253010_PRLS_fy123115.pdf

Puerto Rico Legal Services, Inc.

FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITORS' REPORT

December 31, 2015 with comparative totals for 2014

RECIPIENT NUMBER: 253010

Padilla, Medina & Associates, P.s.c.

Certified Public Accountants

INDEPENDENT AUDITORS' REPORT

To the Board of Directors Puerto Rico Legal Services, Inc.

Report on the Financial Statements

We have audited the accompanying financial statements of Puerto Rico Legal Services, Inc. (A Non Profit Organization), which comprise the statement of financial position as of December 31, 2015, and the related statements of activities and changes in net assets, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an op1111on on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the Audit Guide for Recipients and Auditors issued by Legal Services Corporation. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion .

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Puerto Rico Legal Services, Inc. as of December 31, 2015, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Prior Period Financial Statements

The financial statements of Puerto Rico Legal Services, Inc. as of December 3 1, 2014, were audited by other auditors whose opinion dated April 25, 2015 on those statements was qualified because of a departure from generally accepted accounting principles related to the presentation of deferred revenues in the financial statements.

Other Matters

Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole.

The accompanying Schedule of Expenditures of Federal Awards, Statement of Support, Revenues and Expenses, and Changes in Net Assets for the Legal Services Corporation (LSC) Grants, and the Statement of Support, Revenues and Expenses, and Changes in Net Assets for "Acceso a la Justicia Educativa - Ill" are presented for purposes of additional analysis as required by the LSC Audit Guide for Recipients and Auditors, and Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), and are not a required part of the financial statements. The supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated April 18, 2016, on our consideration of Puerto Rico Legal Services, Inc.' s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Puerto Rico Legal Services, Inc:'s internal control over financial reporting and compliance.

Stamp number E181724 of the Puerto Rico Society of Certified Public Accountants was affixed to the original of this report.

San Juan, Puerto Rico April 18, 2016

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(A non-profit organization)

STATEMENT OF FINANCIAL POSITION

As of December 31, 2015, with comparative totals for 2014

ASSETS

2015 2014

CURRENT ASSETS

Cash and cash equivalents (Note A.1 1) $ 3,687,710 $ 6,297,824 Accounts receivable-other 71,912 120,421 Prepaid expenses 79,628 101,207

Total current assets 3,839,250 6,519,452

PROPERTY AND EQUIPMENT, net (Note A.5 and D) 2,389,410 2,463,818

OTHER ASSETS - Deposits 41,824 41,824

Total assets $ 6,270,484 $ 9,025,094

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES

Accounts payable (Note E) $ 232,664 $ 253,544 Current maturities of long-term debt (Note G) 338,966 179,036 Deferred revenues - Advanced funding received (Note A.9) 1,881 ,297 4,419,280 Accrued vacations and benefits 1,051,568 930,983

Total current liabilities 3,504,495 5,782,843

LONG-TERM DEBT (Note G) 131,021 444,210

COMMITMENTS (Note H)

NET ASSETS

Temporarily restricted:

Legal Services Corporation (LSC) - Grant 160, 103 167,549 Net investment in property 557,847 731,864

717,950 899,413 Non-LSC

Grant 555,578 790,056 Net investment in property 1,361,440 1,108,572

1,917,0 18 1,898,628

Total net assets 2,634,968 2,798,041

Total liabilities and net assets $ 6,270,484 $ 9,025,094

The accompaying notes are an integral part of these financial statements.

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(A Non-Profit Organization)

STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS

For the year ended December 3 1, 2015, with comparative totals for 2014

PROPERTY 2015 2014

UNRESTRICTED TEMPORARILY RESTRICTED FUND TOTAL TOTAL

LSC NON-LSC TOTAL

REVENUE AND SUPPORT

Grants and contracts $ $11,417,908 $ 7,679,657 $ 19,097,565 $ - $19,097,565 $17,680,514 Interest income 7,646 24,845 32,491 - 32,491 29,870 Other income - 148,128 . 148,128 - 148,128 66,472

11,425,554 7,852,630 19,278,184 - 19,278,184 17,776,856 Net assets released from restrictions:

Satisfaction of program restrictions 19,260,626 (11,426,3 86) (7,834,240) ( 19,260,626)

Total revenues and other support 19,260,626 (832) 18,390 17,558 - 19,278,184 17,776,856

EXPENSES

Program Services 18,232,232 - 18,232,232 16,836,928 Management and general 1,028,394 - - 180,631 1,209,025 1,019,318

Total expenses 19,260,626 180,631 19,441,257 17,856,246

EXCESS OF INCOME OVER EXPENSES - (832) 18,390 17,558 (180,631) (163,073) (79,390)

OTHER CHANGES IN NET ASSETS

Acquisition of property (6,614) (99,609) (106,223) 106,223 Payment of long-tenn debt - - (153,259) (153,259) 153 ,259

Change in Net Assets (7,446) (234,478) (241,924) 78,85 1 (163,073) (79,390)

Net assets at beginning of year - 167,549 790,056 957,605 1,840,436 2,798,041 2,877,431

Net assets at end of year $ $ 160,103 $ 555,578 $ 715,681 $ 1,919,287 $ 2,634,968 $ 2,798,041

The accompanying notes are an integral part of these financial statements.

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STATEMENT OF FUNCTIONAL EXPENSES

Year ended December 3 1, 2015, with comparative totals for 2014

Program Management Sub-total ProQerty 2015 2014 Services and General ExQenses Fund Total Total

PERSONNEL EXPENSES

Lawyers $ 4,885,464 $ 430,029 $ 5,315,493 $ $ 5,3 15,493 $ 4,940,658 Non-Lawyers 6,4 15,653 151,9 17 6,567,570 - 6,567,570 5,929,085 Employee benefits 3,922,901 261, 172 4.184,073 - 4, 184,073 3,51 5,920

Total personnel expenses 15,224,0 18 843.1 18 16,067, 136 16,067, 136 14,385,663

OTHER EXPENSES

Professional services 897,236 77,320 974,556 974,556 1,050,587 Facil ities and occupancy 586,993 31,837 618,830 618,830 609,375 Telephone 142,700 6,305 149,005 149,005 166,690 Litigation 216,4 15 16,502 232,9 17 232,9 17 228,877 Office supplies and expenses 134,189 7,067 141,256 14 1,256 128,982 Travel 151,830 7,977 159,807 159,807 158,845 Util ities 263,256 14,499 277,755 - 277,755 332,433 Depreciation and amortization 180,63 1 180,631 183,981 Insurance 97,095 5,460 102,555 102,555 130,420 Equipment rental and maintenance 145,527 8,164 153,69 1 153,691 122,750 Maintenance and repairs 93,980 4,9 10 98,890 98,890 77,230 Library subscriptions and maintenance 49,875 2,4 18 52,293 52,293 60,264 Training 3,7 15 367 4,082 4,082 1,912 Dues and fees 43,644 43,644 43,644 44,620 Audit 28,233 1,267 29,500 29,500 20,500 Interest 33,866 33,866 33,866 42,617 Non-capitalizable assets 16,315 883 17,198 - 17, 198 12,759 Parking 23,792 140 23,932 - 23,932 23,820 Security 29,854 29,854 29,854 28, 167 Bank charges 16,304 16,304 16,304 16,075 Other 33,395 160 33,555 - 33,555 29,679

Total other expenses 3,008,214 185,276 3, 193,490 180,63 1 3,374, 12 1 3,470,583

TOT AL EXPENSES $ 18,232,232 $ 1,028,394 $ 19,260,626 $ 180,63 1 $ 19,44 1,257 $ 17,856,246

The acompaying notes are an integral part of these financial statements.

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(A non-profit organization)

STATEMENT OF CASH FLOWS

Year ended December 3 1, 2015, with comparative totals for 2014

2015 2014

CASH FLOWS FROM OPERA TING ACTIVITIES:

Change in net assets $ (163,073) $ (79,390)

Adjustments to reconcile changes in net assets to net cash provided by (used in) operating activities:

Depreciation and amortization 180,631 183,981 Decrease in operating assets

Accounts receivable 48,509 39,066 Prepaid expenses 21 ,579 37,840

Increase (decrease) in operating liabilities Accounts payable (20,880) (69,475) Deferred revenues (2,537,983) 1,571 ,832 Accrued vacations and benefits 120,585 26,744

Net cash flow provided by (used in) operating activities (2,3 50,632) 1,710,598

CASH FLOWS FROM INVESTING ACTIVITIES:

Acquisition of property and equipment (106,223) (6,900)

Net cash flow used in investing activities (106,223) (6,900)

CASH FLOWS FROM FINANCING ACTIVITIES:

Payments of long-term debt (153 ,259) (178,464)

Net cash flow used in financing activities (153,259) (178,464)

NET INCREASE (DECREASE) IN CASH (2,610,114) 1,525,234

Cash and cash equivalents at beginning of year 6,297,824 4,772,590

Cash and cash equivalents at end of year $ 3,687,710 $ 6,297,824

The accompanying notes are an integral part of these financial statements.

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NOTE A-

1.

Puerto Rico Legal Services, Inc.

(A Non-Profit Organization)

NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Activities

Puerto Rico Legal Services, Incorporated ("PRLSI") is a non-profit corporation organized under the laws of the Commonwealth of Puerto Rico on April 5, 1966. It is dedicated to provide legal assistance in non-criminal proceedings or matters to qualifying financially disabled program participants who cannot afford private legal assistance.

PRLSI receives continued support through annual grants from the Legal Services Corporation ("LSC"), a non-profit corporation established by the United States Congress to administer a nationwide legal assistance program.

2. Basis of Presentation

PRLSI has adopted FASB Accounting Standards Codification (ASC) No. 958- 205-50, "Non-for-Profit Entities Presentation of Financial Statements ".

Under FASB ASC No. 958-205-50, PRLSI is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. In addition, PRLSI is required to present a statement of cash flows. When a restriction expires, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the Statement of Activities as net assets released from restrictions.

3. Contributions and Revenue Recognition

PRLSI has also adopted F ASB Accounting Standards Codification (ASC) No.

958-605-25, "Revenue Recognition'', which requires that contributions be recorded as restricted revenues if they are received with donor stipulations that limit the use of donated assets. When donor stipulations expire, that is, when time restrictions end or purpose restrictions are accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions.

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(A Non-Profit Organization)

NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -

CONTINUED

Contributions received without donor-imposed restrictions are recorded as unrestricted support that increase unrestricted net assets. During the years ended December 31, 2015 and 2014 most of the restrictions on the net assets of PRLSI were related to support received from LSC, the Commonwealth of Puerto Rico Legislature, and the U.S. Department of Justice.

Contributions received are recorded as unrestricted, or temporarily restricted, depending on the existence and/or nature of any donor restrictions. Support that is restricted by the donor is reported as an increase in unrestricted net assets if the restrictions expire in the fiscal year in which the contributions are recognized. All of the donor-restricted support is reported as an increase in temporarily restricted net assets. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished, such as the incurrence of allowable expenses), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Statement of Activities as net assets released from restrictions.

4. Grants receivable

Management considers grants receivable to be fully collectible. Accordingly, no allowance for doubtful accounts has been provided. If amounts become uncollectible, they are charged to operations in the period in which the determination is made.

5. Property and equipment

Property and equipment are recorded at cost at the date of acquisition, or fair market value at date of donation, in the case of gifts. Depreciation and amortization is calculated using the straight-line method over the estimated useful life of the assets, which range from five to forty years. Property and equipment are considered to be owned by PRLSI while used in the program or in authorized future programs. LSC has a reversionary interest on those assets acquired with its support and the right to determine the use of any proceeds from the sale of such assets.

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5.

Puerto Rico Legal Services, Inc.

(A Non-Profit Organization)

NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -

CONTINUED

Property and equipment - continued

PRLSI has multiple sets of library law books with an estimated salvage value approximating the original cost. Accordingly, depreciation expense is not recorded for library books.

6. Use of estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses and changes in net assets during the reporting period. Actual results could differ from those estimates.

7. Income taxes

PRLSI is exempt from Puerto Rico and U.S. Federal income taxes under the provisions of Section 1101 of the Puerto Rico Internal Revenue Code of 2011, as amended, and Section 501 ( c ) (3) of the U.S. Internal Revenue Code, respectively. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements. However, if applicable, income from unrelated business activities would be taxable. No such income was earned by PRLSI during the years ended December 31, 2015 and 2014.

8. Impairment of long-lived assets

PRLSI has adopted F ASB Accounting Standards Codification (ASC) No. 360- 10-35, "Impairment or Disposal of Long-Lived Assets''. Accordingly, management reviews the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Measurement of the impairment loss is based on the fair value of the asset. Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows. The provisions of this statement did not affect the accompanying financial statements.

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9.

Puerto Rico Legal Services, Inc.

(A Non-Profit Organization)

NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -

CONTINUED

Deferred income

Funds collected for awards pertaining to a subsequent year, but received in advance, are recorded as deferred revenues.

10. Concentration of credit risk

Financial instruments that potentially expose PRLSI to concentration of credit risk include cash in bank accounts and revenues. PRLSI maintains bank accounts at several high quality financial institutions. While management attempts to limit any financial exposure, its deposit balances may, at times, exceed federally insured limits. PRLSI has not experienced any losses on such accounts.

PRLSI receives funding from two main sources: LSC and the Commonwealth of Puerto Rico Legislature. During the years ended December 31, 2015 and 2014 approximately 99%, respectively, of its total revenues were generated therefrom.

11. Cash and Cash Equivalents

For purposes of the statements of cash flows, PRLSI considers all highly liquid instruments with an initial maturity of three months or less to be cash equivalents.

12. Functional allocation of expenses

The costs of providing the various programs and other activities have been summarized on a functional basis on the statement of activities. Accordingly, certain costs have been allocated among the programs and supporting services benefited.

13. Subsequent events

Management has evaluated subsequent events through April 18, 2016 the date the financial statements were available to be issued. No material subsequent events have occmTed since December 31, 2015 that required recognition or disclosure in the current period financial statements.

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NOTE B-

(A Non-Profit Organization)

NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014

TEMPORARILY RESTRICTED PROGRAMS

PRLSI receives funds from various sources to be expended for specific purposes as follows:

1. Legal Services Corporation

During the years ended December 31, 2015 and 2014 PRLSI was granted federal funds of $11,417,908 and $11,180,381, respectively, by the LSC to provide legal assistance in non-criminal proceedings to qualifying financially disabled program participants. These funds are to be utilized in three stipulated programs: Basic Field Grant, Private Attorney Involvement and Migrant program.

As a recipient of LSC funds, PRLSI is also required to designate 12.5% of the annual support received to a Private Attorney Involvement program. During 2015 and 2014 PRLSI allocated $1,390,886 and $1,361,952, respectively, for such purpose. During the years ended December 31, 2015 and 2014, the referenced allocations include a sub-grant of $417,266 and $408,586, respectively, which was passed-through to Pro-Bono, Inc., an entity that is under the control of the Puerto Rico Bar Association.

2. Puerto Rico Legislature

During the years 2015 and 2014 the Puerto Rico Legislature approved through Joint Resolutions annual contributions to PRLSI of $5,220,000 each year to cover certain employment positions. The funds were approved for the government's fiscal years ending on June 30, 2015 and 2016.

In accordance with normal policies of grantors, PRLSI may retain unexpended funds for use in future periods if expenses incurred are in compliance with the specific terms of each grant or contract. Grantors, at their discretion, can request reimbursement for expenses or support, as a result of non-compliance · with the terms of the grants or contracts. In addition, all unexpended grant funds are required to be returned to the LSC if the PRLSI terminates its legal assistance activities.

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(A Non-Profit Organization)

NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014

NOTE C - FAIR VALUE MEASUREMENTS

Financial assets and liabilities measured at fair value are recorded in accordance with SFAS No. 157, Fair Value Measurements (Accounting Standards Codification No. 820), which clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SF AS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at measurement date for identical assets and liabilities.

Level 2 Inputs - Inputs other than quoted prices in active markets that are observable either directly or indirectly.

Level 3 Inputs - Unobservable inputs in which there is little or no market data, which requires management to develop their assumptions.

The organization uses appropriate valuation techniques based on the available inputs to measure the fair value of its financial assets and liabilities. Whenever available the organization measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

The organization financial instruments consist primarily of cash, certificates of deposit, accounts receivable, accounts payable, loans payable, line of credit and mortgage loan payable. The carrying amount of cash, certificates of deposit, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. Certificates of deposit are valued at cost plus accrued interest at year end.

The carrying amount of the line of credit approximates fair value at December 31, 2015 and 2014, since the interest rate is market based and is generally adjusted periodically. The carrying amount of the mortgage loan and other loans payable approximate their fair value because the interest rates approximate the prevailing market rates.

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NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014

NOTE D - PROPERTY AND EQUIPMENT

NOTEE-

NOTE F-

Property and equipment as of December 31, 2015 and 2014 consist of the following:

Useful life

Description (years) 2015 2014

Buildings 40 $ 1,077,092 $ 1,077,092 Building Improvements Various 1,821,796 1,821,796 Equipment 5 to 10 1,454,463 1,528,520 Leasehold Improvements Various 143,954 143,954 Vehicles 5 22,834 22,834

4,520,139 4,594,196 Less: Accumulated Depreciation . (2,800,753) (2,799,827)

Net Property and equipment 1,719,3 86 1,794,369

Library books 186,141 185,566 Land 483,883 483,883

Total Property and Equipment $ 2,389,410 $ 2,463,818

ACCOUNTS PAYABLE

Accounts payable as of December 31, 2015 and 2014 consist of the following:

2015 2014

Trade $ 187,571 $ 213,482

Private Attorney Involvement Program 45,093 40,062

$ 232,664 $ 253,544

LINE OF CREDIT

PRLSI has an available line of credit with Banco Popular de Puerto Rico in the amount of $400,000. As of December 31 , 2015 and 2014 there were no outstanding balances. The line is subject to interest at the rate of 1 % over the prime rate, but not lowers than 5%.

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(A Non-Profit Organization)

NOTES TO FINANCIAL STATEMENTS

December 31 , 2015 and 2014

NOTE G- LONG-TERM DEBT

Notes payable as of December 31, 2015 and 2014 consisted of the following:

2015 2014

Mortgage note payable to bank in 59 monthly installments of $7, 146, including interest at 5%, secured by land and building, due on June 28, 2018. $ 208,158 $ 275,284

Note payable to bank in 59 monthly installments of $3,383 plus interest at 6.25% with a final balloon payment on May 31, 2016, secured by building. 216,534 253,750

Capital lease payable in 39 consecutive monthly payments of $1,562 including interest at 10%, due on August 2016, collaterized by mailing equipment. 12,037 26,769

Capital lease payable in 36 consecutive monthly payments of $3 , 118 including interest at 6.2%, due on December 2016, collaterized by equipment. 33,258 67,443

Sub-total 469,987 623,246

Less: current maturities 338,966 179,036

Total $ 131 ,021 $ 444,210

The following are maturities of long-term debt for each of the next three years:

2016 $ 338,966 2017 81,083 2018 49,938

Total $ 469,987

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NOTEH-

1.

2.

Puerto Rico Legal Services, Inc.

(A Non-Profit Organization)

NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014

COMMITMENTS

Grants and contracts

As a recipient of continued support from its major grantor, the LSC, PRLSI is required to serve effectively and economically all qualified program participants ( clientele) in compliance with the rules, regulations, guidelines, and policies of the LSC Act which, among other, requires PRLSI to comply with the provisions of LSC Accounting and Audit Guide and the LSC Compliance Supplement. Assessing compliance with these particular regulations and with the Office of Management and Budget, (OMB) Circular A-133, is one of the primary objectives of the annual external audit of the Entity.

Rental commitments

PRLSI conducts its operations in various regional office locations throughout Puerto Rico, which are leased under the terms of various rental agreements that are classified as operating leases. Total rental expense on these leases, which is included as part of the facilities and occupancy expense account in the accompanying statement of activities, aggregated to $618,830 and $609,375 for the years ended December 31, 2015 and 2014, respectively.

Minimum annual rental payments required under these lease agreements for the next five years are as follows:

Year ending December 31, Amount

$ 517,508 517,508 517,508 517,508 517,508

$ 2,587,540

3. Collective bargaining agreements

A significant portion of PRLSI's employees is covered by two collective bargaining agreements (one for attorneys and one for non-attorneys). Both the attorney and non-attorney union agreements were negotiated on 2015 and the attorney's agreement expire on March 30, 2018 and the non-attorney's agreement on January 31, 2019. Under the provisions of these agreements PRLSI must comply with specific requirements related to compensation, fringe benefits and other related matters.

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NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014

NOTE H - COMMITMENTS - CONTINUED

4. Litigation

NOTE I-

PRLSI is defendant in various legal cases. The principal case arose from an action of a former employee of PRLSI that claims was unjustly and discriminatorily terminated from her employment. The plaintiff alleges that the organization discriminated against her on account of her age, in violation of several Puerto Rico's employment laws. According to the organization' s legal counsel the indemnification to which plaintiff would be entitled in the event that she prevails in her claim totals $160,000. According to its legal counsel, in the event of an adverse judgment against PRLSI the claim is fully covered by an employment practices insurance policy with a maximum coverage of $500,000, of which $250,000 are still available. The organization's management believes that the claims are without merit and intends to vigorously defend its position. The ultimate outcome of this litigation cannot presently be determined. However, in management's opinion, the likelihood of a material adverse outcome is remote. Accordingly adjustments for losses, if any, that might result from the resolution of this matter, have not been recognized in the financial statements.

RETIREMENT PLAN

PRLSI sponsors a defined contribution retirement plan for all of its qualifying employees. Under the terms of the Plan, PRLSI matches employee contributions up to a maximum of three percent (3%) of the employee's compensation. The plan contribution for the years ended December 31, 2015 and 2014 amounted to $270,407 and $228,460, respectively.

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SUPPLEMENTARY INFORMATION

Schedule of Expenditures of Federal Awards For the year ended December 31, 2015

Federal Grantor!Pass-through

LEGAL SERVICES CORPORATION:

Direct program

Basic Field Grant Private Attorney Involvement Program Migrant Program

U.S. DEPARTMENT OF HEALTH AND HUMAN

SERVICES:

Pass-throught from the Puerto Rico General Justice Court - State Court Improvement Program

RECONCILIATION OF TOTAL EXPENDITURES OF

FEDERAL A WARDS AND TOTAL EXPENDITURES

PRESENTED IN THE ST A TEMENT OF ACTIVITIES:

Total expenditures per statement of activities Less:

Expenses not requiring cash outlays - Depreciation expense (LSC grant)

Expenses pertaining to non-federal awards

Plus:

Capitalized expenditures for property and equipment Payment of long-term debt

Total expenditures per Schedule of Federal Awards

See accompanying notes to schedule of expenditures of federal awards.

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Federal

CFDA

Number

09.253010

93.586

Agency or Pass-through

Number

2015-272-141

Total

Federal Expenditures

$ 9,727,500 1,390,886

290,819

11 ,409,205

133,885

$ 11,543,090

$ 19,441 ,257

(180,631) (7,724,150)

6,614

$ 11 ,543,090

NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AW ARDS

December 31, 2015

NOTE A-BASIS OF PRESENTATION

The accompanying schedule of expenditures of federal awards includes the federal grant activity of PRLSI under programs of the federal government for the year ended December 31, 2015. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Unfform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the schedule presents only a selected portion of the operations of PRLSI, it is not intended to and does not presents the financial position, changes in net assets, or cash flows of PRLSI.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Expenditures reported on the schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained on OMB Circular A-122, Cost Principles for Non-profit Organizations, and Title 2 U.S . Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), wherein certain types of expenditures are not allowed or are limited as to reimbursement.

2. Pass-through entity identifying numbers are presented where available.

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Puerto Rico Lega l Services, Inc.

(A Non-P rofit Organization)

STATEMENT OF SUPPORT, REVENUES AND EXPENSES, AND CHANGES IN

NET ASSETS FOR LEGAL SERVICES CORPORATION (LSC) GRANTS

For the year ended December 3 1, 20 15, with comparative totals for 20 14

BASIC PRIVATE 2015 2014

FIELD ATTORNEY MIGRANT SUB- TOTAL TOTAL

GRANT INVOLVEMENT PROGRAM TOTAL PROPERTY LSCGRANT LSCGRANT

SUPPORT AND REVENUES

Grants and con tracts $ 9,736,203 $ 1,390,886 $ 290,8 19 $ 11 ,4 17,908 $ $ 11,417,908 $ 11 ,180,38 1 Interest income 7,646 7,646 7,646 6,559 Other income 64 .962

Total support and revenues 9,743,849 1,390,886 290,8 19 11,425,554 11 ,425,554 11,25 1,902

PERSONNEL EXPENSES

Lawyers $ 4,561,97 1 $ 127,192 $ 88,932 $ 4,778,095 $ $ 4,778,095 $ 4,608,996 Non-Lawyers l ,253,8 15 300,670 133,264 l,687,749 l ,687,749 2,841,060 Employee benefits 2,699,378 128,140 74,393 2,90 1,91 1 2,901,911 2,026,356

Total personnel expenses 8,5 15, 164 556,002 296,589 9,367 ,755 9,367,755 9,476.412

OTHER EXPENSES

Professional services 58,065 801,040 859,105 859,105 814,460 Faciliti es and occupancy 353,74 1 353,74 1 353,741 2 18, 146 Telephone 66,969 472 2,616 70,057 70,057 140 Litigation 168,342 14,583 428 183,353 183,353 171,711 Office suppli es and expenses 72,605 5,786 132 78,523 78,523 127,507 Travel 85,805 2,825 88,630 88,630 158,040 Uti lities 161 ,098 16 1,098 16 1,098 9,846 Depreciation and amortization 180,63 1 180,63 1 183 ,982 Insurance 57,390 1,094 2,1 81 60,665 60,665 4,289 Equipment rental and maintenance 86,031 3,559 1,121 90,7 11 90,7 11 3,924 Mai ntenance and repairs 54,304 256 54,560 54,560 Library subscriptions and maintenance 26,633 248 26,88 1 26,881 39,81 4 Training 4,082 4,082 4,082 1,9 12 Audit 10,30 1 3,472 308 14,081 14,08 1 20,500 Interest 42,617 Non-capitalizable assets 9,664 150 9,814 9,814 476 Parki ng 1,552 1,552 1,552 23,820 Security Bank charges 15,726 Other 1,388 390 1,778 1,778 17,970

Tota l Other Expenses 1,2 12,336 834,884 11,411 2,058,631 180,631 2,239,262 1,854,880

Total Expenses 9,727,500 1,390,886 308,000 11,426,386 180,631 11,607,017 11,331,292

SUPPORT AND REVENUE

OVER(UNDER)EXPENSES 16,349 ( 17, 181) (832) ( 180,631) (181,463) (79,390)

OTHER CHANGES IN NET ASSETS

Acquisition of property (6,614) (6,6 14) 6,6 14 Payment of long-term debt

CHANGE IN NET ASSETS 9,735 (17, 181) (7,446) ( 174,0 17) (18 1,463) (79,390)

NET ASSETS AT BEGINNING OF YEAR 8,260 159,289 167,549 731 ,864 899,413 978,803

NET ASSETS AT END OF YEAR $ 17,995 $ $ 142, 108 $ 160, 103 $ 557,847 $ 717,950 $ 899,4 13

The acompaying notes are a n integral part of these financial statements.

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(A Non-Profit Organization)

STATEMENT OF SUPPORT, REVENUES AND EXPENSES, AND CHANGES IN

NET ASSETS FOR THE "ACCESO A LA JUSTICIA EDU CA TIV A - III" PROGRAM

For the year ended December 31, 20 15, with comparative totals for 2014

2015 2014

SUPPORT AND REVENUES

Grant Support $ 360,257 $ 312,945

Lawyers 44, 157 107,199 Non-Lawyers 116,425 44,435 Employee benefits 136,376 101,487

Total personnel expenses 296,958 253,121

OTHER EXPENSES

Professional services 48,476 52,794 Office supplies and expenses 14,823 7,030

63,299 59,824

Total other expenses 360,257 312,945

SUPPORT AND REVENUE

OVER EXPENSES

NET ASSETS AT BEGINNING OF YEAR

NET ASSETS AT END OF YEAR $ $

The acompaying notes are an integral part of these financial statements.

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INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL

REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT

OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT

AUDITING STANDARDS

To the Board of Directors Puerto Rico Legal Services, lnc.

We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Puerto Rico Legal Services, Inc. (a nonprofit organization), which comprise the statement of financial position as of December 31, 2015, and the related statements of activities and changes in net assets, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated April 18, 2016.

Internal Control over Financial Reporting

In planning and performing our audit of the financial statements, we considered Puerto Rico Legal Services, lnc. 's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Puerto Rico Legal Services, Inc. 's internal control. Accordingly, we do not express an opinion on the effectiveness of the Puerto Rico Legal Services, Inc.'s internal control.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether Puerto Rico Legal Services, Inc. 's financial statements are free from material misstatement, we perfonned tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

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,"".J.:). 8UA IS 17..:!!:! ~µ.,(~ .JUAfJ \,'j'.•V\I..!. P,-1~;: __ /",i1 £ i1 Ii! .l\ .C·.:• i :i

INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR EACH MAJOR

FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND

REPORT ON SCHEDULE OF EXPENDITURES OF FEDERAL AW ARDS REQUIRED BY

THE UNIFORM GUIDANCE

To the Board of Directors Puerto Rico Legal Services, Inc.

Report on Compliance for Each Major Federal Program

We have audited Puerto Rico Legal Services, Inc.'s compliance with the types of compliance requirements described in the OMB Compliance Supplement and in the Compliance Supplement for Audits of LSC Recipients that could have a direct and material effect on each of Puerto Rico Legal Services, Inc.' s major federal programs for the year ended December 31, 2015. Puerto Rico Legal Services, Inc.' s major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs.

Management's Responsibility

Management is responsible for compliance with the requirements of federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs.

Auditor's Responsibility

Our responsibility is to express an opinion on compliance for each of Puerto Rico Legal Services, Inc. 's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance);

and the Compliance Supplement for Audits of LSC Recipients. Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Puerto Rico Legal Services, Inc. 's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of Puerto Rico Legal Services, Inc. 's compliance.

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Opinion on Each Major Federal Program

In our opinion, Puerto Rico Legal Services, Inc. complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2015.

Other Matters

The results of our auditing procedures disclosed instances of noncompliance, which are required to be reported in accordance with the Uniform Guidance and the Compliance Supplement for Audits ofLSC Recipients, which are described in the accompanying schedule of findings and questioned costs as items 2015-001. Our opinion on each major federal program is not modified with respect to these matters.

Puerto Rico Legal Services, Inc.' s response to the noncompliance findings identified in our audit is described in the accompanying schedule of findings and questioned costs. Puerto Rico Legal Services, Inc. 's response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response.

Report on Internal Control over Compliance

Management of Puerto Rico Legal Services, Inc. is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Puerto Rico Legal Services, Inc.' s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance and the Compliance Supplement for Audits of LSC Recipients, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.

Accordingly, we do not express an opinion on the effectiveness of Puerto Rico Legal Services, Inc.'s internal control over compliance.

A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis.

A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance.

Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses.

However, we identified certain deficiencies in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as items 2015-001, which we consider to be significant deficiencies.

-26-

Puerto Rico Legal Services, Inc. 's response to the internal control over compliance findings identified in our audit is described in the accompanying schedule of findings and questioned costs. Puerto Rico Legal Services, Inc.'s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response.

The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance and the Compliance Supplement for Audits of LSC Recipients. Accordingly, this report is not suitable for any other purpose.

Report on Schedule of Expenditures of Federal Awards Required by Uniform Guidance

We have audited the financial statements of Puerto Rico Legal Services, Inc. as of and for the year ended December 31, 2015, and have issued our report thereon dated April 18, 2016, which contained an unmodified opinion on those financial statements. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the financial statements.

Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the financial statements as a whole.

Stamp number El 8 l 726 of the Puerto Rico Society of Certified Public Accountants was affixed to the original ofthis report.

San Juan, Puerto Rico April 18, 2016

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(A Non-Profit Organization)

SUMMARY SCHEDULE OF PRIOR YEAR AUDIT FINDINGS AND QUESTIONED COSTS

For the year ended December 31, 2015

Findings and Questioned Costs - Major Federal Award Program Audit 2014

Finding No. 14-1 Revenue Recognition for Non-LSC Awards

Condition:

Management deferred revenues on certain Non-LSC contributions, affecting revenue recognition on prior year transactions.

Current status: Corrected .

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SCHEDULE OF FINDINGS AND QUESTIONED COSTS

December 31 , 2015

Section I - Summary of Auditors' Results

Financial Statements:

Type of auditors' report issued:

Internal control over financial reporting:

Material weaknesses identified?

Significant deficiencies identified?

Noncompliance material to the financial statements noted:

Federal Awards:

Internal control over major programs:

Unmodified

No No

No

Material weaknesses identified?

Significant deficiencies identified?

No Yes. Reported on Section III

Type of auditors' report issued on compliance for major programs:

Any audit findings disclosed that are required to be reported in accordance with the Uniform Guidance?

Dollar threshold used to distinguish between Type A and Type B programs:

Auditee qualified as low-risk auditee?

Identification of Maj or Programs:

Legal Services Corporation

-29-

Unmodified

Yes

$750,000

No

09.253010

December 31, 2015

Section II - Findings and Questioned Costs - Financial Statements Audit

There are no findings required to be reported in accordance with Generally Accepted Government Auditing Standards.

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December 31, 2015

Section III - Findings and Questioned Costs - Major Federal Award Program Audit

Finding No. 2015-001

Private Attorney Involvement (P Al) Allocation Policies

Condition

An LSC's 2014 onsite review and subsequent follow-up by the Office of Compliance and Enforcement (OCE) concluded that PRLSI and its sub-grantee Pro-Bono, Inc. (PBI) failed to provide information regarding what reasonable operating data it uses and what supporting methodology it has in place to ensure an equitable allocation of its non-personnel common costs.

Furthermore, OCE indicated on its finding RCA No. 21 of the 2014 onsite review report that PRLSI has not provided information regarding how it determines whether cases handled and or…