<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

                  For the fiscal year ended: DECEMBER 31, 1999
                                       or
     [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

                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)

1255 Corporate Drive, SVC04C08, Irving, Texas               75038
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)               (ZIP CODE)

         Registrant's telephone number, including area code 972-507-5000

              (Former name, former address and former fiscal year,
               if changed since last report)

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



Securities registered pursuant to Section 12(g) of the Act:  NONE



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 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, 2000. The Company's common stock is 100% owned by GTE Corporation.

The Company meets the conditions set forth in General Instruction I (1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.

================================================================================



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PART I

Item 1.  Business

GTE Hawaiian Telephone Company Incorporated (the 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 has three wholly-owned subsidiaries: GTE Hawaiian Tel Insurance
Company Incorporated, GTE Hawaiian Tel International Incorporated and The
Micronesian Telecommunications Corporation (MTC). GTE Hawaiian Tel Insurance
Company Incorporated provides auto liability, general liability and workers'
compensation insurance to the Company on a direct basis. GTE Hawaiian Tel
International Incorporated provides interstate and international
telecommunications services in Hawaii and telecommunication services in Guam.
GTE Far East (Services) Limited, which is a wholly-owned subsidiary of GTE
Hawaiian Tel International Incorporated, provides international
telecommunications services in Japan. MTC, which is headquartered in Saipan in
the Commonwealth of the Northern Mariana Islands (CNMI), provides local
telecommunications services on the islands of Saipan, Tinian and Rota. In
addition, GTE Pacifica Incorporated (Pacifica), which is a wholly-owned
subsidiary of MTC, provides interstate and international telecommunications
services in the CNMI and Guam.

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
Transport Area) toll service among the islands. InterLATA toll services between
Hawaii and domestic points within the United States are provided by
long-distance carriers which connect to the Company's local facilities for call
origination and termination. The long-distance carriers 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 toll service between
Hawaii and international termination points in competition with international
carriers. These international revenues are settled between the Company and
international carriers through revenue sharing arrangements. The Company earns
other revenues by providing such services as billing and collection and operator
services to long-distance carriers. At December 31, 1999, the Company served
969,431 access lines in Hawaii and 25,025 access lines on the islands of Saipan,
Tinian and Rota.

At December 31, 1999, the Company had 2,589 employees.

The Company has written agreements with the International Brotherhood of
Electrical Workers (IBEW) covering substantially all non-management employees.
New agreements with the IBEW in Hawaii and Micronesia were negotiated in 1999
and will expire in 2002.


REGULATORY AND COMPETITIVE TRENDS

The Company is regulated by the Public Utilities Commission (PUC) of the state
of Hawaii for its intrastate business operations, the Commonwealth Utilities
Corporation (CUC) of the CNMI for MTC's local operations and the Federal
Communications Commission (FCC) for GTE Hawaiian Tel International Incorporated
and Pacifica, which provide interstate and international telecommunications
services.

During 1999, regulatory and legislative activity at both the state and federal
levels continued to be a direct result of the Telecommunications Act of 1996
(Telecommunications Act). Along with promoting competition in all segments of
the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.



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<PAGE>   3

INTERSTATE SERVICES

GTE continued in 1999 to meet the wholesale requirements of new competitors. GTE
has signed interconnection agreements with other carriers, providing them the
capability to purchase unbundled network elements (UNEs), resell retail services
and interconnect facilities-based networks. Several of these interconnection
agreements were the result of the arbitration process established by the
Telecommunications Act, and incorporated prices or terms and conditions based
upon the FCC rules that were subsequently appealed to the U.S. Supreme Court
(Supreme Court). GTE challenged a number of such agreements in federal district
courts during 1997.

GTE's position in these challenges was supported by a decision of the Eighth
Circuit Court (Eighth Circuit) in July 1997 which stated the FCC had overstepped
its authority in several areas concerning implementation of the interconnection
provisions of the Telecommunications Act. In January 1999, the Supreme Court
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit's determination that the FCC had no
jurisdiction over pricing. As a result, the pricing rules established by the FCC
are now subject to review on their merits by the Eighth Circuit. In addition,
the Supreme Court vacated the FCC rule setting forth the UNEs that incumbent
local exchange carriers (ILECs) are required to provide to competitive local
exchange carriers (CLECs). This latter ruling led to a proceeding before the FCC
concerning what elements had to be offered and under what conditions.

In November 1999, the FCC reaffirmed that incumbents must provide unbundled
access to five of the original seven network elements, which must be available
on either a stand-alone basis, or as a combined local service "platform" if the
elements have been previously combined by the ILEC. ILECs are no longer required
to provide unbundled operator services, including directory assistance where
alternate routing is available. In addition, in certain circumstances, local and
tandem switching need not be unbundled. However, the FCC expanded the definition
of some UNEs by specifying that components of the loop UNE must be made
available in sub-loop components, and augmenting the types of call-related
databases that must be unbundled as UNEs. The FCC also found that state
commissions can require ILECs to unbundle additional elements as long as they
are consistent with the requirements of the Telecommunications Act and the
national policy framework instituted in the FCC's order. Furthermore, the order
precludes states from removing network elements from the FCC's list of
unbundling obligations. The United States Telecom Association (USTA) has
appealed this order and GTE will participate.

In December 1999, the FCC released another order that requires ILECs to provide
line sharing to CLECs by unbundled access to the high-frequency portion of the
local loop over which the ILEC provides voice services. The FCC's stated intent
in adopting the line sharing order is to enable competitive carriers to provide
digital subscriber line (DSL) services over the same lines simultaneously used
by ILECs to provide basic phone services.

In June 1999, the Eighth Circuit established a schedule for addressing the
issues it did not decide in 1998. Parties to this action have filed briefs and
participated in oral arguments in September 1999. The major issues are: (1) the
FCC's cost methodology used to set prices, (2) its methodology for setting
wholesale discounts, (3) the "proxy rates" it set for interconnection, UNEs, and
wholesale discounts, (4) whether ILECs should be required to combine UNEs that
are not already combined, and (5) whether the FCC can require ILECs to provide
"superior quality" to competitors than what the ILEC provides to itself. A court
decision is expected during the first half of 2000.

Universal Service

GTE is active before both state and federal regulators advocating development
and implementation of measures that will meet the requirements of the universal
service provisions of the Telecommunications Act. Specifically, GTE urges
regulators to identify and remove all hidden subsidies and to provide explicit
universal service subsidies.

In October 1998, the FCC issued an order selecting a cost model for universal
service. In July 1999, the United States Court of Appeals for the Fifth Circuit
(Fifth Circuit) affirmed in part, reversed in part, and remanded in part the
FCC's universal service regime. In October 1999, the FCC released two orders in
response to the Fifth Circuit decision. One order permits ILECs to continue to
recover their universal service contributions from access charges or to
establish end-user charges. The second order changed the contribution basis for
school/library funding to



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eliminate calculations based upon intrastate revenues. In January 2000, GTE
requested the Supreme Court to review the Fifth Circuit decision allowing the
FCC to base universal service support from the results of a hypothetical cost
model rather than historical costs that were incurred to provide local service.
GTE argued that the Fifth Circuit ignored long standing legal precedent in
permitting a major revision to ILEC cost recovery mechanisms without ensuring
the new process would not result in a constitutionally prohibited "taking".

In November 1999, the FCC released an order selecting the cost inputs for the
federal universal service cost model. GTE is seeking reconsideration. Since the
FCC moved the implementation date of the new universal service mechanism for
non-rural carriers to January 2000, many state regulators awaited FCC action
before they began designing their universal service programs.

In November 1999, the FCC released an order dealing with implementation of the
new FCC federal high cost support mechanism for non-rural ILECs, including GTE.
The effective date for the new federal universal service plan is January 1,
2000. This plan will distribute federal high cost funds to states with higher
than average costs. The role of state commissions is to ensure reasonable
comparability within the borders of a state. Federal high cost support will be
calculated by comparing the nationwide average cost with each state's average
cost per line, and providing federal support for only states that exceed 135% of
the nationwide average. To guard against rate shock, the FCC also adopted a
"hold harmless" approach so that the amount of support provided to each
non-rural carrier under the new plan will not be less than the amount provided
today. U S WEST has appealed this order on the basis that it fails to provide a
sufficient amount of support. This FCC order also established a May 1, 2000
deadline by which state commissions must create at least three deaveraged price
zones for UNEs. In January 2000, GTE requested the FCC grant a one year delay to
give state commissions ample opportunity to implement deaveraged retail rates
and establish state universal service funds in concert with UNE deaveraging.

In December 1999, the FCC asked for comment on requests made by the North Dakota
and South Dakota state commissions and the Rural Utilities Service (RUS) asking
the FCC to redefine "voice grade access" in the FCC's universal service rules.
The FCC requires that, in order to be eligible for universal service support, a
carrier must offer, among other things, voice grade access to the public
switched telephone network. Current FCC rules specify that voice grade access
should occur in a frequency range between approximately 300 Hertz (Hz) to 3,000
Hz. The petitioners requested the frequency range be changed to 200 Hz to 3,500
Hz. GTE participated in this proceeding and opposed any change in FCC
requirements. The network is not designed for the proposed ubiquitous
requirement and would require a significant infrastructure investment and at
least a decade to implement.

Price Cap

The federal price cap regime allows access prices to change each year by a
measure of inflation minus a productivity factor offset. In May 1999, the U.S.
Court of Appeals for the District of Columbia (Court) released a decision
regarding the FCC's choice of a 6.5% price cap productivity factor in a 1997
order. The Court found the FCC's choice of a 6.0% base factor and a 0.5%
Consumer Productivity Dividend to be inadequately supported. The Court remanded
the matter back to the FCC for further action and established an April 2000 date
by which the FCC must issue a revised decision. As a result, in November 1999,
the FCC initiated a rulemaking proposal requesting comments on the interstate
price cap productivity factor. Currently, it is unknown whether the single price
cap productivity factor will be applied retroactively to July 1, 1997 and remain
in effect until the next price cap performance review in 2003, or whether one
factor will apply from 1997 to 2000 and another factor apply from 2000 to 2003.

Interstate Access Revision

Effective July 1999, access charges were further reduced using a 6.5%
productivity factor in compliance with FCC requirements to reflect the impacts
of access charge reform and in making GTE's 1999 Annual Filing. The total annual
financial impact of the reduction was $113 million. Similar filings during 1997
and 1998 had already resulted in price reductions.



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In August 1999, GTE, along with a coalition of local exchange and long-distance
companies (CALLS), submitted a proposal for interstate access charge and
universal service reform to the FCC. The proposal would accelerate the shift in
non-usage sensitive access revenue recovery from per-minute to flat-rated
charges, set a schedule for elimination of the price cap productivity factor,
and provide more explicit support for universal service. The coalition filed a
revised plan in March 2000 and the FCC has offered the plan for comments. A
decision by the FCC is expected in 2000.

In August 1999, the FCC released an order pertaining to access reform and
pricing flexibility. The order grants price cap LECs immediate flexibility under
certain circumstances to deaverage certain access services and permits the
introduction of new services on a streamlined basis, without prior FCC approval.

Advanced Telecommunications Services

The Telecommunications Act required the FCC to "encourage the deployment on a
reasonable and timely basis of advanced telecommunications capability to all
Americans." Further, the FCC was required to conduct a proceeding aimed at
determining the availability of advanced telecommunications, and to take action
to remove barriers to infrastructure investment and to promote competition.

In March 1999, the FCC released an order adopting a number of new collocation
rules designed to make competitive entry easier and less costly. These rules
specify how ILECs will manage such items as alternate collocation arrangements,
security, space preparation cost allocation, provisioning intervals, and space
exhaustion. GTE asked the Court to review this order. In March 2000, the Court
issued a ruling granting, in part, challenges raised by GTE to the FCC's March
1999 order. The Court ruled that the FCC failed to justify its requirement that
ILECs must permit collocation of any CLEC equipment that was "used or useful"
for interconnection or access to network elements. The Court remanded this
portion of the decision back to the FCC for further deliberation.

In November 1999, the FCC released an order concluding that an ILEC's offering
of DSL services to Internet Service Providers (ISPs) pursuant to volume and term
discount plans that are a component of the ISPs high-speed Internet service are
not a retail offering, and thus not subject to the discounted resale obligation.
The order also concluded that an ILECs DSL offering to end users is a retail
offering if the ILEC performs certain consumer-oriented functions, such as
provisioning of customer premises equipment and wiring, marketing, billing and
collection, and accepting repair requests directly from the end user. The FCC
concluded that these services are subject to discounted resale obligation,
regardless of whether the service is classified as telephone exchange service
(local tariff) or exchange access service (access tariff).

Number Portability

In December 1998, the FCC released an order establishing cost recovery rules for
local number portability (LNP) that permitted the recovery of carrier-specific
costs directly related to the provision of long-term LNP via a federally
tariffed end-user monthly charge. GTE subsequently filed an LNP tariff with the
FCC, and in March 1999 instituted an end-user number portability fee. This
charge is levied on all business and residential customers. In June 1999, GTE's
tariffed LNP charge was reviewed and accepted by the FCC at $0.36 per access
line per month.

Internet Service Traffic

ILECs are required to provide open access to all ISPs, while cable television
operators are not. Several major cable television operators providing Internet
access through cable modem facilities are only offering their affiliated ISPs to
consumers. Cable television operators that do allow customers to select
non-affiliated ISPs often require the customer to also pay for their affiliated
ISP's service (i.e., to pay twice for the same service). GTE has been active in
encouraging municipalities engaged in reviewing cable television mergers or
franchise renewals to require cable modem open access as a condition for
approval. The City of Portland, Oregon was first to adopt such a requirement and
AT&T Corp. has appealed that decision. Arguments took place in November 1999
before the Ninth Circuit Court.



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<PAGE>   6

In October 1999, GTE filed an antitrust lawsuit contending that cable TV
providers' refusal to provide ISPs with "open access" to cable modem platforms
is a violation of federal antitrust law. The lawsuit filed in the U.S. District
Court in Pittsburgh, names Tele-Communications, Inc., (now a unit of AT&T
Corp.), Comcast Corp., and Excite@Home and seeks an injunction to require open
access and damages.

GTE's interconnection contracts with CLECs specify that parties compensate each
other for the exchange of local traffic, defined as traffic that is originated
by an end user of one party and terminating to the end user of the other party
within GTE's current local serving area. It is GTE's position that ISP traffic
does not satisfy the definition of local traffic, and that no compensation
should be paid to CLECs that carry this traffic to their ISP customers. In a
recent ruling, the FCC has clarified that ISP traffic is largely interstate and
is not local traffic. Nevertheless, the FCC permitted state commissions to
arbitrate whether ILECs should pay as reciprocal compensation for ISP-bound
traffic, based upon existing interconnection agreements, until the FCC reaches a
decision on a long-term compensation scheme. GTE challenged this FCC conclusion
in federal district court. In March 2000, the Court vacated and remanded the
FCC's ruling that ISP-bound calls are interstate since the FCC failed to provide
a satisfactory explanation to support its ruling. As a result, the Court did not
address GTE's argument that the Telecommunications Act preempts state commission
authority to arbitrate disputes over non-local traffic.

Further information regarding the Company's activities with the various state
regulatory agencies is included in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations - "REGULATORY AND COMPETITIVE
TRENDS - INTRASTATE SERVICES".


PROPOSED MERGER WITH BELL ATLANTIC

Bell Atlantic and GTE have announced a proposed merger of equals under a
definitive merger agreement dated July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock they own. Bell Atlantic shareholders
will continue to own their existing shares after the merger.

The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. The completion of the merger is subject to a
number of conditions, including certain regulatory approvals and receipt of
opinions that the merger will be tax-free. At annual meetings held in May 1999,
the shareholders of each company approved the merger. All state regulatory
commissions have now approved the merger and the only remaining approval is
required from the FCC. Both companies are working diligently to complete the
merger and are targeting completion of the merger in the second quarter of 2000.


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.

Item 2.  Properties

The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services. All of these
properties, located in the state of Hawaii and on the islands of Saipan, Tinian
and Rota, are generally in good operating condition and are adequate to satisfy
the needs of the business. Substantially all of the Company's property is
subject to the liens of its respective mortgages securing funded debt. From
January 1, 1995 to December 31, 1999, the Company made capital expenditures of
$619.8 million for new plant and facilities required to meet telecommunication
service needs and to modernize plant and facilities. These additions were equal
to 30% of gross plant of $2.1 billion at December 31, 1999.



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Item 3.  Legal Proceedings

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


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

This item has been omitted in accordance with the relief provisions under
General Instruction I (2) of Form 10-K.


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).

PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1999 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call 800/225-5160.

INFORMATION VIA THE INTERNET
World Wide Web users can access information about GTE at:  http://www.gte.com.

SECURITIES
Questions regarding the bonds and debentures of the Company should be directed
to Treasury Department - Capital Markets, GTE Corporation, 1255 Corporate Drive,
Irving, TX 75038, or call 972/507-5038.

PRODUCTS AND SERVICES HOTLINE
To receive information concerning GTE products and services, please call
800/828-7280.

DIVERSITY AT GTE
The Company and GTE strive to be a workplace of choice in which people of
diverse backgrounds are valued, challenged, acknowledged and rewarded, leading
to higher levels of fulfillment and productivity. A copy of our Diversity at GTE
brochure is available upon request from the GTE Corporate Secretary's Office.


Item 6.  Selected Financial Data

This item has been omitted in accordance with the relief provisions under
General Instruction I (2) of Form 10-K.



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Item 7. Management's Discussion and Analysis of Financial Condition and
        Results of Operations (Abbreviated pursuant to General Instruction I
        (2) of Form 10-K.)

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 has
three wholly-owned subsidiaries. GTE Hawaiian Tel Insurance Company Incorporated
provides auto liability, general liability and workers' compensation insurance
to the Company on a direct basis. GTE Hawaiian Tel International Incorporated
provides interstate and international telecommunications services in Hawaii and
telecommunication services in Guam. GTE Far East (Services) Limited, which is a
wholly-owned subsidiary of GTE Hawaiian Tel International Incorporated, provides
international telecommunications services in Japan. The Micronesian
Telecommunications Corporation (MTC) is headquartered in Saipan in the
Commonwealth of the Northern Mariana Islands (CNMI) and provides local
telecommunications services on the islands of Saipan, Tinian and Rota. In
addition, GTE Pacifica Incorporated (Pacifica), which is a wholly-owned
subsidiary of MTC, provides interstate and international telecommunications
services in the CNMI and Guam. At December 31, 1999, the Company served 994,456
access lines in its service territories.


RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                    --------------------------------                    Percent
                                                         1999             1998          Increase        Change
                                                    ---------------  --------------- --------------- --------------
                                                                  (Dollars in Millions)
<S>                                                 <C>              <C>             <C>             <C>
    Net income                                      $       96.8     $       72.9    $       23.9           33%
</TABLE>

Net income increased in 1999 as a result of a decline in total operating costs
and expenses partially offset by an overall increase in revenues and sales.


REVENUES AND SALES
<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                    -----------------------------                      Percent
                                                        1999             1998          Increase        Change
                                                    ------------     ------------    ------------    -----------
                                                                 (Dollars in Millions)
<S>                                                 <C>              <C>             <C>             <C>
    Local services                                  $      279.5     $      277.0    $        2.5            1%
    Network access services                                178.8            177.4             1.4            1%
    Other services and sales                               220.8            216.9             3.9            2%
                                                    ------------     ------------    ------------

      Total revenues and sales                      $      679.1     $      671.3    $        7.8            1%
                                                    ============     ============    ============
</TABLE>

Local Services Revenues

Local services revenues are based on fees charged to customers for providing
local exchange service within designated franchise areas. Access line growth of
1% in 1999 generated additional revenues of $0.6 million from basic local
services, CentraNet(R) services, Integrated Services Digital Network (ISDN) and
Digital Channel Services (DCS). Continued growth in demand for custom calling
features, such as SmartCall(R) services, contributed an additional $2.9 million
in local services revenue growth in 1999. These increases were partially offset
by a $1.5 million decrease in private line revenue in 1999.

Network Access Services Revenues

Network access services revenues are based on fees charged to long-distance
carriers that use the Company's local exchange network in providing
long-distance services. In addition, business and residential customers pay
access



                                       7
<PAGE>   9

fees to connect to the local network to obtain long-distance service. Cellular
service providers and other local exchange carriers (LECs) also pay access
charges for cellular and intraLATA (Local Access Transport Area) toll calls
transported by the Company. Minutes of use increased 8%, generating additional
revenues of $4.4 million in 1999 compared to 1998. Special access revenues grew
by $8.7 million as a result of greater demand for increased bandwidth services
by high-capacity users. End-user surcharges increased $2.5 million primarily as
a result of implementation of the local number portability (LNP) surcharge (for
further information see "REGULATORY AND COMPETITIVE TRENDS - INTERSTATE SERVICES
- Number Portability"). These increases were partially offset by a decrease of
$14.4 million resulting from the impact of mandated interstate and intrastate
access price changes.

Other Services and Sales Revenues

The increase in other services and sales revenues in 1999, compared to 1998, was
primarily due to increases of $4.7 million in rent revenue, $2.0 million in
public safety revenue and $1.6 million in directory advertising revenue, which
were offset by a $4.5 million reduction in toll services revenues due to the
continuing impacts of intraLATA toll competition.


OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                    -----------------------------      Increase        Percent
                                                        1999             1998         (Decrease)       Change
                                                    ------------     ------------    ------------    -----------
                                                                (Dollars in Millions)
<S>                                                 <C>              <C>             <C>             <C>
    Cost of services and sales                      $      253.6     $      287.5    $      (33.9)         (12)%
    Selling, general and administrative                    116.7            120.7            (4.0)          (3)%
    Depreciation and amortization                          124.7            115.5             9.2            8%
                                                    ------------     ------------    ------------

      Total operating costs and expenses            $      495.0     $      523.7    $      (28.7)          (5)%
                                                    ============     ============    ============
</TABLE>

Total operating costs and expenses decreased $28.7 million in 1999 compared to
1998. An employee-reduction program initiated in the first quarter of 1999
resulted in the lump-sum settlement of pension obligations for the affected
employees. Accordingly, the Company recognized net pension plan gains of $33.1
million. Additionally, reduced labor and benefits, due to productivity
improvements, and adjustments of certain employee benefits reduced 1999
operating costs and expenses by $21.4 million. Partially offsetting these
reductions in costs was a one-time special charge of $7.2 million associated
with employee separation programs mentioned above, and favorable adjustments
recorded in 1998 for certain employee benefits and other liabilities, which
reduced 1998 expenses by $5.2 million. Additionally, operating costs and
expenses increased $6.6 million in 1999 due to costs from an affiliate for the
publication of the Company's White Pages directories. The increase in
depreciation and amortization expense was due to additional investment in
network facilities resulting from increased demand for switched access lines,
and the amortization of capitalized software right-to-use (RTU) fees.


OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                    --------------------------------    Increase        Percent
                                                         1999             1998         (Decrease)       Change
                                                    ---------------  --------------- --------------- --------------
                                                                  (Dollars in Millions)
<S>                                                 <C>              <C>             <C>             <C>
    Interest - net                                  $       36.7     $       41.6    $       (4.9)         (12)%
    Other - net                                             (1.5)            (3.1)           (1.6)         (52)%
    Income taxes                                            52.1             36.2            15.9           44%
</TABLE>

The decrease in interest - net was due to a decrease in the average long-term
debt balance in 1999 and an adjustment recorded in 1998, which increased 1998
interest expense. These decreases were partially offset by an increase in
interest expense associated with a higher average short-term debt balance in
1999.



                                       8
<PAGE>   10

The change in other - net was due to a decrease in income from the Company's
wholly-owned subsidiary, GTE Hawaiian Tel Insurance Company Incorporated,
partially offset by foreign currency translation gains in 1999.

The increase in income taxes in 1999 was primarily due to an increase in pretax
income, which was partially offset by other tax adjustments.


REGULATORY AND COMPETITIVE TRENDS

The Company is regulated by the Public Utilities Commission (PUC) of the state
of Hawaii for its intrastate business operations, the Commonwealth Utilities
Corporation (CUC) of the CNMI for MTC's local operations and the Federal
Communications Commission (FCC) for GTE Hawaiian Tel International Incorporated
and Pacifica, which provide interstate and international telecommunications
services.

During 1999, regulatory and legislative activity at both the state and federal
levels continued to be a direct result of the Telecommunications Act of 1996
(Telecommunications Act). Along with promoting competition in all segments of
the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.

INTERSTATE SERVICES

GTE continued in 1999 to meet the wholesale requirements of new competitors. GTE
has signed interconnection agreements with other carriers, providing them the
capability to purchase unbundled network elements (UNEs), resell retail services
and interconnect facilities-based networks. Several of these interconnection
agreements were the result of the arbitration process established by the
Telecommunications Act, and incorporated prices or terms and conditions based
upon the FCC rules that were subsequently appealed to the U.S. Supreme Court
(Supreme Court). GTE challenged a number of such agreements in federal district
courts during 1997.

GTE's position in these challenges was supported by a decision of the Eighth
Circuit Court (Eighth Circuit) in July 1997 which stated the FCC had overstepped
its authority in several areas concerning implementation of the interconnection
provisions of the Telecommunications Act. In January 1999, the Supreme Court
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit's determination that the FCC had no
jurisdiction over pricing. As a result, the pricing rules established by the FCC
are now subject to review on their merits by the Eighth Circuit. In addition,
the Supreme Court vacated the FCC rule setting forth the UNEs that incumbent
local exchange carriers (ILECs) are required to provide to competitive local
exchange carriers (CLECs). This latter ruling led to a proceeding before the FCC
concerning what elements had to be offered and under what conditions.

In November 1999, the FCC reaffirmed that incumbents must provide unbundled
access to five of the original seven network elements, which must be available
on either a stand-alone basis, or as a combined local service "platform" if the
elements have been previously combined by the ILEC. ILECs are no longer required
to provide unbundled operator services, including directory assistance where
alternate routing is available. In addition, in certain circumstances, local and
tandem switching need not be unbundled. However, the FCC expanded the definition
of some UNEs by specifying that components of the loop UNE must be made
available in sub-loop components, and augmenting the types of call-related
databases that must be unbundled as UNEs. The FCC also found that state
commissions can require ILECs to unbundle additional elements as long as they
are consistent with the requirements of the Telecommunications Act and the
national policy framework instituted in the FCC's order. Furthermore, the order
precludes states from removing network elements from the FCC's list of
unbundling obligations. The United States Telecom Association (USTA) has
appealed this order and GTE will participate.

In December 1999, the FCC released another order that requires ILECs to provide
line sharing to CLECs by unbundled access to the high-frequency portion of the
local loop over which the ILEC provides voice services. The



                                       9
<PAGE>   11

FCC's stated intent in adopting the line sharing order is to enable competitive
carriers to provide digital subscriber line (DSL) services over the same lines
simultaneously used by ILECs to provide basic phone services.

In June 1999, the Eighth Circuit established a schedule for addressing the
issues it did not decide in 1998. Parties to this action have filed briefs and
participated in oral arguments in September 1999. The major issues are: (1) the
FCC's cost methodology used to set prices, (2) its methodology for setting
wholesale discounts, (3) the "proxy rates" it set for interconnection, UNEs, and
wholesale discounts, (4) whether ILECs should be required to combine UNEs that
are not already combined, and (5) whether the FCC can require ILECs to provide
"superior quality" to competitors than what the ILEC provides to itself. A court
decision is expected during the first half of 2000.

Universal Service

GTE is active before both state and federal regulators advocating development
and implementation of measures that will meet the requirements of the universal
service provisions of the Telecommunications Act. Specifically, GTE urges
regulators to identify and remove all hidden subsidies and to provide explicit
universal service subsidies.

In October 1998, the FCC issued an order selecting a cost model for universal
service. In July 1999, the United States Court of Appeals for the Fifth Circuit
(Fifth Circuit) affirmed in part, reversed in part, and remanded in part the
FCC's universal service regime. In October 1999, the FCC released two orders in
response to the Fifth Circuit decision. One order permits ILECs to continue to
recover their universal service contributions from access charges or to
establish end-user charges. The second order changed the contribution basis for
school/library funding to eliminate calculations based upon intrastate revenues.
In January 2000, GTE requested the Supreme Court to review the Fifth Circuit
decision allowing the FCC to base universal service support from the results of
a hypothetical cost model rather than historical costs that were incurred to
provide local service. GTE argued that the Fifth Circuit ignored long standing
legal precedent in permitting a major revision to ILEC cost recovery mechanisms
without ensuring the new process would not result in a constitutionally
prohibited "taking".

In November 1999, the FCC released an order selecting the cost inputs for the
federal universal service cost model. GTE is seeking reconsideration. Since the
FCC moved the implementation date of the new universal service mechanism for
non-rural carriers to January 2000, many state regulators awaited FCC action
before they began designing their universal service programs.

In November 1999, the FCC released an order dealing with implementation of the
new FCC federal high cost support mechanism for non-rural ILECs, including GTE.
The effective date for the new federal universal service plan is January 1,
2000. This plan will distribute federal high cost funds to states with higher
than average costs. The role of state commissions is to ensure reasonable
comparability within the borders of a state. Federal high cost support will be
calculated by comparing the nationwide average cost with each state's average
cost per line, and providing federal support for only states that exceed 135% of
the nationwide average. To guard against rate shock, the FCC also adopted a
"hold harmless" approach so that the amount of support provided to each
non-rural carrier under the new plan will not be less than the amount provided
today. U S WEST has appealed this order on the basis that it fails to provide a
sufficient amount of support. This FCC order also established a May 1, 2000
deadline by which state commissions must create at least three deaveraged price
zones for UNEs. In January 2000, GTE requested the FCC grant a one year delay to
give state commissions ample opportunity to implement deaveraged retail rates
and establish state universal service funds in concert with UNE deaveraging.

In December 1999, the FCC asked for comment on requests made by the North Dakota
and South Dakota state commissions and the Rural Utilities Service (RUS) asking
the FCC to redefine "voice grade access" in the FCC's universal service rules.
The FCC requires that, in order to be eligible for universal service support, a
carrier must offer, among other things, voice grade access to the public
switched telephone network. Current FCC rules specify that voice grade access
should occur in a frequency range between approximately 300 Hertz (Hz) to 3,000
Hz. The petitioners requested the frequency range be changed to 200 Hz to 3,500
Hz. GTE participated in this proceeding and opposed any change in FCC
requirements. The network is not designed for the proposed ubiquitous
requirement and would require a significant infrastructure investment and at
least a decade to implement.



                                       10
<PAGE>   12

Price Cap

The federal price cap regime allows access prices to change each year by a
measure of inflation minus a productivity factor offset. In May 1999, the U.S.
Court of Appeals for the District of Columbia (Court) released a decision
regarding the FCC's choice of a 6.5% price cap productivity factor in a 1997
order. The Court found the FCC's choice of a 6.0% base factor and a 0.5%
Consumer Productivity Dividend to be inadequately supported. The Court remanded
the matter back to the FCC for further action and established an April 2000 date
by which the FCC must issue a revised decision. As a result, in November 1999,
the FCC initiated a rulemaking proposal requesting comments on the interstate
price cap productivity factor. Currently, it is unknown whether the single price
cap productivity factor will be applied retroactively to July 1, 1997 and remain
in effect until the next price cap performance review in 2003, or whether one
factor will apply from 1997 to 2000 and another factor apply from 2000 to 2003.

Interstate Access Revision

Effective July 1999, access charges were further reduced using a 6.5%
productivity factor in compliance with FCC requirements to reflect the impacts
of access charge reform and in making GTE's 1999 Annual Filing. The total annual
financial impact of the reduction was $113 million. Similar filings during 1997
and 1998 had already resulted in price reductions.

In August 1999, GTE, along with a coalition of local exchange and long-distance
companies (CALLS), submitted a proposal for interstate access charge and
universal service reform to the FCC. The proposal would accelerate the shift in
non-usage sensitive access revenue recovery from per-minute to flat-rated
charges, set a schedule for elimination of the price cap productivity factor,
and provide more explicit support for universal service. The coalition filed a
revised plan in March 2000 and the FCC has offered the plan for comments. A
decision by the FCC is expected in 2000.

In August 1999, the FCC released an order pertaining to access reform and
pricing flexibility. The order grants price cap LECs immediate flexibility under
certain circumstances to deaverage certain access services and permits the
introduction of new services on a streamlined basis, without prior FCC approval.

Advanced Telecommunications Services

The Telecommunications Act required the FCC to "encourage the deployment on a
reasonable and timely basis of advanced telecommunications capability to all
Americans." Further, the FCC was required to conduct a proceeding aimed at
determining the availability of advanced telecommunications, and to take action
to remove barriers to infrastructure investment and to promote competition.

In March 1999, the FCC released an order adopting a number of new collocation
rules designed to make competitive entry easier and less costly. These rules
specify how ILECs will manage such items as alternate collocation arrangements,
security, space preparation cost allocation, provisioning intervals, and space
exhaustion. GTE asked the Court to review this order. In March 2000, the Court
issued a ruling granting, in part, challenges raised by GTE to the FCC's March
1999 order. The Court ruled that the FCC failed to justify its requirement that
ILECs must permit collocation of any CLEC equipment that was "used or useful"
for interconnection or access to network elements. The Court remanded this
portion of the decision back to the FCC for further deliberation.

In November 1999, the FCC released an order concluding that an ILEC's offering
of DSL services to Internet Service Providers (ISPs) pursuant to volume and term
discount plans that are a component of the ISPs high-speed Internet service are
not a retail offering, and thus not subject to the discounted resale obligation.
The order also concluded that an ILECs DSL offering to end users is a retail
offering if the ILEC performs certain consumer-oriented functions, such as
provisioning of customer premises equipment and wiring, marketing, billing and
collection, and accepting repair requests directly from the end user. The FCC
concluded that these services are subject to discounted resale obligation,
regardless of whether the service is classified as telephone exchange service
(local tariff) or exchange access service (access tariff).



                                       11
<PAGE>   13
Number Portability

In December 1998, the FCC released an order establishing cost recovery rules for
local number portability (LNP) that permitted the recovery of carrier-specific
costs directly related to the provision of long-term LNP via a federally
tariffed end-user monthly charge. GTE subsequently filed an LNP tariff with the
FCC, and in March 1999 instituted an end-user number portability fee. This
charge is levied on all business and residential customers. In June 1999, GTE's
tariffed LNP charge was reviewed and accepted by the FCC at $0.36 per access
line per month.

Internet Service Traffic

ILECs are required to provide open access to all ISPs, while cable television
operators are not. Several major cable television operators providing Internet
access through cable modem facilities are only offering their affiliated ISPs to
consumers. Cable television operators that do allow customers to select
non-affiliated ISPs often require the customer to also pay for their affiliated
ISP's service (i.e., to pay twice for the same service). GTE has been active in
encouraging municipalities engaged in reviewing cable television mergers or
franchise renewals to require cable modem open access as a condition for
approval. The City of Portland, Oregon was first to adopt such a requirement and
AT&T Corp. has appealed that decision. Arguments took place in November 1999
before the Ninth Circuit Court.

In October 1999, GTE filed an antitrust lawsuit contending that cable TV
providers' refusal to provide ISPs with "open access" to cable modem platforms
is a violation of federal antitrust law. The lawsuit filed in the U.S. District
Court in Pittsburgh, names Tele-Communications, Inc., (now a unit of AT&T
Corp.), Comcast Corp., and Excite@Home and seeks an injunction to require open
access and damages.

GTE's interconnection contracts with CLECs specify that parties compensate each
other for the exchange of local traffic, defined as traffic that is originated
by an end user of one party and terminating to the end user of the other party
within GTE's current local serving area. It is GTE's position that ISP traffic
does not satisfy the definition of local traffic, and that no compensation
should be paid to CLECs that carry this traffic to their ISP customers. In a
recent ruling, the FCC has clarified that ISP traffic is largely interstate and
is not local traffic. Nevertheless, the FCC permitted state commissions to
arbitrate whether ILECs should pay as reciprocal compensation for ISP-bound
traffic, based upon existing interconnection agreements, until the FCC reaches a
decision on a long-term compensation scheme. GTE challenged this FCC conclusion
in federal district court. In March 2000, the Court vacated and remanded the
FCC's ruling that ISP-bound calls are interstate since the FCC failed to provide
a satisfactory explanation to support its ruling. As a result, the Court did not
address GTE's argument that the Telecommunications Act preempts state commission
authority to arbitrate disputes over non-local traffic.

INTRASTATE SERVICES

In June 1999, the Company filed a revised rate rebalancing proposal in the rate
design phase (Phase 2) of its 1995 rate case. This proposal was a revised
version of a similar proposal filed in 1997. Included in the filing was a
proposal to eliminate a surcharge that was being applied to recover the $25
million revenue increase from Phase 1. In July 1999, the Company filed comments
urging the PUC to proceed with Phase 2, despite the revenue requirement being
based on 1995 test year data. In September 1999, the PUC issued an order that
closed the 1995 rate case and ordered the Company to submit a new rate case
proceeding. The Company informed the PUC that it would file a new rate case in
November 2000. The surcharge will remain unchanged until the completion of the
new rate case proceeding.


PROPOSED MERGER WITH BELL ATLANTIC CORPORATION

Bell Atlantic and GTE have announced a proposed merger of equals under a
definitive merger agreement dated July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock they own. Bell Atlantic shareholders
will continue to own their existing shares after the merger.



                                       12
<PAGE>   14

The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. The completion of the merger is subject to a
number of conditions, including certain regulatory approvals and receipt of
opinions that the merger will be tax-free. At annual meetings held in May 1999,
the shareholders of each company approved the merger. All state regulatory
commissions have now approved the merger and the only remaining approval is
required from the FCC. Both companies are working diligently to complete the
merger and are targeting completion of the merger in the second quarter of 2000.


YEAR 2000 CONVERSION

GTE does not believe that the Year 2000 rollover has had, or will have, any
material adverse impacts on results of operations or liquidity. Additionally,
GTE has not experienced any material contingencies regarding customers or major
suppliers. GTE experienced no significant Year 2000 events, and service to GTE's
customers was unaffected by the rollover to January 1, 2000. GTE completed its
Year 2000 renovation, conducted system testing and returned to production the
essential systems that support its businesses substantially in advance of
December 31, 1999. Additionally, GTE's portion of the public switched telephone
network (PSTN) in the United States was upgraded for Year 2000, and all of GTE's
access lines have been operating using Year 2000 compliant central office
switches and network elements since mid-year 1999. With the successful
transition into 2000, GTE believes that the risk of disruptions arising from
time/date transitions, that would affect GTE's ability to provide basic
services, has been eliminated.

GTE continues to enhance its normal business continuity planning to address
potential Year 2000 and other time/date interruptions. These include: potential
gradual system degradation after January 1, 2000; possible accumulation of
processing errors or degraded performance; leap year processing through February
29, 2000; and potential impacts of degrading performance from partners. GTE's
disaster preparedness recovery plans include procedures and activities for a
"multi-regional" time/date contingency, if it occurs.

The estimated total multi-year cost of GTE's Year 2000 Program is expected to
total approximately $380 million, of which $372 million has been expended
through December 31, 1999. The current estimate for the cost of remediation for
the Company is approximately $6.7 million. Through December 31, 1999,
expenditures totaled $6.7 million. Year 2000 renovation costs are expensed in
the year incurred. Approximately 69% of GTE's program effort involved U.S.
domestic operations. With the successful transition from 1999 to 2000, GTE has
completed its Year 2000 Program. All future efforts will be performed under
normal business operations.


RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS No.
133, as amended, which is effective January 1, 2001.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which currently must be adopted by June 30, 2000. SAB No. 101
provides additional guidance on revenue recognition as well as criteria for when
revenue is generally realized and earned and also requires the deferral of
incremental direct selling costs. The Company is currently assessing the impact
of SAB No. 101.



                                       13
<PAGE>   15

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.


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In this Management's Discussion and Analysis of Financial Condition and Results
of Operations, the Company has made forward-looking statements. These statements
are based on the Company's estimates and assumptions and are subject to certain
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company, as
well as those statements preceded or followed by the words "anticipates,"
"believes," "estimates," "expects," "hopes," "targets" or similar expressions.
For each of these statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.

The future results of the Company could be affected by subsequent events and
could differ materially from those expressed in the forward-looking statements.
If future events and actual performance differ from the Company's assumptions,
the actual results could vary significantly from the performance projected in
the forward-looking statements.

The following important factors could affect the future results of the Company
and could cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in the markets served by the Company; (2) material changes in
available technology; (3) the final resolution of federal, state and local
regulatory initiatives and proceedings, including arbitration proceedings, and
judicial review of those initiatives and proceedings, pertaining to, among other
matters, the terms of interconnection, access charges, universal service,
unbundled network elements and resale rates; and (4) the extent, timing, success
and overall effects of competition from others in the local telephone and
intraLATA toll service markets.


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company views derivative financial instruments as risk management tools and,
in accordance with Company policy, does not utilize them for speculative or
trading purposes. The Company is also not a party to any leveraged derivatives.
The Company is exposed to market risk from changes in interest rates. The
Company manages its exposure to market risks through its regular operating and
financing activities and, when deemed appropriate, through the use of derivative
financial instruments that have been authorized pursuant to the Company's
policies and procedures. The use of these derivatives allows the Company to
reduce its overall exposure to market risk, as the gains and losses on these
contracts substantially offset the gains and losses on the liabilities being
hedged.

The Company uses derivative financial instruments to manage its exposure to
interest rate movements and to reduce borrowing costs. The Company's net
exposure to interest rate risk primarily consists of floating rate instruments
that are benchmarked to U.S. money market interest rates. The Company manages
this risk by using interest rate swaps to convert floating rate short-term debt
to synthetic fixed rate instruments. The Company also uses forward contracts to
sell U.S. Treasury bonds to hedge interest rates on anticipated long-term debt
issuance.



                                       14
<PAGE>   16

Item 8.  Financial Statements and Supplementary Data

GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Income

<TABLE>
<CAPTION>
Years Ended December 31,                                              1999              1998              1997
------------------------                                         -------------     -------------     -------------
                                                                               (Dollars in Millions)
REVENUES AND SALES (a)
<S>                                                              <C>               <C>               <C>
  Local services                                                 $       279.5     $       277.0     $       267.7
  Network access services                                                178.8             177.4             162.7
  Other services and sales                                               220.8             216.9             212.0
                                                                 -------------     -------------     -------------

    Total revenues and sales                                             679.1             671.3             642.4
                                                                 -------------     -------------     -------------

OPERATING COSTS AND EXPENSES (b)
  Cost of services and sales                                             253.6             287.5             262.2
  Selling, general and administrative                                    116.7             120.7             118.7
  Depreciation and amortization                                          124.7             115.5             121.4
                                                                 -------------     -------------     -------------

    Total operating costs and expenses                                   495.0             523.7             502.3
                                                                 -------------     -------------     -------------

OPERATING INCOME                                                         184.1             147.6             140.1

OTHER (INCOME) EXPENSE
  Interest - net                                                          36.7              41.6              37.5
  Other - net                                                             (1.5)             (3.1)             (0.7)
                                                                 -------------     -------------     -------------

INCOME BEFORE INCOME TAXES                                               148.9             109.1             103.3
  Income taxes                                                            52.1              36.2              42.3
                                                                 -------------     -------------     -------------

NET INCOME                                                       $        96.8     $        72.9     $        61.0
                                                                 =============     =============     =============
</TABLE>


(a) Includes billings to affiliates of $40.9 million, $39.0 million and $39.5
    million for the years 1999-1997, respectively.
(b) Includes billings from affiliates of $74.2 million, $99.4 million and $34.3
    million for the years 1999-1997, respectively.






Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation.

The accompanying notes are an integral part of these statements.



                                       15
<PAGE>   17

GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets

<TABLE>
<CAPTION>
December 31,                                                                            1999              1998
------------                                                                       -------------     -------------
                                                                                        (Dollars in Millions)
<S>                                                                                <C>               <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                        $         2.3     $         1.3
  Receivables, less allowances of $4.2 million and $6.5 million                            156.1             179.1
  Affiliate receivables                                                                     14.5              13.0
  Inventories and supplies                                                                   5.5              11.0
  Prepaid expenses and other                                                                16.1              22.9
                                                                                   -------------     -------------

    Total current assets                                                                   194.5             227.3
                                                                                   -------------     -------------

Property, plant and equipment, net                                                         835.3             854.2
Prepaid pension costs                                                                      308.3             234.8
Other assets                                                                                19.3              12.1
                                                                                   -------------     -------------

Total assets                                                                       $     1,357.4     $     1,328.4
                                                                                   =============     =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Current maturities of long-term debt                                             $         3.0     $         2.3
  Notes payable to affiliates                                                              101.7              93.7
  Accounts payable                                                                          47.8              47.7
  Affiliate payables and accruals                                                           26.1              30.6
  Advanced billings and customer deposits                                                   14.2              18.2
  Taxes payable                                                                              --               15.6
  Accrued interest                                                                          12.5              15.4
  Accrued payroll costs                                                                     26.6              22.5
  Dividends payable                                                                         17.0              18.5
  Other                                                                                      5.6              14.8
                                                                                   -------------     -------------

    Total current liabilities                                                              254.5             279.3
                                                                                   -------------     -------------

  Long-term debt                                                                           461.6             467.5
  Deferred income taxes                                                                    210.9             150.8
  Employee benefit plans and other                                                          29.1              38.1
                                                                                   -------------     -------------

    Total liabilities                                                                      956.1             935.7
                                                                                   -------------     -------------

Shareholder's equity:
  Common stock (10,000,000 shares issued)                                                  250.0             250.0
  Additional paid-in capital                                                                93.3              91.1
  Retained earnings                                                                         58.0              51.6
                                                                                   -------------     -------------

    Total shareholder's equity                                                             401.3             392.7
                                                                                   -------------     -------------

Total liabilities and shareholder's equity                                         $     1,357.4     $     1,328.4
                                                                                   =============     =============
</TABLE>


The accompanying notes are an integral part of these statements.



                                       16
<PAGE>   18

GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Years Ended December 31,                                                1999             1998              1997
                                                                   -------------    -------------     -------------
                                                                                 (Dollars in Millions)
<S>                                                                <C>              <C>               <C>
OPERATIONS
   Net income                                                      $        96.8    $        72.9     $        61.0
   Adjustments to reconcile net income to net cash
     from operations:
     Depreciation and amortization                                         124.7            115.5             121.4
     Employee retirement benefits                                          (79.8)           (43.4)            (35.3)
     Deferred income taxes                                                  60.5             12.9              38.1
     Provision for uncollectible accounts                                   16.1             10.3              12.9
     Change in current assets and current liabilities:
       Receivables - net                                                     0.1             (1.8)            (61.0)
       Other current assets                                                 10.4             (4.0)            (11.1)
       Accrued taxes and interest                                          (17.6)            31.2               4.1
       Other current liabilities                                           (22.3)             8.4               2.4
     Other - net                                                            (2.5)           (19.5)             (7.2)
                                                                   -------------    -------------     -------------

     Net cash from operations                                              186.4            182.5             125.3
                                                                   -------------    -------------     -------------
INVESTING
   Capital expenditures                                                   (102.0)          (117.3)           (138.7)
   Other - net                                                               0.6              0.4               --
                                                                   -------------    -------------     -------------

     Net cash used in investing                                           (101.4)          (116.9)           (138.7)
                                                                   -------------    -------------     -------------

FINANCING
   Long-term debt retired, including premiums paid
     on early retirement                                                    (5.9)            (2.1)            (59.1)
   Dividends                                                               (91.5)           (38.2)            (29.1)
   Increase (decrease) in short-term obligations,
     excluding current maturities                                           13.4            (24.7)             82.1
                                                                   -------------    -------------     -------------

     Net cash used in financing                                            (84.0)           (65.0)             (6.1)
                                                                   -------------    -------------     -------------

Increase (decrease) in cash and cash equivalents                             1.0              0.6             (19.5)

Cash and cash equivalents:
   Beginning of year                                                         1.3              0.7              20.2
                                                                   -------------    -------------     -------------

   End of year                                                     $         2.3    $         1.3     $         0.7
                                                                   =============    =============     =============
Cash paid (refunded) during the year for:
   Interest                                                        $        42.3    $        41.4     $        42.0
                                                                   -------------    -------------     -------------
   Income taxes                                                    $        (3.1)   $        (5.3)    $         0.3
                                                                   -------------    -------------     -------------
</TABLE>



The accompanying notes are an integral part of these statements.



                                       17
<PAGE>   19



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
                                              -----------   -----------   -----------   -----------
                                                               (Dollars in Millions)
<S>                                           <C>           <C>           <C>           <C>
Shareholder's equity, December 31, 1996       $     250.0   $      91.1   $      (1.8)  $     339.3

Net income                                                                       61.0          61.0
Dividends declared                                                              (34.6)        (34.6)
                                              -----------   -----------   -----------   -----------

Shareholder's equity, December 31, 1997             250.0          91.1          24.6         365.7

Net income                                                                       72.9          72.9
Dividends declared                                                              (45.9)        (45.9)
                                              -----------   -----------   -----------   -----------

Shareholder's equity, December 31, 1998             250.0          91.1          51.6         392.7

Net income                                                                       96.8          96.8
Tax benefit from exercise of stock options                          2.1                         2.1
Dividends declared                                                              (90.0)        (90.0)
Other                                                               0.1          (0.4)         (0.3)
                                              -----------   -----------   -----------   -----------

Shareholder's equity, December 31, 1999       $     250.0   $      93.3   $      58.0   $     401.3
                                              ===========   ===========   ===========   ===========
</TABLE>






The accompanying notes are an integral part of these statements.



                                       18
<PAGE>   20

GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1.  DESCRIPTION OF BUSINESS AND 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. At December 31, 1999, the
Company served 994,456 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 management to 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 three wholly-owned subsidiaries: The Micronesian Telecommunications
Corporation (MTC), GTE Hawaiian Tel Insurance Company Incorporated and GTE
Hawaiian Tel International Incorporated. All significant intercompany
transactions have been eliminated.

Reclassifications of prior-year data have been made, where appropriate, to
conform to the 1999 presentation.

Transactions with Affiliates

GTE Supply (100% owned by GTE) provides construction and maintenance equipment,
supplies and electronic repair services to the Company. These purchases and
services amounted to $26.0 million, $22.8 million and $30.5 million for the
years 1999-1997, respectively. Such purchases and services are recorded in the
accounts of the Company at the lower of cost, including a return realized by GTE
Supply, or fair market value.

The Company is billed for data processing services, software development and
equipment rentals, and receives management, consulting, research and development
and pension management services from other affiliated companies. The Company's
consolidated financial statements also include allocated expenses resulting from
the sharing of certain executive, administrative, financial, accounting,
marketing, personnel, engineering and other support services being performed at
consolidated work centers within GTE. The amounts charged for these affiliated
transactions are based on proportional cost allocation methodologies. These
charges amounted to $63.6 million, $87.8 million and $34.0 million for the years
1999-1997, respectively. The significant increases, beginning in 1998 charges,
are due to a reorganization of support functions within GTE. Prior to 1998, the
cost of these support functions was recorded directly by the Company, and is now
allocated to the Company on a proportional cost basis.

The Company has an agreement with GTE Directories Corporation (GTE Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to GTE Directories. In addition, when GTE
Directories sells Yellow Page directory advertising to customers within the
Company's franchise area, the Company records a portion of the sale as revenue.
Revenues from these activities amounted to $40.9 million, $39.0 million and
$39.5 million for the years 1999-1997, respectively. Also, the Company is billed
for certain printing and other costs associated with telephone directories,
including the cost of customer contact information pages which are included in
the Company's White Pages directories. These charges amounted to $10.6 million,
$11.6 million and $0.3 million for the years 1999-1997, respectively.



                                       19
<PAGE>   21

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.

Depreciation and Amortization

Property, plant and equipment of the Company is depreciated on a straight-line
basis over the following estimated useful asset lives:

<TABLE>
<CAPTION>
       Average lives (in years)
       ------------------------

<S>                                                      <C>
       Buildings                                         20 - 40
       Inside communications plant                        5 - 10
       Outside communications plant                       8 - 40
       Furniture, vehicles and other equipment            3 - 10
</TABLE>

The Company depreciates assets using the remaining life methodology. This method
depreciates the net investment in telephone plant less anticipated net salvage
value, over remaining useful asset lives and requires the periodic review and
revision of depreciation rates.

When depreciable plant of the Company is retired in the normal course of
business, the amount of such plant is deducted from the respective plant and
accumulated depreciation accounts. Gains or losses on disposition are amortized
with the remaining net investment in telephone plant. When depreciable telephone
plant is retired outside the normal course of business, for example if a local
exchange is sold, any resulting gain or loss is included in operating income.

Employee Benefit Plans

Pension and postretirement health care and life insurance benefits earned during
the year as well as interest on projected 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. Curtailment gains and losses associated
with employee separations are recognized when they occur. Settlement gains and
losses are recognized when significant pension obligations are settled and the
gain or loss is determinable.

Valuation of Assets

The impairment of tangible and intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
the Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination
of impairment, if any, is made based on estimated future cash flows, salvage
value or expected net sales proceeds depending on the circumstances. In
instances where goodwill has been recorded in connection with impaired assets,
the carrying amount of the goodwill is first eliminated before any reduction to
the carrying value of tangible or identifiable intangible assets. The Company's
policy is to record asset impairment losses, and any subsequent adjustments to
such losses as initially recorded, as well as net gains or losses on sales of
assets as a component of operating income.

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.



                                       20
<PAGE>   22

Deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each reporting period. Deferred tax assets and
liabilities are subsequently adjusted, to the extent necessary, to reflect tax
rates expected to be in effect when the temporary differences reverse. A
valuation allowance is established for deferred tax assets for which realization
is not likely.

Cash and Cash Equivalents

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

Financial Instruments

The Company uses a variety of financial instruments to hedge its exposure to
fluctuations in interest rates. The Company does not use financial instruments
for speculative or trading purposes, nor is the Company a party to leveraged
derivatives. Amounts to be paid or received under interest rate swaps are
accrued as interest expense.

Inventories and Supplies

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

Software

Software costs are recognized in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which became effective in January 1999. The Company capitalizes
costs associated with externally acquired software (including right-to-use fees)
for internal use. Capitalized software is generally amortized on a straight-line
basis over its useful life, not to exceed five years for non-network software or
three years for network software. As a result of adopting SOP 98-1, the Company
capitalized software expenditures of $9.8 million, $9.5 million and $4.4
million, respectively, for 1999-1997, which would have previously been expensed.

Comprehensive Income

The Company had no comprehensive income components for the years 1999-1997,
therefore comprehensive income is the same as net income for all three years.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS No.
133, as amended, which is effective January 1, 2001.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which currently must be adopted by June 30, 2000. SAB No. 101
provides additional guidance on revenue recognition as well as criteria for when
revenue is generally realized and earned and also requires the deferral of
incremental direct selling costs. The Company is currently assessing the impact
of SAB No. 101.



                                       21
<PAGE>   23
2.  PROPOSED MERGER WITH BELL ATLANTIC CORPORATION

Bell Atlantic and GTE have announced a proposed merger of equals under a
definitive merger agreement dated July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock they own. Bell Atlantic shareholders
will continue to own their existing shares after the merger.

The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. The completion of the merger is subject to a
number of conditions, including certain regulatory approvals and receipt of
opinions that the merger will be tax-free. At annual meetings held in May 1999,
the shareholders of each company approved the merger. All state regulatory
commissions have now approved the merger and the only remaining approval is
required from the Federal Communications Commission (FCC). Both companies are
working diligently to complete the merger and are targeting completion of the
merger in the second quarter of 2000.


3.  COMMON STOCK

The authorized common stock of the Company consists of 18,000,000 shares with a
par value of $25 per share. All 10,000,000 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. At December 31, 1999, $14.5
million of retained earnings were restricted as to the payment of cash dividends
on common stock under the terms of the Company's Articles of Incorporation.


4.  DEBT

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

<TABLE>
<CAPTION>
                                                                                   1999                 1998
                                                                            ----------------     ----------------
                                                                                     (Dollars in Millions)
<S>                                                                         <C>                  <C>
First mortgage bonds:
    6.75 % Series BB, due 2005                                              $          125.0     $          125.0
Debentures:
    7.00 % Series A, due 2006                                                          150.0                150.0
    7.375% Series B, due 2006                                                          150.0                150.0
Other:
    5% Rural Utilities Services first mortgage bond, due 2018                            8.6                  8.9
    Rural Telephone Bank first mortgage bonds,
        maturing through 2021, rates ranging from 5.43% to 7.50%                        23.6                 28.5
    GTE Leasing Corporation financing agreements, maturing
        through 2001, rates ranging from 6.52% to 11.99%                                 1.5                  2.1
    Capitalized leases                                                                   1.1                  --
                                                                            ----------------     ----------------

  Total principal amount                                                               459.8                464.5
Unamortized premium - net                                                                4.8                  5.3
                                                                            ----------------     ----------------

  Total                                                                                464.6                469.8
Less: current maturities                                                                (3.0)                (2.3)
                                                                            ----------------     ----------------

  Total long-term debt                                                      $          461.6     $          467.5
                                                                            ================     ================
</TABLE>

In February 1999, the Company retired $3.8 million of long-term debt prior to
stated maturity and incurred $0.1 million in premiums associated with this
retirement.



                                       22
<PAGE>   24

The aggregate principal amount of mortgage 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 discounts and
premiums 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: $3.0
million in 2000; $2.8 million in 2001; $1.7 million in 2002; $1.8 million in
2003; and $1.9 million in 2004.

Total short-term obligations as of December 31, were as follows:

<TABLE>
<CAPTION>
                                                                                   1999                 1998
                                                                            ----------------     ----------------
                                                                                     (Dollars in Millions)
<S>                                                                         <C>                  <C>
Notes payable to affiliate - average rates 6.2% and 5.7%                    $          101.7     $           93.7
Current maturities of long-term debt                                                     3.0                  2.3
                                                                            ----------------     ----------------

  Total                                                                     $          104.7     $           96.0
                                                                            ================     ================
</TABLE>


5.  FINANCIAL INSTRUMENTS

The Company entered into interest rate swap agreements to hedge against changes
in market interest rates.

As of December 31, 1999 and 1998, the Company had the following financial
instruments in effect:

<TABLE>
<CAPTION>
                                                                                                    Weighted
                                                                  Notional        Expiration        Average
                                                                   Amount           Dates           Pay Rate
                                                                 -----------     -------------    -------------
  Interest rate swap                                         (Dollars in Millions)
    agreements:
<S>                                                              <C>             <C>              <C>
             1999                                                    --               --               --
             1998                                                   $40.0            1999            6.56%
</TABLE>

The Company has entered into interest rate swaps where the Company pays fixed
rates, as indicated in the table above, and receives floating rates, primarily
based on three month LIBOR. At December 31, 1999 and 1998, the three month LIBOR
was 6.0% and 5.1%, respectively.

The risk associated with these financial instruments arises from the possible
inability of counterparties to meet the contract terms and from movements in
interest rates. The Company carefully evaluates and continually monitors the
creditworthiness of its counterparties and believes the risk of nonperformance
is remote.

The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1999, the estimated fair
value of long-term debt based on either reference to quoted market prices or an
option pricing model, was lower than the carrying value by approximately $14.1
million. As of December 31, 1998, the estimated fair value of long-term debt
exceeded the carrying value by approximately $29.5 million.



                                       23
<PAGE>   25

6.  INCOME TAXES

The income tax provision (benefit) was as follows:

<TABLE>
<CAPTION>
                                                                      1999              1998              1997
                                                                 -------------     -------------     -------------
                                                                               (Dollars in Millions)
<S>                                                              <C>               <C>               <C>
Current:
  Federal                                                        $        (8.1)    $        28.7     $         4.4
  State                                                                   (0.2)             (5.5)             (0.2)
                                                                 -------------     -------------     -------------
                                                                          (8.3)             23.2               4.2
                                                                 -------------     -------------     -------------
Deferred:
  Federal                                                                 56.0               5.1              35.9
  State                                                                    5.1               8.6               3.0
                                                                 -------------     -------------     -------------
                                                                          61.1              13.7              38.9
                                                                 -------------     -------------     -------------

Amortization of deferred investment tax credits                           (0.7)             (0.7)             (0.8)
                                                                 -------------     -------------     -------------

    Total provision                                              $        52.1     $        36.2     $        42.3
                                                                 =============     =============     =============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                      1999              1998              1997
                                                                 -------------     -------------     -------------
                                                                               (Dollars in Millions)
<S>                                                              <C>               <C>               <C>
Amounts computed at statutory rates                              $        52.1     $        38.2     $        32.5
State and local income taxes, net of federal income tax effect             1.6               3.0               1.8
Amortization of deferred investment tax credits                           (0.7)             (0.7)             (0.8)
Undistributed earnings of foreign subsidiary                              (2.8)             (3.3)             (3.7)
Other differences - net                                                    1.9              (1.0)             12.5
                                                                 -------------     -------------     -------------

    Total provision                                              $        52.1     $        36.2     $        42.3
                                                                 =============     =============     =============
</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, were as
follows:

<TABLE>
<CAPTION>
                                                                             1999               1998
                                                                        -------------       ------------
                                                                              (Dollars in Millions)
<S>                                                                     <C>                 <C>
Depreciation and amortization                                           $        60.8       $       41.2
Employee benefit obligations                                                    (13.8)             (17.3)
Prepaid pension costs                                                           127.4               92.0
Capital goods excise tax credits                                                 34.8               35.2
Investment tax credits                                                            0.9                1.6
Other - net                                                                      (1.8)              (9.2)
                                                                        -------------       ------------

    Net deferred tax liability                                          $       208.3       $      143.5
                                                                        =============       ============
</TABLE>



                                       24
<PAGE>   26

7.  EMPLOYEE BENEFIT PLANS

The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," in February 1998. Certain disclosures are required to
be made of the components of pension credits, postretirement benefit costs and
the funded status of the plans, including the actuarial present value of
accumulated plan benefits, accumulated or projected benefit obligation and the
fair value of plan assets. We do not present such disclosures because the
structure of the GTE plans does not permit the plans' data to be readily
disaggregated.

Pension Plans

The Company participates in noncontributory defined benefit pension plans
sponsored by GTE covering substantially all employees. The benefits to be paid
under these plans are generally based on years of credited service and average
final earnings. GTE's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plans' benefit obligation to employees upon their retirement. The assets of the
plans consist primarily of corporate equities, government securities, and
corporate debt securities.

The significant weighted-average assumptions used by GTE for the pension
measurements were as follows at December 31:

<TABLE>
<CAPTION>
                                                                       1999                 1998
                                                                --------------------  ------------------
<S>                                                             <C>                   <C>
        Discount rate                                                  8.00%                7.00%
        Rate of compensation increase                                  5.50%                4.75%
        Expected return on plan assets                                 9.00%                9.00%
</TABLE>

Net periodic benefit credit was $73.5 million, $32.3 million and $31.4 million
for the years 1999-1997, respectively. Included in the net periodic benefit
credit for 1999 and 1997 were net pension gains of $27.2 million and $4.5
million, respectively, comprised of one-time costs for special termination
benefits provided under voluntary and involuntary separation programs,
curtailment losses and settlement gains. These curtailment losses and settlement
gains are a result of the separation programs, as well as the required
settlement gain or loss recognition, due to the fact that in 1999, the Company's
lump-sum pension distributions surpassed the settlement threshold equal to the
sum of the service cost and interest cost components of net periodic pension
cost.

Postretirement Benefits Other than Pensions

Substantially all of the Company's employees are covered under postretirement
healthcare and life insurance benefit plans sponsored by GTE. The determination
of benefit cost for postretirement health plans is generally based on
comprehensive hospital, medical and surgical benefit plan provisions. The
Company intends to fund amounts for postretirement benefits as deemed
appropriate.

Postretirement benefit cost was $8.1 million, $3.8 million and $11.9 million for
the years 1999-1997, respectively. The weighted-average assumptions used by GTE
in the actuarial computations for postretirement benefits were as follows at
December 31:

<TABLE>
<CAPTION>
                                                                       1999                 1998
                                                                --------------------  ------------------
<S>                                                             <C>                   <C>
        Discount rate                                                  8.00%                7.00%
        Expected return on plan assets                                 8.00%                8.00%
</TABLE>

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
$3.3 million, $2.9 million and $3.1 million in 1999-1997, respectively.



                                       25
<PAGE>   27

8.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is summarized as follows at December 31:

<TABLE>
<CAPTION>
                                                                         1999                1998
                                                                   -------------       -------------
                                                                          (Dollars in Millions)
<S>                                                                <C>                 <C>
Land                                                               $        10.6       $        10.6
Buildings                                                                  209.0               203.3
Plant and equipment                                                      1,796.4             1,789.8
Construction in progress and other                                          53.2                42.0
                                                                   -------------       -------------

  Total                                                                  2,069.2             2,045.7
Accumulated depreciation                                                (1,233.9)           (1,191.5)
                                                                   -------------       -------------

  Total property, plant and equipment - net                        $       835.3       $       854.2
                                                                   =============       =============
</TABLE>


9.  REGULATORY AND COMPETITIVE MATTERS

The Company is regulated by the Public Utilities Commission (PUC) of the state
of Hawaii for its intrastate business operations, the Commonwealth Utilities
Corporation (CUC) of the Commonwealth of the Northern Mariana Islands (CNMI) for
MTC's local operations and the FCC for GTE Hawaiian Tel International
Incorporated and Pacifica, which provide interstate and international
telecommunications services.

During 1999, regulatory and legislative activity at both the state and federal
levels continued to be a direct result of the Telecommunications Act of 1996
(Telecommunications Act). Along with promoting competition in all segments of
the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.


10.  COMMITMENTS AND CONTINGENCIES

The Company has noncancelable operating leases covering certain buildings,
office space and equipment. Rental expense was $10.4 million, $13.0 million and
$14.3 million in 1999-1997, respectively. Minimum rental commitments under
noncancelable leases are $7.9 million, $7.7 million, $4.0 million, $3.6 million
and $3.4 million for the years 2000-2004, respectively, and aggregate $39.6
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 environmental, safety and health matters. Management believes
that the ultimate resolution of these matters will not have a materially adverse
effect on the results of operations or the financial position of the Company.


11.  SEGMENT REPORTING

The Company does not have separate reportable segments of its own. The Company
is part of the Network Services product segment of GTE's National Operations.
Network Services provides wireline communication services within franchised
areas. These services include local telephone service and toll calls as well as
access services that enable long-distance carriers to complete calls to or from
locations outside of the Company's operating areas. Network Services also
provides complex voice and data services to businesses, billing and collection,
and operator assistance services to other telecommunications companies and
receives revenues in the form of a publication right from an affiliate that
publishes telephone directories in its operating areas.



                                       26
<PAGE>   28

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholder 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, 1999 and 1998, 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, 1999, as set forth
under Item 8 and Schedule II of this report. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.

Our audits were 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 part of the basic financial
statements. The supporting schedule and exhibit have been subjected to the
auditing procedures applied in the audits 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.




Dallas, Texas                                               ARTHUR ANDERSEN LLP
January 27, 2000



                                       27
<PAGE>   29

MANAGEMENT REPORT

To Our Shareholder:

The management of GTE Hawaiian Telephone Company Incorporated (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




LAWRENCE R. WHITMAN
Vice President - Finance and Planning



                                       28
<PAGE>   30

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

None.


PART III

The following items have been omitted in accordance with the relief provisions
under General Instruction I (2) 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



                                       29
<PAGE>   31

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 public 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, 1999-1997 (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)

          3.2*    Amended Bylaws (Exhibit 3.2 of the 1994 Form 10-K)

          4.1*    Indenture dated as of February 1, 1995 between GTE Hawaiian
                  Telephone Company Incorporated and Hawaiian Trust Company
                  Limited, as Trustee (Exhibit 4.1 of the Company's Registration
                  Statement on Form S-3, File No. 33-57743, filed with the
                  Securities and Exchange Commission on February 17, 1995)

          4.2*    First Supplemental Indenture dated as of July 1, 1996 between
                  GTE Hawaiian Telephone Company Incorporated and Hawaiian Trust
                  Company Limited, as Trustee (Exhibit 4.3 of the Company's
                  Report on Form 8-K, dated July 1, 1996)

          10.1*   Material Contracts - Severance Agreement between GTE Service
                  Corporation and John C. Appel (Exhibit 10.1 of the 1998 Form
                  10-K)

          10.2*   Material Contracts - Severance Agreements between GTE Service
                  Corporation and Richard L. Schaulin, Larry J. Sparrow and
                  Lawrence R. Whitman (Exhibit 10.2 of the 1998 Form 10-K)

          10.3*   Material Contracts - Retention Agreement between GTE Service
                  Corporation and John C. Appel (Exhibit 10.3 of the 1998 Form
                  10-K)

          10.4*   Material Contracts - Retention Agreements between GTE Service
                  Corporation and Richard L. Schaulin, Larry J. Sparrow and
                  Lawrence R. Whitman (Exhibit 10.4 of the 1998 Form 10-K)

          10.5    Material Contracts - Retention Agreement between GTE Service
                  Corporation and William M. Edwards, III

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

          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

         No reports on Form 8-K were filed during the fourth quarter of 1999.


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



                                       30
<PAGE>   32

GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES

Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
             Column A            Column B                  Column C                    Column D        Column E
--------------------------------------------------------------------------------------------------------------------
                                                          Additions
                                               -------------------------------
                                                                   Charged           Deductions
                                Balance at                      (Credited) to           from
                                Beginning         Charged       Other Accounts        Reserves        Balance at
     Description                 of Year         to Income         (Note a)           (Note b)       Close of Year
---------------------         ============     =============   ===============      =============   ==============
                                                    (Dollars in Millions)

Allowance for uncollectible accounts for the years ended:
<S>                           <C>              <C>             <C>                  <C>             <C>
    December 31, 1999         $        6.5     $        16.5   $         (0.8)      $        18.0   $         4.2
                              ============     =============   ==============       =============   =============

    December 31, 1998         $        8.6     $        10.3   $          2.1       $        14.5   $         6.5
                              ============     =============   ==============       =============   =============

    December 31, 1997         $        6.1     $        12.9   $          9.5       $        19.9   $         8.6
                              ============     =============   ==============       =============   =============
</TABLE>






NOTES:

(a) Recoveries of previously written-off amounts.
(b) Charges for which reserve was created.



                                       31
<PAGE>   33

                                   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.

<TABLE>
<S>                                                     <C>
                                                             GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED
                                                          ---------------------------------------------------
                                                                             (Registrant)

 Date    March 29, 2000                                 By             /s/  Warren H. Haruki
      ----------------------                              ---------------------------------------------------
                                                                           Warren H. Haruki
                                                                               President
</TABLE>


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>
/s/  Warren H. Haruki                    President and Director                                      March 29, 2000
----------------------------             (Principal Executive Officer)
Warren H. Haruki


/s/  Lawrence R. Whitman                 Vice President - Finance and Planning                       March 29, 2000
----------------------------             and Director
Lawrence R. Whitman                      (Principal Financial Officer)


/s/  Stephen L. Shore                    Controller                                                  March 29, 2000
----------------------------             (Principal Accounting Officer)
Stephen L. Shore


/s/  John C. Appel                       Director                                                    March 29, 2000
----------------------------
John C. Appel


/s/  Mateland L. Keith, Jr.              Director                                                    March 29, 2000
----------------------------
Mateland L. Keith, Jr.
</TABLE>



                                       32
<PAGE>   34

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
     Exhibit
      Number                                                     Description
-------------------        -----------------------------------------------------------------------------------------
<S>                        <C>
      10.5                 Material Contracts - Retention Agreement between GTE Service Corporation and William M.
                           Edwards, III

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

      27                   Financial Data Schedule
</TABLE>