TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements Item 2. Management's Discussion and Analysis or Plan of Operation Item 3. Controls and Procedures PART II OTHER INFORMATION Item 1. Legal Proceedings Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures 2 ITEM 1 DEVINE ENTERTAINMENT CORPORATION MARCH 31, 2008 CONTENTS PAGE INTERIM CONSOLIDATED FINANCIAL STATEMENTS Balance Sheet 4 Statement of Shareholders' Equity 5 Statement of Operations 6 Statement of Cash Flows 7 Notes to Financial Statements 8 - 39 3 DEVINE ENTERTAINMENT CORPORATION INTERIM CONSOLIDATED BALANCE SHEET (Unaudited - Prepared by Management) (expressed in Canadian dollars) MARCH 31, 2008 <TABLE> <CAPTION> ASSETS March 31, December 31, 2007 Restated (Note 2) ----------- ------------ <S> <C> <C> Cash and cash equivalents $ 246,134 $ 245,872 Accounts receivable 1,044,228 1,028,705 Film tax credits receivable (Note 4) 607,493 1,112,207 Inventory 51,895 54,871 Prepaid and sundry assets 134,953 185,360 Advances receivable (Note 5) 494,550 494,550 Investment in film, television programs and recordings (Note 6) 5,455,790 5,355,327 Property and equipment (Note 7) 14,295 15,345 ----------- ------------ $ 8,049,338 $ 8,492,237 =========== ============ LIABILITIES Accounts payable and accrued liabilities $ 1,582,710 $ 1,569,974 Film production loan (Note 8) 1,272,570 1,840,604 Loans payable (Note 9) 1,700,800 1,700,800 Preferred shares (Note 10) 494,550 494,550 ----------- ------------ 5,050,630 5,605,928 =========== ============ SHAREHOLDERS' EQUITY Capital stock (11) 12,652,998 12,652,998 Contributed surplus (Note 12) 1,132,196 902,449 Warrants (Note 11(d) 708,456 708,456 Deficit (11,494,942) (11,377,594) ----------- ------------ 2,998,708 2,886,309 ----------- ------------ $ 8,049,338 $ 8,492,237 =========== ============ </TABLE> See accompanying notes to consolidated financial statements. 4 DEVINE ENTERTAINMENT CORPORATION INTERIM CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited - Prepared by Management) (expressed in Canadian dollars) FOR THE PERIOD ENDED MARCH 31, 2008 AND FOR THE YEAR ENDED DECEMBER 31, 2007 <TABLE> <CAPTION> Stock Contributed Common Shares Warrants Options Surplus Deficit ------------- -------- ------- ------- ------- # $ # $ # $ $ (Note 12) ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE, as restated December 31, 2006 39,313,699 12,268,006 6,069,166 335,544 4,245,000 707,165 (10,805,510) - expired options (905,000) - settlement for services rendered 68,850 10,328 - settlement of accrued liabilities 63,600 9,540 - issuance of private placement 6,475,000 365,124 6,475,000 227,276 - grant of stock options 1,315,000 119,450 - modification of warrants 16,256 (16,256) - grant of warrants 1,930,000 129,380 - Proceeds from financings 131,316 - subscription receivable, net (39,226) NET LOSS (572,084) ----------------------------------------------------------------------------------------- BALANCE, December 31, 2007 45,921,149 12,652,998 14,474,166 708,456 4,655,000 902,449 (11,377,594) - subscription received 229,747 NET LOSS (117,348) ----------------------------------------------------------------------------------------- BALANCE, March 31, 2008 45,921,149 12,652,998 14,474,166 708,456 4,655,000 1,132,196 (11,494,942) ------------ ----------- ------------ ---------- ------------ ------------- ------------ </TABLE> See accompanying notes to consolidated financial statements. 5 DEVINE ENTERTAINMENT CORPORATION INTERIM CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited - Prepared by Management) (expressed in Canadian dollars) FOR THE 3 MONTH PERIOD ENDED MARCH 31, <TABLE> <CAPTION> 2008 2007 Restated (Note 2) ------------ ------------ <S> <C> <C> REVENUE $ 104,554 $ 2,029,075 ------------ ------------ EXPENSES Operating 196,413 132,546 Amortization - film, television programs and recordings 24,374 1,376,705 - equipment 1,050 1,407 Interest (Note 13) 65 5,737 ------------ ------------ 221,902 1,516,395 ------------ ------------ NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) $ (117,348) $ 512,680 ============ ============ EARNINGS (LOSS) PER SHARE (Note 14) Basic and diluted $ 0.00 $ 0.01 ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES Basic and diluted 45,921,149 39,313,699 ============ ============ </TABLE> See accompanying notes to interim consolidated financial statements. 6 DEVINE ENTERTAINMENT CORPORATION INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited - Prepared by Management) (expressed in Canadian dollars) FOR THE 3 MONTH PERIOD ENDED MARCH 31 <TABLE> <CAPTION> 2008 2007 Restated (Note 2) ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES Net income (loss) for the period $ (117,348) $ 512,680 Amortization - film, television programs and recordings 24,374 1,376,705 - property and equipment 1,050 1,407 Change in non-cash components of working capital (Note 19) 555,310 (310,797) ----------- ----------- Cash flows provided by operating activities 463,386 1,579,995 ----------- ----------- FINANCING ACTIVITIES Decrease in film production loans (568,034) (655,347) Net change in proceeds from financing and subscription receivable 229,747 -- ----------- ----------- Cash flows used in financing activities (338,287) (655,347) ----------- ----------- INVESTING ACTIVITY Investment in film, television programs and recordings (124,837) (875,827) ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS 262 48,821 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 245,872 268,001 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 246,134 $ 316,822 =========== =========== SUPPLEMENTAL CASHFLOW INFORMATION Interest paid $ -- $ 45,004 =========== =========== </TABLE> See accompanying notes to interim consolidated financial statements. 7 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 1. NATURE OF BUSINESS AND GOING CONCERN Devine Entertainment Corporation ("the Company") is an integrated developer and producer of children's and family programs for worldwide television and film broadcast and home video markets. Television and film production and distribution is highly speculative and inherently risky. There can be no assurance of the economic success of such television and film programming since the revenues derived from the production and distribution (which do not necessarily bear a direct correlation to the production or distribution costs incurred) depend primarily upon their acceptance by the public. Furthermore, the industry has long operating cycles which require cash injections into new projects significantly ahead of the delivery and exploitation of the final production. The success of the Company's television and film programming also may be impacted by, among other factors, prevailing advertising rates, which are subject to fluctuation. Therefore, there is a substantial risk that some or all of the Company's television projects will not be commercially successful, resulting in costs not being recouped or anticipated profits not being realized. These financial statements have been prepared on the basis of accounting principles applicable to a going concern, which presumes the realization of assets and settlement of liabilities in the normal course of operations in the foreseeable future. While the Company continues to maintain its day-to-day activities and produce and distribute films and television programming, it has a significant working capital deficiency and its continued existence is dependent upon its ability to restore and maintain profitable operations and to successfully extinguish loans payable (Note 9), which are currently in default. Management is in constant communication with the loan holders and expects that the Company will be able to settle the loans in the normal course of operations. Nonetheless, the Company remains unable to service this loan and the Company will require additional working capital from its production activities or corporate financing in 2008. The Company is pursuing various financing initiatives; however, there is no assurance that the Company will be successful in its financing efforts and in achieving sufficient cash flows from operating activities. If the Company is unsuccessful, the Company may be required to significantly reduce or limit operations. The application of the going concern basis is dependent upon the 8 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 1. NATURE OF BUSINESS AND GOING CONCERN (continued) Company obtaining additional financing to fund its continuing operations and meet its obligations as they come due. If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying values of assets and liabilities and the reported net income. 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS The Company is restating its previously reported consolidated financial statements for the 3 months ended March 31, 2007. A summary of the impact of the restatement adjustments on the previously reported consolidated balance sheet, statement of operations and cash flows amounts is as follows: Summary of Restatement Adjustments a) The Company has determined that the previously filed financial statements for the 3 month period ended March 31, 2007 contained errors resulting from the incorrect accounting related to interest for the Company's Investment in film, television programs and recordings. The interest income was incorrectly accounted for and should not have been included in the results for the period ended March 31, 2007. In addition, the transaction should have been accounted for and was addressed in the December 31, 2007 financial statements. The Company has restated the interest income from interest expense (income). The restatement amounts to $30,312. As a result accrued liabilities increased by $30,312 and net income decreased by $30,312 for the 3 months ended March 31, 2007. The deficit increased by $30,312. b) The company restated its preferred shares from an equity component to a liability as it was determined that under the CICA Handbook Section 3861, and following the guidance under EIC-149. The preferred shares are redeemable, retractable and have a preferential priority participation in the residual equity of the company, accordingly preferred shares have been restated as a liability. The effect of the restatement resulted in a reclassification from preferred shares in the equity section of the balance sheet in the amount of $494,550 to preferred shares in the liability section in the amount of $494,550. This change was reflected in the Company's December 31, 2007 financial statements. Accordingly dividends 9 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued) amounting to $11,220 would be restated as interest expense for the 3 month period ending March 31, 2008. The following table summarizes the impact of the restatement adjustment on the previously reported consolidated balance sheet, statement of operations and cash flows for the 3 months ended March 31, 2007. March 31, 2007 -------------- Balance Sheet ------------- Assets as previously reported $ 11,164,939 Assets as restated $ 11,164,939 ------------ Liabilities as previously reported $ 7,152,381 Interest income (Note 2 (a)) 30,312 Interest expense (Note 2 (b)) 11,220 Liabilities as restated (Note 2) $ 7,193,913 ------------ Shareholders' Equity as previously reported $ 4,012,558 Interest income (Note 2 (a)) (30,312) Interest expense (Note (b)) (11,220) ------------ Shareholders' Equity as restated $ 3,971,026 ------------ Statement of Operations ----------------------- Net income and comprehensive income As previously reported $ 554,212 Interest expense (Note 2 (a)) (30,312) Interest income (Note 2 (b)) (11,220) ------------ Net income and comprehensive income As restated $ 512,680 ------------ 10 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued) Statement of Cash Flows Cash flows provided by operating activities As previously reported $ 1,579,995 Interest income (Note 2 (a)) (30,312) Interest expense (Note 2 (b)) (11,220) Accrued liabilities (Note 2 (a and b)) 41,532 ----------- Cash flows provided by operating activities As restated $ 1,579,995 ----------- Cash flows used in by financing activities As previously reported $ (655,347) Cash flows used in by financing activities As restated $ (655,347) ----------- Cash flows provided by investing activities $ (875,827) Cash flows used in investing activities As restated $ (875,827) ----------- 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). Note 21 describes and reconciles the significant measurement differences between Canadian generally accepted accounting principles (Canadian GAAP) and accounting principles generally accepted in the United States ("US GAAP") affecting the accompanying consolidated financial statements. A summary of significant accounting principles is set below: 11 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (a) Revenue Recognition Revenue is derived from broadcast licensing agreements, royalties, distribution fees, the sale of distribution rights, sale of copyright interests and the sale of home videos. All revenue is recognized upon meeting all recognition requirements of Statement of Position of the American Institute of Certified Public Accountants ("SOP 00-2"). Revenue from the sale of film and television programming rights and license arrangements is recognized only when persuasive evidence of a sale or arrangement with a customer exists, the film is complete and the contractual delivery arrangements have been satisfied, the license period has commenced, the arrangement fee is fixed or determinable, collection of the arrangement fee is reasonably assured, and other conditions as specified in the respective agreements have been met. Revenue from broadcast licensing agreements, together with related costs, and revenue from the sale of copyright interests are recognized once the licensing periods have commenced, the programs are delivered and collection is reasonably assured. Revenue from royalties is recognized when reported by the licensee and collection is reasonably assured. Revenue from the sale of distribution rights is recognized when the film or television programs are substantially complete, the investors have irrevocably committed to acquire distribution rights and there is reasonable assurance of the collectability of proceeds. Revenue from the sale of home videos and DVD's are recognized at the time of shipment and collection is reasonably assured. Amounts received in advance are recorded as deferred revenue until the revenue recognition criteria are met. (b) Basis of Consolidation These consolidated financial statements include the accounts of Devine Entertainment Corporation, its wholly-owned subsidiaries, Across the River Productions and across the River II Productions as well as Variable Interest Entities ("VIE"). All inter-company transactions have been eliminated. 12 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The Company adheres to the Canadian Institute of Chartered accountants' (CICA) Accounting Guideline 15 (AcG-15), "Consolidation of Variable Interest Entities" ("VIE"). AcG-15 is substantially similar to the Financial Accounting Standards Board interpretation No.46R ("FIN 46R") "Consolidation of Variable Interest Entities". AcG-15 provides guidance that addresses when a company should consolidate in its financial statements the assets, liabilities and operating results of another entity. Under previous guidance, a company generally included another entity in its consolidated financial statements only if it controlled the entity through a controlling voting interest. AcG-15 requires a VIE to be consolidated by the Company if that company is the primary beneficiary of that entity. Accordingly, the Company has included the results of operations of certain limited partnerships. (c) Inventory The Company's inventory consists of finished goods and is stated at the lower of cost and net realizable value. Finished goods are comprised mainly of DVD's, videos teachers guides of previously released productions for resale through various distribution channels. (d) Investment in Film, Television Programs and Recordings In accordance with SOP 00-2, Investment in film, television programs and recordings represent projects in progress and the unamortized costs of film, television programs and recordings, net of federal and provincial film production tax credits, which have been produced by the Company or for which the Company has acquired a copyright interest or the rights to future revenue. Such costs include development and production expenditures, capitalized overhead and financing costs and other costs, which are expected to benefit future periods. Exploitation costs, including advertising and marketing costs, are being expensed as incurred. The Company also has an interest in programs, which have been fully amortized in prior years and have no carrying value in these financial statements. Projects in progress include the costs of acquiring film rights to original screenplays and costs to adapt such projects. Such costs are capitalized and, upon commencement of production, are added to investment in film, television programs, and recordings. Advances or contributions received 13 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) from third parties to assist in development are deducted from these costs. If the property under development has not been set for production within three years, or if upon review management determines that certain costs are unrecoverable, the costs associated with such property are written off to income. Amortization is determined based on the ratio that current gross film revenues bear to management's estimate of total remaining ultimate gross film revenue as of the beginning of the current fiscal year on a program by program basis (the "individual film forecast method"). Revenue and film carrying costs are continually reviewed by management and revised when warranted by changing conditions. When estimates of total revenues and costs indicate that a feature film or television program will result in an ultimate loss, a reduction in the carrying value of the investment is recognized to the extent that capitalized film costs exceed estimated fair value. Such adjustments could have a material effect on the results of operations in future periods. Production financing provided by third parties that acquire substantive equity participation is recorded as a reduction of costs of the production. Capitalized film costs are stated at the lower of unamortized cost or estimated fair value on an individual film basis. Fair market value is based on the discounted projected net cash flows. The determination of the projected net cash flows and discount rates are subjective in nature and involve uncertainties and matters of significant judgement by management. (e) Cash and Cash Equivalents Cash and cash equivalents include cash and all investments purchased with an original maturity of three months or less at the date of purchase. Cash and Cash equivalents are held in three major financial institutions located in Canada. 14 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (f) Property and Equipment Property and equipment are recorded at cost less accumulated amortization. Amortization is being provided for on the declining balance basis at the following annual rates. Computer and editing equipment - 30% Furniture and fixtures - 20% (g) Foreign Currency Translation Monetary assets and liabilities denominated in currencies other than Canadian dollars are translated at year-end exchange rates. Revenue, expenses and film production costs are translated at the exchange rates in effect at the times of the transactions. The gains or losses resulting from these translations are reflected in the consolidated statements of operations. (h) Government and Other Assistance The Company has access to various government programs, including refundable film and television tax credits that are designed to assist film, television programs and recordings production and distribution in Canada. Refundable tax credits are recorded as a reduction of the cost of related films. Tax credits are recognized when there is reasonable assurance that the amount claimed will be received. (i) Stock-Based Compensation The Company accounts for all stock-based payments using the fair value based method. The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant, and vesting immediately. The Company recognizes compensation expense for the stock-based compensation plan when stock or stock options are issued. Any consideration received from employees on exercise of stock options or purchase of stock is credited to share capital and the fair value of stock options is transferred from contributed surplus to share capital. 15 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) For stock based compensation issued to non employees, the Corporation recognizes an expense based on the fair value of the equity instrument issued. (j) Future Income Taxes The Company uses the asset and liability method to account for income taxes. The asset and liability method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities and their tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. When the realization of a future tax asset is determined to not be more likely than not realized, a valuation allowance is provided (k) Earnings Per Share Earnings per share are computed in accordance with Section 3500 ("Earnings per Share") of the CICA Handbook, which directs that the treasury stock and if-converted method be used to calculate diluted earnings per share. Diluted earnings per share considers the dilutive impact of the exercise of outstanding stock options, warrants, and conversion of preferred shares, as if the events had occurred at the beginning of the period or at a time of issuance, if later. Diluted loss per share is not presented when the effect would be anti dilutive. (l) Use of Estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles and United States Generally accepted accounting principles ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts on assets and liabilities, revenues and expenses and disclosures of contingent assets and liabilities. Significant areas requiring the use of significant judgment include the measurement of ultimate revenue related to future revenues from film distribution, amortization of Investment in film, television programs and recordings, valuation of stock compensation, inventory, recoverability of tax credits and estimation of future income tax assets, 16 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) valuation allowances and other project related accruals. Actual results could differ from these estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the period in which they become known. (m) Impairment of Long-Lived Assets Long-Lived Assets, Including property and equipment, Investments in Films, Television programs and recordings are reviewed for impairment on an annual basis at year end or when significant events or circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment exists when the carrying value of the assets is greater than the undiscounted future cash flows expected to be provided by the asset. The amount of impairment loss, if any, which is in excess of net carrying value over fair value, is charged to income for the period. Fair value is generally measured equal to the estimated future discounted net cash from the asset. (n) Deferred Revenue Revenue received from sales of rights and licences related to projects in progress is recorded as deferred revenue until revenue recognition parameters have been met. (o) Basis of Presentation The Company is presenting its balance sheet as an unclassified balance sheet as its normal operating cycle is more than one year. (p) Adoption of new accounting policies Effective January 1, 2007, the Company adopted the recommendations of the CICA Handbook Sections 1530, Comprehensive Income; 3251, Equity; 3855, Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments - Measurement, Disclosure and Presentation; and Section 3865, Hedges. As required by the standards, the change in policies have been applied retrospectively with no restatement to prior periods. 17 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) i. Comprehensive Income: Section 1530 establishes standards for reporting and display of comprehensive income. Unrealized gains or losses on available-for-sale investments, and the effective portion of gains or losses on derivatives designated as cash flow hedges and hedges of the net investment in self-sustaining foreign operations are included in other comprehensive income ("OCI" and accumulated other comprehensive income ("AOCI") is included as a separate component of equity. The Company had no such OCI or loss transactions for the year ended December 31, 2007 and there were no opening or closing balances for AOCI. ii. Financial Instruments: Under the new standards, all financial instruments are classified into one of the following five categories: held-for-trading (assets and liabilities), available-for-sale financial assets, loans and receivables, held-to-maturity financial assets, and other financial liabilities. Transaction costs are included in the initial carrying amount of financial instruments except for held-for-trading items in which case they are expensed as incurred. All financial instruments are initially measured at fair value. Measurement in subsequent periods depends on the classification of the financial instrument. Under these standards: Held-for-trading (assets or liabilities) This category is comprised of certain investments in equity and debt instruments, stand-alone derivatives, other than those designated as hedging items, and embedded derivatives requiring separation. They are carried in the balance sheet at fair value with changes in fair value recognized in the statement of operations. Loans and receivables These assets are non-derivative financial assets resulting from the delivery of cash or other assets by a lender to a borrower in return for a promise to repay on a specified date or dates, or on demand. They arise principally through the provision of goods and services to customers (accounts receivable), but also incorporate other types of contractual monetary assets. They are initially recognized at fair value and subsequently carried at amortized cost, using the effective interest rate method, less any provision for impairment. 18 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Available-for-sale investments Non-derivative financial assets not included in the above categories are classified as available-for-sale and comprises certain investments in equity instruments, including a company's investments in private companies. When they have a quoted market price in an active market, they are carried at fair value with changes in fair value recognized as a separate component of other comprehensive income. When they do not have a quoted market price in an active market, they are carried at cost. Where a decline in the fair value is determined to be other than temporary, the amount of the loss is removed from other comprehensive income and recognized in the statement of operations. Other financial liabilities Other financial liabilities includes all financial liabilities other than those classified as held-for-trading and comprises trade payables, other short-term monetary liabilities, and the debt element of convertible debt. These liabilities are initially recognized at fair value and subsequently carried at amortized cost using the effective interest rate method. The adoption of these standards had no impact on the opening retained earnings and therefore did not result in a transitional adjustment as of January 1, 2007. 19 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The Corporation's financial assets and liabilities are recorded and measured as follows: Asset/Liability | Category | Measurement Accounts receivable | Loans and receivables | Amortized cost Subscription receivable | Loans and receivables | Amortized cost Accounts payable and | Other liabilities | Amortized cost accrued liabilities | | Accrued Liabilities | Other liabilities | Amortized cost Loans payable | Other liabilities | Amortized cost No derivative financial instruments existed for the periods presented. Based on the preceding information, the application of these new standards had a limited impact on the financial statements of the Company. Other balance sheet accounts, such as prepaid expenses, property and equipment, intangible assets, deferred costs, and deferred revenue are not within the scope of the new accounting standards as they are not financial instruments. iii. On January 1, 2007, the Company adopted Section 1506, "Accounting Changes", from the CICA Handbook. This Section establishes criteria related to the accounting treatment to adopt and disclosure requirements for accounting changes made, revision of accounting estimates and correction of errors. The adoption of these new standards had no material impact on the financial statements of the Company. (q) Recent Accounting Pronouncements i) In 2006 the CICA issued Handbook Section 3862, Financial Instruments - Disclosures, and Handbook Section 3863, Financial Instruments - Presentation. These standards enhance existing disclosure requirements and place greater emphasis on disclosures related to recognized and unrecognized financial instruments and how those risks are managed. Section 3863 carries forward the same presentation standards as Section 3861. These new standards are effective for interim and annual financial statements relating to fiscal years commencing on or after October 1, 2007 on a prospective basis. Disclosures required by these standards 20 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) will be included in the Company's interim and annual consolidated financial statements commencing January 1, 2008. ii) In 2006, the CICA issued Handbook Section 1535, Capital Disclosures ("CICA 1535"). CICA 1535 requires that an entity disclose information that enables users of its financial statements to evaluate an entity's objectives, policies and processes for managing capital, including disclosures of any externally imposed capital requirements and the consequences for non-compliance. Disclosures required by the new standard will be included in the Company's interim and annual consolidated financial statements commencing January 1, 2008. iii) In August of 2006, the CICA issued Handbook Section 3031 ("CICA 3031"). "Inventories", which must be applied for fiscal years beginning on or after January 1, 2008. CICA 3031 prescribes the measurement of inventories at the lower of cost and net realizable value, with guidance on the determination of cost including allocation of overheads and other costs to inventory. Reversals of previous write-downs to net realizable value are permitted when there is a subsequent increase on the value of inventories. The Company is evaluating the potential impact of the adoption of this standard. iv) In 2008, the CICA issued Handbook Section 3064, Goodwill and Intangible Assets ("CICA 3064"). CICA 3064, which replaces Section 3062, Goodwill and Intangible Assets, and Section 3450, Research and Development Costs, establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. The provisions relating to the definition and initial recognition of intangible assets, including internally generated intangible assets, are equivalent to the corresponding provisions for IFRS IAS 38, Intangible Assets. v) The new standard is effective for the Company's interim and annual consolidated financial statements commencing January 1, 2009. The Company is assessing the impact of the new standard on its consolidated financial statements. vi) In May 2007, the CICA published an updated version of its "Implementation Plan for Incorporating International Financial Reporting Standards ("IFRS") into Canadian GAAP". This plan includes an outline of the key decisions that the CICA will need to make as it implements the Strategic Plan for publicly accountable enterprises 21 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) that will converge Canadian generally accepted accounting principles with IFRS. The changeover date from Canadian GAAP to IFRS is for annual and interim financial statements relating to fiscal years beginning on or after January 1, 2011. 4. FILM TAX CREDITS RECEIVABLE Film tax credits receivable are federal and provincial refundable tax credits related to specific film and television productions in Canada. Amounts recorded represent management's best estimate of the amounts recoverable; however all amounts are subject to final determination by the relevant tax authorities. As at March 31, 2008, the Company expects to receive tax credits of $194,080 (December 31, 2007 $194,080) from the federal government and $258,052 (December 31, 2007 $820,766) from the provincial government. for its completed productions. The Company accrued $58,000 for tax credits receivable related to its projects in progress (2007 - $97,361) 5. ADVANCES RECEIVABLE Advances to an unrelated company bear interest at 6.5% per annum and are due December 16, 2014. 6. INVESTMENT IN FILM, TELEVISION PROGRAMS AND RECORDINGS <TABLE> <CAPTION> March 31, December 31, 2008 2007 ---- ---- Accumulated Cost Amortization Net Net ---- ------------ --- --- <S> <C> <C> <C> <C> Completed television programs and recordings $ 6,869,808 $ 6,633,981 $ 235,827 $ 265,000 Completed Motion picture - Bailey's Billion$ 6,972,580 4,937,661 2,034,919 2,034,919 Completed television Drama Series- 5,714,560 3,869,114 1,845,446 1,816,485 Projects in progress 1,339,598 -- 1,339,598 1,238,923 ----------- ----------- ----------- ----------- $20,896,546 $15,440,756 $ 5,455,790 $ 5,355,327 =========== =========== =========== =========== </TABLE> 22 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 6. INVESTMENT IN FILM, TELEVISION PROGRAMS AND RECORDINGS (continued) Amortization expensed in the three months ended March 31, 2008 for the Company's Investment in Film, Television Programs and Recordings totaled $24,374. At March 31, 2008 investment in completed television programs and recordings totaled $235,827 (December 31, 2007 - $265,000). At March 31, 2008, the Company's investment in completed motion picture, Bailey's Billion$, totaled $2,034,919 (December 31, 2007 - $2,034,919), its investment in completed television drama series totaled $1,845,446 (December 31, 2007 - $1,816,485) and its investment in projects in progress totaled $1,339,598 (December 31, 2007 - $1,238,923). Development costs for properties that are expected to benefit future periods are capitalized. If the property under development has not been set for production within three years, or if upon review management determines that certain costs are unrecoverable, the costs associated with such property are written off to income. The net carrying value for the Company's Investment in Film, Television Programs and Recordings totaled $5,455,790 at March 31, 2008 as compared to $5,355,327 at December 31, 2007. At year end 2007 96% of completed television programs and recordings, 71% of completed motion picture costs and 68% of completed television drama series costs have been amortized. The remaining period of amortization for the completed projects ranges from one to nine years at December 31, 2007. 100% of completed television programs and recordings will be amortized in 2008. The Company expects approximately 42% of the remaining completed motion picture costs will be amortized in the next three years and expects 84% will have been amortized by 2012. The Company expects to amortize 79% of the remaining completed television drama series costs in the next three years and expects 84% will have been amortized by 2011. The remaining period of amortization for the completed projects ranges from one to nine years at December 31, 2007. Interest incurred on funds borrowed during productions of films, television programs and recordings is capitalized as a cost of the production. During the quarter ended March 31, 2008 the Company capitalized interest in connection with various productions amounting to $38,110, (December 31, 2007 - $21,421). In addition, interest on the Company's film production loan totalled $29,242 for the three month period ended March 31, 2008 (three months ended Dec. 31, 2007 - $32,899) and has been capitalized to completed television drama series. 23 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 7. PROPERTY AND EQUIPMENT <TABLE> <CAPTION> March 31 December 31, 2008 2007 ---- ---- Accumulated Cost Amortization Net Net ---- ------------ --- --- <S> <C> <C> <C> <C> Computer and editing equipment $181,028 $170,550 $ 10,478 $ 11,327 Furniture and fixtures 58,193 54,376 3,817 4,018 -------- -------- -------- -------- $239,221 $224,926 $ 14,295 $ 15,345 ======== ======== ======== ======== </TABLE> 8. FILM PRODUCTION LOAN <TABLE> <CAPTION> December 31, 2008 2007 ---- ---- <S> <C> <C> A Demand loan bearing interest at prime plus 1%, repayable in full by June 30, 2008 was arranged for the financing of 6 episodes of a one hour TV series entitled Across the River to Motor City, which was produced by the Company's wholly owned subsidiary Across the River Productions Ltd. The loan is secured by all receipts including all commercialization or exploitation of the series worldwide including pre-sale and funding agreements and various tax credits. The loan is not secured by the parent company's assets and is non-recourse to parent company. $1,272,570 $1,840,604 ---------- ---------- </TABLE> Interest on the above demand loan totalled $29,242 for the three month period ended March 31, 2008 (three months ended Dec. 31, 2007 - $32,899) and has been capitalized to completed television drama series. 9. LOANS PAYABLE Loans payable consist of the Company's 1995, 1996 and 2000 Convertible debentures, which bear interest at 10.5 %, have matured, have not been extended and carry no fixed term, accordingly the Company is carrying the outstanding amount of $1,700,800 (2007 - $1,700,800) as a loan payable. The creditors have a general security assignment on the assets of the Company. Accrued interest as at 24 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 March 31, 2008 was $891,058 (December 31, 2007 - $846,505) and is included in accounts payable and accrued liabilities. 10. PREFERRED SHARES The Series 1 preferred shares are non-voting, cumulative, non-participating, $1 redeemable and retractable. The shares pay interest at the rate of 9.1% per annum payable in annual instalments on the 15th day of December in each year and shall accrue and be cumulative from the date of issue. As at March 31, 2008 dividends in arrears amounted to $11,220. Under CICA Handbook Section 3861 and following the guidance under EIC-149, the Company has classified this series of preferred shares as a liability. Issued - Series 1 preferred shares Number $ Amount Balance, March 31, 2008 and 2007 494,550 494,550 ======= ======= 11. CAPITAL STOCK (a) Authorized An unlimited number of common shares and preferred shares issuable in series 494,550 of Series 1 preferred shares. (b) Issued - common shares Number Amount ----------- ----------- Balance, March 31, 2008 and December 31, 2007 $45,921,149 $12,652,998 =========== =========== (c) Stock Option Plan Under the terms of a stock option plan approved by the shareholders, the Company is authorized to grant directors, officers, employees and others, options to purchase common shares at prices based on the market price of shares as determined on the date of grant. 25 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 11. CAPITAL STOCK (continued) (c) Stock Option Plan The outstanding and exercisable stock options are as follows: Weighted Average Number Exercise Outstanding and Exercisable of Options Price -------------------------------------------------------------------- Balance, March 31, 2008 and December 31, 2007 4,655,000 0.16 ========= ==== The Company has granted stock options as follows: Weighted Outstanding Average Number Exercise and Remaining Expiry Date Grant Date of Options Price Exercisable Life -------------------------------------------------------------------------------- June 25, 2009 June 25, 2004 3,000,000 0.10 3,000,000 1.24 May 11, 2009 May 11, 2007 200,000 0.15 200,000 1.11 May 11, 2012 May 11, 2007 1,100,000 0.15 1,100,000 4.11 July 29, 2012 July 30, 2007 15,000 0.15 15,000 4.33 April 24, 2010 April 25, 2006 100,000 0.10 100,000 2.07 Dec.29, 2009 Dec.29, 2006 240,000 1.00 240,000 1.75 4,655,000 4,655,000 1.97 ========= ========= ==== The Company has recorded the fair value of options using the Black-Scholes options pricing model with the following assumptions. Issue date May 11, 2007 May 11, 2007 July 30, 2007 -------------------------------------------------------------------------------- Number of options 200,000 1,100,000 15,000 Expected life 1.5 years 5 years 5 years Price volatility 118% 260% 290% Dividend yield -- -- -- Risk-free interest rate of return 4.56% 4.54% 4.64% Fair value $9,000 $110,000 $450 26 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 11. CAPITAL STOCK (continued) (d) Warrants Balance at March 31, 2008 and December 31, 2007 $708,456 ======== Common shares have been reserved for warrants on the following basis: Weighted Average Exercise Outstanding and Exercisable # of Warrants Price -------------------------------------------------------------------------------- Balance, March 31, 2008 and December 31, 2007 14,474,166 0.18 ========== ==== The Company has granted warrants as follows: <TABLE> <CAPTION> Outstanding Weighted Number Exercise and Average Expiry Date Grant Date of Warrants Price Exercisable Remaining Life ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> December 31, 2009 June 30, 2004 1,830,000 0.25 1,830,000 1.75 April 7, 2008 April 7, 2007 2,547,500 0.30 2,547,500 1.02 May 31, 2008 May 31, 2007 1,691,666 0.30 1,691,666 1.14 December 31, 2009 May 11, 2007 550,000 0.25 550,000 1.75 August 14, 2010 August 14, 2007 1,200,000 0.10 1,200,000 2.37 April 11, 2009 October 11, 2007 6,475,000 0.10 6,475,000 1.03 October 1, 2008 October 1, 2007 180,000 0.10 180,000 0.53 ---------- ---------- ---- 14,474,166 14,474,166 0.97 ========== ========== ==== </TABLE> 27 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 11. CAPITAL STOCK (continued) (d) Warrants The Company has recorded the fair value of warrants using the Black-Scholes options pricing model with the following assumptions. <TABLE> <CAPTION> <S> <C> <C> <C> Grant date May 11, 2007 August 14, 2007 October 1, 2007 Number of warrants 550,000 1,200,000 180,000 Expected life 2.5 years 3 years 1.7 years Price volatility 118% 256% 125% Dividend yield -- -- -- Risk-free interest rate of return 4.56% 4.28% 4.22% Fair value $27,500 $93,600 $8,280 Grant date October 11, 2007 Number of warrants 6,475,000 Expected life 1.5 years Price volatility 113% Dividend yield -- Risk-free interest rate of return 4.22% Fair value $604,566 </TABLE> There were no warrants granted during the first quarter of 2008, however, subsequent to March 31, 2008 the board of directors approved an extension of 2,547,500 warrants to April 7, 2009 that were originally to expire in April 2008 and 1,691,666 warrants to May 31, 2009 that were originally to expire in May 2008. There was no impact to the Financial Statements for the 3 months ended March 31, 2008 as a result of the extension of the warrants. 12. CONTRIBUTED SURPLUS Balance, December 31, 2007 $ 902,449 Subscription receivable 229,747 ---------- Balance March 31, 2008 $1,132,196 === ==== ========== 28 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 13. INTEREST EXPENSE (INCOME) Restated March 31, March 31, 2008 2007 ---- ---- Interest on convertible debentures $ 44,552 $ 44,552 Bank film production loan 29,242 37,127 Interest on preferred shares 11,220 11,220 -------- -------- 85,014 92,899 Interest income (17,597) (8,147) -------- -------- 67,417 84,752 Less: amounts capitalized to projects (67,352) (79,015) -------- -------- $ 65 $ 5,737 ======== ======== Interest expense of $29,242 for the film production bank loan has been capitalized to projects in progress. (See note 8) 14. EARNINGS (LOSS) PER SHARE Earnings (loss) per share is calculated using the weighted average number of shares outstanding during each of the periods presented in the interim consolidated financial statements. The Company follows CICA Handbook Section 3500, "Earnings Per Share", effective January 31, 2003. The statement requires the presentation of both basic and diluted earnings (loss) per share ("EPS") in the statement of operations, using the "treasury stock" method to compute the dilutive effect of stock options and warrants and the "if converted" method for the dilutive effect of convertible instruments. For the 3 months ended March 31, 2008 and 2007, options to purchase 4,655,000 and 210,000 common shares and warrants to purchase 14,474,166 and 6,069,166 common shares, respectively were not included in the computation of diluted earnings (loss) per share because the effect would have been anti-dilutive. 29 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 14. EARNINGS (LOSS) PER SHARE (continued) The following table sets forth the weighted average number of common shares outstanding for each of those periods. Number of Common Shares Period Outstanding ------ ----------- March 31, 2008 45,921,149 March 31, 2007 39,313,699 <TABLE> <CAPTION> Restated March 31, March 31, 2008 2007 ---- ---- Numerator: ---------- <S> <C> <C> Net income (loss) for the period, basic and diluted $ (117,348) $ 512,680 Denominator: ------------ Weighted average number of shares - basic 45,921,149 39,313,699 Effect of dilutive securities: Stock options -- 554,167 Warrants -- -- ----------- ----------- Weighted average number of shares - diluted 45,921,149 39,867,866 =========== =========== Net income (loss) per share - basic and diluted $ 0.00 $ 0.01 =========== =========== </TABLE> 15. FINANCIAL INSTRUMENTS Fair values approximate amounts at which financial instruments could be exchanged between willing parties, based on current markets for instruments of the same risk, principal and remaining maturities. Fair values are based on estimates using valuation techniques, which are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows, which reflect varying degrees of risk. 30 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 15. FINANCIAL INSTRUMENTS (continued) Therefore, due to the use of subjective judgement and uncertainties, the aggregate fair value amount should not be interpreted as being realizable in an immediate settlement of the instruments. (i) Fair Value The carrying values of cash and cash equivalents, accounts receivable, film tax credits receivable for which application has been filed, subscription receivables due within one year, accounts payable and accrued liabilities approximate fair value due to their short-term maturity and normal credit terms. The fair value of subscription receivables due in over one year, and accrued film tax credits receivable are recorded at the fair value using an appropriate discount rate. The carrying value of advances receivable and loans payable approximates their fair value because the interest rate is at market rate. (ii) Credit Risk The Company's accounts receivable are subject to credit risk. The Company continually monitors its positions with and credit quality of the organizations, which are counterpart to its accounts receivable and does not anticipate non-performance. The majority of the accounts receivable are amounts due from sales of foreign distribution rights and a limited number of licenses and distributors of video cassettes and DVD's. (iii) Currency Risk The Company is subject to currency risk through its activities in the United States and other countries. Unfavourable changes in the exchange rate may affect the operating results of the Company. 31 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 15. FINANCIAL INSTRUMENTS (continued) The Company does not use derivative instruments to reduce its exposure to foreign currency risk. However, dependent on the nature, amount and timing of foreign currency receipts and payments, the Company may consider entering into forward exchange contracts to mitigate any associated risks. The Company did not have any forward exchange contracts outstanding at December 31, 2007 and 2006. 16. COMMITMENTS AND CONTINGENCIES (a) In February 2004, the Company renewed the lease for its premises. The agreement expires May 31, 2009. Minimum annual rent commitments excluding occupancy costs are as follows: 2008 $ 21,750 2009 13,000 -------- $ 34,750 ======== (b) The Company has entered into contractual agreements for creative talent related to future film production. The agreements provide for a minimum fee paid to be paid for the creative work with an additional fee paid if the work goes into production. The additional fee would be based on a percentage of revenues. (c) The purchasers of the copyright interest are entitled to a priority distribution of the future revenue earned from the motion picture "Bailey's Billion$" up to the original amount of the purchase price of $2,477,500. Subsequent to the priority distribution, all the amounts would be distributed pari passu in accordance with the percentage ownership acquired. (d) The distributors of the film are entitled to a priority distribution of the future revenue earned from the motion picture "Bailey's Billion$" up to the original amount of the purchase price in the amount of approximately $2,900,000. Subsequent to the priority distribution, all the amounts would be distributed in accordance with the contractual agreements. 32 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 16. COMMITMENTS AND CONTINGENCIES (continued) (e) In the normal course of operations the Company is involved in negotiations, grievances and arbitrations with guilds and unions related to the film production industry. Management estimates that the grievances will not result in any future material financial obligation. No amount has been recorded in the consolidated financial statements with regard to this matter. (f) In connection with certain Limited Partnership financings (Note18) the Company may be obligated to issue up to 408,000 common shares to the participants. (g) The Company is eligible for various grants and government incentive programs that are designed to assist film and television production and distribution in Canada. The Company has received $240,661 in forgivable development funding and grants which have been recorded as a reduction of development costs in Projects in Progress. The Company could be required to repay up to $200,000 of this funding and grants in case the projects are fully funded and produced or sold by the Company to a third party in the future, The ultimate liability related to the repayment of these funds is not determinable. The Company will record the liability or repay these funds once the actual liability is known or determinable. 17. RELATED PARTY TRANSACTIONS During the 3 month period ended March 31, 2008 $73,750 (March 31, 2007 - $151,445) of fees were paid or accrued to corporations controlled by two of the directors for writing, directing and producing services on the Company's film and television productions. These transactions occur during the normal course of business and have been measured at exchange amount, which is the amount of consideration established and agreed to by the related parties and which management believes reflect prevailing market rates. 33 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 18. LIMITED PARTNERSHIP FINANCING The Company has entered into tax preferred financing arrangements with limited partnerships. These limited partnerships meet the criteria for variable interest entities and are consolidated. In connection with these financings the Company received proceeds net of costs of $380,414 to date recorded as contributed surplus and subscriptions receivable (net) of $116,872 at March 31, 2008. In connection with the limited partnership financing the Company may be obligated to issue up to 408,000 common shares to the participants. 19. CHANGE IN NON-CASH OPERATING ASSETS AND LIABILITIES AND SUPPLEMENTAL INFORMATION Restated March 31, 2008 March 31, 2007 -------------- -------------- Accounts receivable $ (15,523) $ 80,692 Film tax credits receivable 504,714 1,286,974 Advance receivable -- (59,529) Inventory 2,976 9,613 Prepaid and sundry assets 50,407 (1,394) Accounts payable and accrued liabilities 12,736 (39,844) Deferred revenue -- (1,587,309) ----------- ----------- $ 555,310 $ (310,797) =========== =========== 20. GEOGRAPHIC SALES INFORMATION The Company is considered by its Chief Operating Decision Maker to operate in one industry segment, and generates revenue from film productions and film library. Revenue by geographic location, based on the location of customers, is as follows: March 31 March 31 % 2008 % 2007 ----- ---- ----- ---- $ $ Revenue Canada 5 4,720 93 1,886,950 United States 67 69,958 2 42,533 Russia -- 4 83,442 Europe - Other 28 29,876 1 16,150 ----- ------- ----- --------- 100.0 104,554 100.0 2,029,075 ===== ======= ===== ========= 34 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 21. CANADIAN GAAP AND US GAAP RECONCILIATION The consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP. The material differences between the accounting policies used by the Company under Canadian and U.S. GAAP, and their effect on the consolidated financial statements of the Company, are disclosed below. a. Under US GAAP, FIN 48 requires the Company to evaluate whether a tax position taken by the company will "more likely than not" be sustained upon examination by the appropriate tax authority. It also provides guidance on how a company should measure the amount of benefit that the Company is to recognize in its financial statements. There was no material impact on the Company's financial statements as a result of implementing FIN 48. b. Under US GAAP, FASB 150, if the preferred shares are redeemable at the option of the holders, they should be presented as mezzanine equity. The preferred shares are retractable by the holder but are not mandatorially redeemable. c. Under US GAAP preferred shares are classified as mezzanine equity and the interest on preferred shares would be classified as a dividend and recorded as a reduction to the deficit under shareholders' equity. Under Canadian GAAP the preferred shares are classified as a liability and interest is expensed accordingly. Consolidated statements of operations: The net income (loss) as reported in the accompanying consolidated statements of operations would have been different had the financial statements been prepared in accordance with US GAAP: 2007 FOR THE 3 MONTHS ENDED MARCH 31, 2008 (restated) --------- ---------- Net income (loss) in accordance with Canadian $(117,348) $ 512,680 GAAP and US GAAP Interest on Preferred Shares (Note c) 11,220 11,220 --------- --------- Net Income (Loss) in accordance with U.S. GAAP $(106,128) $ 523,900 --------- --------- Net Income (Loss) per share - Basic & Diluted $ 0.00 $ 0.01 ========= ========= 35 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 21. RECONCILIATION TO UNITED STATES GAAP (continued) Effects of these adjustments described above on the consolidated Balance Sheet are as follows: <TABLE> <CAPTION> 2007 FOR THE PERIODS ENDED MARCH 31, 2008 (restated) ----------- ----------- ASSETS ------ <S> <C> <C> Assets in accordance with Canadian GAAP $ 8,049,338 $ 8,492,237 Assets in accordance with US GAAP $ 8,049,338 $ 8,492,237 =========== =========== LIABILITIES ----------- Liabilities in accordance with Canadian GAAP $ 5,050,630 $ 5,605,928 Preferred shares (Note b) $ (494,550) (494,550) ----------- -------- Liabilities in accordance with US GAAP 4,556,080 5,111,378 SHAREHOLDERS' EQUITY -------------------- Equity in accordance with Canadian GAAP 2,998,708 2,886,309 Preferred Shares (Note b) 494,550 494,550 Effect of interest on preferred shares on deficit (Note c ) 11,220 11,220 Dividends on preferred shares (Note c) (11,220) (11,220) ----------- ----------- Equity in accordance with US GAAP 3,493,258 2,886,309 ----------- ----------- </TABLE> 36 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 21. RECONCILIATION TO UNITED STATES GAAP (continued) Impact of Newly Issued United States Accounting Standards i) In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides accounting guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of tax positions under FIN 48 is a two-step process, whereby (1) The Company determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold. There was no material impact on the Company's consolidated financial statements as a result of implementing FIN 48. ii) In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. The SAB requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 does not change the guidance in SAB 99, "Materiality", when evaluating the materiality of misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. Upon initial application, SAB 108 permits a one-time cumulative effect adjustment to beginning retained earnings. There was no material impact on the Company's consolidated financial statements as a result of the adoption of SAB 108. iii) In September 2006, the FASB issued SFAS No. 157 "Fair Value Measures." (SFAS No. 157), SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption of SFAS No. 157 will have on our future financial statements. The 37 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 21. RECONCILIATION TO UNITED STATES GAAP Impact of Newly Issued United States Accounting Standards (continued) Company is currently evaluating the potential impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements. iv) In February 2007, the FASB issued FASB Statement NO. 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115" ("SFAS 159"). The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains or loses on items for which the fair value option has been elected in earnings (or another performance indication if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. FASB No. 159 is effective as of the beginning of the fiscal years beginning after November 15, 2007. The adoption of SFAS 159 will not have a material effect to the Company's financial statements. v) In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 21 ("No. 160"). This statement amends ARB No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The provisions of SFAS No. 160 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As of December 31, 2007, management believes that SFAS No. 160 will not have a material effect on our financial position, results of operations and cash flows. vi) In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities--an amendment of FASB Statement No. 133" ("FAS 161"). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures 38 DEVINE ENTERTAINMENT CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited- Prepared by Management) (expressed in Canadian dollars) March 31, 2008 21. RECONCILIATION TO UNITED STATES GAAP (continued) Impact of Newly Issued United States Accounting Standards for earlier periods at initial adoption. The Company is currently assessing the impact of FAS 161 and does not anticipate any material effect on the Company's financial statements. vii) In December 2007, FASB issued SFAS No. 141 (revised 2007), Business Combinations ("No. 141R"). This statement establishes requirements for (i) recognizing and measuring in an acquiring company's financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizing and measuring the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determining what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of SFAS No. 141R are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. As of December 31, 2009, management believes that SFAS No. 141R will not have a material effect on the financial position, results of operations and cash flows. 39 ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis has been prepared as of May 14, 2008 to provide a review of current activities and a comparison of the performance and financial position of Devine Entertainment for the three months ended March 31, 2008 and 2007. Additional information related to the Company is available on SEDAR at www.sedar.com The financial data in this document have been prepared in accordance with Canadian generally accepted accounting principles that conforms, in all material respects, with accounting principles generally accepted in the United States of America except as described in Note 21 to the financial statements. References to Canadian dollars, Cdn$ or $ are to the currency of Canada and references to U.S. dollars or US$ are to the currency of the United States. OVERVIEW Five-time Emmy Award-winning Devine Entertainment Corporation develops, produces and distributes feature films, primetime drama, children's and family entertainment for the theatrical motion picture, television and the Video/DVD marketplace worldwide. The Company's proprietary library includes 19 award-winning broadcast programs based on the lives of landmark international historical figures and other classic family stories, which permit it access to sales in a wide variety of outlets encompassing both the entertainment and educational markets. Its landmark Composers', Inventors' and Artists' are critically acclaimed and broadcast in over 50 countries. The Company completed its first feature film for theatrical release, Bailey's Billion$, which was released in North America on August 5, 2005 and is currently being distributed on television and DVD worldwide. In 2006 and 2007 the Company continued expanding its proprietary library by financing and producing and delivering its first general audience primetime one-hour mystery series, entitled Across the River to Motor City for broadcast worldwide. The Company's business strategy is to: (i) focus on the production of its high-quality children's and family films in order to continue building its broadly based library of original programs; (ii) increase its feature film and primetime drama production and distribution through strategic alliances with major international distributors, broadcasters and co-producers and (iii) grow by expanding its library through acquisitions of third party film libraries and the integration of third party productions and production companies 40 FORWARD-LOOKING STATEMENTS Readers are cautioned that actual results may differ materially from the results projected in any "forward-looking" statements included in this discussion and analysis, which involve a number of risks and uncertainties. Forward-looking statements are statements that are not historical facts, and include (but are not limited to) statements regarding the Company's planned production slate and development activities, anticipated future profitability, losses, revenues, expected future expenditures, the Company's intention to raise new financing, sufficiency of working capital for continued operations, and other statements regarding anticipated future events and the Company's anticipated future performance. Forward-looking statements generally can be identified by the words "expected", "intends", "anticipates", "feels", "continues", "planned", "plans", "potential", "with a view to", and similar expressions or variations thereon, or that events or conditions "will", "may", "could" or "should" occur, or comparable terminology referring to future events or results. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous factors, including those listed under "Risks and Uncertainties", any of which could cause actual results to vary materially from current results or the Company's anticipated future results. The Company assumes no responsibility to update the information contained herein. NON-GAAP MEASURE - Earnings (loss) before interest, taxes, depreciation, amortization and write-down ("EBITDA") EBITDA is a non-GAAP financial measure that management believes to be a meaningful indicator of the Company's performance that provides useful information to investors regarding the Company's financial condition and results of operations. EBITDA is a non-GAAP financial measure commonly used in the entertainment industry and by financial analysts and others who follow the industry to measure operating performance. While management considers EBITDA to be an important measure of comparative operating performance, it should be considered in addition to, but not as a substitute for, net income and other measures of financial performance reported in accordance with GAAP. EBITDA does not reflect cash available to fund cash requirements. Not all companies calculate EBITDA in the same manner and the measure as presented may not be comparable to similarly-titled measures presented by other companies. EBITDA is not used by the Company as a performance indicator for the evaluation of management or employee performance and any related remuneration or bonuses. 41 FIRST QUARTER HIGHLIGHTS The Company's activities in the first quarter of 2008 were focused on ongoing development and financing new production for later in the year and the continuing sales and distribution of its proprietary library. The Company reported a modest loss of $117,348, or (0.00) per share in the quarter. o Revenues for the three months ended March 31, 2008 decreased by $1,924,521 to $104,554 as compared to $2,029,521 for the same period in 2007. This drop in revenues reflected the fact that the Company delivered two episodes of its miniseries, Across the River to Motor City, and recognized $1,870,809 from these deliveries in the first quarter of 2007. The Company delivered no new productions in the first quarter of 2008. All of the Company's revenues in the first quarter of 2008 were generated from the Company's proprietary library of films and television programs. o The Company reported a modest loss of $117,348 as compared to earnings of $512,680 in the same period in 2007. RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2008 AND 2007 Revenues The Company's Revenues for the three months ended March 31, 2008 decreased by $1,924,521 to $104,554 as compared to $2,029,521 for the same period in 2007. This drop in revenues reflected the fact that the Company delivered two episodes of its miniseries, Across the River to Motor City, and recognized $1,870,809 from these deliveries in the first quarter of 2007. The Company delivered no new productions in the first quarter of 2008. All of the Company's revenues in the first quarter of 2008 were generated from the Company's proprietary library of films and television programs. $29,876 was derived from foreign broadcast licenses in Eastern Europe through the Company's relationship with Paris-based distributor Carrere Group. The balance of revenues, or $74,678, was derived from the Company's in-house DVD and ancillary product sales in North America. Sales in the US made up $69,958 of these revenues, with the balance of $4,720 being generated in Canada. 42 The Company's revenues by geographic location, based on the location of customers were as follows: 2008 % 2007 % ------- ---- --------- ---- $ $ Revenue Canada 4,720 4.5 1,886,950 93.0 United States 69,958 66.9 42,533 2.1 Russia -- -- 83,442 4.1 Europe - Other 29,876 28.6 16,150 0.8 ------- --------- 104,554 2,029,075 ======= ========= Earnings / Loss per Share Loss for the three months ended March 31, 2008 was $117,348 or ($0.00) per share as compared to earnings of $512,680, or $0.01 per share, in the same period in 2007. EBITDA EBITDA, a non-GAAP financial measure defined as earnings (loss) before interest, taxes, depreciation, amortization and write-down, was negative ($91,859) in the three months ended March 31, 2008, as compared to $1,854,997 in the same period in 2007. 2008 2007 ------------------------------------------------ --------------- -------------- Net Loss $(117,348) $ 512,680 ------------------------------------------------ --------------- -------------- Amortization & Write-down of film television programs and recordings 24,374 1,376,705 ------------------------------------------------ --------------- -------------- Amortization of property and equipment 1,050 1,407 ------------------------------------------------ --------------- -------------- Interest (Interest expense) 65 (35,795) ------------------------------------------------ --------------- -------------- EBITDA $ (91,859) $1,854,997 ------------------------------------------------ --------------- -------------- Shareholders' Equity Shareholders' equity increased year over year by $112,399 to $2,998,708 as at March 31, 2007 as compared to $2,886,309 as at December 31, 2007. 43 SUMMARY OF QUARTERLY RESULTS: <TABLE> <CAPTION> Restated Restated Restated Restated Restated Restated Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, 2008 2007 2007 2007 2007 2006 2006 2006 ------- ------- --------- --------- --------- -------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues 104,554 147,941 2,032,153 1,935,408 2,029,075 60,430 84,255 115,414 Operating 196,413 336,529 363,626 285,586 102,234 205,268 280,670 185,684 Expenses Earnings (loss) before income taxes (117,348) (1,633,516) 292,758 255,994 512,680 (2,019,389) (224,648) (153,939) Net earnings (loss) (117,348) (1,633,516) 282,758 255,994 512,680 (2,019.389) (224,648) (153,939) Basic earnings (0.00) (0.04) 0.01 0.01 0.01 (0.06) (0.01) (0.00) (loss) per common share </TABLE> Operating expenses The Company's operating expenses for the three months ended March 31, 2008 increased by $94,179, or approximately 92% to $196,413 as compared to $102,234 in the same period in 2007. The increase in operating expenses reflects that the Company was engaged in production in the three months ended March 31, 2007 and not in production in the same period in 2008. Production and Development Activity The Company continues to develop new projects in order to secure new production activity. The Company has acquired the rights and is actively developing additional films and series projects targeted to the worldwide family audience including Russell Sprout, October 7, 1944, Fat Camp and Humchucker. The Company has also entered into an initial agreement to co-develop, with the intent of co-producing in the future, a new series of Writers' Specials with a co-producer in France. Although a new order of Across the River to Motor City in Canada does not seem likely in the near future, the Company is preparing to expand on the primetime drama franchise established by Across the River to Motor City with a new series, entitled Rio Grande, set on the US/Mexico border and is presenting this new series concept to US broadcasters. Investment in Film and Television Programs and Recordings The Company determines amortization of its investment in film and television programs and recordings based on the ratio that current gross film revenues bear to management's estimate of total remaining ultimate gross film revenue as of the beginning of the current fiscal year on a program by program basis (the "individual film forecast method"). 44 Revenue and film carrying costs are continually reviewed by management and revised when warranted by changing conditions. When estimates of total revenues and costs indicate that a feature film or television program will result in an ultimate loss, a reduction in the carrying value of the investment is recognized to the extent that capitalized film costs exceed estimated fair value. Amortization expensed in the three months ended March 31, 2008 for the Company's Investment in Film, Television Programs and Recordings totaled $24,374. At March 31, 2008 investment in completed television programs and recordings totaled $235,827 (December 31, 2007 - $265,000). At March 31, 2008, the Company's investment in completed motion picture, Bailey's Billion$, totaled $2,034,919 (December 31, 2007 - $2,034,919), its investment in completed television drama series totaled $1,845,446 (December 31, 2007 - $1,816,485) and its investment in projects in progress totaled $1,339,598 (December 31, 2007 - $1,238,923). The Company believes that its proprietary library of completed television programs and recordings are evergreen and will continue to generate revenues in the future. In accordance with statement of position of the American Institute of Certified Public Accountants ("SOP 00-2") all of the Company's carrying value for its completed television programs and recording are required to be expensed by the end of the prescribed ten year amortization period in 2008. Development costs for properties that are expected to benefit future periods are capitalized. If the property under development has not been set for production within three years, or if upon review management determines that certain costs are unrecoverable, the costs associated with such property are written off to income. The net carrying value for the Company's Investment in Film, Television Programs and Recordings totaled $5,455,790 at March 31, 2008 as compared to $5,355,327 at December 31, 2007, as per the following table: <TABLE> <CAPTION> March 31, December 31, 2008 2007 ---- ---- Accumulated Cost Amortization Net Net ---- ------------ --- --- <S> <C> <C> <C> <C> Completed television programs $ 6,869,808 $ 6,633,981 $ 235,827 $ 265,000 and recordings Completed Motion picture - Bailey's Billion$ 6,972,580 4,937,661 2,034,919 2,034,919 Completed television Drama Series- 5,714,560 3,869,114 1,845,446 1,816,485 Projects in progress 1,339,598 -- 1,339,598 1,238,923 ----------- ----------- ---------- ---------- $20,896,546 $15,440,756 $5,455,790 $5,355,327 =========== =========== ========== ========== </TABLE> 45 At year end 2007 96% of completed television programs and recordings, 71% of completed motion picture costs and 68% of completed television drama series costs have been amortized. The remaining period of amortization for the completed projects ranges from one to nine years at December 31, 2007. 100% of completed television programs and recordings will be amortized in 2008. The Company expects approximately 42% of the remaining completed motion picture costs will be amortized in the next three years and expects 84% will have been amortized by 2012. The Company expects to amortize 79% of the remaining completed television drama series costs in the next three years and expects 84% will have been amortized by 2011. The remaining period of amortization for the completed projects ranges from one to nine years at December 31, 2007. Interest incurred on funds borrowed during productions of films, television programs and recordings is capitalized as a cost of the production. During the quarter ended March 31, 2008 the Company capitalized interest in connection with various projects in progress amounting to $38,110 (December 31, 2007 - $21,421). In addition, interest on the Company's film production loan totalled $29,242 for the three month period ended March 31, 2008 (three months ended Dec. 31, 2007 - $32,899) and has been capitalized to completed television drama series. Capital stock There were no common shares, preferred shares or warrants issued in the three months ended March 31, 2008. At March 31, 2008 and December 31, 2007 the Company had 45,921,149 common shares, 494,550 Series 1 Class A preferred shares outstanding and 14,474,166 warrants outstanding. Related Party Transactions During the 3 month period ended March 31, 2008 $73,750 (March 31, 2007 - $151,445) of fees were paid or accrued to corporations controlled by two of the directors for writing, directing and producing services on the Company's film and television productions. These transactions occur during the normal course of business and have been measured at exchange amount, which is the amount of consideration established and agreed to by the related parties and which management believes reflect prevailing market rates. 46 Variable Interest Entities A Variable Interest Entity ("VIE") is an entity that either does not have sufficient equity at risk to finance its activities without subordinated financial support or wherein the equity investors lack the characteristic of a controlling financial interest. Pursuant to CICA AcG-15 and FIN 46, VIEs are consolidated by a company if that company is deemed the primary beneficiary of the VIE. Accordingly, the Company has consolidated the VIE's in the December 31, 2007 financial statements as discussed herein. During 2004 the Company entered into a services agreement with Devine Entertainment Limited Partnership ("the Partnership"). On December 22, 2004 the Company issued 380,450 Common Shares and 494,550 Series 1 preferred shares of the Company. The Company recorded the common shares as equity and classified the preferred shares as a liability. In December 2005, The Devine Entertainment Film Library Limited Partnership ("DEFL LP"), a limited partnership formed and registered under the Limited Partnerships Act (Ontario) on March 8, 2004, acquired Devine Entertainment Corporation's interest in a defined part of the Company's proprietary film library. These limited partnerships meet the criteria for variable interest entities and are consolidated. . In connection with these financings the Company received proceeds net of costs of $380,414 to date recorded as contributed surplus and subscriptions receivable (net) of $116,872 at March 31, 2008. In connection with the limited partnership financing the Company may be obligated to issue up to 408,000 common shares to the participants. Restatement The Company is restating its previously reported consolidated financial statements for the 3 months ended March 31, 2007. A summary of the impact of the restatement adjustments on the previously reported consolidated balance sheet, statement of operations and cash flows amounts is as follows: Summary of Restatement Adjustments a) The Company has determined that the previously filed financial statements for the 3 month period ended March 31, 2007 contained errors resulting from the incorrect accounting related to interest for the Company's Investment in film, television programs and recordings. The interest income was incorrectly accounted for and should not have been included in the results for the period ended March 31, 2007. In addition, the transaction should have been accounted for and was addressed in the December 31, 2007 financial statements. The Company has restated the interest income from interest expense (income). The restatement amounts to $30,312. As a result accrued liabilities increased by $30,312 and net income decreased by $30,312 for the 3 months ended March 31, 2007. The deficit increased by $30,312. 47 c) The company restated its preferred shares from an equity component to a liability as it was determined that under the CICA Handbook Section 3861, and following the guidance under EIC-149. The preferred shares are redeemable, retractable and have a preferential priority participation in the residual equity of the company, accordingly preferred shares have been restated as a liability. The effect of the restatement resulted in a reclassification from preferred shares in the equity section of the balance sheet in the amount of $494,550 to preferred shares in the liability section in the amount of $494,550. This change was reflected in the Company's December 31, 2007 financial statements. Accordingly dividends amounting to $11,220 would be restated as interest expense for the 3 month period ending March 31, 2008. The following table summarizes the impact of the restatement adjustment on the previously reported consolidated balance sheet, statement of operations and cash flows for the 3 months ended March 31, 2007. March 31, 2007 -------------- Balance Sheet ------------- Assets as previously repor