley Landfill, Inc.                                       Puerto Rico
People's Landfill, Inc.                                              Delaware
Peterson Demolition, Inc.                                            Minnesota
Phillipps & Cypher, Inc.                                             California
Phoenix Resources, Inc.                                              Pennsylvania
Pine Bluff Landfill, Inc.                                            Georgia
Pine Grove Landfill, Inc.                                            Delaware
Pine Grove Landfill, Inc.                                            Pennsylvania
Pine Ridge Landfill, Inc.                                            Delaware
Pine Tree Acres, Inc.                                                Michigan
Plantation Oaks Landfill, Inc.                                       Delaware
Poly-Jon of Savannah, Inc.                                           Georgia
PPP Corporation                                                      Delaware
Prairie Bluff Landfill, Inc.                                         Delaware
Pulaski Grading, L.L.C.                                              Delaware
Quail Hollow Landfill, Inc.                                          Delaware
Quality Waste Control, Inc.                                          Minnesota
Questquill, Ltd.                                                     United Kingdom
R & B Landfill,  Inc.                                                Georgia
R.S.W. Recycling, Inc.                                               Nevada
Rail Cycle North Ltd.                                                Ontario
Rail Cycle, L.P.                                                     California
RCC Fiber Company, Inc.                                              Delaware
RCI Hudson, Inc.                                                     Massachusetts
Recycle & Recover, Inc.                                              Georgia
Recycle America, Inc.                                                Delaware
Recycle Minnesota Resources, Inc.                                    Minnesota
Re-cy-co, Inc.                                                       Minnesota
Redwood Landfill, Inc.                                               Delaware
Refuse Disposal, Inc.                                                West Virginia
Refuse Energy Systems Company J.V.                                   Massachusetts
Refuse Services, Inc.                                                Florida
Refuse, Inc.                                                         Nevada
Regional Recycling Corporation                                       New Jersey
REI Holdings Inc.                                                    Delaware
Reliable Landfill, L.L.C.                                            Delaware
Reliable Trash Hauling, Inc.                                         Florida
Remote Landfill Services, Inc.                                       Tennessee
Reno Disposal Co.                                                    Nevada
Resco Holdings Inc.                                                  Delaware
Residual Processing, Inc.                                            California
Resource Control Composting, Inc.                                    Massachusetts
Resource Control, Inc.                                               Massachusetts
Reuter Recycling of Florida, Inc.                                    Florida
Richland County Landfill, Inc.                                       South Carolina
RIH, Inc.                                                            Delaware
Riley Energy Systems of Lisbon Corporation                           Delaware
RIS Risk Management, Inc.                                            Delaware
Riverbend Landfill Co., Inc.                                         Oregon
Rolling Meadows Landfill, Inc.                                       Delaware
Ronnie's Sanitation Service, Incorporated                            North Carolina
RRT Design & Construction Corporation                                Delaware
RRT Empire of Monroe County, Inc.                                    New York

</TABLE>
<PAGE>   7
<TABLE>
<S>                                                           <C>

RRT of New Jersey, Inc.                                              New Jersey
RTS Landfill, Inc.                                                   Delaware
Rust Architecture, Inc.                                              Delaware
Rust Capital Corporation                                             Delaware
Rust China, Inc.                                                     Delaware
Rust Engineering & Construction, Inc.                                Delaware
Rust International Holdings Inc.                                     Delaware
Rust International Inc.                                              Delaware
S&J Landfill Limited Partnership                                     Texas
S&S Grading, Inc.                                                    West Virginia
S.V. Farming Corporation                                             New Jersey
Salinas Disposal Service, Inc.                                       California
Sanifill Arizona Acquisition Corporation                             Delaware
Sanifill de Mexico (US), Inc.                                        Delaware
Sanifill de Mexico, S.A. de C.V.                                     Mexico
Sanifill of Florida, Inc.                                            Florida
Sanifill of San Juan, Inc.                                           Puerto Rico
Sanifill Power Corporation                                           Delaware
SC Holdings, Inc.                                                    Pennsylvania
Serrot International, Inc.                                           Illinois
SES Bridgeport, L.L.C.                                               Delaware
SES Connecticut Inc.                                                 Delaware
SF, Inc.                                                             Delaware
Shade Landfill, Inc.                                                 Delaware
Shore Disposal, Inc.                                                 Virginia
Shoreline Disposal Service, Inc.                                     California
Sierra Estrella Landfill, Inc.                                       Arizona
Signal Capital Sherman Station Inc.                                  Delaware
Signal RESCO, Inc.                                                   Delaware
Smyrna Landfill, Inc.                                                Georgia
Sokins Enterprises, Inc.                                             Arizona
Sonoma-Marin Waste Management, Inc.                                  California
Southern Alleghenies Landfill, Inc.                                  Pennsylvania
Southern Plains Landfill, Inc.                                       Oklahoma
Southern Waste Services, L.L.C.                                      Delaware
Spruce Ridge, Inc.                                                   Minnesota
Star Sanitation Services, Inc.                                       Alaska
Stockton Scavenger Association                                       California
Stony Hollow Landfill, Inc.                                          Delaware
Storey County Sanitation, Inc.                                       Nevada
Suburban Landfill, Inc.                                              Delaware
Sun Waste Alternatives, Inc.                                         California
Super Cycle, Inc.                                                    Minnesota
T. R. Walters Investments, Inc.                                      California
The Waste Management Charitable Foundation                           Delaware
The Woodlands of Van Buren, Inc.                                     Michigan
Three River Disposal, Inc.                                           Montana
TNT Sands, Inc.                                                      South Carolina
Tonitown Landfill, Inc.                                              Delaware
Town and Country Refuse, Inc.                                        Florida
Trail Ridge Landfill, Inc.                                           Delaware
TransAmerican Waste Central Landfill, Inc.                           Delaware
TransAmerican Waste Industries Southeast, Inc.                       Delaware
TransAmerican Waste Industries, Inc.                                 Delaware
TransWaste, Inc.                                                     Louisiana
Trash Hunters of Tunica, Inc.                                        Mississippi

</TABLE>
<PAGE>   8
<TABLE>
<S>                                                           <C>

Trash Hunters, Inc.                                                  Mississippi
Tri-County Sanitary Landfill, L.L.C.                                 Delaware
Twin City Sanitation, Inc.                                           Minnesota
United Waste Systems Leasing, Inc.                                   Michigan
United Waste Systems of Gardner, Inc.                                Massachusetts
United Waste Systems of Minneapolis, Inc.                            Minnesota
United Waste Systems of Minnesota, Inc.                              Minnesota
United Waste Systems, Inc.                                           Minnesota
United Waste Transfer, Inc.                                          Minnesota
USA South Hills Landfill, Inc.                                       Delaware
USA Valley Facility, Inc.                                            Pennsylvania
USA Waste - Management Resources, LLC                                New York
USA Waste Geneva Landfill, Inc.                                      Delaware
USA Waste Industrial Services, Inc.                                  Delaware
USA Waste Landfill Operations and Transfer, Inc.                     Texas
USA Waste of Alaska, Inc.                                            Delaware
USA Waste of California, Inc.                                        Delaware
USA Waste of DC, Inc.                                                District of Columbia
USA Waste of Kentucky, L.L.C.                                        Delaware
USA Waste of Maryland, Inc.                                          Maryland
USA Waste of Minnesota, Inc.                                         Minnesota
USA Waste of Mississippi, Inc.                                       Mississippi
USA Waste of New York City, Inc.                                     Delaware
USA Waste of Pennsylvania, LLC                                       Delaware
USA Waste of San Antonio Landfill, Inc.                              Delaware
USA Waste of Texas Landfills, Inc.                                   Delaware
USA Waste of Virginia Landfills, Inc.                                Delaware
USA Waste of Virginia, Inc.                                          Virginia
USA Waste Services North Carolina Landfills, Inc.                    Delaware
USA Waste Services of Nevada, Inc.                                   Nevada
USA Waste Services of NYC, Inc.                                      Delaware
USA Waste Services-Hickory Hills, L.L.C.                             Delaware
UWS Barre, Inc.                                                      Massachusetts
UWSI GI Industries Acquisition Corporation                           California
VAI  VA Projekt AS                                                   Sweden
Valley Garbage and Rubbish Company, Inc.                             California
Van Handel Disposal, Inc.                                            Wisconsin
VAR Projekt A/S                                                      Sweden
Vern's Refuse Service, Inc.                                          North Dakota
VHG, Inc.                                                            Minnesota
Vickery Environmental, Inc.                                          Delaware
Voyageur Disposal Processing, Inc.                                   Minnesota
Voyageur Leasing, Inc.                                               Minnesota
Voyageur Services, Inc.                                              Minnesota
Warner Company                                                       Delaware
Wasco Landfill, Inc.                                                 Delaware
Wasilla Refuse, Inc.                                                 Alaska
Waste Away Group, Inc.                                               Alabama
Waste Control Systems, Inc.                                          Minnesota
Waste Management (W.M.) Israel Ltd.                                  Israel
Waste Management Arizona Landfills, Inc.                             Delaware
Waste Management Asia B.V.                                           Netherlands
Waste Management Austria mbH                                         Austria
Waste Management Collection and Recycling, Inc.                      California
Waste Management Development B.V.                                    Netherlands
Waste Management Disposal Services of Arizona, Inc.                  Delaware

</TABLE>
<PAGE>   9
<TABLE>
<S>                                                           <C>

Waste Management Disposal Services of Colorado, Inc.                 Colorado
Waste Management Disposal Services of Maine, Inc.                    Maine
Waste Management Disposal Services of Maryland, Inc.                 Maryland
Waste Management Disposal Services of Massachusetts, Inc.            Massachusetts
Waste Management Disposal Services of Oregon, Inc.                   Delaware
Waste Management Disposal Services of Pennsylvania, Inc.             Pennsylvania
Waste Management Disposal Services of Virginia, Inc.                 Delaware
Waste Management Disposal Services of Washington, Inc.               Delaware
Waste Management Environmental Services B.V.                         Netherlands
Waste Management Environmental, L.L.C.                               Delaware
Waste Management Financing Corporation                               Delaware
Waste Management Holdings, Inc                                       Delaware
Waste Management Inc. of Florida                                     Florida
Waste Management International B.V.                                  Netherlands
Waste Management International Ltd.                                  Bermuda
Waste Management International, Inc.                                 Delaware
Waste Management International Services (UK) Limited                 United Kingdom
Waste Management Municipal Services of California, Inc.              California
Waste Management New England Environmental Transport, Inc.           Delaware
Waste Management of Almeda County, Inc.                              California
Waste Management of Arizona, Inc.                                    California
Waste Management of Arkansas, Inc                                    Delaware
Waste Management of California, Inc.                                 California
Waste Management of Carolinas, Inc.                                  North Carolina
Waste Management of Central Florida, Inc.                            Florida
Waste Management of Colorado, Inc.                                   Colorado
Waste Management of Connecticut, Inc.                                Delaware
Waste Management of Delaware, Inc.                                   Delaware
Waste Management of Five Oaks Recycling and Disposal Facility, Inc.  Delaware
Waste Management of Florida Holding Company, Inc.                    Delaware
Waste Management of Georgia, Inc.                                    Georgia
Waste Management of Hawaii, Inc.                                     Delaware
Waste Management of Idaho, Inc.                                      Idaho
Waste Management of Illinois, Inc.                                   Delaware
Waste Management of Indiana Holdings One, Inc.                       Delaware
Waste Management of Indiana Holdings Two, Inc.                       Delaware
Waste Management of Indiana, L.L.C.                                  Delaware
Waste Management of Iowa, Inc.                                       Iowa
Waste Management of Kansas, Inc.                                     Kansas
Waste Management of Kentucky Holdings, Inc.                          Delaware
Waste Management of Kentucky, L.L.C.                                 Delaware
Waste Management of Leon County, Inc.                                Florida
Waste Management of Louisiana Holdings One, Inc.                     Delaware
Waste Management of Louisiana, L.L.C.                                Delaware
Waste Management of Maine, Inc.                                      Maine
Waste Management of Maryland, Inc.                                   Maryland
Waste Management of Massachusetts, Inc.                              Massachusetts
Waste Management of Michigan, Inc.                                   Michigan
Waste Management of Minnesota, Inc.                                  Minnesota
Waste Management of Mississippi, Inc.                                Mississippi
Waste Management of Missouri, Inc.                                   Delaware
Waste Management of Montana, Inc.                                    Montana
Waste Management of Nebraska, Inc.                                   Delaware
Waste Management of Nevada, Inc.                                     Nevada
Waste Management of New Hampshire, Inc.                              Connecticut
Waste Management of New Jersey, Inc.                                 Delaware

</TABLE>
<PAGE>   10
<TABLE>
<S>                                                           <C>

Waste Management of New Mexico, Inc.                                 New Mexico
Waste Management of New York, L.L.C.                                 Delaware
Waste Management of North Dakota, Inc.                               Delaware
Waste Management of Ohio, Inc.                                       Delaware
Waste Management of Oklahoma, Inc.                                   Oklahoma
Waste Management of Oregon, Inc.                                     Oregon
Waste Management of Pennsylvania, Inc                                Pennsylvania
Waste Management of Rhode Island, Inc.                               Delaware
Waste Management of South Carolina, Inc.                             South Carolina
Waste Management of South Dakota, Inc.                               South Dakota
Waste Management of Texas, Inc.                                      Texas
Waste Management of Utah, Inc.                                       Utah
Waste Management of Virginia, Inc.                                   Virginia
Waste Management of Washington, Inc.                                 Delaware
Waste Management of West Virginia, Inc.                              Delaware
Waste Management of Wisconsin, Inc.                                  Wisconsin
Waste Management of Wyoming, Inc.                                    Delaware
Waste Management Paper Stock Company, Inc.                           Florida
Waste Management Partners, Inc.                                      Delaware
Waste Management Plastic Products, Inc.                              Delaware
Waste Management Project Services B.V. (Thailand)                    Netherlands
Waste Management Recycling and Disposal Services of California, Inc. California
Waste Management Recycling of New Jersey, Inc.                       New Jersey
Waste Management Service Center, Inc.                                Delaware
Waste Management Services SA                                         Switzerland
Waste Management South America B.V.                                  Netherlands
Waste Management Technology Center, Inc.                             Delaware
Waste Management Transfer of New Jersey, Inc.                        New Jersey
Waste Management, Inc. of Tennessee                                  Tennessee
Waste Resource Technologies                                          California
Waste Resources of Tennessee, Inc.                                   Tennessee
Waste to Energy Holdings, Inc.                                       Delaware
Wastech Inc.                                                         Nevada
Webster Parish Landfill, L.L.C.                                      Delaware
WESI Baltimore Inc.                                                  Delaware
WESI Capital Inc.                                                    Delaware
WESI Peekskill Inc.                                                  Delaware
WESI Westchester Inc.                                                Delaware
West Essex Disposal Co., Inc.                                        New Jersey
Westchester Waste Services Co., L.L.C.                               New York
Western U.P. Landfill, Inc.                                          Michigan
Western Waste Industries                                             California
Westlake Truck Leasing, Inc.                                         California
Wheelabrator Baltimore, L.L.C.                                       Delaware
Wheelabrator Carteret Inc.                                           Delaware
Wheelabrator Cedar Creek Inc.                                        Delaware
Wheelabrator Claremont Company, L.P.                                 Delaware
Wheelabrator Concord Inc.                                            Delaware
Wheelabrator Connecticut Inc.                                        Delaware
Wheelabrator Culm Services Inc.                                      Delaware
Wheelabrator Environmental Systems, Inc.                             Delaware
Wheelabrator Falls Inc.                                              Delaware
Wheelabrator Frackville Energy Company Inc.                          Delaware
Wheelabrator Frackville Properties Inc.                              Delaware
Wheelabrator Gloucester Company, L.P.                                New Jersey
Wheelabrator Gloucester Inc.                                         Delaware

</TABLE>
<PAGE>   11
<TABLE>
<S>                                                           <C>

Wheelabrator Guam Inc.                                               Delaware
Wheelabrator Hudson Energy Company Inc.                              Delaware
Wheelabrator Land Resources Inc.                                     Delaware
Wheelabrator Lassen Inc.                                             Delaware
Wheelabrator Martell Inc.                                            Delaware
Wheelabrator McKay Bay Inc.                                          Florida
Wheelabrator Millbury Inc.                                           Delaware
Wheelabrator New Hampshire Inc.                                      Delaware
Wheelabrator New Jersey Inc.                                         Delaware
Wheelabrator NHC Inc.                                                Delaware
Wheelabrator North Broward, Inc.                                     Delaware
Wheelabrator North Shore Inc.                                        Delaware
Wheelabrator Norwalk Energy Company Inc.                             Delaware
Wheelabrator Penacook Inc.                                           Delaware
Wheelabrator Pinellas Inc.                                           Delaware
Wheelabrator Polk Inc.                                               Delaware
Wheelabrator Putnam Inc.                                             Delaware
Wheelabrator Ridge Energy Inc.                                       Delaware
Wheelabrator Saugus Inc.                                             Delaware
Wheelabrator Shasta Energy Company Inc.                              Delaware
Wheelabrator Sherman Station One Inc.                                Delaware
Wheelabrator Sherman Station Two Inc.                                Delaware
Wheelabrator Shrewsbury Inc.                                         Delaware
Wheelabrator South Broward Inc.                                      Delaware
Wheelabrator Spokane Inc.                                            Delaware
Wheelabrator Technologies International, Inc.                        Delaware
Wheelabrator Technologies Inc.                                       Delaware
White Lake Landfill, Inc.                                            Michigan
Williams Landfill, L.L.C.                                            Delaware
Williwaw Services, Inc.                                              Alaska
WM International Holdings, Inc.                                      Delaware
WM Landfills of Georgia, Inc.                                        Delaware
WM Landfills of Michigan, Inc.                                       Delaware
WM Landfills of Ohio, Inc.                                           Delaware
WM Landfills of Tennessee, Inc.                                      Delaware
WM Partnership Holdings, Inc.                                        Delaware
WM Resources, Inc.                                                   Pennsylvania
WM Thailand B.V.                                                     Netherlands
WM Trading, Inc.                                                     Delaware
WM Transportation Services, Inc.                                     Delaware
WMI Mexico Holdings, Inc.                                            Delaware
WMNA Container Recycling, Inc.                                       Delaware
WMNA Rail-Cycle Sub, Inc.                                            Delaware
WTI Air Pollution Control, Inc.                                      Delaware
WTI International Holdings Inc.                                      Delaware
WTI Rust Holdings Inc.                                               Delaware
Wynne's Rubbish & Recycling, Inc.                                    Minnesota
Yell County Landfill, Inc                                            Arkansas
Zenith/Kremer Material Recovery, Inc.                                Minnesota
Zenith/Kremer Waste Systems, Inc.                                    Minnesota
</TABLE>




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>8
<FILENAME>h84376ex23-1.txt
<DESCRIPTION>CONSENT OF ARTHUR ANDERSEN LLP
<TEXT>

<PAGE>   1
                                                                    EXHIBIT 23.1


                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
report included in this Annual Report on Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (Registration Nos.
33-84944, 333-45062, 333-45064 and 333-45066), previously filed Registration
Statements on Form S-3 (Registration Nos. 333-00097, 333-08573, 333-32471,
333-52197, 333-80063, 333-17421, 33-85018, 33-42988, 33-76226, 33-76224), and
previously filed Registration Statements on Form S-4 (Registration Nos.
333-31979 and 333-32805, 333-63981, 333-60103, 333-14109).

ARTHUR ANDERSEN LLP

Houston, Texas
March 13, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>9
<FILENAME>h84376ex27.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WASTE MANAGEMENT, INC. FOR THE YEAR ENDED DECEMBER 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000

<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-START>                             JAN-01-2000
<PERIOD-END>                               DEC-31-2000
<CASH>                                              94
<SECURITIES>                                         0
<RECEIVABLES>                                    1,703
<ALLOWANCES>                                       128
<INVENTORY>                                         75
<CURRENT-ASSETS>                                 2,457
<PP&E>                                          16,985
<DEPRECIATION>                                   6,859
<TOTAL-ASSETS>                                  18,565
<CURRENT-LIABILITIES>                            2,937
<BONDS>                                          8,485
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                             6
<OTHER-SE>                                       4,795
<TOTAL-LIABILITY-AND-EQUITY>                    18,565
<SALES>                                              0
<TOTAL-REVENUES>                                12,492
<CGS>                                                0
<TOTAL-COSTS>                                   11,454
<OTHER-EXPENSES>                                  (31)
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 748
<INCOME-PRETAX>                                    321
<INCOME-TAX>                                       418
<INCOME-CONTINUING>                               (97)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                      (97)
<EPS-BASIC>                                     (0.16)
<EPS-DILUTED>                                   (0.16)


</TABLE>
</TEXT>
</DOCUMENT>
</SUBMISSION>
