<PAGE>
 
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                      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, 1998
                                      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: 1-12365.
 
                          BA MERCHANT SERVICES, INC.
            (Exact name of registrant as specified in its charter)
 
                      
        Delaware           One South Van Ness Avenue        94-3252840
     (State or other    San Francisco, California 94103   (I.R.S. Employer
     jurisdiction of             415-241-3390            Identification No.)
    incorporation or     (Address and telephone number   
      organization)     of principal executive offices) 

                                                         
          Securities registered pursuant to Section 12(b) of the Act:
   New York Stock Exchange: Class A Common Stock, Par Value $0.01 per share
 
          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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
                                 Yes  X    No
                                     ----     ----
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to thisForm 10-K. [X]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price on the consolidated
transaction reporting system on March 10, 1999, was $333.2 million.
 
  Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 10, 1999.
 
 Class A Common Stock, $0.01 par value--16,252,027 shares outstanding on March
                                        10, 1999.
 Class B Common Stock, $0.01 par value--32,400,000 shares outstanding on March
                                        10, 1999.
 
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<PAGE>
 
                                   FORM 10-K
 
                                     PART I
 
<TABLE>
<S>                                                                        <C>
 Item 1.  Business
          General........................................................     2
          Description of Business........................................     2
          BankAmerica and NationsBank Merger.............................     3
          The Company's Merger with BankAmerica..........................     3
          Proposed Divestiture of the Company's Taiwan Operations........     4
          Products.......................................................     4
          New Product Initiatives........................................     6
          Merchant Customer Base.........................................     7
          Technology.....................................................     7
          Relationship with BankAmerica and the Bank.....................     8
          Competition....................................................     9
          Supervision and Regulation.....................................    10
          Certain State Tax Issues.......................................    10
          Seasonality....................................................    10
          Employees......................................................    11
 Item 2.  Properties.....................................................    11
 Item 3.  Legal Proceedings..............................................    11
 Item 4.  Submission of Matters to a Vote of Security Holders............    11
 
                                    PART II
             
 Item 5.  Market for Registrant's Common Equity and Related Stockholder
          Matters........................................................    12
          Dividend Policy................................................    12
          Description of Capital Stock...................................    12
 Item 6.  Selected Financial Data........................................    14
 Item 7.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations..........................................    15
          Overview.......................................................    15
          Highlights.....................................................    15
          Results of Operations..........................................    16
          Balance Sheet Review...........................................    18
          Liquidity and Capital Resources................................    18
          Operating Strategy.............................................    18
          Year 2000......................................................    19
          Forward-Looking Statements.....................................    20
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....    21
 Item 8.  Financial Statements and Supplementary Data....................    22
 Item 9.  Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure...........................................    41
 
                                    PART III
 
 Item 10. Directors and Executive Officers of the Registrant.............    41
 Item 11. Executive Compensation.........................................    44
 Item 12. Security Ownership of Certain Beneficial Owners and 
          Management.....................................................    47
 Item 13. Certain Relationships and Related Transactions.................    50
 
                                    PART IV
           
 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
          8-K.............................................................   52
 Signatures...............................................................   55
</TABLE>
 
                                       1
<PAGE>
 
Item 1. Business
 
General
 
  Organization and Use of Proceeds from Initial Public Offerings - BA Merchant
Services, Inc. (the Company) was incorporated in October 1996. At the close of
business on December 3, 1996, the merchant processing business of Bank of
America NT&SA (the Bank), a multi-state operation based in California, and the
merchant processing business of Bank of America NW, National Association
(formerly Seattle-First National Bank) (BANW), located principally in the
State of Washington, were transferred to the Company. At December 31, 1996,
both the Bank and BANW were subsidiaries of BankAmerica Corporation, a
Delaware corporation (referred to herein as BAC when the context refers to
such corporation prior to its merger with NationsBank Corporation, as
described below under "--BankAmerica and NationsBank Merger"). On
January 1, 1997, BANW was merged into the Bank. References in this report to
BankAmerica shall be deemed to be references to BankAmerica Corporation and
its subsidiaries and affiliates, including the Bank, unless the context
otherwise requires.
 
  On December 19, 1996, the Company commenced initial public offerings (the
Offerings) of 16.1 million shares of Class A Common Stock, $0.01 par value, at
$15.50 per share. Of these shares, 12.9 million shares were offered in the
United States and 3.2 million shares were offered in a concurrent
international offering outside the United States. The Company completed the
Offerings on December 31, 1996. Net proceeds from the Offerings were $232.9
million. In late December 1996, $126.3 million of the proceeds from the
Offerings were used to pay down the outstanding balance on a revolving line of
credit with an affiliate which had been used to finance operations pending
receipt of the proceeds of the Offerings.
 
  During the second and third quarters of 1997, the Company acquired BAC's
merchant processing businesses in Thailand, the Philippines and Taiwan and its
merchant processing administrative office in Hong Kong in consideration for a
total of 2.2 million shares of Class B Common Stock. The acquisition of these
entities is collectively referred to herein as the "Asia Acquisitions". The
Company provided approximately $33.0 million of the proceeds from the
Offerings to fund the regulatory and working capital requirements of the Asia
Acquisitions.
 
  As a result of the completion of the Offerings and subsequent Asia
Acquisitions, BankAmerica, which indirectly owns 100 percent of the
outstanding Class B Common Stock of the Company, owns approximately 66.6
percent of the economic interest of the Company. BankAmerica's economic
ownership represents approximately 95.2 percent of the combined voting power
of the Company.
 
Description of Business
 
  The Company provides an array of payment processing and related information
products and services to merchants throughout the United States and certain
Asian countries who accept credit and charge cards (collectively "credit
cards") and debit cards as payment for goods and services. According to
published industry sources, the Company is the fifth largest processor of
merchant credit card transactions and one of the largest processors of debit
card transactions in the United States.
 
  The Company provides its products and services to a client base of merchants
in a wide variety of industries, including general retailers, restaurants and
supermarkets. The Company's clients are comprised of large multi-regional
chains, middle-market merchants, and small merchants that collectively operate
from approximately 229,000 locations as of year-end 1998. The Company markets
its products and services to merchants directly and also indirectly through
BankAmerica's branch network and product distribution system. In addition, the
Company has increased its client base as well as its transaction volume
through the use of agent banks and independent sales organizations (ISOs) that
enlist merchant clients on its behalf. The Company continually invests in
technology, research, and product development and emphasizes excellent client
service in the delivery of its products and services.
 
                                       2
<PAGE>
 
  In order to process credit and debit card transactions, the Company, along
with all other nonbank merchant processors, must be controlled or sponsored by
a financial institution that is a principal member of the credit card
associations and debit card networks. Through sponsorship by BankAmerica, the
Company is a member of Visa(R) and MasterCard(R), and participates in various
debit networks including Interlink(R), Explore(R), Accel(R), Pulse(R), and
Cash Station(R) for processing transactions through those associations or
networks.
 
  The Company experienced substantial growth in its transaction volume, net
revenue and net income during the three years ended December 31, 1998,
principally through internally generated growth. The number of card
transactions processed by the Company increased from 386.2 million for the
year ended December 31, 1996 to 713.9 million for the year ended December 31,
1998. During the same periods, the Company's net revenue increased from $138.8
million to $188.4 million and net income increased from $27.4 million to $36.7
million.
 
BankAmerica and NationsBank Merger
 
  On April 13, 1998, BAC and NationsBank Corporation (NBC) announced a
definitive agreement to merge in a stock-for-stock transaction. On May 29,
1998, the Company announced that BAC and NBC had jointly determined that the
Company would be the principal merchant processing servicer for the combined
organization following the merger. NBC previously offered merchant processing
services through a minority interest in a venture with another merchant
processing provider. The merger of BAC and NBC was consummated on September
30, 1998. On November 13, 1998, BankAmerica announced it had signed a letter
of intent to sell its minority interest in such venture to its venture
partner, and the sale was completed on December 18, 1998.
 
  The new BankAmerica franchise has approximately 4,800 retail branches in 22
states. Under various contractual agreements with BankAmerica, the Company has
access to BankAmerica's client base, the Bank of America name and trademarks,
the implementation of "On-Us" transaction processing and marketing, the Bank's
distribution channels, and credit and debit card association and network
sponsorships. The Company believes the opportunity to be the exclusive
merchant acquiror for new business with access to BankAmerica's client base
will be a significant source of growth for the Company. However, the Company
cannot at this time estimate the impact this may have on its financial
position or results of operations.
 
The Company's Merger with BankAmerica
 
  On December 22, 1998, BankAmerica and the Company jointly announced the
execution of an Agreement and Plan of Merger (Merger Agreement), pursuant to
which a wholly owned subsidiary of BankAmerica will be merged with and into
the Company. A Special Meeting of Stockholders for the purpose of considering
the approval and adoption of the Merger Agreement has been scheduled for April
28, 1999. If the Merger Agreement is approved and adopted by the Company's
stockholders and the merger becomes effective, each share of Class A Common
Stock of the Company outstanding immediately prior to the merger (except for
shares as to which appraisal rights have been perfected) will be converted
into the right to receive $20.50 in cash, without interest thereon. Approval
and adoption of the Merger Agreement requires the affirmative vote of the
holders of a majority of the Company's outstanding shares of Class A Common
Stock and Class B Common Stock, voting as a single class. As of March 26, 1999
(the record date established for the Special Meeting of Stockholders)
BankAmerica, directly or indirectly, owned 100% of the outstanding Class B
Common Stock, which, on that date, represented approximately 66.6% of the
economic ownership of the Company and approximately 95.2% of the combined
voting power of the Company. Therefore, BankAmerica has sufficient voting
power to approve and adopt the Merger Agreement, regardless of the vote of any
other stockholder. In the Merger Agreement, BankAmerica has agreed to vote in
favor of the merger provided that the recommendation of the Special Committee
of the Company's Board of Directors with respect to the merger is not revoked,
modified or qualified in a manner adverse to BankAmerica. It is anticipated
that the merger would be consummated as soon as practicable following receipt
of stockholder approval. Subsequent to the merger, the Company will operate as
a wholly owned subsidiary of the Bank. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Highlights."
 
 
                                       3
<PAGE>
 
  Subsequent to the announcement by BankAmerica and the Company on October 22,
1998, that BankAmerica was offering to acquire through merger each outstanding
share of Class A Common Stock for $15.50 per share in cash, three putative
class actions were filed in the Court of Chancery of the State of Delaware.
Each of these actions challenged the terms of BankAmerica's initial proposal,
named as defendants certain present and former directors of the Company, the
Company and BankAmerica and allege that these named defendants breached their
fiduciary duties to the public stockholders of the Company. On December 22,
1998, counsel to BankAmerica, the Company and the other defendants entered
into a Memorandum of Understanding with counsel to the plaintiffs in such
cases for the settlement thereof, subject to court approval and certain other
conditions. On February 9, 1999, BankAmerica, the Company and the other
defendants entered into a Stipulation and Agreement of Compromise, Settlement
and Release (the "Stipulation") with counsel to the plaintiffs in such cases
for the settlement thereof. A hearing to consider approval of the settlement
and the attorneys' fee request of plaintiffs' counsel was held on March 18,
1999 (the "Settlement Hearing"). At the Settlement Hearing, an Order and Final
Judgment was entered, wherein it is provided, in accordance with the
Stipulation, that the Lawsuit is dismissed with prejudice. Fees and expenses
were awarded to the plaintiffs' counsel in the amount of $1.1 million and
approximately $35,000, respectively. The effective date of the settlement
provided by the Stipulation will occur five days after the later of (i) the
consummation of the Merger, which will occur after the Special Meeting of
Stockholders, and (ii) the Order and Final Judgment of March 18, 1999 becoming
final, which, in the absence of an appeal, will occur on April 19, 1999.
 
PROPOSED DIVESTITURE OF THE COMPANY'S TAIWAN OPERATIONS
 
  On December 9, 1998, BankAmerica announced a plan to divest certain of the
assets and businesses of BankAmerica and its affiliates which are located in
various countries in Asia, including possibly certain assets and businesses
located in the Republic of China. The proposed sale of such Asian operations,
including possibly the assets and business of the Company located in the
Republic of China (Taiwan Business), arose, in part, as a consequence of the
merger of BAC and NBC (BAC/NBC Merger), and the post-merger evaluation of the
strategic and economic significance of BankAmerica's varied business
operations. The Company's Merger Agreement with BankAmerica provides that the
Taiwan Business may, at the election of BankAmerica, be included within
certain assets and businesses of BankAmerica or its affiliates which may be
the subject of divestitures by BankAmerica or its affiliates after the date of
the Merger Agreement. BankAmerica has agreed to consult with the Company in
connection with such divestitures and has further agreed that the Company
shall be entitled to receive its allocable proportion of the consideration
received by BankAmerica and its affiliates for such Asian assets.
 
  In the event that the Merger Agreement is terminated for any reason and the
divestiture of the Taiwan Business is consummated on terms resulting in the
consideration receivable under the Merger Agreement by the Company being less
than the market value of the securities of the Company issued to BankAmerica
in connection with the Company's acquisition of the Taiwan Business,
BankAmerica has agreed to pay the Company the difference between such market
value and the consideration receivable therefor.
 
PRODUCTS
 
  The Company offers a broad selection of products and services related to
payment processing. Through proprietary and third-party licensed software
applications and equipment, the Company provides electronic authorization and
settlement services for all major credit, charge and debit card brand
transactions. Additionally, the Company provides an array of value-added
services in connection with its processing systems including data capture and
reporting, billing dispute resolution, merchant marketing programs and a
variety of specialty industry applications.
 
  Electronic Authorization Services - The Company provides electronic
transaction authorization services for all major credit and debit cards.
Authorization generally involves approving a cardholder's purchase at the
point of sale after verifying that the card is not lost or stolen and the
transaction amount is within the cardholder's credit or account limit. The
Company utilizes third-party national authorization networks available on a
 
                                       4
<PAGE>
 
subscription basis to confirm such information. In the case of certain On-Us
transactions (those transactions originated in California involving debit
cards issued by BankAmerica), the Company obtains the necessary authorization
directly from BankAmerica, thus avoiding third-party authorization networks
and the related fees. In the event that a merchant is not able to connect with
the electronic network, the Company provides access to voice authorization and
automated voice response that is available 24 hours a day, seven days a week.
 
  Data Capture and Reporting Services - The Company records data relating to
card transactions at the time of the transaction authorization and aggregates
this data for each merchant client using a software application programmed by
the Company into the merchant's terminal. The Company compiles this aggregated
data and uses it to provide merchants with information services, such as
specialized management reports. For certain national merchant customers, the
Company captures data via a "host-to-host" linkage with the merchant's own
mainframe computer which, in turn, allows the merchant enhanced access to the
reporting capabilities of the Company's proprietary systems.
 
  Settlement, Clearing and Accounting Services - The Company processes
transactions for settlement, forwards transaction data to credit card
associations for payment, and provides daily payments to merchants. The
settlement process involves managing a record of each merchant's transactions
and transferring funds for payment from the card issuer to the merchant.
Transaction information is transmitted by the Company, or a third-party
merchant accounting provider, to the card-issuing bank through the card
association, such as Visa(R) or MasterCard(R). The Company then arranges for
funds to be transferred to the merchant's bank account via Automated Clearing
House (ACH) or Fedwire transfer, or via BankAmerica's internal deposit systems
in the event the merchant has a BankAmerica deposit account.
 
  Billing Dispute Resolution Services - The Company assists merchants in
investigating and resolving billing disputes with their clients.
 
  Terminal Services - The Company rents and sells point-of-sale (POS)
terminals to its merchant clients. The Company customizes and regularly
updates the software that drives the terminals and provides terminal
maintenance services.
 
  Client Service and Support - The Company maintains a telephone call-in
service staffed by client service representatives which is available 24 hours
a day, seven days a week. Representatives provide technical support for
merchants for all of the Company's products and services.
 
  Merchant Marketing Programs - The Company and BankAmerica jointly offer a
number of services designed to allow merchant clients to target and reward
retail BankAmerica clients who are frequent customers of a merchant. Through
joint marketing programs of BankAmerica and the Company, merchants are able to
communicate directly with BankAmerica retail clients through advertising,
statement messages and inserts, transaction receipts, newsletters and direct
mail.
 
  Specialty Applications - The Company also provides products and services
tailored to the needs of individual merchants or a particular industry. In the
retail industry, a variety of products are offered to support different types
of equipment at the point-of-sale, including POS terminals, electronic cash
registers and personal computers. For restaurants, the Company offers products
that assist merchants in managing the entry and distribution of tips to
servers. For lodging establishments, the Company offers products which assist
such establishments in managing the unique circumstances that result from
numerous types of transaction activity occurring over a period of days. The
Company offers additional products to support supermarkets and large-
volume/low-dollar-amount merchants who find it economically beneficial to
process transactions in batches rather than individually. For very small
merchants, the Company offers voice authorization and the deposit of paper
drafts at BankAmerica or agent bank branches. These products are supported
through a variety of arrangements that involve the use of the Company's
internal authorization and capture system or third-party authorization and
capture systems.
 
 
                                       5
<PAGE>
 
  Quasi-Cash Access - In 1997, the Company introduced a new product which
enables customers of gaming establishments to use their credit cards and debit
cards at automated terminals to obtain authorization for negotiable drafts
which are redeemable for cash at the gaming establishment. The Company
expanded its quasi-cash access product line during the second quarter of 1998
by offering Casino Cash Plus(R) through the Bank's automated teller machines
(ATMs) in gaming locations. On July 9, 1998, the Company entered into an
agreement to invest in a new limited liability company (LLC) with First Data
Financial Services, LLC and Global Cash Access to provide cash advance and
related services to the gaming industry. The Company invested $35 million in
cash, plus all interest earned during the escrow period of July 9, 1998 to
September 10, 1998, in addition to its interest in existing gaming contracts
and gaming related assets, for a 21 percent ownership interest in the LLC.
 
New Product Initiatives
 
   During 1998, significant product initiatives included the following:
 
 .  HostLINK(TM): The HostLINK(TM) system was expanded to support the
   processing of debit card, purchasing card and mail/telephone order
   transactions. In addition to expanding the host system, point-of-sale
   applications were developed to support additional market segments,
   including retail, restaurant, hotel and motel businesses. The expanded host
   and point-of-sale capabilities will enable the Company to place 80% of all
   new business through the Company's proprietary host. In 1999, the Company
   will seek to convert existing third party businesses to HostLINK(TM). By
   converting existing third party vendor-supported business and placing new
   business on HostLINK(TM), the Company seeks to realize a significant
   reduction in transaction processing costs.
 
 .  Electronic Commerce: The Company is continuing to expand its presence in
   the e-commerce arena. In 1998, the Company transitioned its e-commerce host
   "v-GATE" from the SET 0.0 encryption protocol to the SET 1.0 protocol.
   During the same period, the Company more than tripled the transaction
   volume through v-GATE by continuing to expand the number of merchants using
   the corresponding internet point-of-sale application "v-POS". Additional
   users included a second grocery store chain and a university.
 
 .  Electronic Benefit Transfer (EBT): EBT is the distribution of government
   benefits through card-based programs. In support of this growing market
   segment, the Company implemented point-of-sale products to support the
   processing of EBT transactions in San Bernardino and San Diego counties. In
   addition to building the necessary products, the Company facilitated the
   introduction of these products to thousands of merchants in the two
   counties. The Company expects to expand EBT processing into Georgia in 1999
   and is evaluating the possible expansion of EBT processing into additional
   areas in the year 2000.
 
 .  Merchant Reporting: The Company implemented a merchant reporting system
   that enables merchants to dial in and retrieve reports and files that
   contain comprehensive transaction, deposit, adjustment and chargeback
   information. Such reports are available on a daily, weekly or monthly
   basis, as desired. The Company expects to make these same reports available
   via the Internet during 1999.
 
                                       6
<PAGE>
 
Merchant Customer Base
 
  The Company provides merchant processing services to a diverse client base,
ranging from large multi-regional chains to small merchants. At December 31,
1998, the Company provided merchant processing services to over 182,000
merchant locations directly, to over 26,000 merchant locations through 230
agent banks not affiliated with the Company, and to approximately 20,000
merchant locations through ISOs.
 
  The Company's merchant accounts were distributed by type of merchant at
December 31, 1998 (as measured by annualized credit card sales volume for the
year ended December 31, 1998) as follows:
 
<TABLE>
<CAPTION>
      Merchant Type                                                   Percentage
      -------------                                                   ----------
      <S>                                                             <C>
      General retail.................................................     28%
      Supermarkets...................................................     14
      Restaurants....................................................      9
      Automobile sales and repair....................................      7
      Lodging establishments.........................................      6
      Mail order companies...........................................      4
      Other..........................................................     32
                                                                         ---
        Total........................................................    100%
                                                                         ===
</TABLE>
 
  As indicated by the above table, the composition of the Company's merchant
client base emphasizes general retail merchants, supermarkets, restaurants,
lodging establishments and other similar merchants. In the "Other" category,
no single merchant type accounted for more than 4 percent of annualized credit
card sales volume.
 
  The Company's clients were distributed by size at December 31, 1998 (as
measured by credit card sales volume for the year ended December 31, 1998) as
follows:
 
<TABLE>
<CAPTION>
      Sales Volume                                                    Percentage
      ------------                                                    ----------
      <S>                                                             <C>
      Less than $250,000.............................................     15%
      $250,000 to $50,000,000........................................     47
      $50,000,000 or More............................................     38
                                                                         ---
        Total........................................................    100%
                                                                         ===
</TABLE>
 
  As shown by the above data, a significant percentage of the Company's
business is with merchants with less than $50 million in annual sales volume.
In the Company's experience, its smaller retail merchant clients have been
less price sensitive than large corporate businesses. Fees per transaction
paid by high sales volume merchants are generally lower compared to the fees
per transaction paid by the Company's merchant base as a whole. In addition,
no single merchant accounted for more than 5 percent of the net revenue of the
Company in 1998.
 
  At December 31, 1998, more than half of the merchant locations served by the
Company were located in California. In addition, the Company estimates that
approximately 47 percent of its sales volume processed for the year ended
December 31, 1998 was derived from merchant locations in California.
 
Technology
 
  To remain competitive in the merchant processing industry, the Company has
dedicated significant resources to developing proprietary technologies that
lower costs and enhance service. The Company believes its continuing
investment in technology will allow it to remain competitive in the industry.
The principal systems that the Company has developed are described below:
 
 
                                       7
<PAGE>
 
  Transaction Processing System - The Company's transaction processing system,
called HostLINK(TM), is an advanced system which the Company began installing
in the second quarter of 1997. Management believes that the client-server open
architecture technology of this system will enhance the Company's position
among the technological leaders of the payment processing business. The
Company began to process restaurant and lodging merchant transactions through
HostLINK(TM) in the fourth quarter of 1998. Most of these transactions are
currently processed through third-party processors. Additional systems
enhancements will enable the Company to meet the processing requirements of
diverse media, including the Internet. These enhancements also will enable the
Company to expand the types and delivery methods of information reported to
merchants. Management believes that the flexibility resulting from the open
architecture design of HostLINK(TM) will result in reduced maintenance costs
compared with those normally associated with mainframe systems, improved
product differentiation and reduced product development time.
 
  On-Us Debit Card Transactions - In early 1997, the Company developed the
capability to process On-Us transactions. On-Us transactions are those
processed directly with the Bank, thereby bypassing the third-party
authorization networks and related network charges. This capability is
presently operational for on-line (ATM) debit card transactions initiated in
California. The Company expects to offer On-Us capabilities for debit card
transactions in the 21 other states in the BankAmerica retail market area
during 1999.
 
  Automated Chargeback System - The Company's Automated Chargeback System
automates the processing of billing disputes between the Company's merchants
and their customers. Resolution of disputed transactions involves the receipt,
processing and tracking of retrieval requests and chargebacks. Retrieval
requests are requests from card-issuing banks for copies of sales drafts.
Chargebacks are transactions returned by card-issuing banks to merchant
processors when customers dispute the receipt of goods or services from
merchants. According to card association rules, if the merchant processor is
unable to collect the amount of the transaction from the merchant within a
specified time period, the merchant processor is liable for such amount. The
system automates many of the time-consuming, labor-intensive processes
normally associated with the handling of retrieval requests and chargebacks.
The system incorporates nearly all aspects of the transaction dispute process,
including the receipt of chargebacks from issuing banks, the distribution of
chargeback notices to merchants, the receipt of merchant rebuttals, and the
collection of transaction dollar amounts. The system improves the timeliness
of the dispute resolution process and reduces operating costs and losses
associated with the processing of retrieval requests and chargebacks.
 
Relationship with BankAmerica and the Bank
 
  BankAmerica, indirectly through the Bank, owns 100 percent of the
outstanding Class B Common Stock of the Company, which represents
approximately 66.6 percent of the economic interest of the Company. Such
ownership represents approximately 95.2 percent of the combined voting power
of the Company. The Bank has the ability to elect all of the members of the
Board of Directors of the Company and to exercise a controlling influence over
the business and affairs of the Company. As of the date of this report, the
size of the Board of Directors of the Company is fixed at seven. Three of the
present members of the Board of Directors are independent of BankAmerica.
 
  The Company and BankAmerica engage in various intercompany transactions and
arrangements, including the provision by BankAmerica of various services to
the Company. Such services are provided pursuant to certain intercompany
agreements (Intercompany Agreements) which provide, among other things, for
the grant to the Company of a license to use the Bank of America name and
certain trademarks and servicemarks, including Bank of America(R),
BankAmericard(R), VERSATEL(R) and VERSATELLER(R), in connection with the
Company's business. Pursuant to the Intercompany Agreements, BankAmerica
performs for the Company certain product distribution, processing, system
support, telecommunications, marketing, regulatory compliance, legal, tax and
treasury, accounting and audit, and other miscellaneous support and
administrative services. Additionally, BankAmerica provides association and
network sponsorship and representation in the Visa(R) and MasterCard(R)
associations. The Company and BankAmerica have also entered into agreements
concerning registration rights, the allocation of tax liabilities, and the
leasing of certain facilities by the Company from BankAmerica.
 
                                       8
<PAGE>
 
  In December 1996, BAC and the Company entered into a Non-Competition and
Corporate Opportunities Allocation Agreement (Non-Competition Agreement)
pursuant to which BAC will not compete with the Company for a period of five
years with respect to payment processing for merchants that arise in the use
of credit, charge or debit cards that are authorized through an electronic
medium originating at the point of sale in the United States and certain Asian
countries in which the Company has operations.
 
  BankAmerica is not required to maintain control of the Company, and any
disposition by BankAmerica of its interest in the Company could, depending
upon the circumstances, have an adverse effect on the Company or the price of
its stock. Any divestiture by BankAmerica which results in it owning less than
a majority of the voting power of the Company will permit BankAmerica to
terminate its contractual arrangements with the Company under which the
Company has access to the Bank's client base, the Bank of America name and
trademarks, the implementation of On-Us transaction processing and marketing,
the Bank's product distribution channels, and credit and debit card
association and network sponsorships. Any such termination could have a
material adverse effect on the Company's business. The Company expects that
the Intercompany Agreements and the Non-Competition Agreement will govern the
relationship between the Company and BankAmerica, the provision of services
and the payments therefrom, for the foreseeable future. See "--The Company's
Merger with BankAmerica" and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the pending
merger between BankAmerica and the Company.
 
  For additional information regarding the Company's relationship with
BankAmerica and the Bank, see Item 13, "Certain Relationships and Related
Transactions".
 
Competition
 
  The United States domestic market in which the Company competes for credit,
charge and debit card payment processing for merchants is intensely
competitive. According to publicly available industry sources, the 10 largest
merchant processors in the United States processed approximately 83 percent of
the credit card sales volume during the calendar year 1997. Other competitors
include smaller vertically integrated processors, community and regional
banks, and ISOs. The Company competes on the basis of price, the availability
of products and services, the quality of customer service and support, and
transaction processing speed, quality and reliability. The Company also
competes by building alliances with other banks to gain access to their
distribution systems, acquiring merchant portfolios, and enlisting ISOs. The
majority of the Company's contracts with its merchant clients are cancelable
at will or on short notice or provide for renewal at frequent periodic
intervals, and, accordingly, the Company and its competitors regularly rebid
such contracts. This competition may influence the prices the Company can
charge, which consequently requires the Company to aggressively control costs
to maintain acceptable profit margins.
 
  Since 1997, price competition has caused the Company's net revenue in
relation to sales volume to decline, particularly with respect to high-volume
retail clients. No assurance can be given that the Company will be able to
maintain profit margins at or near present levels, whether with respect to its
high-volume retail clients or its small- and middle-market clients.
 
  The merchant processing industry in general requires the use of advanced
computer hardware and software technology, and has been characterized by the
development of new products and services to meet increasingly complex and
rapidly changing client and regulatory requirements. The success of any
competitor in this industry, including the Company, depends in part on the
ability to continue to adapt its technology in a timely and cost-effective
manner to meet these requirements.
 
  In recent years, there has been a trend toward consolidation in the merchant
processing industry. Further tightening of margins may result in banks and
other payment processors abandoning the transaction processing business, thus
accelerating the trend toward consolidation. Due to market demands requiring
processors to provide advanced and efficient technology, certain processors
have recently left the business or merged with other providers. This
consolidation has enabled certain of the Company's competitors to gain access
to significant capital, management, marketing and technological resources that
are equal to or greater than those of the Company.
 
                                       9
<PAGE>
 
Supervision and Regulation
 
  As long as BankAmerica has a controlling interest in the Company, the
Company is subject to all provisions of federal banking laws and regulations
that are applicable to the Bank unless specifically provided otherwise
(collectively, the Banking Laws). As a result, the Company's activities are
generally limited to those that are permissible for a national bank, e.g.,
those activities which are a part of or incidental to the business of banking.
All of the current activities of the Company are permissible for national
banks.
 
  The Company is subject to the supervision and examination of the Office of
the Comptroller of the Currency (OCC), one of the principal regulatory bodies
having jurisdiction over the Bank, as well as the Board of Governors of the
Federal Reserve System (Federal Reserve Board) with respect to foreign
activities and investments. The Company may not engage in any new activities
until it first obtains the written approval of the OCC and/or the Federal
Reserve Board. The OCC will only approve those activities legally permissible
for a national bank or their subsidiaries that are consistent with prudent
banking principles and OCC policy. The Federal Reserve Board applies similar
requirements to the Company's foreign activities and/or investments. Future
acquisitions by the Company may also require the prior written approval of the
OCC and/or the Federal Reserve Board.
 
  To facilitate BankAmerica's compliance with applicable Banking Laws and to
allow BankAmerica to obtain any required consents or approvals, the Company
and the Bank have entered into an agreement which prohibits the Company from
entering into any business activities prior to the receipt of any consents and
approvals required pursuant to the Banking Laws and, if such consents are not
received, prohibits the Company from engaging in such business activities.
 
  The Company must adhere to the standards of the credit card associations and
debit card networks or risk suspension or termination of its membership or
participation status. There can be no assurance that: (i) the credit card
associations or debit card networks will maintain the Company's membership or
participation status; (ii) the rules of the credit card associations or debit
card networks allowing the Company and other nonbank transaction processors to
market and provide transaction processing services will remain in effect; or
(iii) the credit card associations or debit card networks will continue to
interpret their rules as they have done in the past, a change in
interpretation of which may have an adverse impact on the Company's business,
financial condition or results of operations.
 
Certain State Tax Issues
 
  Merchant processing companies like the Company may be subject to state
taxation on certain portions of their service fees charged to merchants.
Application of this tax is an emerging issue in the industry and the states
have not yet adopted uniform guidelines regarding the taxation of merchant
services. In the event the Company is required to bear all or a portion of
these costs, and is unable to pass such costs through to its merchant clients,
the Company's business, financial condition or results of operations could be
adversely affected.
 
Seasonality
 
  The merchant processing industry in general is prone to seasonal
fluctuations in transaction activity. Although the Company generally
experiences seasonality in its business, fluctuations are less pronounced than
in the industry, due in part to its diverse merchant client base. Those
segments of merchants that are particularly sensitive to seasonal
fluctuations, such as airlines, travel agencies, lodging, and mail order
merchants, each represent relatively small percentages of the Company's
processing business, as compared to those segments of the Company's client
base that are generally not subject to significant seasonality, such as
general retail merchants, restaurants, supermarkets and gas stations. The
Company's net revenue is typically higher in the third and fourth calendar
quarters and lower in the first calendar quarter. Increased tourism in
California and other western states during the summer months and retail
activity prior to the beginning of the school year contribute to higher third
quarter net revenue, and holiday activity contributes to higher fourth quarter
net revenue. The decline in retail activity following the holiday season
results in lower first quarter net revenue.
 
                                      10
<PAGE>
 
Employees
 
  At December 31, 1998, the actual number of persons employed by the Company
was 973. On a full-time-equivalent basis, the Company's staff level was 963.
 
Item 2. Properties
 
  The Company leases its principal executive offices and processing facility
in San Francisco from BankAmerica. The Company also leases other facilities in
California (Los Angeles, Pasadena and Foster City) and Washington (Bellevue,
Seattle and Spokane) from BankAmerica. The Company also leases other
facilities in various locations in the United States and certain Asian
countries from unrelated third parties.
 
Item 3. Legal Proceedings
 
  Various legal actions arising in the ordinary course of business are pending
against the Company. None of the litigation pending against the Company,
individually or collectively, is expected to have a material adverse effect on
the Company's financial condition, results of operations or liquidity.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
  None.
 
                                      11
<PAGE>
 
                                    PART II
 
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
 
  The Class A Common Stock of the Company is listed for trading on the New
York Stock Exchange under the symbol BPI. The following table sets forth the
high and low sales prices of the Company's Class A Common Stock for the
periods indicated:
 
<TABLE>
<CAPTION>
                                                                High     Low
                                                              -------- --------
      <S>                                                     <C>      <C>
      Year ended December 31, 1997 -
       First Quarter......................................... $17 3/4  $12 3/4
       Second Quarter........................................ $19 1/2  $12
       Third Quarter......................................... $22 1/4  $17 1/8
       Fourth Quarter........................................ $19 1/2  $14 1/8
      Year ended December 31, 1998 -
       First Quarter......................................... $21 9/16 $16 1/16
       Second Quarter........................................ $20 1/4  $14 3/8
       Third Quarter......................................... $21 1/2  $12 1/16
       Fourth Quarter........................................ $20 1/8  $10 3/8
</TABLE>
 
Dividend Policy
 
  The Company has not declared any dividends since its incorporation. It
currently intends to retain all future earnings for use in the operations of
its business and does not anticipate paying any cash dividends in the
foreseeable future. The Company's future dividend policy will be determined by
its Board of Directors on the basis of various factors, including the
Company's results of operations, financial condition, liquidity needs, capital
requirements and investment opportunities. The historical financial statements
included in this report for periods prior to the Offerings reflect the
remittance to BankAmerica of all cash generated by the Company in excess of
the amount required for the Company's operating and investing activities.
 
Description of Capital Stock
 
Authorized Capital Stock
 
  The authorized capital stock of the Company consists of 200 million shares
of Class A Common Stock, par value $0.01 per share, 50 million shares of Class
B Common Stock, par value $0.01 per share, and 10 million shares of Preferred
Stock, par value $0.01 per share. None of the Preferred Stock was issued or
outstanding as of December 31, 1998. Of the 200 million shares of Class A
Common Stock authorized, approximately 16.3 million shares were outstanding as
of January 31, 1999 and held by approximately 1,859 beneficial stockholders,
32.4 million shares have been reserved for issuance upon conversion of Class B
Common Stock into Class A Common Stock and 7.0 million shares have been
reserved for issuance pursuant to certain employee and nonemployee director
benefit and option plans. Of the 50 million shares of Class B Common Stock
authorized, 32.4 million shares, or 100 percent of the outstanding shares, are
owned by BankAmerica. The following summary description of the capital stock
of the Company is qualified in its entirety by reference to the Certificate of
Incorporation of the Company and the Bylaws of the Company.
 
Common Stock
 
  Voting Rights - The holders of Class A Common Stock and Class B Common Stock
generally have identical rights except that holders of Class A Common Stock
are entitled to one vote per share while holders of Class B Common Stock are
entitled to ten votes per share on all matters to be voted on by stockholders.
The holders of Common Stock are not entitled to cumulative voting rights.
Generally, all matters to be voted on by
 
                                      12
<PAGE>
 
stockholders must be approved by a majority (or, in the case of election of
directors, by a plurality) of the votes entitled to be cast by all shares of
Class A Common Stock and Class B Common Stock present in person or represented
by proxy, voting together as a single class, subject to any voting rights
granted to holders of any Preferred Stock. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of shares of Common Stock would be entitled to share ratably in all assets
remaining after payment of liabilities subject to prior distribution rights
and payment of any distributions owing to holders of shares of Preferred Stock
then outstanding, if any. Holders of the shares of Common Stock have no
preemptive rights, and the shares of Common Stock are not subject to further
calls or assessment by the Company. There are no redemption or sinking fund
provisions applicable to the shares of Common Stock.
 
  Dividends - Holders of Class A Common Stock and Class B Common Stock will
share in an equal amount per share in any dividend declared by the Board of
Directors, subject to any preferential rights of any outstanding Preferred
Stock. Dividends consisting of shares of Class A Common Stock and Class B
Common Stock may be paid only as follows: (i) shares of Class A Common Stock
may be paid only to holders of Class A Common Stock and shares of Class B
Common Stock may be paid only to holders of Class B Common Stock and
(ii) shares shall be paid proportionally with respect to each outstanding
share of Class A Common Stock and Class B Common Stock.
 
  Conversion - Generally, one share of Class B Common Stock is convertible
into one share of Class A Common Stock prior to a tax-free spin-off (as
defined in the Internal Revenue Code of 1986, as amended): (a) at any time, at
the holder's option; (b) automatically, with respect to any shares retained by
BankAmerica or its subsidiaries after transfer of Class B Common Stock
representing more than a 50 percent economic interest in the then outstanding
shares of common stock in a single transaction to a person who is not an
affiliate of BankAmerica (Class B Transferee); (c) automatically, upon
transfer of a share to a person other than BankAmerica or a Class B Transferee
or its subsidiaries; (d) automatically, if shares owned by BankAmerica or a
Class B Transferee or its subsidiaries in the aggregate constitute less than
30 percent of the economic ownership of the shares of Class A Common Stock and
Class B Common Stock combined. Shares transferred to BankAmerica stockholders
or to stockholders of a Class B Transferee in a tax-free spin-off do not
automatically convert upon the spin-off. However, after a tax-free spin-off,
shares of Class B Common Stock automatically convert into shares of Class A
Common Stock on the fifth anniversary of a tax-free spin-off unless counsel
opines that the conversion could adversely affect the ability to secure a tax-
free ruling from the Internal Revenue Service, or the Service has adopted a
no-ruling policy and the conversion could adversely affect the tax-free status
of the distribution, in which case stockholders must approve the conversion
(unless counsel opines that approval could adversely affect the tax-free
status of the distribution). In the event that counsel opines that stockholder
approval of the conversion could affect the tax-free status of the
distribution, the shares of Class B Common Stock will not convert to shares of
Class A Common Stock.
 
Preferred Stock
 
  The Board of Directors has the authority, without further action by
stockholders, to issue preferred stock in one or more series and to fix the
rights, designation, preferences, privileges, limitations and restrictions
thereof, including dividend rights, conversion rights, terms and rights of
redemption, liquidation preferences, and sinking fund terms (any or all of
which may be greater than the rights of the Common Stock). The Board of
Directors, without stockholder approval, can issue shares of preferred stock
with conversion, voting and other rights which could adversely affect the
rights of the holders of shares of Common Stock.
 
                                      13
<PAGE>
 
Item 6. Selected Financial Data
 
<TABLE>
<CAPTION>
                                             Year Ended December 31, (1)
                                       -----------------------------------------
                                        1998    1997    1996     1995     1994
                                       ------- ------- -------  -------  -------
                                        (in millions, except per share data)
<S>                                    <C>     <C>     <C>      <C>      <C>
Operating Data:
Net revenue..........................  $ 188.4 $ 161.0 $ 138.8  $ 119.9  $ 106.2
                                       ------- ------- -------  -------  -------
Operating expense:
  Salaries and employee benefits.....     40.8    34.7    27.9     24.1     21.6
  Data processing and
   communications....................     42.0    34.4    29.5     28.4     25.0
  General and administrative.........     25.7    24.8    20.7     20.8     18.5
  Depreciation.......................     15.3    10.6     9.1      6.6      4.6
  Merger related expenses............      4.4      --      --       --       --
  Employee stock exchange(2).........       --      --     2.4       --       --
  Amortization of intangibles........      2.0      .8     1.1      1.2      1.3
                                       ------- ------- -------  -------  -------
   Total operating expense...........    130.2   105.3    90.7     81.1     71.0
                                       ------- ------- -------  -------  -------
Income from operations...............     58.2    55.7    48.1     38.8     35.2
Net interest income (expense)........      7.1     7.7    (1.5)    (0.8)      --
                                       ------- ------- -------  -------  -------
Income before income taxes...........     65.3    63.4    46.6     38.0     35.2
Provision for income taxes...........     28.6    26.0    19.2     15.7     14.5
                                       ------- ------- -------  -------  -------
   Net income........................  $  36.7 $  37.4 $  27.4  $  22.3  $  20.7
                                       ======= ======= =======  =======  =======
Basic and diluted earnings per common
 share(3)............................  $   .75 $   .77 $   .56      N/A      N/A
                                       ======= ======= =======  =======  =======
Pro forma basic and diluted earnings
 per common share(4).................      N/A     N/A     N/A  $   .46  $   .43
                                       ======= ======= =======  =======  =======
Pro forma basic and diluted earnings
 per common share, as
 adjusted(3)(5)......................      N/A     N/A $   .69  $   .57  $   .51
                                       ======= ======= =======  =======  =======
Balance Sheet Data at December 31:
Total assets.........................  $ 372.8 $ 332.1 $ 318.3  $ 150.1  $ 125.9
Total liabilities....................     44.0    40.8    38.3     27.3     27.4
BAC's equity interest(6).............      N/A     N/A    27.9    122.8     98.5
Stockholders' equity.................    328.8   291.3   252.1       NA       NA
Other Data:
Total transactions processed.........    713.9   531.2   386.2    322.2    251.6
Total sales volume processed.........  $41,525 $33,900 $26,430  $21,241  $16,979
</TABLE>
--------
(1)  All data presented for the years ended December 31, 1997, 1996, 1995 and
     1994 include the historical results of the Asia Acquisitions. The
     acquisition of these entities has been accounted for as a reorganization
     of entities under common control in a manner similar to a pooling-of-
     interests.
(2)  On December 31, 1996, certain employees of the Company elected to exchange
     their employee stock options and restricted stock from BAC for options and
     restricted stock of the Company. This employee stock exchange resulted in
     a one-time expense of $2.4 million (see Note 9 of the Notes to the
     Consolidated Financial Statements).
(3)  Basic and diluted earning per common share for the year ended 1996 has
     been calculated as if the initial offerings of Class A Common Stock had
     been completed on January 1, 1993, and 48.5 million shares (32.4 million
     shares of Class B Common Stock and 16.1 million shares of Class A Common
     Stock) had been outstanding for all periods presented.
(4)  Pro forma diluted earnings per common share for all periods presented has
     been calculated as if the Offerings of Class A Common Stock had been
     completed on January 1, 1993, and 48.5 million shares (32.4 million
     shares of Class B Common Stock and 16.1 million shares of Class A Common
     Stock) had been outstanding for all periods presented.
(5)  Pro forma earnings per share, as adjusted, assumes that the proceeds from
     the Offerings were available from January 1, 1994 and were invested in
     short-term investments, and excludes the one-time expense related to the
     employee stock exchange ($2.4 million) and interest expense of $492,000
     from the 1996 results.
(6)  BAC's equity interest represents cumulative historical net income of the
     Company adjusted for net cash transfers to and from BAC. On December 3,
     1996, BankAmerica exchanged its equity interest in the domestic
     operations of the Company for 30.2 million shares of Class B Common
     Stock. During the second and third quarters of 1997, BankAmerica
     exchanged its equity interest in certain Asian operations of the Company
     for 2.2 million shares of Class B Common Stock which management estimates
     had an approximate aggregate fair value of $41.8 million based upon the
     market values at the dates of issuance of the Class A Common Stock.
 
                                      14
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and
        Results of Operations
 
Overview
 
  The Company has historically focused its marketing efforts on small- and
medium-sized merchants due to lower acquisition costs, higher ongoing
profitability and higher retention. The strategy has fit well with the
Company's competitive advantage in its relationship with BankAmerica. The
Company will continue to refine its strategic focus by leveraging four key
opportunities:
 
  . Extending the Company's marketing programs to the approximately 2,800 new
    full service banking centers which the Company can access as a result of
    the merger of BAC and NBC;
 
  . Focusing sales efforts on value creating merchant accounts;
 
  . Utilizing a more refined account valuation model to actively manage the
    Company's existing portfolio; and
 
  . Continuing to explore opportunities for expense reductions.
 
  The recently completed merger between BAC and NBC provides the Company with
access to 2,800 additional full service banking centers, approximately 900,000
additional business banking relationships and significantly expanded On-Us
transaction processing potential. The Company is recruiting new skilled sales
associates to take advantage of this opportunity.
 
  The Company is increasing its historical sales efforts related to small- and
medium-sized businesses through a combination of life-of-relationship product
and pricing strategies, sales incentives and joint marketing programs with
BankAmerica. Portfolio management responsibilities and compensation of the
portfolio account managers will also focus on retaining and growing merchant
relationships in this market segment.
 
  The Company intends to maintain its focus on controlling expenses. The
installation of the Company's enhanced HostLINK(TM) in-house transaction
processing system, which was implemented in the fourth quarter of 1998, will
allow the Company to move merchants from third party vendors to the more cost-
efficient HostLINK(TM) system, providing the potential for additional cost per
transaction savings to the Company.
 
  The Company faces market risks from potential economic downturns which could
affect growth in retail transaction volumes or increased losses from
chargeback and further currency devaluation. Further, the Company may not be
successful in implementing its strategies. Risk could also arise in unforeseen
delays in Year 2000 compliance efforts, inability of the Company to hire or
retain qualified sales staff and continued industry-wide compression in
pricing margins.
 
Highlights
 
  On April 13, 1998, BAC and NBC announced a definitive agreement to merge in
a stock-for-stock transaction. On May 29, 1998, the Company announced that BAC
and NBC had jointly determined that the Company would be the principal
merchant processing servicer for the combined organization following the
merger. NBC previously offered merchant processing services through a minority
interest in a venture with another merchant processing provider. The merger of
BAC and NBC was consummated on September 30, 1998. On November 13, 1998,
BankAmerica announced it had signed a letter of intent to sell its minority
interest in such venture to its venture partner, and the sale was completed on
December 18, 1998.
 
  The new BankAmerica franchise has approximately 4,800 retail branches in
twenty-two states. Under various contractual agreements with BankAmerica, the
Company has access to BankAmerica's client base, the Bank of America name and
trademarks, the implementation of On-Us transaction processing and marketing,
the Bank's distribution channels, and credit and debit card association and
network sponsorships. The Company
 
                                      15
<PAGE>
 
believes the opportunity to be the exclusive merchant acquiror for new
business with access to BankAmerica's client base will be a significant source
of growth for the Company. However, the Company cannot at this time estimate
the impact this may have on its financial position or results of operations.
 
  In addition to the merger of BAC and NBC and the Company's ultimate
selection as the primary merchant processor for BankAmerica, the Company
executed the following transactions during 1998:
 
  . BMCF Gaming Joint Venture: On July 9, 1998, the Company entered into an
    agreement to invest in a new limited liability company (LLC) with First
    Data Financial Services, LLC and Global Cash Access. The joint venture
    will provide cash advance and related services to the gaming business.
    The Company received its required regulatory approval and made its
    investments in the LLC on September 10, 1998. The name of the new entity
    is BMCF Gaming, LLC. The Company invested $35 million in cash, plus all
    interest earned during the escrow period of July 9, 1998 to September 10,
    1998, in addition to its interest in existing gaming contracts and
    gaming-related assets, for a 21 percent ownership interest in the LLC.
    The LLC will provide the following services to gaming establishments: (a)
    single system financial services authorization platform to be utilized by
    gaming establishments, (b) operations of financial services booths
    located on the premises of gaming establishments, and (c) check
    verification and guarantee services at gaming establishments.
 
  . Closure of the Thailand Merchant Processing Operations: On October 31,
    1998 the Company closed its merchant processing operations in Thailand.
    For the year ended December 31 1998, the Company's operations in Thailand
    lost approximately $0.6 million after tax. The Company's financial
    results for 1998 includes a $260,000 pre-tax charge to pay for closure-
    related costs.
 
  On December 22, 1998, BankAmerica and the Company jointly announced the
execution of the Merger Agreement, pursuant to which a wholly owned subsidiary
of BankAmerica will be merged with and into the Company. A Special Meeting of
Stockholders for the purpose of considering the approval and adoption of the
Merger Agreement has been scheduled for April 28, 1999. If the Merger
Agreement is approved and adopted by the Company's stockholders and the merger
becomes effective, each share of Class A Common Stock of the Company
outstanding immediately prior to the merger (except for shares as to which
appraisal rights have been perfected) will be converted into the right to
receive $20.50 in cash, without interest thereon. Approval and adoption of the
Merger Agreement requires the affirmative vote of the holders of a majority of
the Company's outstanding shares of Class A Common Stock and Class B Common
Stock, voting as a single class. As of March 26, 1999 (the record date
established for the Special Meeting of Stockholders), BankAmerica, directly or
indirectly, owned 100% of the outstanding Class B Common Stock, which, on that
date, represented approximately 66.6% of the economic ownership of the Company
and approximately 95.2% of the combined voting power of the Company.
Therefore, BankAmerica has sufficient voting power to approve and adopt the
Merger Agreement, regardless of the vote of any other stockholder. In the
Merger Agreement, BankAmerica has agreed to vote in favor of the merger
provided that the recommendation of the Special Committee of the Company's
Board of Directors with respect to the merger is not revoked, modified or
qualified in a manner adverse to the BankAmerica. It is anticipated that the
merger will be consummated as soon as practicable following receipt of
stockholder approval. Subsequent to the merger, the Company will operate as a
wholly owned subsidiary of the Bank.
 
  For a discussion of certain litigation arising in connection with the
merger, see "Business--The Company's Merger with BankAmerica."
 
RESULTS OF OPERATIONS
 
 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
 
  During 1998, the Company reported net income of $36.7 million compared to
$37.4 million in 1997. Earnings per share for 1998 was $0.75, a decrease of 3
percent as compared to earnings per share of $0.77 for 1997. Included in the
1998 results were non-deductible charges of approximately $4.4 million or
$0.09 per share related to costs associated with the Company's pending merger
with a subsidiary of BankAmerica. Exclusive of these charges, net income would
have been $41.1 million for 1998 with diluted earnings per share of $0.84.
 
                                      16
<PAGE>
 
  Net Revenue - Net revenue was $188.4 million for 1998, an increase of 17
percent or $27.4 million over 1997. This increase was primarily related to
1998 sales volume processed of $41.5 billion, which increased 22 percent or
$7.6 billion over 1997. The growth in credit card and debit card sales volume
processed in 1998 over 1997 was 23 percent and 19 percent, respectively. The
growth rate in net revenue was lower than that for sales volume processed
primarily as a result of greater sales volume growth in lower spread business
(debit card and high sales volume merchants) and, to a lesser degree,
declining spreads in existing business consistent with historical competitive
trends in the merchant processing industry.
 
  Operating Expense - Total operating expense for 1998 increased $24.9 million
or 24 percent over 1997. Excluding the effect of the $4.4 million in merger-
related costs, total operating expense increased 20 percent over 1997. The
increase was primarily attributable to higher salaries and employee benefits,
data processing and communications, general and administrative and
depreciation expense. Salaries and employee benefits expense for 1998
increased $6.2 million or 18 percent over 1997 primarily as a result of a 20
percent increase in average employee headcount over 1997. Approximately 50
percent of the total headcount increase was attributable to the growth in
sales and portfolio management personnel. Data processing and communications
expense in 1998 increased $7.6 million or 22 percent over 1997 related to
growth in transaction volume. General and administrative expense was $25.7
million, an increase of 4 percent over 1997. Depreciation expense in 1998
increased $4.7 million over 1997 as a result of costs related to increased
point-of-sale device deployments and to the HostLINK(TM) transaction
processing system.
 
  During 1998, operating expense declined to $0.18 from $0.20 per debit and
credit card transaction. This decrease was attributable to: (1) greater
economies of scale; (2) lower processing costs for merchants converted from
the Company's previous transaction processing system to HostLINK(TM); and (3)
growth in transaction volumes.
 
  Net Interest Income (Expense) - Net interest income for 1998 represented
interest income from short-term investments and interest received for merchant
account float from BankAmerica ($7.8 million), net of interest expense paid
for hedging contracts in Asia ($0.7 million). Total net interest income
decreased $0.6 from 1997 as a result of lower investment balances due to the
investment in the LLC and lower interest rates in 1998.
 
  Provision for Income Taxes - The effective tax rate increased from 41.0
percent in 1997 to 43.8 percent in 1998 because the $4.4 million in merger-
related costs are not deductible for federal income tax purposes.
 
 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
  Net Revenue - Net revenue was $161.0 million for 1997, an increase of 16
percent or $22.2 million over 1996. This increase was primarily related to
1997 sales volume processed of $33.9 billion, an increase of 28 percent or
$7.5 billion over 1996. The growth in credit card and debit card sales volume
processed in 1997 over 1996 was 27 percent and 41 percent, respectively. The
growth rate in net revenue was lower than that for sales volume processed
primarily as a result greater sales volume growth in lower spread business
(debit card and high sales volume merchants) and, to a lesser degree,
declining spreads in existing business consistent with historical competitive
trends in the merchant processing industry.
 
  Operating Expense - Total operating expense for 1997 increased $14.6 million
or 16 percent over 1996. Excluding the cost of the non-recurring employee
stock exchange of $2.4 million in 1996, total operating expense for 1997
increased 19 percent over 1996. The increase was primarily attributable to
higher salaries and employee benefits, data processing and communications,
general and administrative and depreciation expense. Salaries and employee
benefits expense for 1997 increased $6.8 million or 24 percent over 1996
primarily as a result of a 32 percent increase in average employee headcount
over 1996. Approximately 47 percent of the total headcount increase was
attributable to the growth in sales and portfolio management personnel. Data
processing and communications expense in 1997 increased $5.0 million or 17
percent over 1996 principally due to increased third-party data processing
services related to growth in transaction volume. General and administrative
expense was $24.8 million in 1997, an increase of $4.1 million or 20 percent
over 1996. This increase was due to higher merchant supplies expense related
to increased transactions processed and increased administrative expense
 
                                      17
<PAGE>
 
associated with being an independent company. Depreciation expense in 1997
increased $1.4 million over 1996 as a result of the purchase of approximately
$19.5 million in equipment, including $5.5 million for HostLINK(TM).
 
  During 1997, operating expense declined to $0.20 from $0.23 per debit and
credit card transaction. This decrease was attributable to: (1) greater
economies of scale; (2) lower processing costs for merchants converted from
the Company's previous transaction processing system to HostLINK(TM) as well
as the conversion of the Northwest merchant accounting platform; (3) the full
year cost savings impact of the favorable renegotiation of a third party
vendor arrangement; and (4) the expansion of processing of On-Us debit card
transactions begun in 1996.
 
  Net Interest Income (Expense) - Net interest income for 1997 represented
interest income from short-term investments and interest received for merchant
account float from BAC ($9.0 million), net of interest expense paid to BAC on
amounts borrowed to fund the daily operating activities of Thailand, the
Philippines and Taiwan merchant processing businesses prior to the
acquisitions ($0.8 million) and costs associated with the revolving line of
credit ($0.4 million). Net interest expense for 1996 represented interest
expense paid to BAC on amounts borrowed to fund operating activities.
 
Balance Sheet Review
 
  The Company's assets totaled $372.8 million as of December 31, 1998, an
increase of $44.7 million from December 31, 1997. The balances in cash and
cash equivalents, short-term investments, drafts in transit and merchants
payable can fluctuate greatly depending on the day of the week in which the
reporting period ends. The timing of payments received from credit card
associations and debit card networks, remittances to merchants and weekend
processing influence these balances. While the individual balances in these
accounts at December 31, 1998 were significantly different from the balances
at December 31, 1997, the net total of these combined accounts was $195.0
million at December 31, 1998, versus $191.8 million at December 31, 1997.
 
  The $37.5 million increase in investment in joint venture and goodwill is
due to the Company entering into an agreement to invest in a new limited
liability company (LLC) with First Data Financial Services, LLC and Global
Cash Access. The Company invested $35 million in cash, plus all interest
earned during the escrow period of July 9, 1998 to September 10, 1998, in
addition to its interest in existing gaming contracts and gaming related
assets, for a 21 percent ownership interest in the LLC.
 
Liquidity and Capital Resources
 
  Cash flow generated from operations provides the Company with a significant
source of liquidity to meet its needs. During 1998, working capital increased
by $2.6 million to $241.5 million at December 31, 1998. Average cash and cash
equivalent and short-term investment balances were $135.8 million during 1998.
The Company anticipates utilizing these balances for funding the daily cash
needs of the business as well as for acquisitions, strategic technology
investments and the funding of research and product development. Additionally,
the Company has a commitment for a $100 million revolving line of credit with
the Bank expiring May 31, 1999.
 
Operating Strategy
 
  While past performance does not guarantee future results, the Company is
committed to continue to sustain quality earnings growth. The Company's goal
is to increase net revenue by expanding its direct sales force, enhancing its
product offerings, each consistent with the Company's key opportunities noted
above, and pursuing business acquisitions that would have an accretive impact
to earnings and would augment the Company's product lines and capabilities.
The Company also expects to leverage its technology and infrastructure to
increase its operating efficiency.
 
  Net Revenue Growth - The Company has invested in its sales infrastructure
over the past year, as the Company has increased sales and management
personnel 33 percent over 1997. Most of this growth, and the corresponding
growth in sales volume processed and net revenue, has come from outside of the
former BAC's traditional retail markets. The Company plans to continue this
expansion into additional domestic geographic markets. The Company also
expects to grow its direct sales force in the new BankAmerica franchise.
 
                                      18
<PAGE>
 
  The Company believes it can further enhance net revenue growth through
increased relationship building with its merchants by providing customized
product solutions, cross-selling additional products and identifying multi-
product offerings through BankAmerica, such as business checking, loans and
other banking products.
 
  Leverage Technology - The merchant processing industry in general requires
the use of advanced computer hardware and software technology and has been
characterized by the development of new products and services to meet
increasingly complex and rapidly-changing merchant and regulatory
requirements. As a result, the payment processing industry has consolidated
significantly in the past few years, and the Company believes this trend will
continue as technological demands on processors increase.
 
  The Company's investment in client-server open architecture technology has
allowed it to provide more flexible and efficient business solutions for its
merchants. This technology entails lower equipment costs and will provide the
Company with greater ability to reduce and control costs. The Company began
installing HostLINK(TM), its transaction processing system, in the second
quarter of 1997. HostLINK(TM) will allow the Company to reduce its dependence
on third party processors. This will also contribute to the Company's efforts
to reduce operating expense per debit and credit card transaction. During
1998, the HostLINK(TM) system was expanded to support the processing of debit
card, purchasing card, and mail/telephone order transactions. In addition to
expanding the host system, point-of-sale applications were developed to
support additional market segments, including retail, restaurant, hotel, and
motel businesses.
 
Year 2000
 
  Because computers frequently use only two digits to recognize years, on
January 1, 2000, many computer systems, as well as any equipment that uses
embedded computer chips, may be unable to distinguish between 1900 and 2000.
If not remedied, this problem could create system errors and failures
resulting in the disruption of normal business operations. Since the Year 2000
is a leap year, there could also be business disruptions as a result of the
inability of many computer systems to recognize February 29, 2000.
 
  The Company has instituted a comprehensive program to ensure that its
computer systems and applications will be ready for the Year 2000. The
program, headed by a senior officer of the Company, includes the following:
 
  . review and testing internally used software and systems for Year 2000
    compliance;
 
  . remediating internally used software and systems that are not Year 2000
    compliant;
 
  . certifying internally used software and systems for Year 2000 compliance;
 
  . reviewing the status of key business partners with respect to Year 2000
    compliance;
 
  . developing contingency plans in case the Company encounters any
    difficulties with the Year 2000 date change either from its internal
    systems or from key business partners.
 
  The Company expects that it will be ready for the Year 2000 date change. The
Company has completed testing and certification of its back office operation
system, all desktop environments and all of its point-of-sale terminal
applications. Additionally, all certified applications are in production. The
Company has completed testing and certification of its chargeback imaging
system, but as of yet has not put the certified version in production. The
production implementation is currently scheduled for April 1999. The testing
and certification of the Company's HostLINK(TM) system was completed in
September 1998 and the Year 2000 compliant version is in production.
 
  The Company has undertaken to review the status of Year 2000 compliance of
its key suppliers. Letters of certification have been received from all major
third-party processing vendors. The Company has developed contingency plans
for its internal systems and software, in the event they do not successfully
pass the Company's Year 2000 testing. The Company is currently working to
develop contingency plans to address potential business disruptions which
might result from Year 2000 issues.
 
                                      19
<PAGE>
 
  The Company estimates that it will spend a total of approximately $350,000
in connection with Year 2000 compliance. Of that amount, the Company has spent
approximately $290,000 in its compliance efforts, including $130,000 in 1998.
The Company does not believe the cost incurred in its Year 2000 compliance
efforts will be material in any one quarter. Year 2000, costs are expensed as
they are incurred by the Company. In addition, a significant portion of these
costs is not expected to be incremental to the Company but instead reflects a
reassignment of existing internal systems technology resources. At this time,
Year 2000 has caused no significant delays or cancellations to any project
having a material impact on the financial condition of the Company.
 
  The Company is taking inventory of equipment that uses embedded computer
chips (i.e., "non-information technology systems" or "Infrastructure") and is
in the process of scheduling remediation or replacement of this
Infrastructure, as necessary. Examples of Infrastructure include building
security systems, fire alarm systems, identification and access cards, date
stamps and elevators.
 
  The Company believes it is taking all appropriate measures to prepare for
the Year 2000 date change. Ultimately, the potential impact of the Year 2000
issue will depend not only on the corrective measures the Company undertakes,
but also on the way in which the Year 2000 issue is addressed by businesses
and other entities who provide data to, or receive data from, the Company, or
whose financial condition or operational capability is important to the
Company as suppliers or customers. Management has identified a long-range,
most reasonably likely, worst-case scenario arising from the failure of the
Company or its key business partners to be Year 2000 compliant, the
consequences of which include the Company having to resort to voice
authorizations and paper draft processing for a portion of its merchants for
purposes of maintaining ongoing business. It is not possible to predict the
effect of this Year 2000 scenario on the economic viability of the Company's
suppliers and customers and the related adverse impact it may have on the
Company's financial condition or results of operations. Consequently, no
assurances can be made that Year 2000 compliance can be achieved without costs
and uncertainties that might have a material adverse effect on the Company's
financial condition, business or results of operations.
 
FORWARD-LOOKING STATEMENTS
 
  From time to time, the Company makes forward-looking statements. Forward-
looking statements include financial projections, statements of plans and
objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto.
 
  The Company may include forward-looking statements in its periodic reports
to the Securities and Exchange Commission (SEC) on Forms 10-K, 10-Q, and 8-K,
annual report and letter to stockholders, in its proxy statement, in other
written materials, and in statements made by senior management to analysts,
institutional investors, representatives of the media and others.
 
  By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections, and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors.
Among the uncertainties to which the Company's forward-looking statements are
subject are credit risk, liquidity risk, and capital risk. In addition,
various events can create uncertainties to which the Company's forward-looking
statements are subject. These events include, but are not limited to, new
product initiatives; technological changes; the effects of competition or of
legislative or regulatory developments; expansion into new markets; changes in
fiscal monetary and tax policies of the United States and other countries in
which the Company does business; political or social developments, including
war, civil unrest or terrorist activity; and natural disasters (including
earthquakes). When relying on forward-looking statements to make decisions
with respect to the Company, investors and others should carefully consider
these and other uncertainties and events, whether or not the statements are
described as forward-looking.
 
  Forward-looking statements made by the Company are intended to apply only at
the time they are made, unless explicitly stated to the contrary. Moreover,
whether or not stated in connection with a forward-looking statement, the
Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were to update or correct a forward-looking
statement, investors and others should not conclude that the Company will make
additional updates or corrections thereafter.
 
                                      20
<PAGE>
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
  The Company's primary market risk exposures are interest rate risk and
foreign currency risk. These exposures are discussed in detail below:
 
Interest Rate Risk
 
  The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company does not use
derivative financial instruments to hedge its investment portfolio. The
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. All of the Company's fixed rate cash
equivalents in the amount of $86.6 million mature during the first quarter of
1999. The fair value of the portfolio amounts to $86.6 million with a
weighted-average interest rate of 5.07 percent.
 
Foreign Currency Risk
 
  The Company's functional currency is the U.S. dollar. The Company transacts
business in various foreign currencies, primarily in Taiwan. The Company has
established a foreign currency hedging program using short-term non-delivery
forward exchange contracts to hedge foreign-currency-denominated financial
assets, liabilities, and firm commitments. The goal of this hedging program is
to economically guarantee or lock in the exchange rates on the Company's
foreign currency exposures which principally arise from transactions
denominated in the Taiwan New Taiwan dollar. Under this program, increases or
decreases in the Company's foreign-currency-denominated financial assets,
liabilities, and firm commitments are partially offset by gains and losses on
the hedging instruments. The Company does not use foreign currency forward
exchange contracts for trading purposes.
 
  The table below provides information about the Company's derivative
financial instruments, comprised of foreign currency forward exchange
contracts. The information is provided in U.S. dollar equivalent amounts, as
presented in the Company's financial statements. For foreign currency forward
exchange contracts, the table presents the notional amounts (at the contract
exchange rates) and the weighted average contractual foreign currency exchange
rates. All instruments mature within 12 months.
 
December 31, 1998
(In thousands, except average contract rate)
 
<TABLE>
<CAPTION>
                                           Notional    Average
                                            Amount   Contract Rate Fair Value*
                                           -------- -------------- -----------
   <S>                                     <C>      <C>            <C>
   Foreign currency forward exchange
    contracts:
    Taiwan NTD............................ $34,566      34.31        $(2,198)
</TABLE>
--------
*Equivalent to the unrealized net gain (loss) on existing forward contracts.
 
  As the table incorporates only those exposures that exist as of December 31,
1998, it does not consider those exposures or positions which could arise
after that date. Moreover, because firm commitments are not presented in the
table above, the information presented therein has limited predictive value.
As a result, the Company's ultimate realized gain or loss with respect to
interest rate and foreign currency fluctuations will depend on the exposures
that arise during the period, the Company's hedging strategies at the time,
and interest rates and foreign currency rates.
 
                                      21
<PAGE>
 
Item 8. Financial Statements and Supplementary Data
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
  BA Merchant Services, Inc.
 
  We have audited the accompanying consolidated balance sheets of BA Merchant
Services, Inc. (as successor to the merchant processing businesses of
BankAmerica Corporation as described in Note 1) as of December 31, 1998 and
1997 and the related consolidated statements of operations, changes in equity,
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of BA Merchant
Services, Inc.'s management. Our responsibility is to express an opinion on
these financial statements 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of BA Merchant Services, Inc. at December 31, 1998 and 1997 and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
 

                                               /s/ ERNST & YOUNG LLP
 
 
San Francisco, California
February 2, 1999
 
                                      22
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                           CONSOLIDATED BALANCE SHEET
            (amounts in thousands, except share and per share data)
 
<TABLE>
<CAPTION>
                                                                 December 31,
                                                               -----------------
                                                                 1998     1997
                                                               -------- --------
<S>                                                            <C>      <C>
Assets
Current assets:
  Cash and cash equivalents..................................  $ 90,516 $ 29,426
  Short-term investments.....................................       --    64,018
  Drafts in transit..........................................   111,710  106,463
  Accounts receivable........................................    76,535   63,461
  Other current assets.......................................     5,746   11,533
                                                               -------- --------
    Total current assets.....................................   284,507  274,901
Property and equipment, net..................................    29,023   27,762
Investment in joint venture..................................    29,430      --
Goodwill, net................................................     8,024      --
Other assets.................................................    21,810   25,422
                                                               -------- --------
    Total assets.............................................  $372,794 $328,085
                                                               ======== ========
 
Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable...........................................  $     62 $     32
  Merchants payable..........................................     7,223    8,058
  Accrued liabilities........................................    13,264    6,050
  Accrued credit card association and interchange fees.......     9,674    9,192
  Income taxes payable.......................................     3,983    3,459
  Other current liabilities..................................     8,800    9,225
                                                               -------- --------
    Total current liabilities................................    43,006   36,016
Other liabilities............................................       994      816
                                                               -------- --------
    Total liabilities........................................    44,000   36,832
                                                               -------- --------
Stockholders' equity:
Class A Common Stock, par value $0.01; authorized 200,000,000
 shares;
 issued and outstanding 16,255,434 shares at December 31,
 1998 and 16,253,126
 at December 31, 1997........................................       162      162
Class B Common Stock, par value $0.01; authorized 50,000,000
 shares;
 issued and outstanding 32,400,000 shares....................       324      324
Additional paid-in capital...................................   252,976  252,479
Retained earnings............................................    74,944   38,280
Accumulated other comprehensive income, net of tax...........       388        8
                                                               -------- --------
    Total stockholders' equity...............................   328,794  291,253
                                                               -------- --------
    Total liabilities and stockholders' equity...............  $372,794 $328,085
                                                               ======== ========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       23
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
                 (amounts in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                    --------------------------
                                                      1998     1997     1996
                                                    -------- -------- --------
<S>                                                 <C>      <C>      <C>
Net revenue.......................................  $188,376 $160,975 $138,776
                                                    -------- -------- --------
Operating expense:
  Salaries and employee benefits..................    40,823   34,657   27,875
  Data processing and communications..............    42,021   34,438   29,447
  General and administrative......................    25,671   24,801   20,683
  Depreciation....................................    15,274   10,592    9,147
  Merger related expenses.........................     4,413      --       --
  Employee stock exchange.........................       --       --     2,431
  Amortization of intangibles.....................     2,035      801    1,118
                                                    -------- -------- --------
    Total operating expense.......................   130,237  105,289   90,701
                                                    -------- -------- --------
Income from operations............................    58,139   55,686   48,075
Net interest income (expense).....................     7,070    7,762   (1,458)
                                                    -------- -------- --------
    Income before income taxes....................    65,209   63,448   46,617
Provision for income taxes........................    28,545   26,020   19,252
                                                    -------- -------- --------
    Net income....................................  $ 36,664 $ 37,428 $ 27,365
                                                    ======== ======== ========
 
Basic and diluted earnings per common share.......     $0.75    $0.77       NA
Weighted average shares used in earnings per share
 computations:
  Basic...........................................    48,664   48,644       NA
  Diluted.........................................    48,772   48,792       NA
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       24
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                             (amounts in thousands)
 
<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                               ------------------------------
                                                 1998      1997       1996
                                               --------  ---------  ---------
<S>                                            <C>       <C>        <C>
Cash Flows from Operating Activities:
Net income.................................... $ 36,664  $  37,428  $  27,365
Adjustments to net income to arrive at cash
 provided by operating activities:
  Depreciation................................   15,274     10,592      9,147
  Amortization of intangibles.................    2,035        801      1,118
  Benefit from deferred income taxes..........   (2,712)    (2,169)    (1,297)
  Amortization of restricted stock............      437        589         38
  Amortization of loan fees...................      --         310        --
  Employee stock exchange.....................      --         --       2,431
Changes in operating assets and liabilities
 excluding the effects of the transfer of net
 assets from BAC:
  (Increase) decrease in drafts in transit....   (5,247)     6,547    (12,124)
  Increase in accounts receivable.............  (13,074)   (28,179)   (10,717)
  Decrease (increase) in other current
   assets.....................................    5,787     (6,495)    (1,387)
  Increase (decrease) in accounts payable.....       30       (383)    (1,468)
  Increase in current income taxes payable....    3,027      1,741      3,306
  (Decrease) increase in merchants payable....     (835)    (8,765)     2,853
  Increase in accrued liabilities.............    7,214      1,573        458
  Increase in accrued credit card association
   and interchange fees.......................      482      2,825      2,483
  Other, net..................................     (915)     2,631      1,256
                                               --------  ---------  ---------
    Net cash provided by operating
     activities...............................   48,167     19,046     23,462
                                               --------  ---------  ---------
Cash Flows from Investing Activities:
Purchase of property and equipment............  (16,535)   (19,537)   (12,807)
Purchase of short-term investments............  (11,674)  (110,620)       --
Maturities of short-term investments..........   75,692     46,602        --
Acquisition of portfolio of merchant
 processing contracts.........................      --     (17,706)       --
Investment in joint venture...................  (35,000)       --         --
                                               --------  ---------  ---------
    Net cash provided by (used for) investing
     activities...............................   12,483   (101,261)   (12,807)
                                               --------  ---------  ---------
Cash Flows from Financing Activities:
Borrowings on revolving line of credit........      --         --     174,500
Repayments on revolving line of credit........      --         --    (174,500)
BAC's change in funding.......................      --     (26,586)  (105,529)
Increase in underwriting expense..............      --        (194)       --
Net proceeds from initial public offering.....      --         --     232,882
Issuance of common stock......................       60        --         --
                                               --------  ---------  ---------
    Net cash provided by (used for) financing
     activities...............................       60    (26,780)   127,353
                                               --------  ---------  ---------
Exchange Rate Effect on Cash:.................      380          8        --
                                               --------  ---------  ---------
Increase (decrease) in cash and cash
 equivalents..................................   61,090   (108,987)   138,008
Cash and cash equivalents at beginning of
 year.........................................   29,426    138,413        405
                                               --------  ---------  ---------
Cash and cash equivalents at end of year...... $ 90,516  $  29,426  $ 138,413
                                               ========  =========  =========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       25
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                  CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
                             (amounts in thousands)
 
<TABLE>
<CAPTION>
                                                               Accumulated
                           Common Stock   Additional              Other       BAC's        Total
                          ---------------  Paid-in   Retained Comprehensive  Equity    Stockholder's
                          Shares  Amounts  Capital   Earnings    Income     Interest      Equity
                          ------  ------- ---------- -------- ------------- ---------  -------------
<S>                       <C>     <C>     <C>        <C>      <C>           <C>        <C>
Balance at December 31,
 1995                        --    $ --    $    --   $   --       $ --      $ 122,821    $ 122,821
Changes in equity for
 the period ended
 December 3, 1996:
Net income..............     --      --         --       --         --         25,326       25,326
BAC's change in
 funding................     --      --         --       --         --       (105,529)    (105,529)
 
Effect of
 Reorganization:
Transfer of net assets
 from BAC in exchange
 for Class B Common
 Stock..................  30,200     302     14,433      --         --        (14,735)         --
Employee stock exchange
 for Class A Common
 Stock..................       2     --       2,431      --         --            --         2,431
 
Changes in equity for
 the period December 4,
 1996 through December
 31, 1996:
Net income..............     --      --         --     2,039        --            --         2,039
Restricted stock
 issuances of Class A
 Common Stock...........     134       1      2,075      --         --            --         2,076
Unvested portion of
 restricted stock, net
 of amortization of
 $37....................     --      --      (2,038)     --         --            --        (2,038)
Net proceeds from the
 initial public offering
 of Class A Common
 Stock..................  16,100     161    232,721      --         --            --       232,882
                          ------   -----   --------  -------      -----     ---------    ---------
Balance at December 31,
 1996...................  46,436     464    249,622    2,039        --         27,883      280,008
Comprehensive income:
 Net income.............     --      --         --    36,241        --          1,187       37,428
 Foreign currency
  translation
  adjustment,
  net of tax............     --      --         --       --           8           --             8
                                                                                         ---------
Total comprehensive
 income.................                                                                    37,436
BAC's change in funding
 related to Asia
 merchant processing
 operations.............     --      --         --       --         --        (26,586)     (26,586)
Restricted stock
 issuances of Class A
 Common Stock...........      17     --         307      --         --            --           307
Unvested portion of
 restricted stock, net
 of amortization of
 $589...................     --      --         282      --         --            --           282
Transfer of net assets
 from BAC in exchange
 for Class B Common
 Stock..................   2,200      22      2,462      --         --         (2,484)         --
Increase in underwriting
 expense................     --      --        (194)     --         --            --          (194)
                          ------   -----   --------  -------      -----     ---------    ---------
Balance at December 31,
 1997...................  48,653     486    252,479   38,280          8           --       291,253
Comprehensive income:
 Net income.............     --      --         --    36,664        --            --        36,664
 Foreign currency
  translation
  adjustment,
  net of tax............     --      --         --       --         380           --           380
                          ------   -----   --------  -------      -----     ---------    ---------
Total comprehensive
 income.................                                                                    37,044
Restricted stock
 issuances of Class A
 Common Stock...........      10     --         163      --         --            --           163
Restricted stock
 cancellations of Class
 A Common Stock.........     (12)    --        (148)     --         --            --          (148)
Unvested portion of
 restricted stock, net
 of amortization of
 $437...................     --      --         422      --         --            --           422
Exercise of employee
 stock options..........       4     --          60      --         --            --            60
                          ------   -----   --------  -------      -----     ---------    ---------
Balance at December 31,
 1998...................  48,655   $ 486   $252,976  $74,944      $ 388     $     --     $ 328,794
                          ======   =====   ========  =======      =====     =========    =========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       26
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Description of Business and Basis of Presentation
 
  Description of Business - BA Merchant Services, Inc. (the Company) provides
an array of payment processing and related information products and services
to merchants throughout the United States and certain Asian countries who
accept credit, charge and debit cards as payment for goods and services. The
Company is the fifth largest processor of merchant credit card transactions
and one of the largest processors of debit card transactions in the United
States.
 
  The Company was incorporated on October 11, 1996 and commenced operations
December 4, 1996, upon the transfer by Bank of America National Trust &
Savings Association (the Bank) and Bank of America NW, National Association
(BANW, formerly Seattle-First National Bank) of their respective United States
merchant processing businesses to the Company in consideration for 30.2
million shares of Class B Common Stock (the Reorganization). Effective January
1, 1997, BANW was merged into the Bank. The Bank is a wholly owned subsidiary
of BankAmerica Corporation (BAC). Reference to "BAC" in the Consolidated
Financial Statements and notes thereto shall be deemed to be references to
BankAmerica Corporation and its subsidiaries and affiliates, including the
Bank and, prior to January 1, 1997, BANW.
 
  During December 1996, the Company issued 16.1 million shares of Class A
Common Stock in underwritten initial public offerings (the Offerings) which
generated gross cash proceeds of $249.6 million less the underwriters'
discount and expense totaling $16.7 million, resulting in net cash proceeds of
$232.9 million. In late December 1996, $126.3 million of the net proceeds were
used to pay down the outstanding balance of a revolving line of credit with an
affiliate. The borrowing had been used to finance operations between the
Reorganization and the Offerings.
 
  On June 2, 1997, the Company acquired BAC's merchant processing business in
Thailand (net assets of approximately $91,000) in consideration for 150,000
shares of Class B Common Stock. On July 1, 1997, the Company acquired BAC's
merchant processing business in the Philippines (net assets of approximately
$153,000) in consideration for 550,000 shares of Class B Common Stock. On
September 30, 1997 the Company acquired BAC's merchant processing business in
Taiwan and merchant processing administrative office in Hong Kong (net assets
of approximately $2.2 million) in consideration for 1,500,000 shares of Class
B Common Stock. Management estimates the fair value of the Class B Common
Stock issued to BAC on the effective dates of the various Asia acquisitions
was $41.8 million. The acquisition of these entities will be collectively
referred to as the "Asia Acquisitions". Approximately $33.0 million of the
proceeds from the Offerings were used to fund the regulatory and working
capital requirements of the Asia Acquisitions. With the issuance by the
Company of additional shares of Class B Common Stock to BAC in connection with
the Asia Acquisitions, BAC's financial interest in the Company increased from
65.0 percent, to 66.6 percent. On October 31, 1998, the Company closed its
merchant processing operations in Thailand. For the year ended December 31,
1998, the Company's operations in Thailand lost $0.6 million after tax.
 
  On April 13, 1998, BAC and NationsBank Corporation (NBC) announced a
definitive agreement to merge in a stock-for-stock transaction. Such merger of
BAC and NBC was consummated on September 30, 1998. References to "BankAmerica"
in the Consolidated Financial Statements and notes thereto are referring to
the merged BAC/NBC entity.
 
  On July 9, 1998, the Company entered into an agreement to invest in a new
limited liability company with First Data Financial Services, LLC and Global
Cash Access ("Global"). The joint venture will provide cash advance and
related services to customers at gaming establishments. The Company received
its required regulatory approval and made its investments in the LLC on
September 10, 1998. The name of the new entity is BMCF Gaming, LLC (LLC). The
Company invested $35 million in cash, plus all interest earned during the
 
                                      27
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
escrow period of July 9, 1998 to September 10, 1998, in addition to its
interest in existing gaming contracts and gaming-related assets, for a 21
percent ownership in the LLC.
 
  On December 22, 1998, BankAmerica and the Company jointly announced the
execution of an Agreement and Plan of Merger (Merger Agreement), pursuant to
which a wholly owned subsidiary of BankAmerica will be merged with and into
the Company. If the Merger Agreement is approved and adopted by the Company's
stockholders and the merger becomes effective, each share of Class A Common
Stock of the Company outstanding immediately prior to the merger (except for
shares as to which appraisal rights have been perfected) will be converted
into the right to receive $20.50 in cash, without interest thereon. Approval
and adoption of the Merger Agreement requires the affirmative vote of the
holders of a majority of the Company's outstanding shares of Class A Common
Stock and Class B Common Stock, voting as a single class. As of March 26, 1999
(the record date established for the Special Meeting of Stockholders),
BankAmerica directly or indirectly, owned 100% of the outstanding Class B
Common Stock, which, on that date, represented approximately 66.6% of the
economic ownership of the Company and approximately 95.2% of the combined
voting power of the Company. Therefore, BankAmerica has sufficient voting
power to approve and adopt the Merger Agreement, regardless of the vote of any
other stockholder. In the Merger Agreement, BankAmerica has agreed to vote in
favor of the merger provided that the recommendation of the Special Committee
of the Company's Board of Directors with respect to the merger is not revoked,
modified or qualified in a manner adverse to the BankAmerica. Subsequent to
the merger, the Company will continue to operate as a wholly owned subsidiary
of BankAmerica. The Company has incurred $4.4 million of merger related costs.
These merger related costs are primarily related to legal, financial and other
advisory services received by a Special Committee of independent directors
formed by the Board of Directors to evaluate the BankAmerica merger proposal
and plaintiff legal fees and expenses that are described further in Note 10.
These merger related costs are non-deductible for federal income tax purposes.
 
  Basis of Presentation - BAC's transfer to the Company of certain assets and
liabilities of its United States and certain Asian merchant processing
businesses (net assets) was accounted for as a reorganization of entities
under common control and, accordingly, the transfer of these net assets was
accounted for at historical cost in a manner similar to a pooling of
interests. Included in the transfer of net assets was Seafirst Merchant
Services, Inc., a wholly owned subsidiary of BANW. The accompanying financial
statements have been prepared as if the Company had operated as a separate
entity for all periods presented. The financial statements include the
combined historical results of operations, assets and liabilities of the U.S.
merchant processing businesses of BAC for all periods prior to the
Reorganization. The financial statements also include the combined historical
results of operations, assets and liabilities of BAC's merchant processing
businesses in Thailand, the Philippines, Taiwan and the merchant processing
administrative office in Hong Kong for all periods prior to the Asia
Acquisitions. For simplicity of presentation, these financial statements are
referred to herein as Consolidated Financial Statements.
 
  Prior to the respective dates of the Asia Acquisitions and the
Reorganization, changes in BAC's equity interest represented net income of the
Company adjusted for net cash transfers to and from BAC. Additionally, prior
to these dates, the Consolidated Financial Statements include allocations of
certain assets (primarily property and equipment) and expenses relating to the
merchant processing businesses transferred from BAC. Management believes these
allocations are reasonable.
 
  Certain of the pre-Asia Acquisition and pre-Reorganization expenses in the
Consolidated Financial Statements are not necessarily indicative of the costs
that would have been incurred if the Company had performed these functions as
a stand-alone entity. Therefore, prior to the respective dates of the Asia
Acquisitions and the Reorganization, the Consolidated Financial Statements may
not necessarily reflect the Company's consolidated results of operations,
changes in equity and cash flows as they would have been had the Company been
a separate, stand-alone entity during the periods presented. Subsequent to
these dates, the Company
 
                                      28
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
performed these functions using its own resources and purchased services (from
BAC and other companies) and was responsible for the cost and expenses
associated with the management of a stand-alone entity.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Principles of Consolidation - The consolidated financial statements of the
Company are prepared in conformity with generally accepted accounting
principles and include the accounts of BA Merchant Services, Inc. and its
wholly owned subsidiary, Seafirst Merchant Services, Inc. (SMSI). SMSI was
dissolved on December 29, 1997. The equity method of accounting is used for
the Company's investment in the LLC joint venture. The Company has a 21
percent interest in the LLC joint venture. Under the equity method, original
investments are recorded at cost and adjusted by the Company's share of
undistributed earnings and losses. Significant intercompany balances and
transactions have been eliminated. Certain amounts in prior periods have been
reclassified to conform to the presentation in the current year.
 
  Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The amounts reflected on the balance sheet at December 31, 1998
and 1997 are held on deposit or invested through BAC.
 
  Short-term Investments - The Company's short-term investments include U.S.
Treasury and other government agency securities, certificates of deposit and
money market funds. Securities held by the Company are considered available-
for-sale securities and are reported at their fair values, with unrealized
gains and losses included on a net-of-tax basis as a separate component of
stockholders' equity. Dividend and interest income, including amortization of
premiums and accretion of discounts are included in interest income. Realized
gains and losses from sales of available-for-sale securities are computed
using the specific identification method. Any decision to sell available-for-
sale securities is based on various factors, including movements in interest
rates, changes in the maturity mix of assets and liabilities, liquidity
demands or other similar factors.
 
  Drafts in Transit - Drafts in transit represent those transactions for which
merchants have been paid by the Company, but for which payment has not yet
been received from the credit card associations or debit card networks.
Payment from those entities is generally received within one to three days.
 
  Accounts Receivable - Accounts receivable primarily represents fee income
earned but not collected under processing agreements with merchants, agent
banks, and independent sales organizations.
 
  Property and Equipment - Property and equipment are carried at cost, net of
accumulated depreciation. Depreciation is computed on a straight-line basis
over the estimated useful lives of the related assets which range from two to
eight years for furniture and equipment and from three to five years for
point-of-sale terminals.
 
  Identifiable Intangible Assets - Included in other assets at December 31,
1998 are net identifiable intangible assets of $15.3 million relating
primarily to the September 1997 acquisition cost of a portfolio of
approximately 4,200 merchant processing contracts. The assets are being
amortized on a straight-line basis over a ten year period corresponding to the
estimated period of benefit related to the merchant base acquired. The balance
of the net identifiable intangible assets at December 31, 1997 was $17.1
million.
 
  Goodwill - Goodwill represents the excess of the purchase price over the
estimated fair value of identifiable net assets. Goodwill is amortized on a
straight-line basis over 15 years. As of December 31, 1998, goodwill amounted
to $8.0 million resulting from the investment in the LLC joint venture.
 
  Merchants Payable - Merchants payable represents those transactions for
which the Company has been paid, but for which amounts have not yet been
remitted to merchants.
 
                                      29
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Net Revenue - Net revenue primarily includes fees earned from merchants
related to the processing of transactions (including merchant discount fees),
offset by interchange fees payable to credit card issuers and fees payable to
credit card associations and debit card networks, and is recorded as services
are performed. Net revenue also includes fees earned from the deployment of
point of sale terminals.
 
  Derivative Financial Instruments - The Company uses foreign exchange forward
contracts in the management of its foreign currency exposure for its Asian
operations. Foreign exchange contracts are agreements to exchange the currency
of one country for the currency of another at an agreed-upon price on an
agreed-upon settlement date. To qualify for hedge accounting, the contract
must reduce risk at the level of the specific transaction, with effectiveness
expected at the inception of the hedge and on an ongoing basis. Hedge
effectiveness is assessed by matching the basis and terms of the hedging
instruments with those of the underlying exposure. If a high level of
correlation is not being achieved, hedge accounting will be terminated.
Discounts and premiums (the difference between the current spot exchange rate
and the forward exchange rate at inception of the contract) are amortized over
the contract lives using the straight-line method and realized and unrealized
gains and losses (including those from open, matured, and terminated
contracts), net of related taxes, are included in the cumulative translation
adjustment account in the Consolidated Statement of Changes in Equity (the
deferral accounting method). The related amounts due to or from counterparties
are included in other liabilities or other assets. Realized and unrealized
gains and losses on instruments that hedge capital exposure are recorded in
stockholders' equity as foreign currency translation adjustments.
 
  Foreign Currency Translation - Assets, liabilities and operations of foreign
offices are recorded based on the functional currency of each branch, which is
the local currency. Assets, liabilities and operations are translated, for
consolidation purposes, at current exchange rates from one local currency to
the reporting currency, the U.S. dollar. The resulting gains or losses are
reported as a component of retained earnings within stockholders' equity on a
net-of-tax basis.
 
  Provision for Income Taxes - The liability method of accounting is used for
income taxes. Under the liability method, deferred tax assets and liabilities
are recognized for the expected future tax consequences of existing
differences between financial reporting and tax reporting bases of assets and
liabilities, as well as for operating losses and tax credit carryforwards,
using enacted tax laws and rates. Deferred tax expense represents the net
change in the deferred tax asset or liability balance during the year. This
amount, together with income taxes currently payable or refundable for the
current year, represents the total income tax expense for the year.
 
  Prior to December 20, 1996, the Company was included in the consolidated
federal return, and in certain consolidated and combined state and local
returns, filed by BAC. The Company settled its consolidated and combined tax
liabilities by making payments to BAC. Since December 20, 1996, the Company
has filed separate federal and certain separate state and local tax returns
according to the taxable activity of its operations. As a result, the
Company's federal and separate state and local income tax provisions and
related tax liabilities were calculated on a stand-alone basis. In addition,
the Company continues to be included in certain consolidated and combined
state and local tax returns filed by BAC. In accordance with the Company's tax
allocation agreement with BAC, the consolidated and combined state and local
income tax provision and related tax liabilities and assets for the Company
will be determined as though the Company had filed separate tax returns. If
the Company is unable to fully recognize all of its state and local deferred
tax assets on a separate return basis, the Company will recognize additional
deferred tax assets to the extent they are expected to be realized in the
consolidated and combined state and local returns. Tax payments related to
excess losses or tax credits will be received by the Company if these
deductions and credits are utilized in the consolidated and combined state and
local returns.
 
  Accounting for Stock-Based Compensation - Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation" provides an
alternative to Accounting Principles Board (APB) Opinion No. 25 "Accounting
for Stock Issued to Employees". The Company accounts for its stock-based
 
                                      30
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
compensation plans in accordance with APB Opinion No. 25, and related
interpretations. Accordingly, if the exercise price of the Company's employee
stock options equals or exceeds the fair market value of the underlying stock
on the date of grant, no compensation expense is recognized by the Company. If
the exercise price of an award is less than the fair market value of the
underlying stock at the date of grant, the Company recognizes the difference
as compensation expense over the vesting period of the award. The Company also
provides the required pro forma net income and pro forma earnings per share
disclosures as if the fair value measurement provisions of SFAS No.123 had
been adopted. See Note 9 of the Notes to Consolidated Financial Statements for
additional information.
 
  Earnings per Common Share - Basic earnings per common share and diluted
earnings per common share are presented in conformity with SFAS No. 128,
"Earnings per Share", for all periods presented. In accordance with SFAS No.
128, basic and diluted earnings per common share have been computed using the
weighted-average number of shares of common stock outstanding during the
period, less shares subject to repurchase. As a result, under the new
requirements, earnings per common share excludes any dilutive effects of stock
options and warrants. Also, the dilutive effect of stock options and warrants
used to compute diluted earnings per common share is based on the average
market price of the Company's common stock for the period.
 
  Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
drafts in transit and accounts receivable.
 
  Fair Value of Financial Instruments - SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the Consolidated
Balance Sheet. Considerable judgement is required in interpreting market data
to develop estimates of fair value. Therefore, for substantially all financial
instruments, the fair value estimates presented herein are not necessarily
indicative of the amounts the Company could have realized in a sales
transaction at either December 31, 1998 or 1997. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
 
  The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, short-term investments, receivables and obligations
under accounts payable and other short-term liabilities, approximate their
fair value.
 
  Recently Issued Accounting Standards - Effective January 1, 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income
and its components in a full set of financial statements. The Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed as prominently as other financial statements. SFAS
No. 130 requires the classification of items of other comprehensive income by
their nature in a financial statement and the display of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. All prior periods presented have been
restated to conform to the provisions of SFAS No. 130.
 
  Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131
establishes standards for a more comprehensive disclosure about an
enterprise's operating segments. The Company adopted SFAS No. 131 in the
fourth quarter of 1998. The adoption of SFAS No. 131 did not affect results of
operations, financial position or disclosure of segment information.
Throughout 1998, the Company maintained merchant processing operations in Asia
which on a consolidated level accounted for less than 10 percent of total
assets, net revenue and net income. The merchant processing operations in Asia
provide substantially the same products and services to merchants as compared
to the domestic operations.
 
 
                                      31
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)
 
  In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivate
Instruments and Hedging Activities", which is effective for financial
statements for fiscal years beginning after June 15, 1999. SFAS No. 133 will
require the Company to record all derivatives on the balance sheet at fair
value. Changes in derivative fair values will either be recognized in earnings
as offsets to the changes in fair value of related hedged assets, liabilities
and firm commitments or, for forecasted transactions, deferred and recorded as
a component of accumulated comprehensive income in stockholders' equity until
the hedge transactions occur and are recognized in earnings. The ineffective
portion of a hedging derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the impact of
SFAS No. 133 will be on the earnings and financial position of the Company.
 
  Use of Estimates in the Preparation of Financial Statements - The
preparation of the consolidated financial statements of the Company requires
management to make estimates and assumptions that affect reported amounts.
These estimates are based on information available as of the date of the
financial statements. Therefore, actual results could differ from those
estimates.
 
3. Merchant Deposits
 
  Merchant deposits are restricted deposit accounts held at the Bank that may
be used by the Company to satisfy chargebacks and other disputes. When a
credit card is used to initiate a transaction which is disputed by the
cardholder, it is the responsibility of the card-accepting processor to see
that the merchant resolves the dispute. If the merchant is unable or unwilling
to do so, the processor may have to refund to the cardholder the purchase
price of the disputed transaction. As protection against such liability, the
Company may require certain merchants to maintain restricted deposit accounts
in which the Company has a security interest. Because these deposits are legal
liabilities of the respective Bank branches, such deposits do not appear on
the balance sheet of the Company. At December 31, 1998, merchant deposits were
approximately $9.5 million.
 
4. Supplemental Disclosures of Cash Flow Information
 
  During 1996, the Company exchanged 30.2 million shares of Class B Common
Stock for the Bank's interest in certain net assets of its United States
merchant processing operations. In addition, the Company issued 134,000 shares
of restricted stock to management personnel. During 1997, the Company
exchanged 2.2 million shares of Class B Common Stock for the Bank's interest
in specific net assets of certain of its Asian merchant processing operations.
Additionally, during 1998 and 1997 the Company issued 10,456 and 17,000 shares
of restricted stock to management personnel, respectively. Cancellation of
restricted stock during 1998 amounted to 12,262 shares. There were no
cancellations of restricted stock during 1997.
 
  During the years ended December 31, 1998, 1997 and 1996, the Company made
net income tax payments to BAC of $6.5 million, $3.9 million, and $15.9
million, respectively. During the years ended December 31, 1998, 1997 and
1996, the Company made additional income tax payments of $21.7 million, $22.5
million and $1.3 million, respectively, directly to various taxing
authorities. Cash payments for interest were approximately $0.8 million, $0.8
million, and $1.5 million for the years ended December 31, 1998, 1997 and
1996, respectively.
 
5. Property and Equipment
 
  The following is a summary of property and equipment as of December 31, 1998
and 1997:
 
<TABLE>
<CAPTION>
                                                               1998      1997
   (amounts in thousands)                                    --------  --------
   <S>                                                       <C>       <C>
   Furniture and equipment.................................. $ 12,855  $ 12,373
   Payment processing terminals.............................   71,638    56,044
                                                             --------  --------
                                                               84,493    68,417
   Less: Accumulated depreciation...........................  (55,470)  (40,655)
                                                             --------  --------
                                                             $ 29,023  $ 27,762
                                                             ========  ========
</TABLE>
 
 
                                      32
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
6. Other Current Liabilities
 
  The following is a summary of other current liabilities as of December 31,
1998 and 1997:
 
<TABLE>
<CAPTION>
                                                                   1998   1997
   (amounts in thousands)                                         ------ ------
   <S>                                                            <C>    <C>
   Merchant settlement liabilities............................... $6,373 $6,088
   Payable to affiliates.........................................  1,906  2,681
   Other.........................................................    521    456
                                                                  ------ ------
                                                                  $8,800 $9,225
                                                                  ====== ======
</TABLE>
 
7. Revolving Line of Credit
 
  During 1998, the Company had a $100 million revolving line of credit
facility (inclusive of overdraft facilities) established with the Bank that
bears interest based on various optional rates at the Company's election,
including the Bank's reference rate, or LIBOR plus 50 basis points. Interest
is payable quarterly. The revolving line of credit expires on May 31, 1999.
 
8. Income Taxes
 
  The significant components of the provision for income taxes were as
follows:
 
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -------------------------
                                                       1998     1997     1996
   (amounts in thousands)                             -------  -------  -------
   <S>                                                <C>      <C>      <C>
   Current:
   Federal..........................................  $22,643  $21,411  $14,515
   State and local..................................    6,811    5,869    4,691
   Foreign..........................................    1,803      909    1,343
                                                      -------  -------  -------
                                                       31,257   28,189   20,549
                                                      -------  -------  -------
   Deferred:
   Federal..........................................   (2,578)  (2,026)  (1,065)
   State and local..................................     (134)    (143)    (232)
                                                      -------  -------  -------
                                                       (2,712)  (2,169)  (1,297)
                                                      -------  -------  -------
     Total..........................................  $28,545  $26,020  $19,252
                                                      =======  =======  =======
</TABLE>
 
  The reconciliation of the provision for income taxes computed at the U.S.
statutory income tax rate to pretax income is as follows:
 
<TABLE>
<CAPTION>
                                                                Year Ended
                                                               December 31,
                                                              ----------------
                                                              1998  1997  1996
                                                              ----  ----  ----
   <S>                                                        <C>   <C>   <C>
   Federal statutory income tax rate......................... 35.0% 35.0% 35.0%
   State and local income taxes, net of federal tax effect...  6.3   5.9   6.2
   Merger expenses...........................................  2.4   --    --
   Other, net................................................  0.1   0.1   0.1
                                                              ----  ----  ----
    Effective tax rate....................................... 43.8% 41.0% 41.3%
                                                              ====  ====  ====
</TABLE>
 
 
                                      33
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  The significant components of the Company's deferred income tax assets are
shown below:
 
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  -------------
                                                                   1998   1997
   (amounts in thousands)                                         ------ ------
   <S>                                                            <C>    <C>
   Deferred income tax assets:
   Accrued expenses.............................................. $2,318 $2,075
   State taxes...................................................  1,705  1,584
   Foreign currency translation..................................  2,085    --
   Identifiable intangible assets................................    430    167
                                                                  ------ ------
   Total deferred income tax assets.............................. $6,538 $3,826
                                                                  ====== ======
</TABLE>
 
  Management believes that the Company will fully realize its total deferred
income tax assets based upon its current level of operating income.
Accordingly, no valuation allowance was established for any reporting period
presented.
 
9. Employee Benefit Plans
 
  The Company participates in defined benefit pension plans, defined
contribution plans, welfare benefit plans, and post-retirement and post-
employment plans sponsored by BAC which cover substantially all salaried
employees of the Company. The Company receives a monthly charge from BAC for
its share of pension costs in an amount equivalent to the employer expense of
the employee benefit plans, health and dental insurance plans, workers'
compensation insurance, and other compensation-related expenses for its
employees participating in the plans. Employee benefits costs incurred by the
Company are calculated by applying a benefit factor percentage, as determined
by BAC, against employee base salaries for the defined benefit pension plan
and defined contribution plans and a per employee charge for welfare benefits.
For the years ended December 31, 1998, 1997, and 1996, the Company incurred a
total expense of $5.4 million, $4.4 million, and $4.1 million, respectively,
for its share of retirement and welfare plan expenses.
 
  Defined Benefit Plans - Eligible salaried U.S. employees of the Company are
covered under the BankAmerica Pension Plan (the Pension Plan), which is a
defined benefit cash balance plan. The BAC Pension Plan was merged with the
corresponding NBC Plan effective December 31, 1998. The Company will remain
under its current plan until the plan is amended in 2000. Prior to January 1,
1996, certain Company employees were covered by the Seafirst Corporation
Retirement Plan (the Seafirst Plan), a final average pay defined benefit plan.
Effective December 31, 1995, the Seafirst Plan was merged into the Pension
Plan; however, the Seafirst Plan benefit formula remained in effect for
Seafirst employees through March 31, 1996.
 
  Benefits are based on the employees' length of service, level of
compensation and a specified interest rate (6.25%, 6.50%, and 7.25% for the
years ending December 31, 1998, 1997 and 1996, respectively). Effective
January 1, 1996, the benefit formula of the Pension Plan was amended such that
eligible participants receive nonmatching employer contributions, called pay-
based credits, of 7 percent of annual qualified earnings over one-half of the
Social Security wage base. Contributions are made by the Company to BAC based
on actuarial computations of the amount sufficient to fund the current service
cost plus amortization of the unfunded actuarial accrued liability.
Contributions are determined in accordance with Internal Revenue Service
funding requirements and are invested in diversified portfolios. Effective
April 1, 1998, eligible hourly employees also began to realize pension-based
credits.
 
  Certain non-U.S. employees of the Company are covered by noncontributory
defined pension plans that the Company funds primarily in accordance with
local laws. The actuarial assumptions used in computing the present
 
                                      34
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
value of the accumulated benefit obligation, the projected benefit obligation,
and net pension expense for the non-U.S. plans are substantially consistent
with those assumptions used for the U.S. plans, given local conditions.
 
  Aggregate contributions for all the defined benefit plans were $1.8 million,
$1.8 million, and $1.1 million for the years ended December 31, 1998, 1997,
and 1996, respectively.
 
  Defined Contribution Plans - The majority of salaried U.S. employees of the
Company participate in the BankAmerica 401(k) Investment Plan. This plan
provides tax-deferred investment opportunities to salaried employees who have
completed a required length of service. Employees may contribute to the plan
up to certain limits prescribed by the Internal Revenue Service. A portion of
these contributions is matched by the Company. Contributions are invested at
the direction of the participant. Prior to April 1, 1996, certain Company
employees participated in the Seafirst Corporation Employee Matched Savings
Plan (Seafirst Savings Plan), also a defined contribution plan with matching
employer contributions. Effective April 1, 1996, the Seafirst Savings Plan was
merged into and replaced by the BankAmerica 401(k) Investment Plan. Effective
January 1, 1996, the BankAmerica 401(k) Investment Plan was amended to provide
eligible employees with pay-based credits equal to 3 percent or 7 percent of
an eligible employee's annual qualified earnings up to one-half of the Social
Security wage base, depending upon the employee's age or length of service.
Effective April 1, 1998, eligible hourly employees are able to contribute to
the plan and receive company matching contributions and pay-based credits.
Matching contributions made by the Company on behalf of eligible U.S.
employees to BankAmerica's 401(k) Investment Plan were $0.8 million, $0.7
million, and $0.6 million for the years ended December 31, 1998, 1997 and
1996, respectively.
 
  Post-Retirement Health Care and Life Insurance Benefits - Currently, the
Company provides certain defined health care and life insurance benefits under
plans for certain U.S. retired employees sponsored by BAC. Retiree health care
benefits are offered under self-insured arrangements, as well as through
various health maintenance organizations. Retiree life insurance benefits are
provided through an insurance company. BAC allocates the cost of post-
retirement benefits to the Company as part of a per employee charge for
welfare benefits. That charge is periodically reviewed and evaluated. The
retiree's share is the remainder of the cost for the given coverage. BAC's
policy is to fund the cost of medical benefits in amounts determined at the
discretion of management. Employer contributions are invested in diversified
portfolios, including fixed income and equity investments. Contributions
expense to the Plan were $0.6 million, $0.5 million and $0.4 million for the
three years ended December 31, 1998, 1997 and 1996, respectively.
 
  Stock Plans - During 1996, the Company adopted two stock-based compensation
plans: the BA Merchant Services, Inc. Long-Term Incentive Plan (the LTIP) and
the BA Merchant Services, Inc. Nonemployee Director Stock Plan (the Director
Plan). Compensation expense related to these stock plans was $2.5 million in
1996, substantially all of which represents a one-time charge for the
conversion of employee options from BAC shares to the Company shares, as
discussed below.
 
  The Company offers shares of its common stock to certain officers and
employees of the Company and its subsidiaries under the LTIP and to directors
of the Company who are not also employees of the Company or BAC (nonemployee
directors) under the Director Plan. Seven million shares of the Company's
Class A Common Stock have been authorized for issuance through the LTIP and
the Director Plan in the aggregate. Both plans are administered by the
Executive Personnel and Compensation Committee of the Board of Directors (the
Compensation Committee). The Compensation Committee may award a number of
forms of stock-based compensation to eligible employees, including incentive
and nonqualified stock options, stock appreciation rights, restricted stock,
performance units, and performance shares, and may award nonqualified stock
options to nonemployee directors.
 
                                      35
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  On December 19, 1996, contingent upon completion of the Offerings, the
Company awarded to its executive officers stock options representing 257,000
shares of Class A Common Stock and 134,000 Class A Common Restricted Stock
with a fair value at the date of grant of $15.50 per share. The transfer of
stock was at no cost to the officers. The shares under option vest ratably
over three years and have a maximum term of ten years after the grant date. An
additional 10,456 and 17,000 restricted shares were issued during 1998 and
1997, respectively. As of December 31, 1998, 138,589 restricted shares were
outstanding. One-third of the restricted shares vest three years after the
date of grant. The remaining shares vest ratably thereafter over the next two
years. Compensation expense related to the restricted shares was $0.4 million
and $0.6 million for the year ended December 31, 1998 and 1997, respectively.
 
  The Company has adopted a program within the LTIP called Ownership
Counts!(TM) under which substantially all employees of the Company receive
periodic stock option grants, or stock appreciation rights (SARs) in certain
foreign locations, for no more than 800 shares of the Company's Class A Common
Stock annually. SARs are generally exercisable under the same terms as the
options. The shares under option vest ratably over three years and have a
maximum term of five years after the date the options are granted.
 
  On December 31, 1996, certain employees of the Company who had received BAC
stock options and restricted stock under BAC's management stock plans elected
to exchange their BAC stock options and restricted stock for stock options
representing 329,711 shares of the Company's Class A Common Stock and 2,092
shares of the Company's Class A Common Restricted Stock with a fair value at
the date of exchange of $17.88, as provided by the LTIP agreement. The
employee stock exchange resulted in a one-time charge of $2.4 million to
compensation expense.
 
  Under the Director Plan, each nonemployee director is granted options to
purchase shares of the Company's Class A Common Stock upon election to the
Board of Directors and on the day following each annual meeting of the
Company's stockholders. The shares under option vest on the day before the
annual meeting of the Company's stockholders following the date of grant and
have a ten-year term.
 
  At December 31, 1998, shares available for grant under the LTIP and Director
Plan as either stock options or restricted stock were 5,400,428. Shares
subject to options that are canceled become available for future grants.
 
  The following is a summary of the Company's stock option activity, and
related information for the periods ended December 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                1998                1997
                                         -------------------- ------------------
                                                    WEIGHTED-          WEIGHTED-
                                                      AVG.               AVG.
                                                    EXERCISE           EXERCISE
                                          SHARES      PRICE   SHARES     PRICE
                                         ---------  --------- -------  ---------
   <S>                                   <C>        <C>       <C>      <C>
   Balance, beginning of year...........   890,985   $13.82   658,765   $13.06
   Granted..............................   654,435   $16.29   253,083   $16.01
   Exercised............................    (4,114)  $15.36       (34)  $15.50
   Forfeited............................   (80,324)  $15.77   (20,829)  $16.23
                                         ---------   ------   -------   ------
   Balance, end of year................. 1,460,982   $14.82   890,985   $13.82
                                         =========   ======   =======   ======
   Exercisable at end of year...........   591,589   $12.89   369,959   $11.67
                                         =========   ======   =======   ======
</TABLE>
 
  At December 31, 1998, 561,292 options were outstanding with exercise prices
ranging from $7.97 to $15.47 having a weighted-average remaining contractual
life of 5.4 years, and 899,690 options were outstanding with exercise prices
ranging from $15.50 to $19.19 having a weighted-average remaining contractual
life of 6.9 years. If the proposed merger with BankAmerica is consummated, the
Merger Agreement provides for the cancellation
 
                                      36
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
of all outstanding options issued under the LTIP and Director Plan in exchange
for a cash payment equal to the excess, if any, of the merger consideration
over the exercise price. For certain executive officers of BAMS, the excess of
the merger consideration over the exercise price will be distributed in
accordance with originally scheduled vesting of the related restricted stock.
 
  The table below reflects the Company's pro forma net income and pro forma
earnings per share for the years ended December 31, 1998, 1997 and 1996 as if
compensation cost for the Company's stock plans had been determined based on
the estimated fair value at the grant dates for awards under those plans and
expensed. Since pro forma compensation cost relates to all periods over which
the awards vest, the initial impact on pro forma net income may not be
representative of compensation cost in subsequent years, when the effect of
the amortization of multiple awards would be reflected.
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                        -----------------------
                                                         1998    1997    1996
   PRO FORMA RESULTS                                    ------- ------- -------
   (IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                                                  <C>     <C>     <C>
   Net income.......................................... $35,064 $36,674 $27,309
   Earnings per common share........................... $  0.72 $  0.75 $  0.56
   Diluted earnings per common share................... $  0.72 $  0.75 $  0.56
</TABLE>
 
  Fair values of the options were estimated at the date of grant using a
variation of the Black-Scholes option pricing model, which includes the
following assumptions used for the stock options awarded during 1998, 1997 and
1996, respectively: risk free weighted average interest rate of 6.0 percent,
6.23 percent and 6.13 percent; weighted average expected volatility of 49.4
percent, 64.2 percent and 23.0 percent; expected option life of the LTIP of
4.0, 4.3 and 4.1 years; expected life for Ownership Counts!(TM) of 3.0, 2.6
and 2.6 years and the expected life for the Director Plan of 10.0, 10.0 and
10.0 years; and expected dividend yield of zero.
 
  The weighted-average fair value of the options on the respective grant dates
during 1998, 1997 and 1996 was $7.65, $7.64 and $4.67 per share. The exercise
price of each option equals the market price of the Company's Class A Common
Stock on the date of grant. Expiration dates for options outstanding at
December 31, 1998 ranged from December 18, 2001 to August 1, 2008.
 
10. COMMITMENTS AND CONTINGENCIES:
 
  The Company has contractual agreements with third parties to receive
merchant data processing services and data processing and card transactions
services. Included in these contracts is an agreement with a third party who
provides the primary processing service to the Company and with whom the
Company has a long-term contract which expires in 2001. Future commitments
under this contract are unknown as payment amounts vary with volumes
processed.
 
  Due to the nature of its business, the Company is subject to various
threatened or filed legal actions. Although the amount of the ultimate
exposure, if any, cannot be determined at this time, the Company, based upon
the advice of counsel, does not expect the final outcome of threatened or
filed suits to have a material adverse effect on its financial position.
 
  Subsequent to the announcement by BankAmerica and the Company that
BankAmerica was offering to acquire through merger all of the Class A Common
Stock three putative class action lawsuits were filed. On December 22, 1998
counsel to the plaintiffs, BankAmerica and the Company entered into a
Memorandum of Understanding for settlement of the litigation subject to court
approval and certain other conditions. On February 9, 1999, the parties
entered into a Stipulation and Agreement of Compromise, Settlement and Release
for settlement of the cases. A hearing to consider settlement of the case and
requested attorney's fees was held
 
                                      37
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
on March 18, 1999. An order and final judgment was entered at that time
dismissing the suits and awarding attorney's fees and costs of $1.1 million in
fees and approximately $35,000 in expenses. The settlement will be effective
five days after the later of (i) consummation of the merger and (ii) the Order
and Final Judgment of March 18, 1999 becoming final, which, in the absence of
an appeal, will occur on April 19, 1999.
 
11. RELATED PARTIES
 
  The Company and BankAmerica engage in various intercompany transactions and
arrangements including the provision by BankAmerica of various services to the
Company. Such services are currently provided pursuant to various intercompany
agreements which, among other things, grant to the Company a license to use
the Bank of America name and certain trademarks and services marks in
connection with the Company's business.
 
  Additional services provided under the intercompany agreements include
product distribution services, direct access processing services, direct
access marketing services, system support services, association and network
sponsorship and representation in the credit card associations,
telecommunications services, tax and treasury services, regulatory and
compliance, legal, accounting and audit services and other miscellaneous
support and administrative services. Fees paid for these services were
approximately $6.2 million, $7.8 million, and $10.9 million, for the years
ended December 31, 1998, 1997, and 1996, respectively.
 
  As part of the intercompany agreements, the Company paid BankAmerica total
rental expense of $2.4 million, $2.6 million, and $2.2 million, for the years
ended December 31, 1998, 1997, and 1996, respectively. The Company leases its
facilities from BankAmerica under a five-year lease agreement which can be
cancelled with six months notice.
 
  The Company believes that the cost of services provided under the
intercompany arrangements are not materially different from the costs that
would have been incurred if the Company was unaffiliated with BankAmerica.
 
  In connection with the Offerings, BankAmerica and the Company also entered
into a Non-Competition and Corporate Opportunities Allocation Agreement
pursuant to which BankAmerica will not compete with the Company for a period
of five years with respect to payment processing for merchants to the extent
that such payments arise in the use of credit, charge or debit cards for the
purchase of goods and services and are authorized through an electronic medium
originating at the point of sale in the United States and, following the
transfer of the Bank's merchant processing business in Taiwan, Thailand and
the Philippines, in those Asian countries. Any or all of the intercompany
agreements may be terminated by BankAmerica, if at any time it beneficially
owns shares representing less than a majority of the voting power of the
Company's outstanding common stock.
 
12. EARNINGS PER SHARE
 
  Historical earnings per share has not been presented for the year ended
December 31, 1996 since such information would not be meaningful because the
Company had no outstanding stock prior to the Reorganization. Pro forma
earnings per share for the year ended December 31, 1996 was computed by
dividing net income by the weighted-average number of common shares
outstanding and the additional dilutive effect of the stock rights and options
outstanding assuming the Reorganization and Asia Acquisitions had occurred as
of January 1, 1994 and the stock issued in the Reorganization, Offerings and
Asia Acquisitions had been outstanding for the year ended December 31, 1996:
 
<TABLE>
<CAPTION>
   (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                                                                  <C>
   Net income.......................................................... $27,365
   Average number of shares outstanding................................  48,500
   Pro forma earnings per share (unaudited)............................    $.56
   Pro forma earnings per share, as adjusted (unaudited)(a)............    $.69
</TABLE>
 
                                                       (footnotes on next page)
 
                                      38
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
--------
(a) Pro forma earnings per share, as adjusted (unaudited), assumes that
    proceeds from the Offerings in the fourth quarter of 1996 were available
    from January 1, 1994 and were invested in short-term investments, and
    excludes the one-time expense related to the employee stock exchange ($2.4
    million) and interest expense ($492,000) from the 1996 results.
 
13. Common and Preferred Stock
 
  The Company has two classes of authorized common stock: Class A Common Stock
and Class B Common Stock. Holders of the Class A Common Stock generally have
identical rights to holders of Class B Common Stock, except that holders of
Class A Common Stock are entitled to one vote per share while holders of the
Class B Common Stock are entitled to ten votes per share on all matters
submitted to a vote of stockholders.
 
  The Company is authorized to issue, in one or more series, ten million
shares of preferred stock and to fix the dividend rights, conversion rights,
terms and rights of redemption, liquidation preferences and sinking fund
terms. At December 31, 1998 and 1997, no preferred stock was outstanding.
 
14. Forward Exchange Contracts
 
  At December 31, 1998, the Company had entered into short-term non-delivery
forward exchange contracts with BAC. Those contracts had notional principal
amounts totaling $34.6 million at forward rates ranging from New Taiwanese
(NT) $32.25 to NT $34.78. Exposure to loss on these contracts will increase or
decrease over the contract life as currency exchange rates fluctuate. At
December 31, 1997, $30.4 million in forward contracts were outstanding.
 
15. Supplemental Pro Forma Statement of Operations (Unaudited)
 
  Supplemental unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1996 has not been presented since
the effects of the Reorganization, Offerings and the Asia Acquisitions did not
have a material impact on the Company's operating results.
 
                                      39
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
16. Quarterly Financial Summary (Unaudited)
 
<TABLE>
<CAPTION>
                                                Year Ended December 31, 1998
                                               -------------------------------
                                                First  Second   Third  Fourth
                                               Quarter Quarter Quarter Quarter
(amounts in thousands, except per share data)  ------- ------- ------- -------
<S>                                            <C>     <C>     <C>     <C>
Net revenue................................... $41,834 $45,239 $48,716 $52,587
Operating expense.............................  28,936  31,503  31,458  38,340
                                               ------- ------- ------- -------
Operating income..............................  12,898  13,736  17,258  14,247
Net interest income (expense).................   1,846   1,900   1,669   1,655
                                               ------- ------- ------- -------
  Income before income taxes..................  14,744  15,636  18,927  15,902
Provision for income taxes....................   6,045   6,411   7,760   8,329
                                               ------- ------- ------- -------
  Net income.................................. $ 8,699 $ 9,225 $11,167 $ 7,573
                                               ------- ------- ------- -------
Basic and diluted earnings per common share
 ............................................. $  0.18 $  0.19 $  0.23 $  0.16
                                               ======= ======= ======= =======
<CAPTION>
                                                Year Ended December 31, 1997
                                               -------------------------------
                                                First  Second   Third  Fourth
                                               Quarter Quarter Quarter Quarter
                                               ------- ------- ------- -------
<S>                                            <C>     <C>     <C>     <C>
Net revenue................................... $35,969 $38,882 $41,192 $44,932
Operating expense.............................  24,360  25,579  26,115  29,235
                                               ------- ------- ------- -------
Operating income..............................  11,609  13,303  15,077  15,697
Net interest income (expense).................   1,524   2,228   2,059   1,951
                                               ------- ------- ------- -------
  Income before income taxes..................  13,133  15,531  17,136  17,648
Provision for income taxes....................   5,428   6,420   7,082   7,090
                                               ------- ------- ------- -------
Net income.................................... $ 7,705 $ 9,111 $10,054 $10,558
                                               ======= ======= ======= =======
Basic and diluted earnings per common share
 ............................................. $  0.16 $  0.19 $  0.21 $  0.22
                                               ======= ======= ======= =======
</TABLE>
 
                                       40
<PAGE>
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure
 
  None.
 
                                    PART III
 
Item 10. Directors and Executive Officers of the Registrant
 
DIRECTORS
 
<TABLE>
<CAPTION>
                          Principal Occupation, Business Experience    Director
 Name and Age                         and Directorships                 Since
 ------------             -----------------------------------------    --------
 <C>                    <S>                                            <C>
 Sharif M. Bayyari      Mr. Bayyari has been the President and Chief     1996
 Age: 54                Executive officer and a member of the Board
                        of Directors of the Company since its
                        formation. From 1993 until the Company's
                        formation, he was an Executive Vice
                        President responsible for managing the
                        merchant services businesses of Bank of
                        America. From 1983 to 1993, he was with
                        National Data Corporation, where he served
                        as Group Vice President in charge of
                        operations from 1990 to 1993. National Data
                        Corporation is a merchant services business.
 
 Christopher A. Callero Mr. Callero has served as a member of the        1998
 Age: 47                Board of Directors of the Company since May
                        1998. Mr. Callero has served as Group
                        Executive Vice President of Bank of America
                        since 1994. He is currently responsible for
                        Strategic Technology and Integrated Payments
                        Services at BankAmerica. Until his
                        assignment to his current post in 1998, he
                        was the Transition Executive in the Bank of
                        America Consumer and Commercial Banking
                        group. From August 1997 until May 1998, he
                        was head of the Bank of America Deposit and
                        Payment Services group; and from March 1994
                        until May 1997, he was head of the Bank of
                        America National Consumer Assets Group.
 
 Barbara J. Desoer      Ms. Desoer has served as a member of the         1996
 Age: 46                Board of Directors of the Company since
                        November 1996. She is currently President,
                        Northern California Banking, at Bank of
                        America. Previously she was Group Executive
                        Vice President and head of the California
                        Retail Group of Bank of America. Ms. Desoer
                        joined Bank of America in 1977.
 
 Donald R. Dixon        Mr. Dixon has served as a member of the          1996
 Age: 51                Board of Directors of the Company since
                        November 1996. He has been the Managing
                        Director of Trident Capital, Inc., a venture
                        capital firm, since 1993. He was Co-
                        President of Partech International, a
                        private equity fund manager associated with
                        Banque Paribas, from 1988 to 1993. Before
                        that time, he was Managing Director of Alex
                        Brown & Sons, Incorporated and a Vice
                        President of Morgan Stanley. He currently
                        serves on the Board of Directors of Platinum
                        Software Corporation, Evolving Systems,
                        Inc., and several privately owned
                        corporations.
 
 William E. Fisher      Mr. Fisher has served as a member of the         1996
 Age: 52                Board of Directors of the Company since
                        November 1996. He is the President, Chief
                        Executive Officer and Chairman of
                        Transaction Systems Architects, Inc., where
                        he has been employed since 1987. He
                        currently serves on the Board of Directors
                        of Transaction Systems Architects, Inc.,
                        Hypercom Inc. and West Teleservices Corp.
</TABLE>
 
                                       41
<PAGE>
 
<TABLE>
 <C>             <S>                                                       <C>
 James G. Jones  Mr. Jones has served as a member of the Board of          1996
 Age: 50         Directors of the Company since November 1996. He is
                 currently President, Direct Banking and Insurance, for
                 Bank of America. He was Group Executive Vice President
                 and head of Consumer Credit & Card Services for Bank of
                 America from 1992 until 1998. Before joining Bank of
                 America in 1992, he served for nine years as Executive
                 Vice President and head of Consumer Credit at Wells
                 Fargo Bank.
 
 Hatim A. Tyabji Mr. Tyabji has served as a member of the Board of         1998
 Age: 53         Directors since May 1998. He is presently a consultant
                 to VeriFone, Inc., the firm he headed as Chairman,
                 President and Chief Executive Officer until his
                 retirement in March 1998. He joined VeriFone as
                 President and Chief Executive Officer in 1986. Before
                 his appointment at VeriFone, he spent 13 years in
                 management positions at Sperry Corporation. He was
                 President of the Information Systems Products and
                 Technologies Group of the merged Sperry and Burroughs
                 organizations, which has since become Unisys
                 Corporation. Mr. Tyabji is a director of Deluxe
                 Corporation, Best Buy and certain privately owned
                 technology firms.
</TABLE>
 
Executive Officers
 
  The executive officers of the Company include Mr. Bayyari, the President and
Chief Executive Officer of the Company and a member of the Board of Directors,
about whom information is provided above.
 
<TABLE>
 <C>                <S>
 James H. Williams  Mr. Williams has been the Executive Vice President, Chief
 Age: 55            Financial Officer, Chief Accounting Officer and Treasurer
                    of the Company since its formation. Before joining the
                    Company, Mr. Williams was employed by Bank of America as a
                    Group Executive Vice President and Chief Accounting Officer
                    and by BankAmerica Corporation (BankAmerica) as Executive
                    Vice President. Before joining Bank of America in 1994, Mr.
                    Williams worked for Seafirst Corporation, starting in 1973,
                    and was named Chief Financial Officer of that organization
                    in 1984 and Manager of Operations and Finance Group in June
                    1993. Seafirst Corporation became a subsidiary of
                    BankAmerica in 1983.
 
 Le Tran-Thi        Ms. Tran-Thi has been the Company's Senior Vice President
 Age: 52            and Director of Operations and Asia Merchant Services since
                    the Company's formation. Previously, Ms. Tran-Thi was a
                    Senior Vice President for Bank of America responsible for
                    operations of Bank of America's Asian merchant processing
                    businesses, joining Bank of America in 1981.
 
 Michael J. Sanders Mr. Sanders has been the Company's Senior Vice President
 Age: 49            and Director of Sales since the Company's formation. Before
                    joining the Company, Mr. Sanders was a Senior Vice
                    President and Sales Director for Bank of America's merchant
                    services business since 1993, having previously served in
                    various operations, customer service, sales and sales
                    management roles with Bank of America since 1967.
 
 James M. Aviles    Mr. Aviles has been the Company's Senior Vice President and
 Age: 38            Director of
                    Product/Strategy/Technology Support since the Company's
                    formation. Mr. Aviles joined Bank of America's merchant
                    services business in 1988, and in June 1993 he assumed
                    responsibility for Bank of America's product development,
                    strategic planning and marketing function for its merchant
                    services businesses.
</TABLE>
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
  Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than 10% of a
registered class of the Company's equity securities to file with the SEC and
the New York Stock Exchange initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and stockholders who own
 
                                      42
<PAGE>
 
more than 10% of a registered class are required by the SEC to furnish the
Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely upon review of the copies of such reports furnished to
the Company and written representations that no other reports were required,
during the fiscal year ended December 31, 1998 all Section 16(a) filing
requirements applicable to the Company's officers, directors and holders of
more than ten percent of the Company's Common Stock were complied with.
 
 
                                      43
<PAGE>
 
Item 11. Executive Compensation
 
Compensation of Executive Officers
 
  The following table sets forth certain summary information concerning
compensation earned by the Company's Chief Executive Officer and the four
other most highly compensated executive officers during each of the last three
fiscal years. Certain of the amounts shown represent payments made to such
individuals by BankAmerica and its subsidiaries and affiliates.
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                           Long Term
                                        Annual Compensation              Compensation
                                  ---------------------------------- -------------------------
                                                           Other     Restricted     Securities
                                                           Annual      Stock        Underlying      All Other
Name And Principal Position  Year Salary(1)     Bonus   Compensation   Awards        Options     Compensation(2)
---------------------------  ---- ---------    -------- ------------ ----------     ----------   ---------------
<S>                          <C>  <C>          <C>      <C>          <C>            <C>          <C>
Sharif M. Bayyari........... 1998 $220,000          --      --            --             --          $15,394
 President and Chief         1997  220,000          --      --            --          64,328(3)       34,539
 Executive Officer           1996  190,000(4)  $175,000     --         27,092(5)(6)   99,631(7)       14,994
James H. Williams (8)....... 1998  175,000          --      --            --             --           17,269
 Executive Vice President    1997  175,000          --      --            --          28,479(9)       45,358
 and Chief Financial Officer
Le Tran-Thi................. 1998  130,000          --      --            --             --            8,894
 Senior Vice President and   1997  130,000          --      --            --          27,376(9)       13,247
 Director, Operations & Asia 1996  115,000(4)    70,000     --         12,000(5)      32,090(10)       9,057
 Merchant Services
Michael J. Sanders.......... 1998  130,000       77,775     --            --             --           16,127
 Senior Vice President and   1997  119,167       55,683     --            --          18,454          10,098
 Director, Sales             1996   80,916(4)    46,738     --         12,000(5)      31,000(11)       8,570
James M. Aviles............. 1998  128,333          --      --            --             --            8,811
 Senior Vice President and   1997  120,000          --      --            --          29,132(12)      10,889
 Director of                 1996   84,167(4)    45,000     --         12,000(5)      31,000(11)       5,177
 Product/Strategy/Technology
 Support
</TABLE>
-------
 (1) The amounts shown include amounts deferred under the BankAmerica 401(k)
     Investment Plan.
 (2) The amounts shown consist of contributions made by the Bank to the
     BankAmerica 401(k) Investment Plan and Supplemental Retirement Plan.
 (3) Includes 46,136 options awarded under the Long-Term Incentive Plan, as
     well as 18,192 options awarded as a short-term incentive.
 (4) Salary paid in 1996 to the named officers included certain amounts paid
     by the Bank as follows: Mr. Bayyari, $174,167; Ms. Le Tran-Thi, $115,000;
     Mr. Sanders, $73,833; and Mr. Aviles, $76,667. Salary and bonus paid to
     the named officers prior to 1996 was paid entirely by the Bank.
 (5) Represents shares of the Company's Class A Common Stock. The number of
     shares and their value (based on the closing price in the New York Stock
     Exchange Composite Transactions of the Company's Class A Common Stock at
     December 31, 1996 of $17.50 per share) for each of the named officers was
     as follows: Mr. Bayyari, 27,092 shares ($474,110); Ms. Le Tran-Thi,
     12,000 shares ($210,000); Mr. Sanders, 12,000 shares ($210,000); and Mr.
     Aviles, 12,000 shares ($210,000). The Company has not paid any dividends
     since its incorporation. It currently intends to retain all future
     earnings for use in the operations of its business and does not
     anticipate paying any cash dividends in the foreseeable future.
 (6) Mr. Bayyari received 500 shares of restricted BankAmerica common stock in
     1994, of which 375 shares remained unvested at December 31, 1996. On such
     date, these shares of restricted BankAmerica common stock were exchanged
     for 2,092 shares of restricted Class A Common Stock.
 (7) Includes options to purchase 8,000 shares of BankAmerica common stock
     which were exchanged for options to purchase 44,631 shares of Class A
     Common Stock.
 (8) Compensation for Mr. Williams is not provided in this table prior to
     1997, because he did not provide services to the merchant services
     businesses prior to October 1996. The total salary and bonus earned by
     Mr. Williams from October 1996 through December 1996 did not exceed
     $100,000.
 (9) Includes 20,761 options awarded under the Long-Term Incentive Plan, as
     well as options awarded as a short-term incentive as follows: Mr.
     Williams, 7,718; and Ms. Tran-Thi, 6,615.
(10) Represents options to purchase 90 shares of BankAmerica common stock
  granted to Ms. Tran-Thi on November 18, 1996 pursuant to the Bank's "Take
  Ownership" program, options to purchase 4,000 shares of BankAmerica common
  stock and options to purchase 28,000 shares of Class A Common Stock.
(11) Represents options to purchase 3,000 shares of BankAmerica common stock
     and options to purchase 28,000 shares of Class A Common Stock.
(12) Includes 23,068 options awarded under the Long-Term Incentive Plan, as
     well as 6,064 options awarded as a short-term incentive.
 
                                      44
<PAGE>
 
Individual Grants
 
  The following tables provides information on options to purchase Class A
Common Stock of the Company granted during 1998 to the named executive
officers.
 
<TABLE>
<CAPTION>
                                                                  Percent of
                            First               Total Number of  Total Options
                         Anniversary   3 year     Securities      Granted to      Exercise or              Grant Date
                           Vesting    Vesting     Underlying     Employees in     Base Price    Expiration  Present
Name                     Options(1)  Options(2) Options Granted Fiscal Year (3) (Per Share) (4)    Date     Value(5)
----                     ----------- ---------- --------------- --------------- --------------- ---------- ----------
<S>                      <C>         <C>        <C>             <C>             <C>             <C>        <C>
Sharif M. Bayyari.......   18,192      46,136       64,328           9.83%          $16.875       2/1/08    $490,823
James H. Williams.......    7,718      20,761       28,479           4.35%           16.875       2/1/08     217,295
Le Tran-Thi.............    6,615      20,761       27,376           4.18%           16.875       2/1/08     208,879
Michael J. Sanders......      --       18,454       18,454           2.82%           16.875       2/1/08     140,804
James M. Aviles.........    6,064      23,068       29,132           4.45%           16.875       2/1/08     222,277
</TABLE>
--------
(1) The shares subject to each option become exercisable on the first
    anniversary of the grant.
(2) One-third of the shares subject to each option become exercisable on the
    first, second and third anniversaries of the date of grant.
(3) Percentage based on options granted by the Company in 1998.
(4) The exercise price of each option equals the market price of the Company's
    Class A Common Stock on the date of the grant.
(5) The estimated "grant date present value" of the Company options granted in
    1998 is based on a variation of the Black-Scholes option pricing model,
    which includes the following assumptions used for the stock options
    awarded during 1998: a risk free interest rate of 6.00%, an expected
    option term of 4 years, an expected volatility of 49.4% and an expected
    dividend yield of zero.
 
Pension Plan
 
  The Company is a participating employer in the BankAmerica Pension and
Supplemental Retirement Plans, and its executive officers continue to accrue
benefits under these plans.
 
  The named executive officers received pension benefits for 1998 through the
BankAmerica Pension Plan, a "cash balance" defined benefit pension plan, and
the Supplemental Retirement Plan, which provides additional benefits equal to
the employer-provided benefits that plan participants do not receive under the
BankAmerica Pension Plan because of Internal Revenue Code limits. Effective
January 1, 1996, participants in the plans accrued benefits equal to 7% of
qualified earnings in excess of one-half of the Social Security wage base each
year. (Participants receive BankAmerica 401(k) Investment Plan contributions
on qualified earnings up to one-half of the Social Security wage base each
year.) Qualified earnings include salary and most cash incentive and bonus
payments. Participants' benefits are adjusted each year by an interest factor.
Estimated annual retirement benefits under the BankAmerica Pension and
Supplemental Retirement Plans for the named executive officers of the Company
at age 65 are as follows:
 
<TABLE>
<CAPTION>
Name                                      Year Reaching Age 65 Amount of Annuity
----                                      -------------------- -----------------
<S>                                       <C>                  <C>
Sharif M. Bayyari........................         2010             $ 47,306
James H. Williams........................         2008              103,383
Le Tran-Thi..............................         2011               33,643
Michael J. Sanders.......................         2014               44,962
James M. Aviles..........................         2025               66,532
</TABLE>
 
  The estimated annual retirement benefits shown assume bonuses equal to the
average percentage bonus (as a percentage of year-end salary) or the cash
equivalent of a short-term incentive award received for the last three years,
a 5% interest factor, retirement at age 65 and no increase in salary.
 
                                      45
<PAGE>
 
Other Benefit Plans
 
  The Company is also a participating employer in the other benefit programs
sponsored by BankAmerica, including the BankAmerica 401(k) Investment Plan
with matching employer contributions, group health, life, accident and
disability coverage and preferred rates on certain loans and banking services.
These programs are made available to executive officers of the Company on
terms not more favorable than those offered to other employees. The
participation of the Company in BankAmerica sponsored benefit programs is
subject to the continued authorization of BankAmerica and the Company's
election to participate.
 
                                      46
<PAGE>
 
Item 12.Security Ownership of Certain Beneficial Owners and Management
 
  The following table indicates the name, address and stock ownership of the
only persons or groups of persons known by the Company to own more than five
percent of the outstanding shares of either Class A Common Stock or Class B
Common Stock as of March 26, 1999:
<TABLE>
<CAPTION>
                                                          Shares of
                                                         Common Stock  Percent
                          Name and Address of            Beneficially     of
 Class of Common Stock    Beneficial Owner                  Owned      Class(1)
 ---------------------    -------------------           -------------- --------
 <C>                      <S>                           <C>            <C>
 Class A Common Stock     William Blair & Company,        2,671,786(3)   16.44%
                          L.L.C.(2)
 
 Class A Common Stock     FMR Corp.(4)                    1,178,200(5)    7.25%
 
 Class A Common Stock     Friess Associates, Inc.(6)      1,144,000(7)    7.04%
 
 Class A Common Stock     Gabelli Funds, Inc.,            2,391,500(9)   14.72%
                          Gabelli Funds, LLC, GAMCO
                          Investors, Inc., Gabelli
                          Associates Fund, Gabelli
                          Associates Limited, Gabelli
                          International Limited,
                          Gabelli Fund, LDC, Gabelli
                          Foundation, Inc.,
                          Gabelli Asset Management
                          Inc., Marc J. Gabelli,
                          Mario J. Gabelli(8)
 
 Class A Common Stock     Milton Arbitrage Partners,       819,600(11)    5.04%
                          L.L.C.(10)
 
 Class B Common Stock(12) Bank of America National      32,400,000(14)  100.00%
                          Trust and
                          Savings Association(13)
</TABLE>
--------
 (1) Calculated based on the number of shares of Class A Common Stock issued
     and outstanding on March 26, 1999.
 (2) The address of the principal place of business of William Blair &
     Company, L.L.C. is 222 W. Adams St., Chicago, Illinois 60606.
 (3) According to an amendment to Schedule 13G filed with the Commission on
     March 17, 1999, William Blair & Company, L.L.C. has sole power to vote
     (or direct the vote) of 962,100 shares of Class A Common Stock and sole
     power to dispose (or direct the disposition of) 2,671,786 shares of Class
     A Common Stock.
 (4) The address of the principal place of business of FMR Corp. is 82
     Devonshire Street, Boston, Massachusetts 02109.
 (5) According to an amendment to Schedule 13G filed February 11, 1999,
     Fidelity Management & Research Company, a wholly owned subsidiary of FMR
     Corp. and an investment advisor to various mutual funds, is the
     beneficial owner of 1,178,200 shares of Class A Common Stock. FMR Corp.
     and Edward C. Johnson 3d, Chairman of FMR Corp., through their control of
     Fidelity Management & Research Company, have sole power to dispose (or
     direct the disposition) of 1,178,200 shares of Class A Common Stock.
     Neither FMR Corp. nor Edward C. Johnson 3d has the sole power to vote (or
     to direct the voting) of the shares owned directly by the Fidelity Funds,
     which power resides with the Funds' Boards of Trustees.
 (6) The address of the principal place of business of Friess Associates, Inc.
     is 115 E. Snow King, Jackson, Wyoming 83001.
 (7) According to a Schedule 13G filed March 20, 1998, Friess Associates, Inc.
     has sole power to vote (or to direct the vote) and sole power to dispose
     (or to direct the disposition) of 1,144,000 shares of Class A Common
     Stock.
 (8) The address of the principal place of business of Gabelli Funds, Inc.,
     Gabelli Funds, LLC, GAMCO Investors, Inc., Gabelli Associates Fund,
     Gabelli Asset Management Inc., Marc J. Gabelli and Mario J. Gabelli is
     One Corporate Center, Rye, New York 10580-1434; the address of the
     principal place of business of Gabelli Associates Limited and Gabelli
     International Limited is c/o MeesPierson (Cayman) Limited, British
     American Centre, Dr. Roy's Drive-Phase 3, George Town, Grand Cayman,
     British West Indies; the address of the principal place of business of
     Gabelli Fund, LDC is c/o Tremont (Bermuda) Limited, Tremont House, 4 Park
     Road, Hamilton HM II, Bermuda; and the principal place of business of
     Gabelli Foundation, Inc. is 165 West Liberty Street, Reno, Nevada 89501.
 (9) According to an amendment to Schedule 13D filed with the Commission on
     March 23, 1999, Gabelli Funds, LLC, a wholly-owned subsidiary of Gabelli
     Asset Management Inc. and an investment adviser, is the beneficial owner
     of 985,800 shares of Class A Common Stock; GAMCO Investors, Inc., a
     wholly owned
 
                                      47
<PAGE>
 
   subsidiary of Gabelli Funds, Inc. and an investment adviser, is the
   beneficial owner of 926,200 shares of Class A Common Stock; Gabelli
   Associates Fund, a limited partnership, the general partners of which are
   Gabelli Securities, Inc. and Mario J. Gabelli, is the beneficial owner of
   347,000 shares of Class A Common Stock; Gabelli Fund, LDC, is the
   beneficial owner of 2,500 shares of Class A Common Stock; Gabelli
   International Limited is the beneficial owner of 50,000 shares of Class A
   Common Stock; Gabelli Associates Limited is the beneficial owner of 50,000
   shares of Class A Common Stock; Gabelli Foundation, Inc. is the beneficial
   owner of 30,000 shares of Class A Common Stock; and Marc J. Gabelli and
   Mario J. Gabelli are the beneficial owners of no shares of Class A Common
   Stock. Mario J. Gabelli is deemed to have beneficial ownership of the
   shares owned beneficially by each of the foregoing persons other than Marc
   J. Gabelli. Gabelli Funds, Inc., the parent company of Gabelli Asset
   Management Inc., and Gabelli Asset Management Inc., a parent company for a
   variety of companies engaged in the securities business, are deemed to have
   beneficial ownership of the shares owned beneficially by each of the
   foregoing persons other than Mario J. Gabelli and Marc J. Gabelli.
   According to such Schedule 13D, each of the foregoing persons has the sole
   power to vote and sole power to dispose or direct the disposition of the
   shares reported for it, with certain exceptions stated in the Schedule 13D.
(10) The address of the principal place of business of Milton Arbitrage
     Partners, L.L.C. is 165 Mason Street, Greenwich, Connecticut 06830.
(11) According to a Schedule 13G filed February 9, 1999, Milton Arbitrage
     Partners, L.L.C. and its affiliate Milton Partners, L.P. have sole power
     to vote (or direct the vote) and sole power to dispose (or direct the
     disposition) of 819,600 shares of Class A Common Stock.
(12) The Class B Common Stock is convertible, upon the occurrence of certain
     events set forth in the Company's Amended and Restated Certificate of
     Incorporation, into Class A Common Stock. The Class B Common Stock
     represents approximately 66.6% of the outstanding Common Stock of the
     Company and 95.2% of the combined voting power of the Company's
     outstanding Common Stock.
(13) The address of the principal place of business of Bank of America
     National Trust and Savings Association is 555 California Street, San
     Francisco, California 94104 and of BankAmerica Corporation is 100 North
     Tryon Street, Charlotte, North Carolina 28255.
(14) According to an amendment to Schedule 13D filed with the Commission on
     December 23, 1998, Bank of America National Trust and Savings Association
     and BankAmerica Corporation have shared power to vote (or to direct the
     vote) and shared power to dispose (or to direct the disposition) of
     32,400,000 shares of Class B Common Stock.
 
                                      48
<PAGE>
 
  The following table sets forth, as of March 26, 1999, the ownership of
shares of the Class A Common Stock by each director and certain executive
officers of the Company, and of all directors and executive officers of the
Company as a group. Except as otherwise noted, each director and executive
officer had sole voting and investment power with respect to the shares held
by such director or executive officer. Sharif M. Bayyari and James H. Williams
each have beneficial ownership of approximately 1.38% and 1.22% respectively,
of the Class A Common Stock issued and outstanding. Except for Mr. Bayyari and
Mr. Williams, each individual owns less than one percent of the Company's
Class A Common Stock issued and outstanding.
 
<TABLE>
<CAPTION>
                                                                     TOTAL
                                                                  BENEFICIALLY
       NAME                                                         OWNED(1)
       ----                                                       ------------
       <S>                                                        <C>
       Sharif M. Bayyari.........................................   226,751
       Christopher A. Callero....................................       --
       Barbara J. Desoer.........................................       --
       Donald R. Dixon...........................................    20,774
       William E. Fisher.........................................    20,774
       James G. Jones............................................       --
       Hatim A. Tyabji...........................................     6,943
       James H. Williams.........................................   200,117
       Le Tran-Thi...............................................    34,534
       Michael J. Sanders........................................    27,150
       James M. Aviles...........................................    34,752
                                                                    -------
       All directors and executive officers as a group (11
        persons).................................................   571,795
                                                                    =======
</TABLE>
--------
(1) All shares which the identified person or persons have the right to
    acquire by exercise of options or vesting of restricted stock within sixty
    days of March 26, 1999 are deemed to be beneficially owned.
 
  As of March 26, 1999, the directors and executive officers of the Company as
a group beneficially owned (including certain family holdings) 571,795 shares
of the Class A Common Stock, constituting approximately 3.50% of the Class A
Common Stock issued and outstanding and less than one percent of the combined
voting power of the outstanding Common Stock.
 
                                      49
<PAGE>
 
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  In the ordinary course of business, the Company may engage in transactions
with other corporations or financial institutions whose officers or directors
are also officers or directors of the Company. Transactions with such
corporations and financial institutions are conducted on an arm's-length basis
and may not come to our attention or to the attention of the Company's
officers or the directors or officers of the other corporations or financial
institutions involved.
 
  None of the officers or directors of the Company have been involved in any
material business relationship with the Company requiring disclosure under SEC
rules.
 
CERTAIN TRANSACTIONS AND RELATIONSHIPS BETWEEN BANKAMERICA AND THE COMPANY
 
  General - The Company was incorporated in October 1996 to combine the
domestic merchant processing business of subsidiaries of BankAmerica.
BankAmerica's subsidiaries transferred these merchant processing businesses in
December 1996 in exchange for an aggregate of 30,200,000 shares of Class B
Common Stock. In 1997, the Company acquired the Asian merchant processing
businesses of the Bank. On June 2, 1997, the Company acquired the Bank's
merchant processing business in Thailand in consideration for 150,000 shares
of Class B Common Stock. On July 1, 1997, the Company acquired Bank's
processing business in the Philippines in consideration for 550,000 shares of
Class B Common Stock. On September 30, 1997, the Company acquired the Bank's
merchant processing business in Taiwan and merchant processing administrative
office in Hong Kong in consideration for 1,500,000 shares of Class B Common
Stock. The consideration paid and other terms of the transactions pursuant to
which the Company acquired the Bank's merchant processing businesses in
Thailand, the Phillipines and Taiwan were approved as to their fairness to the
Company by the directors of the Company who were not affiliated with
BankAmerica. On October 31, 1998, the Company closed its merchant processing
operations in Thailand.
 
  BankAmerica holds no shares of Class A Common Stock and 32,400,000 shares of
Class B Common Stock (100% of the outstanding Class B Common Stock),
representing in the aggregate approximately 66.6% of the total number of
outstanding shares of Common Stock. Since shares of Class B Common Stock are
entitled to ten votes per share, and shares of Class A Common Stock are
entitled to one vote per share, BankAmerica controls approximately 95.2% of
the combined voting power of the Common Stock. Such ownership also permits
BankAmerica, either as the holder of Class B Common Stock or in some cases
upon the conversion of such stock into Class A Common Stock, to effect
amendments to the Company's Certificate of Incorporation, a merger, sale of
assets, "going private" or other corporate transactions without the approval
of present holders of Class A Common Stock. Four of the directors of the
Company are employees or former employees of BankAmerica. Three directors of
the Company are not affiliated with BankAmerica or the Company (other than in
their capacity as directors).
 
  The Company has engaged, and continues to engage, in certain transactions
with BankAmerica and its subsidiaries. Management believes that there would
not have been any material change in aggregate historical revenues or expenses
of the Company had the transactions been between unrelated parties or had the
Company been operating other than as a division of a subsidiary of
BankAmerica.
 
  At a Special Meeting of Stockholders to be held on April 28, 1999, the
Company's stockholders will vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of December 22, 1998, among the
Company, BankAmerica and BAMS Acquisition Corporation pursuant to which a
wholly owned subsidiary of BankAmerica will be merged with and into the
Company and all of the shares of Class A Common Stock outstanding immediately
prior to the merger will be converted into the right to receive $20.50 in
cash, without interest thereon. See "Item 1. Business" and "Item 7.
Management's Discussion and Analysis and Results of Operation--Highlights."
 
                                      50
<PAGE>
 
  Intercompany Agreements and Arrangements - The Company and BankAmerica
engage in various intercompany transactions and arrangements, including the
provision by BankAmerica of various services to the Company. Such services are
provided pursuant to certain intercompany agreements which provide, among
other things, for the grant to the Company of a license to use the Bank of
America name and certain trademarks and servicemarks in connection with the
Company's business. The intercompany agreements also provide for the Bank to
perform for the Company certain product distribution services, processing
services, marketing services, system support services, association and network
sponsorship and representation in the Visa(R) and MasterCard(R) associations,
telecommunications services, tax and treasury services, regulatory,
compliance, accounting and audit services, and other miscellaneous support and
administrative services. The Company and the Bank also have entered into
agreements concerning registration rights, the allocation of tax liabilities
and the leasing of certain facilities by the Company from the Bank. In
general, the intercompany agreements have a term of five years from December
1996 and may be terminated by the Bank if it beneficially owns shares
representing less than a majority of the voting power of the outstanding
common stock of the Company.
 
  The above-described intercompany agreements and the Non-Competition and
Corporate Opportunities Allocation Agreement (described below) were entered
into at a time when the Company was still wholly owned by the Bank, and
therefore they were not the result of arm's length negotiations between the
parties, and the Company was not represented in connection therewith by
separate counsel.
 
  The Bank and the Company have also entered into a Non-Competition and
Corporate Opportunities Allocation pursuant to which the Bank will not compete
with the Company for a period of five years from December 1996, with respect
to payment processing for merchants to the extent that such payments arise in
the use of credit, charge or debit cards for the purchase of goods and
services and are authorized through an electronic medium originating at the
point of sale in the United States and in Taiwan, Thailand and the
Philippines.
 
  Payment for Services - Fees paid for the services provided to the Company or
its predecessors by BankAmerica as described above in "--Intercompany
Agreements and Arrangements" were approximately $10.9 million, $7.8 million
and $6.2 million for the years ended December 31, 1996, 1997 and 1998,
respectively. As part of the intercompany arrangements, the Company (or its
predecessor) paid BankAmerica total rental expense of $2.2 million, $2.6
million and $2.4 million for the years ended December 31, 1996, 1997 and 1998,
respectively. The Company leases its facilities from BankAmerica under a five-
year lease agreement which can be canceled with six months notice. In
addition, the Company (or its predecessor) paid BankAmerica $15.9 million,
$3.9 million and $6.5 million for the years ended December 31, 1996, 1997 and
1998, respectively, under tax allocation arrangements. The Company believes
that the cost of services provided under the intercompany arrangements is not
materially different from the costs that would have been incurred if the
Company had been unaffiliated with BankAmerica.
 
                                      51
<PAGE>
 
                                    PART IV
 
Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K
 
(a)(1) Financial Statements
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
   <S>                                                                      <C>
   BA Merchant Services Inc.:
   Report of Independent Auditors..........................................  22
   Consolidated Balance Sheet-
    December 31, 1998 and 1997.............................................  23
   Consolidated Statement of Operations-
    Years Ended December 31, 1998, 1997 and 1996...........................  24
   Consolidated Statement of Cash Flows-
    Years Ended December 31, 1998, 1997 and 1996...........................  25
   Consolidated Statement of Changes in Equity-
    Years Ended December 31, 1998, 1997 and 1996...........................  26
   Notes to Consolidated Financial Statements..............................  27
</TABLE>
 
(a)(2) Financial Statement Schedules
 
  Financial statement schedules have been omitted because they are not
applicable, not required, or the required information is included in the
financial statements and notes thereto.
 
                                       52
<PAGE>
 
(A)(3) EXHIBITS
 
<TABLE>
<CAPTION>
                                                                      INCORPORATED BY INCORPORATED
                                                                      REFERENCE FROM  BY REFERENCE
                                                                       REGISTRATION     FROM FILE
                                                                       STATEMENT ON    NO. 1-12365
                                                                      FORM S-1, REG.    REPORT ON
                                                                      NO. 333-13985,  FORM 10-Q OR
                                                              FILED    OR AMENDMENT   10-K FOR THE   EXHIBIT
    NO.                       DESCRIPTION                    HEREWITH  THERETO FILED  PERIOD ENDING    NO.
    ---                       -----------                    -------- --------------- ------------- ---------
 <C>       <S>                                               <C>      <C>             <C>           <C>
 2.1       Agreement and Plan of Merger among BankAmerica                                           99.2
           Corporation, BAMS Acquisition Corporation and BA
           Merchant Services, Inc. dated December 22, 1998.
           Incorporated by reference to Exhibit 99.2 of BA
           Merchant Services, Inc.'s Current Report on Form
           8-K dated December 22, 1998.
 3.1(i)    BA Merchant Services, Inc.'s amended and                       12/9/96                   3.1(i)
           restated Certificate of Incorporation.
 3.1(ii)   BA Merchant Services, Inc.'s Bylaws, as amended.                              6/30/97    3.b
 4.1       Specimen Certificate for the Class A Common                    12/9/96                   4.1
           Stock, par value $.01 per share, of Registrant.
 4.2       Registration Rights Agreement dated as of                                    12/31/96    4.2
           December 3, 1996 among the Registrant, Bank of
           America NT&SA and Bank of America NW, National
           Association.
 10.1      Lease Agreement dated as of December 3, 1996                                 12/31/96    10.1
           among the Registrant, Bank of America NT&SA and
           Bank of America NW, National Association.
 10.2      Sponsorship and Processing Agreement dated as of               12/9/96                   10.2
           December 3, 1996 between the Registrant and Bank
           of America, NT&SA.
 10.3      Trademark License Agreement dated as of December               12/9/96                   10.3
           3, 1996 between the Registrant and Bank of
           America NT&SA.
 10.4      Administrative and Support Services Agreement                  12/9/96                   10.4
           dated December 3, 1996 among the Registrant,
           Bank of America NT&SA and Bank of America NW,
           National Association.
 10.5(i)   Marketing Agreement dated as of December 3, 1996                             12/31/96    10.5(i)
           among the Registrant, Bank of America NT&SA and
           Bank of America NW, National Association.
 10.5(ii)  Marketing Agreement dated as of December 3, 1996                             12/31/96    10.5(ii)
           among Bank of America NA, Bank of America NW,
           National Association and the Registrant.
 10.6      Tax Allocation Agreement dated as of December 3,                             12/31/96    10.6
           1996 between the Registrant and BankAmerica
           Corporation.
 10.7      Merchant Card Services Agreement dated June 29,               12/16/96                   10.7
           1994 between the Registrant and Total System
           Services, Inc.
 10.8      Asset Transfer Agreement dated as of December 3,               12/9/96                   10.8
           1996 among the Registrant, Bank of America NT&SA
           and Bank of America NW, National Association.
 10.9      BA Merchant Services, Inc. Nonemployee Director                12/9/96                   10.9
           Stock Plan*
 10.10     BA Merchant Services, Inc. Short-Term Incentive                12/9/96                   10.10
           Plan.*
 10.11     BA Merchant Services, Inc. Long-Term Incentive                 12/9/96                   10.11
           Plan. *
 10.12     Revolving Credit Agreement dated March 5, 1997                               12/31/96    10.16
           between the Registrant and Bank of America
           Texas, N.A. Agreement dated as of December 3,
           1996 between the Registrant and BankAmerica
           Corporation.
 10.13     Non-Competitive and Corporate Opportunities                    12/9/96                   10.14
           Allocation Agreement dated as of December 3,
           1996 between the Registrant and BankAmerica
           Corporation.
 10.14     Stockholders' Agreement dated as of December 3,                12/9/96                   10.14
           1996 among the Registrant, Bank of America NT&SA
           and Bank of America NW, National Association.
 10.15(i)  Processing Services Agreement dated December 3,                12/9/96                   10.15(i)
           1996 between the Registrant and Bank of America
           Texas, N.A.
 10.15(ii) Processing Services Agreement dated December 3,                12/9/96                   10.15(ii)
           1996 between the Registrant and Bank of America,
           F.S.B.
 21.1      Subsidiaries.                                         x
 23.1      Consent of Ernst & Young LLP.                         x
 24.1      Powers of Attorney.                                   x
 27.1      Financial Data Schedule.                              x
</TABLE>
--------
*Management contract or compensation plan, contract, or arrangement.
 
                                       53
<PAGE>
 
(b) Reports on Form 8-K
 
  During the fourth quarter of 1998, the Company filed the following reports
on Form 8-K.
 
  The Company filed a report dated October 1, 1998 announcing that BankAmerica
Corporation and NationsBank Corporation merged in a stock-for-stock
transaction on September 30, 1998.
 
  The Company filed a report dated October 23, 1998 noting that the Company
issued a press release dated October 22, 1998 reporting that Bank of America
NT&SA had disclosed its intention to offer to acquire all of the shares of
Class A Common Stock of the Company at a cash price of $15.50 per share. The
Company's Board of Directors formed a special committee, consisting entirely
of directors independent of Bank of America NT&SA, to review the proposal.
 
  The Company filed a report dated November 19, 1998 noting that on November
16, 1998, the Company issued a press release announcing that the Special
Committee of the Board of Directors had engaged an independent financial
advisor and had engaged independent legal counsel. The Company also reported
that the Special Committee advised the Company and Bank of America NT&SA that
the $15.50 per share offered by Bank of America NT&SA was not adequate. The
Special Committee remained willing to discuss a transaction at an appropriate
per share value.
 
  In a report dated December 23, 1998 the Company reported that on December
22, 1998, the Company and BankAmerica Corporation announced the signing of a
definitive merger agreement which provided that each share of Class A Common
Stock of the Company, other than shares owned directly or indirectly by
BankAmerica or its affiliates, would be converted into the right to receive a
cash payment equal to $20.50 per share, without interest. The Company reported
that the Company and BankAmerica had entered into a memoranda of understanding
with counsel to the plaintiffs in three separate suits filed in Delaware
purportedly on behalf of holders of Class A Common Stock of the Company. The
memoranda of understanding set forth terms for a proposed settlement of the
cases.
 
                                      54
<PAGE>
 
                                   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.
 
March 30, 1999                           BA Merchant Services, Inc.
 
                                                  /s/ JAMES H. WILLIAMS
                                         By ___________________________________
                                                   (James H. Williams,
                                                Executive Vice President,
                                                 Chief Financial Officer,
                                              Chief Accounting Officer, and
                                                        Treasurer)
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
             Signature                                   Title
 
Principal Executive Officer and Director:
 
       /s/ SHARIF M. BAYYARI             President and Chief Executive Officer
____________________________________
        (Sharif M. Bayyari)
 
Principal Financial or Accounting Officer:
 
       /s/ JAMES H. WILLIAMS             Executive Vice President, Chief
____________________________________      Financial Officer, Chief Accounting
        (James H. Williams)               Officer, and Treasurer
 
Directors:
 
       /s/ SHARIF M. BAYYARI             Director
____________________________________
        (Sharif M. Bayyari)
 
    /s/ CHRISTOPHER A. CALLERO*          Director
____________________________________
      (Christopher A. Callero)
 
       /s/ BARBARA J. DESOER*            Director
____________________________________
        (Barbara J. Desoer)
 
        /s/ DONALD R. DIXON*             Director
____________________________________
         (Donald R. Dixon)
 
        /s/ JAMES G. JONES*              Chairman of the Board of Directors
____________________________________
          (James G. Jones)
 
       /s/ WILLIAM E. FISHER*            Director
____________________________________
        (William E. Fisher)
 
        /s/ HATIM A. TYABJI*             Director
____________________________________
         (Hatim A. Tyabji)
 
A majority of the members of the Board of Directors.
 
         /s/ EDWARD J. STARK
*By ________________________________
    (Edward J. Stark, Attorney-in-
                Fact)
 
Dated: March 30, 1999
 
                                       55
<PAGE>
 
                                EXHIBIT INDEX
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<CAPTION>
 
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No.       Description                                        Filed          Incorporated by     Incorporated       Exhibit
                                                             Herewith       Reference from      by Reference       No.
                                                                            Registration        from File No.
                                                                            Statement on        1-12365
                                                                            Form S-1,Reg.       Report on
                                                                            No. 333-13985,      Form 10-Q or
                                                                            or Amendment        10-K for the
                                                                            Thereto Filed       Period
                                                                                                Ending  
<S>        <C>                                               <C>            <C>                 <C>               <C>
2.1        Agreement and Plan of Merger among                                                                      
           BankAmerica Corporation, BAMS Acquisition 
           Corporation and BA Merchant Services, Inc. 
           dated December 22, 1998. Incorporated by
           reference to Exhibit 99.2 of BA Merchant
           Services, Inc.'s Current Report on Form 8-K 
           dated December 22, 1998.
3.1(i)     BA Merchant Services, Inc.'s amended                                12/9/96                              3.1(i)
           and restated Certificate of Incorporation.
3.1(ii)    BA Merchant Services, Inc.'s Bylaws, as                                               6/30/97            3.b
           amended.
4.1        Specimen Certificate for the Class A                                12/9/96                              4.1
           Common Stock, par value $.01 per share,
           of Registrant.
4.2        Registration Rights Agreement dated as                                                12/31/96           4.2
           of December 3, 1996 among the Registrant, 
           Bank of America NT&SA and Bank of
           America NW, National Association.
10.1       Lease Agreement dated as of December 3,                                               12/31/96           10.1
           1996 among the Registrant, Bank of 
           America NT&SA and Bank of America
           NW, National Association.
10.2       Sponsorship and Processing Agreement                                12/9/96                              10.2
           dated as of December 3, 1996 between 
           the Registrant and Bank of
           America, NT&SA.
10.3       Trademark License Agreement dated as of                             12/9/96                              10.3
           December 3, 1996 between the Registrant 
           and Bank of America NT&SA.
10.4       Administrative and Support Services                                 12/9/96                              10.4
           Agreement dated December 3, 1996 among 
           the Registrant, Bank of America
           NT&SA and Bank of America NW, National
           Association.
10.5(i)    Marketing Agreement dated as of                                                       12/31/96           10.5(i)
           December 3, 1996 among the Registrant, 
           Bank of America NT&SA and Bank of
           America NW, National Association.
10.5(ii)   Marketing Agreement dated as of                                                       12/31/96           10.5(ii)
           December 3, 1996 among Bank of 
           America NA, Bank of America NW,
           National Association and the Registrant.
10.6       Tax Allocation Agreement dated as of                                                  12/31/96           10.6
           December 3, 1996 between the Registrant 
           and BankAmerica Corporation.
10.7       Merchant Card Services Agreement dated                              12/16/96                             10.7
           June 29, 1994 between the Registrant 
           and Total System Services, Inc.
10.8       Asset Transfer Agreement dated as of                                12/9/96                              10.8
           December 3, 1996 among the Registrant, 
           Bank of America NT&SA and Bank of
           America NW, National Association.
10.9       BA Merchant Services, Inc. Nonemployee                              12/9/96                              10.9
           Director Stock Plan*
10.10      BA Merchant Services, Inc. Short-Term                               12/9/96                              10.10
           Incentive Plan.*
10.11      BA Merchant Services, Inc. Long-Term                                12/9/96                              10.11
           Incentive Plan. *
10.12      Revolving Credit Agreement dated March                                                12/31/96           10.16
           5, 1997 between the Registrant and 
           Bank of America Texas, N.A.
10.13      Non-Competition and Corporate                                       12/9/96                              10.13
           Opportunities Allocation
           Agreement dated as of December 3, 1996
           between the Registrant and 
           BankAmerica Corporation.
10.14      Stockholders' Agreement dated as of                                 12/9/96                              10.14
           December 3, 1996 among the Registrant, 
           Bank of America NT&SA and Bank of
           America NW, National Association.
10.15(i)   Processing Services Agreement dated                                 12/9/96                              10.15(i)
           December 3, 1996 between the 
           Registrant and Bank of America 
           Texas, N.A.
10.15(ii)  Processing Services Agreement dated                                 12/9/96                              10.15(ii)
           December 3, 1996 between the 
           Registrant and Bank of America, F.S.B.
21.1       Subsidiaries.                                         x
23.1       Consent of Ernst & Young LLP.                         x
24.1       Powers of Attorney.                                   x
27.1       Financial Data Schedule.                              x
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