NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. MERGER
On December 31, 1997, Allied Capital Corporation ("Allied I"), Allied Capital Corporation II ("Allied II"), Allied
Capital Commercial Corporation ("Allied Commercial"), and Allied Capital Advisers ("Advisers"), merged with
and into Allied Capital Lending Corporation ("Allied Lending") (each a "Predecessor Company" and collectively
the "Predecessor Companies") pursuant to an Agreement and Plan of Merger, dated as of August 14, 1997, as
amended and restated as of September 19, 1997 in a stock-for-stock exchange (the "Merger"). Immediately
following the Merger, Allied Lending changed its name to Allied Capital Corporation ("ACC" or the "Company").
The Merger was treated as a tax-free reorganization under Section 368
(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). For federal income tax purposes, the
Predecessor Companies carried forward the historical cost basis of their assets and liabilities to the surviving
entity (ACC). For financial reporting purposes, the Predecessor Companies also carried forward the historical
cost basis of their respective assets and liabilities at the time the Merger was effected. The consolidated financial
statements reflect the operations of ACC with the years ended December 31, 1997 and 1996 restated as if the
Predecessor Companies had merged as of the beginning of the earliest period presented.
Prior to the Merger, Allied I owned approximately 16 percent of Allied Lending's total shares outstanding. These
shares were distributed to the Allied I shareholders in a dividend immediately prior to the Merger at a rate of
0.107448 shares of Allied Lending for each share of Allied I held on the record date. For financial reporting
purposes, Allied I's ownership of Allied Lending has been eliminated for all periods presented.
NOTE 2. ORGANIZATION
Allied Capital Corporation, a Maryland corporation, is a closed-end management investment company that has
elected to be regulated as a busin