May 4 Update: Follow up note to the Chairman of the LFIS Board - For Action

Dear LFIS Board Chairman,

Firstly I would like to thank you and Thomas again for your time the other day. We appreciate the effort to come and meet some representatives of the parents and we do acknowledge the informal nature, and open conversation.

As you suggested, we have waited until the video of “Les réponses à vos questions / Your questions answered” was published yesterday and this small group has watched in detail. I think everyone appreciates the increased transparency and the efforts being made to address questions that are concerning the school community.

Reviewing the petition and the concerns of the parents they can largely be grouped into the below three topics:

1. Compensation for school fee since COVID-19 outbreak
2. Educational support & continuity since COVID-19 outbreak
3. Long term financial management of the school including 2020-2021 budget

Key topics have been partially addressed through our discussions and the recent video communication, however some important points either remain unanswered or more details would be needed to give some comfort / closure.

Educational Support & Continuity since COVID-19 outbreak

We acknowledge that the mandate of the board combined with current organization does not make you the key deciding stakeholder for educational/ pedagogy questions. However, we trust you & Mr Gabet are in a position to play some sort of influential role in that field.

Also, given the fact it remains an ongoing concern, it may be a good idea to have a separate video communication from the pedagogical team to provide further explanations on inconsistent use of remote technology and choices not to offer any summer camps. This is a hard point for many families.

Compensation for school fee since COVID-19 outbreak

We recognize that in order to give a compensation, the money has to come from somewhere and at present your position is:

• Savings have already been made from the 25% non HR costs and the savings have been put into the fund des amis pot
• You cannot generate more savings through the reduction of staffing costs / operating expenses due to the number of remaining AEFE contracts, as they will not engage on this topic. Reducing salaries of non-AEFE contracted staff seems to be ruled out as per the latest video communication
• Cash reserves were depleted significantly through investment into TKO, and whilst there are still reserves, there is not a war chest to dip into to fund compensation
• As such, if compensations are given, it will increase the loss position, that would have to be compensated in future years through increases
• You wish to ensure that you do not put the school into a precarious financial position or do anything to compromise the quality of education, or the platform the new principal will inherit

Open questions based on meeting and video communication:

1. As per latest audited statements, cash position was, as of August 2019, at $125MM and cash flow positive after investing activities. So there were existing cash reserves and post-investing cash flow was still positive
2. Whilst you explained there is no cash to provide a compensation given the breach of services, the 2020-2021 budget shows an increase in operating expenses by +$12MM – how come this is not an issue to use up cash reserves to fund increased operating expenses when it is a no-go to fund a compensation for what many families deem to be due given the complete lack of educational support, esp. during February-Mid April period?
3.  As a reminder / comparison, the proposed increase in operating expenses next year equates a 14% rebate over quarterly fee… Also the operating cash flow, before investing activities, is strong at $60MM – the argument that nothing can be done due to cash reserves is hard to understand as it seems it is more a matter of choices and priorities, which would benefit to be explained openly for community to understand and support
4. Benchmark with other HK international schools shows that yes one big school has discounted by 45% the fee (ESF) to acknowledge COVID situation unlike what was stated in the video communication. Nord Anglia has done a 12% gesture and many others are in the process of looking at a fee compensation, on top of help to distressed families and fee freeze for next year
5. Comprehensive benchmark also shows that LFIS is indeed in the lower price range for Primary (12 out of 20 sorted by descending order per annual tuition fee) but this changes drastically when looking at secondary and IB years where LFIS is actually in the upper range. It would be fair and more honest to reflect that reality instead of asserting that LFIS is 20-30% cheaper as per a “benchmark I have done”. Below is an average fee chart (source: edarabia.com) showing comprehensive picture
6. Last but not least, community is understanding the Fonds Des Amis being there for struggling families, however regret that the clear list of criteria is hard / impossible to find, including some key thresholds to be eligible. That would help to provide transparency and confidence in the audit trail.

Long term financial management of the school including 2020-2021 budget

We feel that while the comments that there is no money to fund rebates without putting the school into deeper loss is understandable at face value, there are many financially minded people that look at the budget and find this still difficult to understand. Please do not misunderstand, we respect Thomas, yourself, the board and the finance community of the school are all very experienced in the formulation of budgets and we are not criticizing it, but we have some questions that people still have and it would be good to gain a deeper understanding of some elements; particularly as it relates to freeing up cash for rebates. Some example questions would be:

• As per video communication, primary vocation of the school, as non-profit organization, is to have a balanced budget. How come the budget is so imbalanced, even before freezing the fees, due to increase in operating expenses? It is hard to follow based on the statement made in the video.
• In the video communication, it is said that the school fee freeze is responsible for an imbalanced / loss budget, however, looking at the numbers contradict that given the +12MM increase in operating expenses which would not have been offset by school fee 2.5% increase anyways…
•  YE August 2019 statements shows a cash position (current assets) at HK$125MM increasing YoY by $8MM. Cash flow statement shows a strong operating cash flow ($61MM) before investing activities (ppe purchase). A 10% compensation on quarterly fee would equate $9MM cash approx., how is that not feasible cash wise?
• The budget shows operating expenses (excl. depreciation) at $342 MM, up by $12MM vs. forecast for YE August 2020, maintaining flat would be more than enough for say a 10% compensation.
• Rather than talking in lay-off plans terms, we feel it would be more appropriate to talk in terms of savings on salaries, using partial time / unpaid leave which is feasible through the government subsidies scheme.

We did not wish to hijack you in the meeting the other day with detailed financial questions like this, but perhaps that is a missing link, and it could be good before the AGM to have an additional session to talk through the budget so some selected people in the community can have a forum to discuss.