<PAGE>   1
                                  UNITED STATES

                       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 Exchange Act
of 1934 [Fee Required]

For the fiscal year ended       December 31, 1995
                                       or

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]

For the transition period from         to

Commission File Number               2-33059

                   GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                 HAWAII                                  99-0049500
     (STATE OR OTHER JURISDICTION OF        (I.R.S. EMPLOYER IDENTIFICATION NO.)
     INCORPORATION OR ORGANIZATION)

600 Hidden Ridge, HQE04B12 - Irving, Texas                 75038   
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)
                                                         
Registrant's telephone number, including area code      214-718-5600

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

                                                  NAME OF EACH EXCHANGE ON
           TITLE OF EACH CLASS                        WHICH REGISTERED

                  NONE

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

                                      NONE
                                (TITLE OF CLASS)

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 REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.  X
           ---

THE COMPANY HAD 10,000,000 SHARES OF $25 PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 29, 1996. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE CORPORATION.

THE COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>   2
                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
Item                                                                                    Page
<S>                                                                                     <C>
Part I

       1.     Business                                                                     1

       2.     Properties                                                                   4

       3.     Legal Proceedings                                                            4

       4.     Submission of Matters to a Vote of Security Holders - This item
              has been omitted in accordance with the relief provisions under
              General Instruction J of Form 10-K

Part II

       5.     Market for the Registrant's Common Equity and Related                        5
              Shareholder Matters

       6.     Selected Financial Data - This item has been omitted in accordance
              with the relief provisions under General Instruction J of Form
              10-K

       7.     Management's Discussion and Analysis of Financial                            6
              Condition and Results of Operations

       8.     Financial Statements and Supplementary Data                                 11

       9.     Changes in and Disagreements with Accountants on                            31
              Accounting and Financial Disclosure

Part III

The following items have been omitted in accordance with the relief provisions
under General Instruction J of Form 10-K:

      10.     Directors and Executive Officers of the Registrant

      11.     Executive Compensation

      12.     Security Ownership of Certain Beneficial Owners and Management

      13.     Certain Relationships and Related Transactions

Part IV

      14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K             32
</TABLE>
<PAGE>   3
PART I

Item 1.  Business

GTE Hawaiian Telephone Company Incorporated (the Company) (formerly Hawaiian
Telephone Company) was incorporated under the laws of the Kingdom of Hawaii in
1883. The Company is a wholly-owned subsidiary of GTE Corporation (GTE) and
provides communications services in Hawaii and in the Pacific and Asia.

The Company owns a majority interest in the Micronesian Telecommunications
Corporation (MTC). MTC, which is headquartered on Saipan in the Commonwealth of
the Northern Marianas, provides local and international telecommunications
services on the islands of Saipan, Tinian and Rota. In addition, the Company has
a wholly-owned subsidiary, GTE Hawaiian Tel Insurance Company Incorporated,
which provides auto liability, general liability and workers' compensation
insurance to the Company on a direct basis.

   
The Company's principal line of business is providing communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for various industries. The Company provides local
telephone service on each island in Hawaii and provides intraLATA (Local Access
and Transport Area) toll service among the islands. InterLATA toll services
between Hawaii and domestic points within the United States are provided by
interexchange carriers (IXCs) which connect to the Company's local facilities
for call origination and termination. The IXCs are charged fees (access charges)
for interconnection to the Company's local facilities. Business and residential
customers also pay access charges to connect to the local network to obtain long
distance service. The Company also provides interLATA toll service between
Hawaii and international termination points in competition with interLATA common
carriers. These international revenues are settled between the Company and
interLATA common carriers through revenue sharing arrangements. The Company
earns other revenues by leasing interexchange plant facilities and providing
such services as billing and collection and operator services to interexchange
carriers. At December 31, 1995, the Company served 780,580 access lines in its
service territories.
    

At December 31, 1995, the Company had 3,025 employees.

The Company has written agreements with the International Brotherhood of
Electrical Workers (IBEW) covering substantially all non-management employees.
In 1994, the contracts with the IBEW expired. An agreement has not yet been
reached and negotiations will continue during 1996.


REGULATORY AND COMPETITIVE TRENDS

The Company is subject to regulation by the Public Utilities Commission (PUC) of
the State of Hawaii as to its intrastate business operations and by the Federal
Communications Commission (FCC) as to its interstate and international
operations.

Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition and
opportunities available to the Company. Presently, the Company is subject to
competition from numerous sources, including competitive access providers (CAPs)
for network access services and specialized communications companies that have
constructed new systems in certain markets to bypass the local-exchange network.
In addition, competition from alternative local-exchange carriers (ALECs),
interexchange carriers (IXCs), wireless and cable TV companies, as well as more
recent entry by media and computer companies, is expected to increase in the
rapidly changing telecommunications marketplace.

On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect the
future development of local and long distance services, cable television and
information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law


                                        1
<PAGE>   4
removes many of the statutory and court-ordered barriers to competition between
segments of the industry, enabling local-exchange, long distance, wireless and
cable companies to compete in offering voice, video and information services.

The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.

A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide, on
a non-exclusive basis, a full array of telecommunications services in support of
GTE's entry into the interLATA long distance market. In March 1996, GTE, through
a separate subsidiary, began offering long distance service to its customers in
selected markets. GTE plans to offer the service, marketed under the name GTE
Easy Savings Plan(sm), in all 28 states where it currently offers local
telephone service by December 1996.

The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including Hawaii. During the first quarter of
1995, the PUC authorized AT&T and Sprint Communications Company, L.P., d.b.a.
Long Distance/USA (Sprint) to provide interisland toll service on a 10XXX basis,
effective March 1, 1995. The PUC reserves the right to modify or rescind the
authority depending on the impact to the Company. On February 14, 1995, the PUC
approved the Company's request to lower its toll rates and make changes to its
various calling plans to keep them competitive with AT&T's rates. On February
22, 1995, the PUC granted MCI Communications Corporations' application to
provide interisland toll service on a 10XXX basis.

Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into GTE markets.

For the provision of interstate and international access services, the Company
operates under the terms of the FCC's price cap incentive plan. The "price cap"
mechanism serves to limit the rates a carrier may charge, rather than just
regulating the rate of return which may be achieved. Under this approach, the
maximum prices that the local-exchange carrier (LEC) may charge are increased or
decreased each year by a price index based upon inflation less a predetermined
productivity target. LECs have limited pricing flexibility provided they do not
exceed the allowed price cap. The FCC is considering how the price cap plan
should be modified in the future in order to adapt the system to the emergence
of competition.

Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 10 of the Company's consolidated financial statements included
in Item 8.

The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable conditions.

The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.


                                        2
<PAGE>   5
INITIATIVES

In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.

Restructuring and Cost Control

During 1995, the Company continued the implementation of its $78.3 million
re-engineering program. Since the program began in 1994, costs of $38.9 million
have been charged to the restructuring reserve --$28.5 million related to
customer service processes, $3.9 million related to administrative processes and
$6.5 million related to the consolidation of facilities and operations and other
related costs. These costs were primarily associated with the closure and
relocation of various centers, software enhancements and separation benefits
associated with workforce reductions. The continued implementation of this
program positions the Company to accelerate delivery of a full array of voice,
video and data services and to reach its stated objective of being the easiest
company to do business with in the industry.

World Class Network

During 1995, the Company deployed its ISDN-based World Class Network in
Honolulu, Hawaii, to provide advanced communications for business customers.
This program includes sophisticated high-speed, digital fiber-optic rings, a
high-capacity switching network (known as SONET), and a new centralized
operations center that monitors the entire network. These SONET rings are an
integral part of the high-speed information network that enables the Company to
provide advanced services such as high-speed data transmission and video
conferencing.


ENVIRONMENTAL MATTERS

GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have not
been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.




                                        3
<PAGE>   6
Item 2.  Properties

The Company's property consists of land, structures and equipment required to
provide various telecommunications services. All of the aforementioned
properties, located in the state of Hawaii and islands of Saipan, Tinian and
Rota, are generally in good operating condition and adequate to satisfy the
needs of the business. Substantially all of the Company's property is subject to
liens of its respective mortgages securing funded debt. From January 1, 1991 to
December 31, 1995, the Company made capital expenditures of $788 million for new
plant and facilities required to meet telecommunications service needs and to
modernize plant and facilities. These additions were equal to 39% of gross plant
of $2 billion at December 31, 1995.

In response to recently enacted and pending legislation and the increasingly
competitive environment, the Company discontinued the use of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71) in the fourth quarter of 1995.

In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of certain
costs based upon approvals received from regulators to recover such costs in the
future. As a result of these requirements, the recorded net book value of
certain assets and liabilities, primarily telephone plant and equipment, were in
many cases higher than that which would otherwise have been recorded based on
their economic lives. See Note 2 to the Company's consolidated financial
statements included elsewhere herein for further detail.

Item 3.  Legal Proceedings

There are no pending legal proceedings, either for or against the Company, which
would have a material impact on the Company's consolidated financial statements.




                                        4
<PAGE>   7
PART II


Item 5. Market for the Registrant's Common Equity and Related Shareholder
        Matters

Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation (GTE).


SHAREHOLDER SERVICES

The First National Bank of Boston, Transfer Agent and Registrar for GTE and the
Company's common stock, should be contacted with any questions relating to
shareholder accounts. This includes the following:

-        Account information
-        Dividends
-        Market prices
-        Transfer instructions
-        Statements and reports
-        Change of address

Shareholders may call toll-free at 1-800-225-5160 anytime, seven days a week.
Customer Service Representatives are available Monday through Friday between the
hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States call
1-617-575-2990.

Or write to:
         Bank of Boston
         c/o Boston EquiServe, L.P.
         P.O. Box 9121
         Mail Stop 45-02-60
         Boston, MA 02205-9121

For overnight delivery services, use the following address:
         Bank of Boston
         c/o Boston EquiServe, L.P.
         Blue Hills Office Park
         150 Royall Street
         Canton, MA 02021

The Bank of Boston address where shareholders, banks and brokers may deliver
certificates is One Exchange Place, 55 Broadway in New York City.

PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1995 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call
1-800-225-5160.

INFORMATION VIA THE INTERNET
Internet World Wide Web users can access information on GTE Corporation through
the following universal resource:
         http://www.gte.com




                                        5
<PAGE>   8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Dollars in Millions)

BUSINESS OPERATIONS

GTE Hawaiian Telephone Company Incorporated (the Company), a wholly-owned
subsidiary of GTE Corporation (GTE), provides a full range of telecommunications
products and services in Hawaii and in the Pacific and Asia. The Company's
majority-owned subsidiary, Micronesian Telecommunications Corporation (MTC), is
headquartered on Saipan and provides local and international telecommunications
services on the islands of Saipan, Tinian and Rota. In addition, the Company has
a wholly-owned subsidiary, GTE Hawaiian Tel Insurance Company Incorporated,
which provides auto liability, general liability and workers' compensation
insurance to the Company on a direct basis. At December 31, 1995, the Company
served 780,580 access lines in its service territories.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                                        ------------------------
                                                        1995               1994
                                                        ----               ----
<S>                                                   <C>                  <C>  
         Net income (loss)                            $(225.5)             $29.8
</TABLE>                                           


The net loss for 1995 includes an extraordinary after-tax charge of $263.4 for
the discontinuance of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (FAS 71) in the
fourth quarter of 1995. Excluding this charge, net income increased 27% or $8.1
in 1995. The 1995 increase is primarily due to higher revenues and sales
resulting from continued customer growth and lower operating costs and expenses,
partially offset by increased depreciation and amortization expenses.

REVENUES AND SALES

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                                        ------------------------
                                                         1995              1994
                                                         ----              ----
<S>                                                     <C>               <C>   
         Local services                                 $244.1            $225.9
         Network access services                         134.6             128.8
         Toll services                                    96.3             121.9
         Other services and sales                        136.8             127.6
                                                        ------            ------
                                                                       
             Total revenues and sales                   $611.8            $604.2
</TABLE> 

Total revenues and sales increased 1% or $7.6 in 1995.

   
Local service revenues are based on fees charged to customers for providing
local-exchange service within designated franchise areas. The Company has not
had a rate increase since 1985. For further discussion of rate matters, see Note
10 of the Company's consolidated financial statements included in Item 8. Local
service revenues increased 8% or $18.2 in 1995. This increase is primarily a
result of the Public Utility Commission (PUC) of the State of Hawaii allowing
recovery of the Company's accrual for Postretirement Benefits Other Than
Pensions (OPEB). The PUC approved the Company's plan to reflect an additional
$10.7 of OPEB expense in its rates, retroactive to January 1, 1995, resulting in
$10.7 of increased revenues for 1995. Revenues in 1995 also increased due to
continued customer growth as reflected by a 3% increase in access lines, which
generated $3.7 in additional revenues, and a $2.9 increase in sales of
nontraditional services including CentraNet(R), and data and custom calling
features, such as SmartCall(R).
    


                                        6
<PAGE>   9
Network access service revenues are based on fees charged to interexchange
carriers that use the Company's local-exchange network in providing long
distance services to their customers. In addition, business and residential
customers pay end-user access fees to connect to the local network to obtain
long distance service. Network access service revenues increased 5% or $5.8 in
1995. This increase is primarily a result of an 8% increase in minutes of use,
which generated $7 in additional revenues. Partially offsetting these increases
are declines in interstate access revenues associated with price reductions of
$2.8.

The Company provides intraLATA (Local Access and Transport Area) toll service
among the islands. The Company also provides interLATA toll service between
Hawaii and international termination points in competition with interLATA common
carriers. These international revenues are settled between the Company and
interLATA common carriers through revenue sharing arrangements. Toll service
revenues decreased 21% or $25.6 in 1995. This decline is primarily due to lower
international toll volumes of $10.5 and lower domestic toll volumes of $6.1. The
lower domestic toll volumes are a result of economic conditions and competition
with long distance carriers who became authorized to provide interisland toll
service on a 10XXX basis. In anticipation of this competition, the Company
lowered its intraLATA toll rates by 11% which further reduced revenues by $4.7.

Other services and sales revenues increased 7% or $9.2 in 1995. This increase is
primarily a result of growth in Radio Paging services of $6.5 and revenues
recognized in 1995 for life extensions of 1994 directories of $5.7. Revenues
also increased $5 from international service contracts initiated in 1995.
Partially offsetting these increases are declines from international service
contracts, which were not renewed in 1995, of $9.0.

OPERATING COSTS AND EXPENSES

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                                        ------------------------
                                                         1995              1994
                                                         ----              ----
<S>                                                     <C>               <C>   
         Cost of services and sales                     $273.6            $280.7
         Selling, general and administrative             122.6             128.2
         Depreciation and amortization                   123.9             116.5
                                                        ------            ------
                                                                                
             Total operating costs and expenses         $520.1            $525.4
</TABLE>                                                                  

Total operating costs and expenses decreased 1% or $5.3 in 1995. This decrease
is primarily due to higher costs in 1994 of $14.8 relating to the resolution of
certain amounts owed to and from interexchange carriers. Partially offsetting
these decreases are increases in depreciation and amortization of $7.4 primarily
resulting from increased plant investments in 1995 and higher provisions for
uncollectible customer and long distance carrier receivables of $2.9 in 1995.

OTHER EXPENSES

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                                        ------------------------
                                                        1995               1994
                                                        ----               ----
<S>                                                     <C>                <C>   
         Interest - net                                 $39.5              $35.0
         Income taxes                                    15.0               12.6
</TABLE>

Interest - net increased 13% or $4.5 in 1995. This increase is primarily due to
higher debt levels resulting from the issuance of long-term debt in August 1995
and higher average commercial paper levels and rates in 1995.

Income taxes increased 19% or $2.4 in 1995. This increase is a result of higher
pre-tax income and a smaller portion of income from nontaxable foreign
operations. Partially offsetting this increase were higher reversals of tax rate
differentials.




                                        7
<PAGE>   10
REGULATORY AND COMPETITIVE TRENDS

The Company is subject to regulation by the Public Utilities Commission (PUC) of
the State of Hawaii as to its intrastate business operations and by the Federal
Communications Commission (FCC) as to its interstate and international
operations.

Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition and
opportunities available to the Company. Presently, the Company is subject to
competition from numerous sources, including competitive access providers (CAPs)
for network access services and specialized communications companies that have
constructed new systems in certain markets to bypass the local-exchange network.
In addition, competition from alternative local-exchange carriers (ALECs),
interexchange carriers (IXCs), wireless and cable TV companies, as well as more
recent entry by media and computer companies, is expected to increase in the
rapidly changing telecommunications marketplace.

On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect the
future development of local and long distance services, cable television and
information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered barriers
to competition between segments of the industry, enabling local-exchange, long
distance, wireless and cable companies to compete in offering voice, video and
information services.

The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.

A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide, on
a non-exclusive basis, a full array of telecommunications services in support of
GTE's entry into the interLATA long distance market. In March 1996, GTE, through
a separate subsidiary, began offering long distance service to its customers in
selected markets. GTE plans to offer the service, marketed under the name GTE
Easy Savings Plan(sm), in all 28 states where it currently offers local
telephone service by December 1996.

The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including Hawaii. During the first quarter of
1995, the PUC authorized AT&T and Sprint Communications Company, L.P., d.b.a.
Long Distance/USA (Sprint) to provide interisland toll service on a 10XXX basis,
effective March 1, 1995. The PUC reserves the right to modify or rescind the
authority depending on the impact to the Company. On February 14, 1995, the PUC
approved the Company's request to lower its toll rates and make changes to its
various calling plans to keep them competitive with AT&T's rates. On February
22, 1995, the PUC granted MCI Communications Corporations' application to
provide interisland toll service on a 10XXX basis.

Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into GTE markets.




                                        8
<PAGE>   11
For the provision of interstate and international access services, the Company
operates under the terms of the FCC's price cap incentive plan. The "price cap"
mechanism serves to limit the rates a carrier may charge, rather than just
regulating the rate of return which may be achieved. Under this approach, the
maximum prices that the local-exchange carrier (LEC) may charge are increased or
decreased each year by a price index based upon inflation less a predetermined
productivity target. LECs have limited pricing flexibility provided they do not
exceed the allowed price cap. The FCC is considering how the price cap plan
should be modified in the future in order to adapt the system to the emergence
of competition.

Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 10 of the Company's consolidated financial statements included
in Item 8.

The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable conditions.

The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.


INITIATIVES

In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.

Restructuring and Cost Control

During 1995, the Company continued the implementation of its $78.3
re-engineering program. Since the program began in 1994, costs of $38.9 have
been charged to the restructuring reserve --$28.5 related to customer service
processes, $3.9 related to administrative processes and $6.5 related to the
consolidation of facilities and operations and other related costs. These costs
were primarily associated with the closure and relocation of various centers,
software enhancements and separation benefits associated with workforce
reductions. The continued implementation of this program positions the Company
to accelerate delivery of a full array of voice, video and data services and to
reach its stated objective of being the easiest company to do business with in
the industry.

World Class Network

During 1995, the Company deployed its ISDN-based World Class Network in
Honolulu, Hawaii, to provide advanced communications for business customers.
This program includes sophisticated high-speed, digital fiber-optic rings, a
high-capacity switching network (known as SONET), and a new centralized
operations center that monitors the entire network. These SONET rings are an
integral part of the high-speed information network that enables the Company to
provide advanced services such as high-speed data transmission and video
conferencing.


ENVIRONMENTAL MATTERS

GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have not
been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.




                                        9
<PAGE>   12
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss be
recognized when circumstances indicate that the carrying amount of an asset may
not be recoverable. In discontinuing the application of FAS 71, the Company used
a methodology similar to FAS 121 in determining the amount of asset impairments.
Accordingly, the issuance of FAS 121 will not have a significant impact on the
Company's consolidated financial statements.

In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by FAS
123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.


INFLATION

The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.




                                       10
<PAGE>   13
Item 8.  Financial Statements and Supplementary Data


GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME

   
<TABLE>
<CAPTION>
Years Ended December 31                          1995        1994        1993
-----------------------                          ----        ----        ----
                                                    (Thousands of Dollars)
<S>                                           <C>          <C>         <C>     
Revenues and sales (a):
  Local services                              $ 244,106    $225,913    $214,627
  Network access services                       134,588     128,840     112,712
  Toll services                                  96,252     121,871     106,867
  Other services and sales                      136,814     127,587     142,227
                                              ---------    --------    --------

    Total revenues and sales                    611,760     604,211     576,433
                                              ---------    --------    --------
                                                                     
Operating costs and expenses (b):                                    
  Cost of services and sales                    273,636     280,648     273,091
  Selling, general and administrative           122,603     128,247     109,145
  Depreciation and amortization                 123,876     116,478     104,202
  Restructuring                                      --          --      78,275
                                              ---------    --------    --------

    Total operating costs and expenses          520,115     525,373     564,713
                                              ---------    --------    --------

Operating income                                 91,645      78,838      11,720
                                                                     
Other (income) expense:                                              
  Interest - net                                 39,500      35,039      27,107
  Other - net                                      (779)      1,387        (480)
                                              ---------    --------    --------

Income (loss) before income taxes                52,924      42,412     (14,907)
  Income taxes (benefit)                         15,023      12,613      (9,865)
                                              ---------    --------    --------

Income (loss) before extraordinary               37,901      29,799      (5,042)
   charge 
  Extraordinary charge                         (263,419)         --          --
                                              ---------    --------    --------

Net income (loss)                             $(225,518)   $ 29,799    $ (5,042)
                                              =========    ========    ========
</TABLE>
    

(a) Includes billings to affiliates of $41,958, $38,420 and $38,198 for the
years 1995-1993, respectively.

(b) Includes billings from affiliates of $45,446, $37,322 and $33,174 for the
years 1995-1993, respectively.


See Notes to Consolidated Financial Statements.


                                       11
<PAGE>   14
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31                                                 1995         1994
-----------                                                 ----         ----
                                                         (Thousands of Dollars)
<S>                                                      <C>          <C>       
ASSETS
Current assets:
  Cash and temporary investments                         $    4,515   $    7,709
  Receivables, less allowances of $6,338 and $9,010         150,560      137,478
  Inventories and supplies                                    8,829        7,998
  Deferred income tax benefits                               18,157       12,061
  Prepaid taxes                                              11,707       12,507
  Other                                                       3,620        2,285
                                                         ----------   ----------

    Total current assets                                    197,388      180,038
                                                         ----------   ----------

Property, plant and equipment, net                          809,445    1,205,827

Prepaid pension costs                                       141,083      114,804

Other assets                                                  6,899       26,580
                                                         ----------   ----------

Total assets                                             $1,154,815   $1,527,249
                                                         ==========   ==========

LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Short-term obligations, including current maturities   $  123,764   $  211,929
  Accounts payable                                           19,744       25,785
  Affiliate payables and accruals                            17,787       16,875
  Advanced billings and customer deposits                    17,762       16,764
  Taxes payable                                              15,927       15,310
  Accrued interest                                           11,786        7,341
  Accrued payroll costs                                      31,351       24,497
  Accrued restructuring costs                                39,353       19,890
  Other                                                      13,009       18,527
                                                         ----------   ----------

    Total current liabilities                               290,483      356,918
                                                         ----------   ----------

Non-current liabilities:
  Long-term debt                                            482,412      371,840
  Deferred income taxes                                      78,114      214,548
  Restructuring costs                                            --       40,926
  Other liabilities                                          30,378       20,378
                                                         ----------   ----------

    Total non-current liabilities                           590,904      647,692
                                                         ----------   ----------

Shareholder's equity:
  Common stock (10,000,000 shares issued)                   250,000      250,000
  Additional paid-in capital                                 41,146       41,146
  Retained earnings (deficit)                               (17,718)     231,493
                                                         ----------   ----------

    Total shareholder's equity                              273,428      522,639
                                                         ----------   ----------

Total liabilities and shareholder's equity               $1,154,815   $1,527,249
                                                         ==========   ==========
</TABLE>






See Notes to Consolidated Financial Statements.


                                       12
<PAGE>   15
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
<TABLE>
<CAPTION>
Years Ended December 31                                      1995         1994         1993
-----------------------                                      ----         ----         ----
                                                                   (Thousands of Dollars)
<S>                                                       <C>          <C>          <C>       
Operations:
   Income (loss) before extraordinary charge              $  37,901    $  29,799    $  (5,042)
   Adjustments to reconcile income (loss) before
     extraordinary charge to net cash from operations:
     Depreciation and amortization                          123,876      116,478      104,202
     Deferred income taxes                                   22,112       13,405        4,264
     Restructuring costs                                         --           --       78,275
     Provision for uncollectible accounts                     9,119        5,673       12,679
     Change in current assets and current liabilities:
              Receivables - net                             (13,154)     (19,362)     (29,413)
              Other current assets                           (1,366)        (885)       1,767
              Accrued taxes and interest                      5,062        5,225         (430)
              Other current liabilities                     (23,337)     (20,408)       5,896
     Other - net                                            (22,189)     (16,043)     (36,755)
                                                          ---------    ---------    ---------

     Net cash from operations                               138,024      113,882      135,443
                                                          ---------    ---------    ---------

Investing:
Capital expenditures                                       (130,127)    (171,667)    (190,612)
                                                          ---------    ---------    ---------

     Cash used in investing                                (130,127)    (171,667)    (190,612)
                                                          ---------    ---------    ---------

Financing:
Common stock issued                                              --           --       40,000
Long-term debt issued                                       148,236           --      123,466
Long-term debt retired                                       (8,301)     (12,702)     (19,143)
Dividends                                                   (23,693)     (20,631)     (24,648)
Increase (decrease) in short-term obligations,
 excluding current maturities                              (127,333)      98,019      (67,944)
                                                          ---------    ---------    ---------

     Net cash from (used in) financing                      (11,091)      64,686       51,731
                                                          ---------    ---------    ---------


Increase (decrease) in cash and temporary investments        (3,194)       6,901       (3,438)

Cash and temporary investments:
   Beginning of year                                          7,709          808        4,246
                                                          ---------    ---------    ---------

   End of year                                            $   4,515    $   7,709    $     808
                                                          =========    =========    =========


Cash paid (refunded) during the year for:
   Interest                                               $  37,321    $  35,737    $  28,459
   Income taxes                                               9,945        4,960      (11,086)
</TABLE>
    


See Notes to Consolidated Financial Statements.


                                       13
<PAGE>   16
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                     Additional   Retained
                                            Common    Paid-In     Earnings
                                            Stock     Capital     (Deficit)    Total
                                            -----     -------     ---------    -----
                                                (Thousands of Dollars)
                                                                 
<S>                                        <C>        <C>        <C>         <C>      
Shareholder's equity, December 31, 1992    $210,000   $40,809    $ 252,135   $ 502,944
Net loss                                                            (5,042)     (5,042)
Dividends declared                                                 (29,768)    (29,768)
Issuance of common stock                     40,000                             40,000
Other                                                      12                       12
                                           --------   -------     --------   ---------
Shareholder's equity, December 31, 1993     250,000    40,821      217,325     508,146
                                                                 
Net income                                                          29,799      29,799
Dividends declared                                                 (15,631)    (15,631)
Other                                                     325                      325
                                           --------   -------     --------   ---------
Shareholder's equity, December 31, 1994     250,000    41,146      231,493     522,639
                                                                 
Net loss                                                          (225,518)   (225,518)
Dividends declared                                                 (23,693)    (23,693)
                                           --------   -------     --------   ---------
Shareholder's equity, December 31, 1995    $250,000   $41,146    $ (17,718)  $ 273,428
                                           ========   =======    =========   =========
</TABLE>                                                       






See Notes to Consolidated Financial Statements.

                                       14
<PAGE>   17
GTE Hawaiian Telephone Company Incorporated and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

GTE Hawaiian Telephone Company Incorporated (the Company) provides a wide
variety of communications services, in Hawaii and in the Pacific and Asia,
ranging from local telephone service for the home and office to highly complex
voice and data services for various industries. The Company owns a majority
interest in the Micronesian Telecommunications Corporation (MTC), headquartered
in Saipan, which provides local and international telecommunications services to
the islands of Saipan, Tinian and Rota. In addition, the Company has a
wholly-owned subsidiary, GTE Hawaiian Tel Insurance Company Incorporated, which
provides auto liability, general liability and workers' compensation insurance
to the Company on a direct basis. At December 31, 1995 the Company served
780,580 access lines in its service territories. The Company is a wholly-owned
subsidiary of GTE Corporation (GTE).


BASIS OF PRESENTATION

The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles which require that management make
estimates and assumptions that affect reported amounts. Actual results could
differ from those estimates.

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany items have been eliminated.

The Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71), in the fourth quarter of 1995 (see Note 2). The 1995
financial presentation reflects account classifications consistent with
unregulated enterprises operating in a competitive environment. Specifically,
uncollectible revenue accounts have been reclassified from revenues and sales to
selling, general and administrative expenses. Reclassifications of prior-year
data have been made, where appropriate, to conform to the 1995 presentation.


TRANSACTIONS WITH AFFILIATES

Certain affiliated companies, which are not subsidiaries of the Company, supply
construction and maintenance equipment, supplies and electronic repair services
to the Company. These purchases and services amounted to $27.7 million, $27.1
million and $42.4 million for the years 1995-1993, respectively. Such purchases
and services are recorded in the accounts of the Company, at cost, which
includes a normal return realized by the affiliates.

The Company is billed for certain printing and other costs associated with
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension management
services from other affiliated companies. These charges amounted to $45.4
million, $37.3 million and $33.2 million for the years 1995-1993, respectively.
The amounts charged for these affiliated transactions are based on a
proportional cost allocation method.

The Company's consolidated financial statements include allocated expenses based
on the sharing of certain executive, administrative, financial, accounting,
marketing, personnel, engineering, and other support services being performed at
consolidated work centers among the domestic GTE Telephone Operating Companies.
The amounts charged for these affiliated transactions are based on a
proportional cost allocation method as filed with the Federal Communications
Commission.



                                       15
<PAGE>   18
The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. Revenues from these activities
amounted to $42 million, $38.4 million and $38.2 million for the years
1995-1993, respectively.


DEPRECIATION AND AMORTIZATION

The Company has historically provided for depreciation on a straight-line basis
over asset lives approved by regulators. Beginning in 1996, the Company will
provide for depreciation on a straight-line basis over the estimated economic
lives of its assets (see Note 2). Maintenance and repairs of property are
charged to income as incurred. Additions to, replacements and renewals of
property are charged to telephone plant accounts. Property retirements are
charged in total to the accumulated depreciation account. No adjustment to
depreciation is made at the time properties are retired or otherwise disposed
of, except in the case of significant sales or extraordinary retirements of
property where profit or loss is recognized.

Franchises, goodwill and other intangibles are amortized on a straight-line
basis over the periods to be benefited, or 40 years, whichever is less.


REVENUE RECOGNITION

Revenues are recognized when earned. This is generally based on usage of the
Company's local-exchange networks or facilities. For other products and
services, revenues are generally recognized when services are rendered or
products are delivered to customers.


INVENTORIES AND SUPPLIES

Inventories and supplies are stated at the lower of cost, determined principally
by the average cost method, or net realizable value.


EMPLOYEE BENEFIT PLANS

Pension and postretirement health care and life insurance benefits earned during
the year as well as interest on accumulated benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Material curtailment/settlement gains
and losses associated with employee separations are recognized in the period in
which they occur.

The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS 112), effective January
1, 1993. FAS 112 requires employers to accrue the future cost of benefits
provided to former or inactive employees and their dependents after employment
but before retirement. Previously, the cost of these benefits was charged to
expense as paid. The impact of this change in accounting on the Company's
results of operations was immaterial.




                                       16
<PAGE>   19
INCOME TAXES

The Company's results are included in GTE's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with GTE and remits
tax payments to GTE based on its tax liability on a separate company basis.

Deferred tax assets and liabilities are established for temporary differences
between financial and tax reporting bases and are subsequently adjusted to
reflect changes in tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established for any deferred tax
asset for which realization is not likely. Deferred income taxes are not
provided on undistributed earnings of the Company's foreign subsidiary,
approximately $27 million at December 31, 1995, as such earnings are expected to
be permanently reinvested in the foreign subsidiary.


COMPUTER SOFTWARE

The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.

CASH AND TEMPORARY INVESTMENTS

Cash and temporary investments include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss be
recognized when circumstances indicate that the carrying amount of an asset may
not be recoverable. In discontinuing the application of FAS 71, the Company used
a methodology similar to FAS 121 in determining the amount of asset impairments.
Accordingly, the issuance of FAS 121 will not have a significant impact on the
Company's consolidated financial statements.

In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by FAS
123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.


2.  EXTRAORDINARY CHARGE

In response to recently enacted and pending legislation (see Note 10) and the
increasingly competitive environment, the Company discontinued the use of FAS 71
in the fourth quarter of 1995.

In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of certain
costs based upon approvals received from regulators to recover such costs in the
future. As a result of these requirements, the recorded net book value of
certain assets and liabilities, primarily telephone plant and equipment, were in
many cases higher than that which would otherwise have been recorded based on
their economic lives.




                                       17
<PAGE>   20
As a result of the decision to discontinue FAS 71, the Company recorded a
non-cash, after-tax extraordinary charge of $263.4 million (net of tax benefits
of $167.8 million) in the fourth quarter of 1995. The charge primarily
represents a reduction in the net book value of telephone plant and equipment
through an increase in accumulated depreciation. The amount of the charge was
based on an analysis of the discounted cash flows expected to be generated by
the embedded telephone plant and equipment over their remaining economic lives.
In addition to the one-time charge, the Company, beginning in 1996, will shorten
the depreciable lives of its telephone plant and equipment as follows as a
result of the discontinuance of FAS 71:

<TABLE>
<CAPTION>
                                                 Depreciable Lives
                                            ---------------------------
                                            Average
           Asset Category                   Before                After
           --------------                   ------                -----
<S>                                         <C>                   <C>
           Copper                            20-30                 15
           Switching                         17-19                 10
           Circuit                           11-13                  8
           Fiber                             25-30                 20
</TABLE>


3.  RESTRUCTURING COSTS

As previously reported, results for 1993 included a one-time pre-tax
restructuring charge of $78.3 million, which reduced net income by $48.2
million, primarily for incremental costs related to implementation of the
Company's three year re-engineering plan. The re-engineering plan will redesign
and streamline processes to improve customer-responsiveness and product quality,
reduce the time necessary to introduce new products and services and further
reduce costs. The major components of the estimated cost to implement the
re-engineering plan and activity since inception are as follows (dollars in
millions):

<TABLE>
<CAPTION>
                                 December 31,                       December 31,
Component                            1993           Activity            1995
---------                        ------------       --------        ------------
<S>                              <C>                <C>             <C>  
Customer service                    $52.8           $(28.5)            $24.3
Administrative                       19.0             (3.9)             15.1
Other                                 6.5             (6.5)               --
                                    -----           ------             -----
    Total                           $78.3           $(38.9)            $39.4
                                    =====           ======             =====
</TABLE>                                                              

Implementation of the re-engineering plan began during 1994 and is expected to
be substantially completed by the end of 1996. Costs of $38.9 million have been
incurred since the plan's inception. These expenditures were primarily
associated with the closure and relocation of various service centers, software
enhancements and separation benefits related to employee reductions.


4.  COMMON STOCK

The authorized common stock of the Company consists of 18,000,000 shares with a
par value of $25 per share. The Company issued $40 million in common stock to
GTE in 1993. All outstanding shares of common stock are held by GTE.

There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.




                                       18
<PAGE>   21
5.  DEBT

Long-term debt as of December 31 was as follows:

<TABLE>
<CAPTION>
                                                                                        1995                 1994
                                                                                        ----                 ----
                                                                                          (Thousands of Dollars)
<S>                                                                                   <C>                  <C>     
First mortgage bonds:
    4 1/2 % Series Q,  due 1995                                                       $     --             $  5,000
    5 5/8 % Series R,  due 1997                                                         16,000               16,000
    6 3/4 % Series S,  due 1998                                                         20,000               20,000
    8 3/4 % Series T,  due 2000                                                         35,000               35,000
    8     % Series U,  due 2001                                                         20,000               20,000
    8 1/2 % Series V,  due 2006                                                         35,000               35,000
    9     % Series AA, due 2000                                                         75,000               75,000
    6 3/4 % Series BB, due 2005                                                        125,000              125,000

Debentures:
      7   % Series A,  due 2006                                                        150,000                   --

Other:
    5% Rural Utilities Services first mortgage bond, maturing through 2018               9,585                9,806
    Rural Telephone Bank first mortgage bonds,
         maturing through 2025, rates ranging from 5.43% to 7.5%                        31,906               32,933
    GTE Leasing Corporation financing agreements, maturing
         through 2001, rates ranging from 8.8% to 10.32%                                 4,831                6,164
    Other                                                                                  801                1,520
                                                                                      --------             --------

  Total principal amount                                                               523,123              381,423

Less: discount and premium - net                                                        (2,911)              (1,904)
                                                                                      --------             --------

  Total                                                                                520,212              379,519

Less: current maturities of long-term debt                                             (37,800)              (7,679)
                                                                                      --------             --------

  Total long-term debt                                                                $482,412             $371,840
                                                                                      ========             ========
</TABLE>


In August 1995, the Company issued $150 million of 7% Series A Debentures, due
2006, toward the repayment of short-term debt incurred for the purpose of
financing the Company's construction program.

The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures. None of
the securities shown above were held in sinking or other special funds of the
Company or pledged by the Company. Debt discount and premium on the Company's
outstanding long-term debt are amortized over the lives of the respective
issues. Substantially all of the Company's telephone plant is subject to the
liens of the indentures under which the bonds listed above were issued.

Estimated payments of long-term debt during the next five years are: $37.8
million in 1996; $18.6 million in 1997; $22 million in 1998; $2.1 million in
1999; and $77.2 million in 2000.

On March 1, 1996, the Company redeemed prior to stated maturity the $35 million
8 3/4% Series T first mortgage bond.




                                       19
<PAGE>   22
<TABLE>
<CAPTION>
                                                          1995            1994
                                                          ----            ----
                                                         (Thousands of Dollars)
<S>                                                     <C>             <C>     
Commercial paper - average rate 5.9%                    $     --        $204,250
Notes payable to banks - average rate 6.1%                85,964              --
Current maturities of long-term debt                      37,800           7,679
                                                        --------        --------
  Total                                                 $123,764        $211,929
                                                        ========        ========
</TABLE>

A $3.5 billion credit line is available to the Company through shared lines of
credit with GTE and other affiliates. Most of these arrangements require payment
of annual commitment fees of .1% of the unused lines of credit.


6.   FINANCIAL INSTRUMENTS

The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1995, the estimated fair
value of long-term debt based on either quoted market prices or an option
pricing model, exceeded the carrying value by approximately $12 million. The
estimated fair value of long-term debt as of December 31, 1994 was lower than
the carrying value by approximately $26 million.




                                       20
<PAGE>   23
7.   INCOME TAXES

The income tax provision (benefit) is as follows:

   
<TABLE>
<CAPTION>
                                                    1995       1994       1993
                                                    ----       ----       ----
                                                      (Thousands of Dollars)
<S>                                               <C>        <C>        <C>      
Current:
  Federal                                         $   709    $ 3,195    $ (6,730)
  State                                            (7,798)    (3,987)     (7,399)
                                                  -------    -------    --------
                                                   (7,089)      (792)    (14,129)
                                                  -------    -------    --------
Deferred:
  Federal                                          14,101      8,253          88
  State                                             8,869      5,970       5,247
                                                  -------    -------    --------
                                                   22,970     14,223       5,335
                                                  -------    -------    --------

Amortization of deferred investment tax credits      (858)      (818)     (1,071)
                                                  -------    -------    --------
    Total                                         $15,023    $12,613    $ (9,865)
                                                  =======    =======    ========
</TABLE>
    


A reconciliation between taxes computed by applying the statutory federal income
tax rate to pre-tax income and income taxes provided in the consolidated
statements of income is as follows:

<TABLE>
<CAPTION>
                                                                    1995       1994       1993
                                                                    ----       ----       ----
                                                                      (Thousands of Dollars)
<S>                                                               <C>        <C>        <C>     
Amounts computed at statutory rates                               $18,523    $14,844    $(5,217)
  State income taxes, net of federal income tax benefits              696      1,288     (6,554)
  Amortization of deferred investment tax credits                    (858)      (818)    (1,071)
  Depreciation of telephone plant construction costs
    previously deducted for tax purposes - net                      1,297      1,516      1,728
  Rate differentials applied to reversing temporary differences    (1,752)    (1,267)    (1,046)
  Undistributed earnings of foreign subsidiary                     (2,259)    (4,154)    (2,424)
  Other differences - net                                            (624)     1,204      4,719
                                                                  -------    -------    ------- 
Total provision (benefit)                                         $15,023    $12,613    $(9,865)
                                                                  =======    =======    =======
</TABLE>


The tax effects of temporary differences that give rise to the current deferred
income tax benefits and deferred income tax liabilities at December 31 are as
follows:

<TABLE>
<CAPTION>
                                                        1995             1994
                                                        ----             ----
                                                        (Thousands of Dollars)
<S>                                                   <C>              <C>     
Depreciation and amortization                         $ 11,958         $160,418
Employee benefit obligations                           (15,552)          (9,278)
Prepaid pension costs                                   52,563           42,390
Restructuring costs                                    (15,312)         (23,664)
Investment tax credits                                   3,569            5,193
Capital goods excise tax credits                        30,434           24,523
Other - net                                             (7,703)           2,905
                                                      --------         --------
    Total                                             $ 59,957         $202,487
                                                      ========         ========
</TABLE>


                                       21
<PAGE>   24
8.  EMPLOYEE BENEFIT PLANS

RETIREMENT PLANS

The Company sponsors noncontributory defined benefit plans covering
substantially all employees. The benefits to be paid under these plans are
generally based on years of credited service and average final earnings. The
Company's funding policy, subject to the minimum funding requirements of U.S.
employee benefit and tax laws, is to contribute such amounts as are determined
on an actuarial basis to provide the plans with assets sufficient to meet the
benefit obligations of the plans. The assets of the plans consist primarily of
corporate equities, government securities and corporate debt securities.

The components of the net pension credit for 1995-1993 were as follows:

<TABLE>
<CAPTION>
                                                   1995       1994       1993
                                                   ----       ----       ----
                                                     (Thousands of Dollars)
<S>                                             <C>         <C>        <C>     
Benefits earned during the year                 $   9,915   $ 11,988   $ 13,919
Interest cost on projected benefit obligations     28,421     26,565     31,254
Return on plan assets:
  Actual                                         (130,646)     1,168    (98,181)
  Deferred                                         79,499    (49,374)    48,102
Other - net                                       (11,779)    (9,087)   (11,429)
                                                ---------   --------   --------
  Total - net                                   $ (24,590)  $(18,740)  $(16,335)
                                                =========   ========   ========
</TABLE>

The expected long-term rate of return on plan assets was 8.5% for 1995 and 1994,
and 8.25% for 1993.

The funded status of the plans and the net prepaid pension costs at December 31,
were as follows:

<TABLE>
<CAPTION>
                                                            1995         1994
                                                            ----         ----
                                                         (Thousands of Dollars)
<S>                                                      <C>          <C>       
Vested benefit obligations                               $(303,917)   $(254,739)
                                                         =========    =========

Accumulated benefit obligations                          $(313,751)   $(264,373)
                                                         =========    =========

Plan assets at fair value                                $ 721,656    $ 607,449
Less: projected benefit obligations                        402,635      346,595
                                                         ---------    ---------
Excess of assets over projected benefit obligations        319,021      260,854
Unrecognized net transition asset                          (28,216)     (36,322)
Unrecognized net gain                                     (149,722)    (109,728)
                                                         ---------    ---------
  Total - net                                            $ 141,083    $ 114,804
                                                         =========    =========
</TABLE>

Assumptions used to develop the projected benefit obligations at December 31,
were as follows:

<TABLE>
<CAPTION>
                                                          1995             1994
                                                          ----             ----
<S>                                                       <C>              <C>  
Discount rate                                             7.50%            8.25%
Rate of compensation increase                             5.25%            5.50%
</TABLE>




                                       22
<PAGE>   25
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (FAS 106). FAS 106 requires that the expected costs of these benefits
be charged to expense during the years that the employees render service. The
Company elected to adopt this new accounting standard on the delayed recognition
method and commencing January 1, 1993, began amortizing the estimated unrecorded
accumulated postretirement benefit obligation over twenty years. Prior to the
adoption of FAS 106, the cost of these benefits was charged to expense as paid.

Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.

The postretirement benefit cost for 1995-1993 included the following components:

<TABLE>
<CAPTION>
                                                                    1995       1994       1993
                                                                    ----       ----       ----
                                                                      (Thousands of Dollars)
<S>                                                               <C>        <C>        <C>    
Benefits earned during the year                                   $ 1,862    $ 2,595    $ 3,275
Interest cost on accumulated postretirement benefit obligations    15,458     16,374     15,320
Actual return on plan assets                                       (5,705)     1,086       (925)
Amortization of transition obligation                               7,500      7,598     11,466
Other - net                                                         4,416       (722)        --
                                                                  -------    -------    -------
  Total - net                                                     $23,531    $26,931    $29,136
                                                                  =======    =======    =======
</TABLE>

The following table sets forth the plans' funded status and the accrued
postretirement benefit obligations as of December 31:

<TABLE>
<CAPTION>
                                                                     1995         1994
                                                                     ----         ----
                                                                  (Thousands of Dollars)
<S>                                                               <C>          <C>      
Accumulated postretirement benefit obligations attributable to:
  Retirees                                                        $ 100,385    $ 105,544
  Fully eligible active plan participants                           104,801       86,350
  Other active plan participants                                     22,157       23,485
                                                                  ---------    ---------
Total accumulated postretirement benefit obligations                227,343      215,379
Less: fair value of plan assets                                      51,102       35,193
                                                                  ---------    ---------
Excess of accumulated obligations over plan assets                  176,241      180,186
Unrecognized transition obligation                                 (126,421)    (135,971)
Unrecognized prior service cost                                     (12,252)     (13,629)
Unrecognized net loss                                               (13,192)     (19,161)
                                                                  ---------    ---------
  Total                                                           $  24,376    $  11,425
                                                                  =========    =========
</TABLE>

The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 7.5% at December 31, 1995 and 8.25% at December 31,
1994. The assumed health care cost trend rates in 1995 and 1994 were 11% and
12%, respectively, for pre-65 participants and 8.5% and 9.0%, respectively, for
post-65 retirees, each rate declining on a graduated basis to an ultimate rate
in the year 2004 of 6%. A one percentage point increase in the assumed health
care cost trend rates for each future year would have increased 1995 costs by $3
million and the accumulated postretirement benefit obligations at December 31,
1995 by $35.5 million.




                                       23
<PAGE>   26
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees retiring on or after January
1, 1995. These changes include, among others, newly established limits to the
Company's annual contribution to postretirement medical costs and a revised cost
sharing schedule based on a retiree's years of service. The resulting
unrecognized prior service benefits are being amortized over the remaining
service lives of the employees.

SAVINGS PLANS

The Company sponsors employee savings plans under section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time employees. Under the
plans, the Company provides matching contributions in GTE common stock based on
qualified employee contributions. Matching contributions charged to income were
$3 million, $3 million and $3.5 million in 1995-1993, respectively.


9.  PROPERTY, PLANT AND EQUIPMENT

The Company's property, plant and equipment is summarized as follows at December
31:

<TABLE>
<CAPTION>
                                                          1995           1994
                                                          ----           ----
                                                        (Thousands of Dollars)
<S>                                                    <C>            <C>       
Land                                                   $   11,551     $   10,782
Buildings                                                 155,302        150,120
Plant & equipment                                       1,583,187      1,521,458
Other                                                     217,761        226,063
                                                       ----------     ----------
  Total                                                 1,967,801      1,908,423
  Accumulated depreciation (see Note 2)                 1,158,356        702,596
                                                       ----------     ----------
  Total property, plant and equipment - net            $  809,445     $1,205,827
                                                       ==========     ==========
</TABLE>

Depreciation provisions in 1995-1993 were equivalent to a composite average
percentage of 6.3%, 6.5% and 6.2%, respectively.




                                       24
<PAGE>   27
10.  REGULATORY AND COMPETITIVE MATTERS

The Company is subject to regulation by the Public Utilities Commission (PUC) of
the State of Hawaii with respect to intrastate business operations and by the
Federal Communications Commission (FCC) for its interstate and international
business operations, earth station ownership and the use of authorized radio
frequencies.

INTRASTATE SERVICES

Rate Matters

On May 11, 1993, the Company filed a general rate increase application with the
PUC, requesting approval to increase intrastate revenues by $50.4 million. This
represented a 15.9% increase over intrastate revenues for 1993 at current rates,
and was the first rate increase application the Company has filed since 1985.
The Company's rate restructure proposal and earnings investigation which were in
progress were incorporated into the rate case docket. Hearings took place in
March and April 1994. On June 14, 1994, the PUC ordered that the Company
continue its rates at existing levels and denied the Consumer Advocate's
recommendation for an interim revenue decrease.

On October 14, 1994, the Company filed a Notice of Intent to file another rate
case with the PUC. The Company also filed a Motion for Waiver of Commission
Rules and for approval of 1995 to be the test year. The waiver requested that
the Company be allowed the option to file its rate case application in early
1995 without having to use a split 1995/1996 test year. On November 29, 1994,
the PUC approved the Company's request for the waiver of its test year rules.

On November 29, 1994, the PUC issued an order approving the adoption of accrual
accounting for Postretirement Benefits Other Than Pensions (FAS 106) for
ratemaking purposes. The PUC's order directed the Company to file plans for
reflecting the full impact of FAS 106 in rates to be effective January 1, 1995.
The PUC approved on January 19, 1995, the Company's plan to reflect an
additional $10.7 million of Postretirement Benefits Other Than Pensions in its
rates, retroactive to January 1, 1995.

On June 9, 1995, the PUC issued a decision on the Company's 1993 Rate Case. The
PUC ordered that the Company's existing rate of return, rate base, and rate
structure remain unchanged until the next rate case. The Company notified the
PUC on July 10, 1995 that it would appeal the decision to the Supreme Court and
the Intermediate Court of Appeals of the State of Hawaii. It is anticipated that
the PUC may take up to one year to prepare the record for the court, from which
time the Company will have forty days to file its brief. Anticipated resolution
will take approximately one to two years.

On September 29, 1995, the Company filed an application to increase its rates by
$74 million in its 1995 Rate Case. The PUC approved bifurcation of the
proceeding into a revenue requirement phase (Phase I) and a rate design phase
(Phase II). The PUC held public hearings on Phase I in late 1995. The Department
of Defense (DOD), AT&T Communications of Hawaii (AT&T) and Pacwest
Telecommunications Corporation (Pacwest) filed motions to intervene in this
proceeding. On January 12, 1996, the PUC granted the DOD intervention in both
phases but limited AT&T and Pacwest to participating in the formulation of
issues for Phase I. The PUC indicated that after the issues are approved, AT&T
and Pacwest may file motions to intervene if it appears that the issues will
significantly impact their interests. They will also have the opportunity to
file for intervention in Phase II after public hearings for that phase are held.
The Company anticipates that it will file its Phase II proposal in mid-1996.


Other

On May 11, 1993, the PUC initiated a communications infrastructure proceeding
which was intended to investigate such issues as: what markets should be opened
to competition; who should be allowed to compete in those markets; and what
rules, if any, should apply. Parties filed opening testimony on these matters on
March 24, 1995 and rebuttal testimony on April 28, 1995. Evidentiary hearings
were held beginning May 22, 1995 and concluding on June 7, 1995. A



                                       25
<PAGE>   28
position statement and reply were filed on June 22, 1995 and July 7, 1995,
respectively. On October 26, 1995, the PUC issued draft rules that will govern
the introduction of and transition to competition in the intrastate
telecommunications market, and the implementation of a state universal service
fund, under the PUC's direction and oversight. Parties submitted suggested
revisions and comments on the draft rules on November 15, 1995. Public hearings
on the proposed rules occurred during the first quarter of 1996. A final
resolution is expected in 1996.

During the first quarter of 1995, the PUC authorized AT&T and Sprint
Communications Company, L.P., d.b.a. Long Distance/USA (Sprint) to provide
interisland toll service on a 10XXX basis, effective March 1, 1995. The PUC
reserves the right to modify or rescind the authority depending on the impact to
the Company. On February 14, 1995, the PUC approved the Company's request to
lower its toll rates and make changes to its various calling plans to keep them
competitive with AT&T's rates. On February 22, 1995, the PUC granted MCI
Communication Corporations' application to provide interisland toll service on a
10XXX basis.

On March 20, 1995, the PUC authorized the expansion of the operating authority
of Pacwest to allow Pacwest to provide both data and voice digital transmission
services on a point-to-point basis. Pacwest is now seeking approval to provide
intrastate telecommunications services within the state. On August 17, 1995, the
PUC granted the application of Time Warner Communications of Hawaii, L.P.,
d.b.a. Oceanic Communications (Oceanic) to provide digital and analog intrastate
dedicated transport in the City & County of Honolulu. Thereafter, on November
27, 1995, the PUC granted Oceanic's request to expand its geographic authority
to provide dedicated transport services within the entire state. On September
29, 1995, Oceanic submitted an application to expand its authority to provide
direct and resold local-exchange services within the state. After granting the
Company's motion to intervene, the PUC stayed the proceedings until further
notice.

In September 1992, the PUC initiated an investigation of the Company's provision
of telephone service in the rural areas in the state. On November 2, 1994, the
PUC issued its ruling in this proceeding, requesting the Company to convert all
existing rural multi-party lines to single-party over a three-year period. The
ruling further allowed the Company to collect one-half of the cost of conversion
from existing multi-party customers choosing to convert to single-party service.
The estimated remaining costs of up to $20.2 million will be recovered from
general ratepayers statewide through a three-year monthly surcharge. On February
24, 1995, the PUC approved the Company's Rural Service Plan (RSP). On September
1, 1995, the Company began assessing a three-year general ratepayer surcharge,
while issuing its first offers to convert customers to single-line service in
those rural areas that were upgraded pursuant to the RSP 1995 construction
schedule. Construction activities under the RSP will continue through 1997.

The PUC opened a docket on December 12, 1994, and ordered the Company to show
cause why the PUC should not authorize an alternate telecommunications provider
for the rural areas of the state. On December 13, 1995, the PUC issued a
decision allowing a telecommunications carrier other than the Company to seek
authorization to provide service in the Ka'u area on the island of Hawaii. The
PUC plans to accept bid proposals through May 15, 1996 from carriers --
including the Company -- who are interested in serving the first rural area for
which an alternative telecommunications provider may be authorized. A provider
for the Ka'u area will be selected by the PUC shortly thereafter.


INTERSTATE AND INTERNATIONAL SERVICES

For the provision of interstate and international services, the Company operates
under the terms of the FCC's price cap incentive plan. The "price cap" mechanism
serves to limit the rates a carrier may charge, rather than just regulating the
rate of return which may be achieved. Under this approach, the maximum price
that the LEC may charge is increased or decreased each year by a price index
based upon inflation less a predetermined productivity target. LECs have limited
pricing flexibility provided they do not exceed the allowed price cap.




                                       26
<PAGE>   29
In March 1995, the FCC adopted interim rules to be utilized by LECs including
the Company for their 1995 Annual Price Cap Filing. The interim rules allowed
LECs to select from three productivity/sharing options for each tariff entity.
Each of the three options required an increase to the 3.3% productivity factor
elected by the Company since 1991. The Company selected the following
productivity factors and sharing thresholds for use in the 1995-1996 tariff
year:

<TABLE>
<CAPTION>
                                                    Sharing Parameters
  Tariff                Productivity       -------------------------------------
  Entity                   Factor                 50%                 100%
----------              ------------       ------------------    ---------------
<S>                     <C>                <C>                   <C>
Hawaii                      4.0%           12.25 - 13.25% ROR    Over 13.25% ROR
Micronesia                  5.3%           None                  None
</TABLE>

Since the Company's access fees were priced below the FCC's maximum price, the
near-term impact of productivity increases are not expected to be significant.
Under the interim rules, the Company filed tariffs to reduce rates by $5 million
annually, effective August 1, 1995. On September 20, 1995, the FCC released its
proposed rulemaking proceeding on price caps which proposes specific changes to
reflect and encourage emerging competition in local and access service markets
and to establish the path towards decreased regulation of LECs' services. On
September 27, 1995, the FCC solicited comments on a number of specific issues
regarding methods for establishing the price caps, such as productivity
measurements, sharing, the common line formula, and exogenous costs. The Company
anticipates the FCC will issue an order prior to the July 1996 annual filing.

On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect the
future development of local and long distance services, cable television and
information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered barriers
to competition between segments of the industry, enabling local-exchange, long
distance, wireless and cable companies to compete in offering voice, video and
information services.

The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.

A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide, on
a non-exclusive basis, a full array of telecommunications services in support of
GTE's entry into the interLATA long distance market. In March 1996, GTE, through
a separate subsidiary, began offering long distance service to its customers in
selected markets. GTE plans to offer the service, marketed under the name GTE
Easy Savings Plan(sm), in all 28 states where it currently offers local
telephone service by December 1996.


SIGNIFICANT CUSTOMER

Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1995-1993 under
various arrangements and amounted to $47.5 million, $46 million, and $44
million, respectively.




                                       27
<PAGE>   30
11. COMMITMENTS AND CONTINGENCIES

   
The Company has noncancelable leases covering certain buildings, office space
and equipment. Rental expense was $12.8 million, $15.7 million, and $14 million
in 1995-1993, respectively. Minimum rental commitments under noncancelable
leases through 2000 do not exceed $3.1 million annually and aggregate $43.8
million thereafter.
    

The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and/or environmental, safety and health matters. Management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the results of operations or the financial position of the
Company.

Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the Company's
operations face increasing competition in virtually all aspects of its business.
The Company supports greater competition in telecommunications provided that,
overall, the actions to eliminate existing legal and regulatory barriers allow
an opportunity for all service providers to participate equally in a competitive
marketplace under comparable conditions.


                                       28
<PAGE>   31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
GTE Hawaiian Telephone Company Incorporated:

We have audited the accompanying consolidated balance sheets of GTE Hawaiian
Telephone Company Incorporated (a Hawaii corporation and wholly-owned subsidiary
of GTE Corporation) and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholder's equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements and the schedule and exhibit referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the schedule and exhibit based on our
audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Hawaiian Telephone Company
Incorporated and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

As discussed in Note 2 to the consolidated financial statements, in 1995, the
Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation".

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule and exhibit listed under
Item 14 are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not a required part of the basic financial
statements. The supporting schedule and exhibit have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state 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

Dallas, Texas
January 24, 1996




                                       29
<PAGE>   32
MANAGEMENT REPORT


To Our Shareholder:

The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report on
Form 10-K, including the consolidated financial statements covered by the Report
of Independent Public Accountants. These statements were prepared in conformity
with generally accepted accounting principles and include amounts that are based
on the best estimates and judgments of management.

The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Company has also instituted
policies and guidelines which require employees to maintain the highest level of
ethical standards.




WARREN H. HARUKI
President




GERALD K. DINSMORE
Senior Vice President - Finance and Planning




                                       30
<PAGE>   33
Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

None.




                                       31
<PAGE>   34
PART IV


Item 14.          Exhibits, Financial Statement Schedules and Reports on Form 
                  8-K

(a)      (1)      Financial Statements - See GTE Hawaiian Telephone Company
                  Incorporated's consolidated financial statements and report of
                  independent accountants thereon in the Financial Statements
                  section included elsewhere herein.

         (2)      Financial Statement Schedules - Schedules supporting the
                  consolidated financial statements for the years ended December
                  31, 1995-1993 (as required):

                  II - Valuation and Qualifying Accounts

   Note: Schedules other than the one listed above are omitted as not
         applicable, not required, or the information is included in the
         consolidated financial statements or notes thereto.

         (3)      Exhibits - Included in this report or incorporated by
                  reference.

                  3.1*     Articles of Incorporation and Bylaws (Exhibit 3.2 of
                           the 1987 Form 10-K, File No. 2- 33059)

                  3.2*     Amended By-laws (Exhibit 3.2 of the 1994 Form 10-K,
                           File No. 2-33059)

                  10       Material Contracts - Agreements Between GTE and
                           Certain Executive Officers

                  12       Statements re: Calculation of the Consolidated Ratio
                           of Earnings to Fixed Charges

                  23       Consent of Independent Public Accountants

                  26       Revised Form of Invitation for Bids pertaining to
                           Registration Statement on Form S-3 (File No.
                           33-57743)

                  27       Financial Data Schedule

(b)               Reports on Form 8-K

                  On November 13, 1995, the Company filed a report on Form 8-K
                  dated November 9, 1995, under Item 5 "Other Events". Financial
                  information was filed with this report.

*  Denotes exhibits incorporated herein by reference to previous filings with
   the Securities and Exchange Commission as designated.




                                       32
<PAGE>   35
GTE Hawaiian Telephone Company Incorporated and Subsidiaries

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 1995, 1994 and 1993
(Thousands of Dollars)

   
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
             Column A                      Column B              Column C                 Column D      Column E
-------------------------------------------------------------------------------------------------------------------
                                                                 Additions
                                                        ----------------------------
                                                                                         Deductions
                                          Balance at                                        from
                                          Beginning     Charged to      Charged to        Reserves     Balance at
            Description                    of Year        Income      Other Accounts      (Note 1)    Close of Year
-------------------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>           <C>                <C>          <C>    
Allowance for uncollectible accounts
    for the years ended:

    December 31, 1995                      $ 9,010       $ 9,119       $ 4,673 (2)        $16,464       $ 6,338
                                           ====================================================================
    December 31, 1994                      $ 9,072       $ 5,673       $ 8,817 (2)        $14,552       $ 9,010
                                           ====================================================================
    December 31, 1993                      $ 8,368       $12,679       $22,600 (2)        $34,575       $ 9,072
                                           ====================================================================

Accrued restructuring costs for the
    years ended (Note 3):

    December 31, 1995                      $60,816       $    --       $    --            $21,463       $39,353
                                           ====================================================================
    December 31, 1994                      $78,275       $    --       $    --            $17,459       $60,816
                                           ====================================================================
    December 31, 1993                      $    --       $78,275       $    --            $    --       $78,275
                                           ====================================================================
</TABLE>
    


NOTES:

(1)  Charges for purpose for which reserve was created.
(2)  Recoveries of previously written-off amounts.
(3)  See Note 3 to the consolidated financial statements included elsewhere 
     herein.

                                       33
<PAGE>   36
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.

                                                  GTE HAWAIIAN TELEPHONE COMPANY
                                                           INCORPORATED
                                                  ------------------------------
                                                           (Registrant)

Date  March 26, 1996                            By       Warren H. Haruki
      ---------------------                       ------------------------------
                                                         Warren H. Haruki
                                                            President


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

<TABLE>
<S>                                      <C>                                    <C> 
Warren H. Haruki                         President and Director                 March 26, 1996
---------------------------              (Principal Executive Officer)
Warren H. Haruki                         

Gerald K. Dinsmore                       Senior Vice President - Finance and    March 26, 1996
---------------------------              Planning and Director 
Gerald K. Dinsmore                       (Principal Financial Officer)

William M. Edwards, III                  Controller                             March 26, 1996
---------------------------              (Principal Accounting Officer)
William M. Edwards, III                  

John C. Appel                            Director                               March 26, 1996
---------------------------
John C. Appel

Richard M. Cahill                        Director                               March 26, 1996
---------------------------
Richard M. Cahill

Michael B. Esstman                       Director                               March 26, 1996
---------------------------
Michael B. Esstman

Thomas W. White                          Director                               March 26, 1996
---------------------------
Thomas W. White
</TABLE>




                                       34
<PAGE>   37
EXHIBIT INDEX

<TABLE>
<CAPTION>
     Exhibit
      Number                                                     Description
------------------         ----------------------------------------------------------------------------------------

<S>                        <C>                                                                                          
        10                 Material Contracts - Agreements Between GTE and Certain Executive Officers

        12                 Statements re: Calculation of the Ratio of Earnings to Fixed Charges

        23                 Consent of Independent Public Accountants

        26                 Revised Form of Invitation for Bids pertaining to Registration Statement on
                           Form S-3 (File No. 33-57743)

        27                 Financial Data Schedule
</TABLE>